Working Paper: CEPR ID: DP18630
Authors: Elhanan Helpman
Abstract: Empirical studies have found that enhanced foreign competition can encourage or discourage innovation. To address this relationship, I examine a market structure in which a small number of large multi-product oligopolists compete with a large number of small single-product firms in the same industry. The single-product firms are short-lived while the multi-product firms live forever, and the large firms invest in innovation in order to enlarge their product spans. All firms export. I show that an increase in the competitiveness of foreign firms can increase or reduce innovation efforts of a large multi-product firm. Moreover, changes in the incentives to innovate can be different for more-productive and less-productive oligopolists. As a result, aggregate sectoral innovation may rise or decline, depending on the productivity distribution of the oligopolists. I also show that changes in short-term operating profits may not be aligned with changes in the incentives to invest in innovation.
Keywords: foreign competition; innovation; firm dynamics; product span
JEL Codes: D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in competitiveness of foreign firms (F23) | Increase in innovation efforts of high-productivity domestic firms (O39) |
| Increase in competitiveness of foreign firms (F23) | Decrease in innovation efforts of low-productivity domestic firms (O49) |
| Increase in competitiveness of foreign firms (F23) | Net effect on aggregate sectoral innovation (O49) |
| Changes in short-term operating profits (D25) | Changes in incentives to invest in innovation (O31) |
| Relative demand levels and market shares of oligopolists (D43) | Outcomes of domestic firms' responses to foreign competition (F23) |