Working Paper: CEPR ID: DP5323
Authors: Philippe Aghion; Richard William Blundell; Rachel Griffith; Peter Howitt; Susanne Prantl
Abstract: How does firm entry affect innovation incentives and productivity growth in incumbent firms? Micro-data suggests that there is heterogeneity across industries - incumbents in technologically advanced industries react positively to entry, but not in laggard industries. To explain this pattern, we introduce entry into a Schumpeterian growth model with multiple sectors which differ by their distance to the technological frontier. We show that entry threat spurs innovation incentives in technologically advanced sectors - successful innovation allows incumbents to prevent entry. In laggard sectors it discourages innovation - increased entry reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro-level productivity growth and patent panel data for the UK, and controlling for the endogeneity of entry by exploiting the large number of policy reforms undertaken during the Thatcher era.
Keywords: entry; growth; innovation
JEL Codes: D21; F21; L10; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm entry (M13) | innovation incentives in technologically advanced industries (O31) |
| firm entry (M13) | innovation incentives in laggard industries (O31) |
| entry threat (Y20) | total factor productivity (TFP) growth in technologically advanced industries (O49) |
| entry threat (Y20) | total factor productivity (TFP) growth in laggard industries (O49) |
| policy reforms (E69) | firm entry (M13) |