Competition and Innovation

The Inverted-U Relationship Revisited

Bibliographic Data

ID19320191
AuthorsAamir Rafique Hashmi (National University of Singapore, corresponding author)
Year2013
Volume95
Issue5
Pages1653-1668
Publication date2013-12-01
Open AccessNo
TypeARTICLE
VenueThe Review of Economics and Statistics (JOURNAL)
Journal identifiersISSN: 0034-6535 • E-ISSN: 1530-9142
PublisherMIT Press - Journals (PUBLISHER)
DOI10.1162/rest_a_00364
OpenAlexW3121880742
LanguageEN
Citations received35
References cited15

I reexamine the inverted-U relationship between competition and innovation (modeled and tested by Aghion et al. (2005)) by using data from publicly traded manufacturing firms in the United States. I control for the possible endogeneity of competition by using a trade-weighted average of industry exchange rates as an instrument. I find a mildly negative relationship between competition (as measured by the inverse of markups) and innovation (as measured by citation-weighted patents). The negative relationship is robust to many alternative assumptions and specifications. To reconcile the mildly negative relationship in the U.S. data with the inverted-U relationship that Aghion et al. (2005) find in the U.K. data, I modify their theoretical model and show that the modified model can explain both negative and inverted-U relationships. The key theoretical assumption is that the U.K. manufacturing industries are technologically more neck-and-neck than their counterparts in the United States. I find support for this assumption in the data. The different empirical results between the two countries may also arise because of differences in data and samples

Competition (biology) · Econometrics · Economics · Endogeneity · Inverse · Ecology · Economic Growth and Productivity · Firm Innovation and Growth · Global trade and economics · Mathematics

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