Competition and Innovation: Pushing Productivity Up or Down?

E. Brouwer, H.P. van der Wiel

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Abstract

This paper examines the relationship between competition, innovation and productivity for the Netherlands. We use industry level data aggregated from micro data as well as moments from firm level data for the period 1996-2006. We match innovation data from Community Innovation Survey with accounting data to link innovative activities with performance at the industry level. We find strong evidence for a positive impact of competition on Total Factor Productivity (TFP) at the industry level. Competition directly increases TFP by reducing X-ineficiencies and removing inefficient forms from markets, but also through more innovation. Nonetheless, there exists an inverted U- curve between competition and innovation for the Netherlands, at least for manufacturing industries. Yet, our results indicate that a negative effect of competition on productivity through lower innovation expenditures arises only at very high levels of competition.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages47
Volume2010-52
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-52

Keywords

  • competition
  • innovation
  • profit elasticity
  • productivity

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    Brouwer, E., & van der Wiel, H. P. (2010). Competition and Innovation: Pushing Productivity Up or Down? (CentER Discussion Paper; Vol. 2010-52). Microeconomics.