Looking for Mr. Schumpeter: Where Are We in the Competition–Innovation Debate? (original) (raw)

Innovation Policy and the Economy, Volume 6

The effect of competition on innovation incentives has been a controversial subject in economics since Joseph Schumpeter advanced the theory that competitive markets are not necessarily the most effective organizations to promote innovation. The incentive to innovate is the difference in profit that a firm can earn if it invests in research and development compared to what it would earn if it did not invest. The concept is straightforward, yet differences in market structure, the characteristics of innovations, and the dynamics of discovery lead to seemingly endless variations in the theoretical relationship between competition and expenditures on research and development or the outputs of research and development (R&D). This paper surveys the economic theory of innovation, focusing on market structure and its relationship to competition, the distinction between product and process innovations, and the role of exclusive and nonexclusive rights to innovation, and draws conclusions from the different models. Exclusive rights generally lead to greater innovation incentives in more competitive markets, while nonexclusive rights generally lead to the opposite conclusion, although there are important exceptions. The paper reviews the large literature on empirical studies of innovation and finds some support for the predictions of the theory.

Competition and Innovation

Journal of Industrial Organization Education, 2006

Which kind of intellectual property regime is more favorable to innovation: one that enforces patents or one that does not? Economic theory is unable to answer this question, as valid arguments can be made both for and against patents; hence we must turn to empirical evidence. In this paper, we review empirical evidence gathered by other researchers and add new evidence of our own. We conclude that the evidence suggests that patents do not promote innovation, but instead retard it.

Competition, R&D, and the Cost of Innovation

SSRN Electronic Journal, 2000

This paper proposes a model of distance to technological frontier that encompasses the magnitude of the impact of competition on R&D according to the cost or size of the innovation. The effect of competition on R&D is inverted U-shaped. But, the shape is flatter and thus competition policy is less relevant for innovation, when innovations are relatively costly. Intuitively, if innovations are costly for a firm, competitive shocks have to be large to change its innovation decisions. Using a unique panel dataset from the Bank of France, we test this model. Empirical findings are consistent with the theoretical predictions.

Radical innovation and R&D competition

Empirical evidence about innovation is doubtful in showing incumbent firms’ and new entrants’ attitude toward radical innovations. Moreover, theoretical works exhibit divergent conclusions when investigating the incentives to innovate. Our paper emphasizes the importance of distinguishing between degrees of innovativeness when comparing an incumbent’s and an entrant’s incentives to invest in innovation. The model captures the peculiarity of a radical innovation along three dimension: risk, impact on the existing market and capability of opening up a new market. The results emphasize the role of substitution and complementarity between markets in determining the incentives to innovate in the radical case. Implications on innovation policy are finally discussed.

Patents and incentives to innovate: Some theoretical and empirical economic evidence

2006

ABSTRACT. In this note, we try to evaluate how effective the patent system is in fostering innovation. We first develop the microeconomic reasoning underlying the legal protection of intellectual property. We then try to assess whether this legal protection does indeed fulfil its mission. We show that due to the difficulty of measuring innovative output, it is hard to reach any conclusive answer.

Competition and Innovation: Revisiting the Inverted-U Relationship

Journal of Industry, Competition and Trade, 2012

This issue of the Journal of Industry, Competition, and Trade warrants some explanation in terms of a brief editorial. It presents a collection of papers that were independently submitted, but are closely related by their common interest in the question of how competition affects innovation. It is therefore not a special issue in the usual sense of an exclusive collection of invited papers, but an unusually focused issue on the topic of competition and innovation. It became possible only by an astonishing surge of renewed interest and novel research in this field. What explains the sudden explosion of new papers on a topic that has been written about so often and for so long? We have already too many papers with too many conflicting findings available, some people (editors among them) might say. In contrast, we believe that this is a good time to revisit the relationship and consider the current stream of publications to be only the beginning of a new wave of research. Our optimism is not only based on the fact that both innovation and competition are two major ingredients in any modern approach to industrial policy, 1 but also on the recognition of three powerful sources that offer new inspiration and opportunities that will continue to energize this development for some time to come. First of all, there has been a remarkable shift in the guiding theoretical hypotheses. For decades the debate was dominated by the simplistic and apparently misguided antagonism between a negative 'Schumpeter effect' versus a positive 'Arrow effect' of competition on innovation. It was simplistic by assuming that the specific arguments presented either by Schumpeter (1911, 1942) or Arrow (1962) are linear and thus apply independently of the initial degree of competition in the market. It was also misguided in two ways. First, by ignoring that Schumpeter's postulate of the logical impossibility of endogenous innovation

Patents, Competition, and Firms’ Innovation Incentives

Industry and Innovation, 2014

In this paper we analyze how industrial property rights (IPRs), measured by patents granted, affect competition at the industry level, and their induced effects on firms' innovation incentives. We use for that purpose a panel dataset of Spanish manufacturing firms for the period 1990-2006. Using indicators of the fundamentals of competitive pressure, we construct a new measure of competition. Our results indicate that patenting activity in an industry lowers competition. In addition, we obtain that enhanced competition discourages innovation incentives in terms of firms' R&D expenditures or the number of product innovations, but it encourages process innovations.