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European Instiute of Japanese Studies, Stockholm School of Economics EIJS Working Papers Series

No 207:
Is There Really an Inverted U-shaped Relation Between Competition and R&D?

Patrik Gustavsson Tingvall () and Andreas Poldahl ()

Abstract: We test whether predictions of the Aghion and Howitt (2004) model are supported by firm level data. In particular, we analyze if there is an inverted U-shaped relation between competition and R&D. Results show that the inverted U-shaped relation is supported by the Herfindahl index but not by the price cost margin. Using the Herfindahl index results suggest that breaking up monopolies increases R&D while further increases in competition most likely leads to reduced R&D. Comparing different estimators, we find that time-series based estimators typically result in less clear-cut results, probably driven by a lack of time series variation in measures of competition.

Keywords: R&D; competition; firm size; spillovers; (follow links to similar papers)

JEL-Codes: D40; L10; L60; O30; (follow links to similar papers)

25 pages, February 1, 2005

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