Scandinavian Working Papers in Economics

EIJS Working Paper Series,
Stockholm School of Economics, The European Institute of Japanese Studies

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

Patrik Gustavsson Tingvall () and Andreas Poldahl ()
Additional contact information
Patrik Gustavsson Tingvall: European Institute of Japanese Studies, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Andreas Poldahl: Örebro Universitet, Postal: Örebro Universitet, Fakultetsgatan 1, 701 82 Örebro

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

JEL-codes: D40; L10; L60; O30

25 pages, February 1, 2005

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