Competition, R&D, and the Cost of Innovation

29 Pages Posted: 22 Sep 2010

See all articles by Philippe Askenazy

Philippe Askenazy

CNRS; IZA Institute of Labor Economics; Paris School of Economics (PSE)

Christophe Cahn

Banque de France

Delphine Irac

Banque de France

Date Written: February 1, 2008

Abstract

This paper proposes a model in the spirit of Aghion et al. (2005) that encompasses the magnitude of the impact of competition on R&D according to the cost of the innovation. The effect of competition on R&D is an inverted U-shape. However, the shape is flatter and competition policy is therefore less relevant for innovation when innovations are relatively costly. Intuitively, if innovations are costly for a firm, competitive shocks have to be significant to alter its innovation decisions. Empirical investigations using a unique panel dataset from the Banque de France show that an inverted U-shaped relationship can be clearly evidenced for the largest firms, but the curve becomes flatter when the relative cost of R&D increases. For large costs, the relationship even vanishes. Consequently, in sectors in which innovations are costly, policy changes have to be on a very large scale for an impact to be expected; at the extreme end, in certain sectors, the curve is so at that competition policy is not an appropriate tool for boosting the research effort of firms.

Keywords: Competition, R&D, Innovation

JEL Classification: L51, O31

Suggested Citation

Askenazy, Philippe and Cahn, Christophe and Irac, Delphine, Competition, R&D, and the Cost of Innovation (February 1, 2008). Banque de France Working Paper No. 197, Available at SSRN: https://ssrn.com/abstract=1680311 or http://dx.doi.org/10.2139/ssrn.1680311

IZA Institute of Labor Economics

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Germany

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Christophe Cahn

Banque de France ( email )

Paris
France

Delphine Irac

Banque de France ( email )

Paris
France

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