This paper studies the empirical relation between market competition and innovation using Luxembourg’s Structural Business Statistics. The competitive pressure in Luxembourg’s markets is assessed by computing a profit elasticity measure, based on the idea of cost-efficiency. From this, the paper analyses the relation between competition and innovation performance by estimating an equation for the determinants of R&D expenditure. The results show that Luxembourg’s industries are characterised by low levels of competition intensity, especially in markets relevant to competition policy and regulation. The relation between competition and innovation is non-linear and depends crucially on the efficient use of inputs to production. The impact of the distribution of technological efficiency on innovation is assessed by measuring both average technology gap and technology spread. The innovation effort is increasing as industries are closer to the frontier, and decreasing in the technology spread.

Competition and Innovation in Luxembourg

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, 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 J Ind Compet Trade (2012) 12:1–5 DOI 10.1007/s10842-011-0123-4

/pdf/competition-and-innovation-revisiting-the-inverted-u-3eqriliy7x.pdf

Competition and Innovation: Revisiting the Inverted-U Relationship

This paper offers an extensive survey and a critical discussion of the empirical literature on the driving factors of RD competition in product markets; RD location and resource related factors, such as spillovers from university research within close geographic proximity, membership of a research joint venture and cooperation with research centres, and the human capital embodied in knowledge workers; and spillovers from foreign R&D. Although on balance there is a consensus regarding the R&D effects of most factors, there is also variation in results. Recent work suggests that accounting for non-linearities is one area of research that may explain and encompass contradictory findings.

https://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/Becker_09.pdf

The determinants of R&D investment: A survey of the empirical research

Sustainable economic development has played a major role in the decline Of global poverty in the past two decades. There is no doubt that competitive markets are key drivers of economic growth and productivity. They are also valuable channels for consumer welfare. Competition policy is a powerful tool for complementing efforts to alleviate poverty and bring about shared prosperity. An effective competition policy involves measures That enable contest-ability and firm entry and rivalry, while ensuring the enforcement of antitrust laws and State aid control. Governments from emerging and developing economies are increasingly requesting pragmatic solutions tor effective competition policy implementation, as well as recommendations for pro-competitive sectoral policies. A Step Ahead: Competition policy for Shared Prosperity and Inclusive Growth puts forward a research agenda that advocates the importance Of market competition, effective market regulation, and competition policies for achieving inclusive growth and shared prosperity in emerging and developing economies. It is the result of a global partnership and shared commitment between the World Bank Group and the Organization for Economic Co-operation and Development (OECD). Part I of the book brings together existing empirical evidence. On the benefits of competition for household welfare. It covers the elimination Of anti-competitive practices and regulations that restrict competition in key markets and highlights the effects of competition on small producers and employment. Part II of the book focuses on the distributional effects of competition policies and how enforcement Can be better aligned with shared prosperity goals.

/pdf/a-step-ahead-competition-policy-for-shared-prosperity-and-4ydxdiwbw8.pdf

A step ahead : competition policy for shared prosperity and inclusive growth

Whether Canadians talk about income inequality, regional growth or technological change, it is clear that economic growth is not uniformly spread across the country. Canada is not unique in this regard: modern economic growth theory shows that economies grow like mushrooms, not yeast. Instead of expanding uniformly like bread in the oven, economic growth pops up sporadically like mushrooms in the forest bed. Economic growth is a process of unpredictable “creative destruction” in which there will be winners and losers. The policy discussion around this kind of growth has often focused on the consequences for those left behind by change. It is often easier to identify those who lose from technological changes, while the winners are diffuse. Policymakers should also think more about harnessing uneven economic growth. From international trade to education policy, this Commentary shows how governments should think about the mix of targeted and economy-wide policies they should introduce to grow the Canadian economy. With increased international trade, Canadians as a whole will benefit not only from lower prices, but also from the more rapid productivity growth that will result from increased innovation by domestic firms as they seek to compete against foreign firms that can enter the Canadian market. Exchange-rate movements have many conflicting and uncertain effects on both the level and growth rate of domestic productivity. Since monetary policy cannot affect the real exchange rate in the long run, the Bank of Canada should continue to focus not on the exchange rate, but on its inflation target. Existing small business tax preferences are unlikely to promote productivity growth. Job creation is fostered not by small businesses per se, but by the young businesses that are the agents of creative destruction. The Canadian telecommunications industry is ideally suited to benefit from enhanced innovation and productivity growth in the event of a serious threat of entry by foreign firms large enough to enjoy significant scale economies. To take advantage of that possibility, the federal government should eliminate foreign ownership restrictions in the industry. Universities should also pursue independent research programs that foster basic science. Community colleges should focus on giving workers the skills they need to work with the most up-to-date technologies. With growth comes change, and it is time that Canadian policymakers think about how that change occurs and how best to use it for the benefit of Canadians.

/pdf/mushrooms-and-yeast-the-implications-of-technological-4r2rqiy51o.pdf

Mushrooms and Yeast: The Implications of Technological Progress for Canada's Economic Growth

Are more competitive industries more innovative? Empirical investigation into various theories of innovation in industrial organization, agency theory, or endogenous growth, make diverse predictions with respect to this long-standing open question in economics. In this paper, we investigate the empirical relationship between competition intensity and firm innovation using a new micro-database containing a large sample of Canadian manufacturing enterprises over the 2000–05 period. Using three different measures of competition intensity, we find evidence that competition intensity is positively related to firm-level expenditures on research and development (R&D) in Canadian manufacturing industries. However, we also find that this relationship is dampened when more firms are further from the technological frontier of their industry. Nevertheless, the results provide evidence for a Schumpeterian interpretation, whereby market power can increase business incentives for innovation when many firms are technological laggards.

Market Incentives for Business Innovation: Results from Canada

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Market Incentives for Business Innovation: Results from Canada