Innovation, Competition and Incentives for R&D

Posted by D. Daniel Sokol

Martin Woerter (KOF Swiss Economic Institute, ETH Zurich, Switzerland), Christian Rammer (Centre for European Economic Research (ZEW), Department of Industrial Economics and International Management, Mannheim), and Spyros Arvanitis (KOF Swiss Economic Institute, ETH Zurich, Switzerland) explore Innovation, Competition and Incentives for R&D.

ABSTRACT: This paper analyses the relationship between past innovation output, competition, and future innovation input in a dynamic econometric setting. We distinguish two dimensions of competition that correspond to the concepts of product substitutability and entry barriers due to fixed costs. Based on firm-level panel data for Germany and Switzerland we obtain consistent results for both countries. Innovation output in t-1 as measured by the sales share of innovative products is positively related to the degree of product obsolescence in t, and negatively to the degree of substitutability in t in both countries. Further, we find that rapid product obsolescence provides positive incentives for higher – primarily product-oriented – R&D investments in t+1, while high substitutability exerts negative incentives for future R&D investment.