Tuesday, August 9, 2011
Posted by D. Daniel Sokol
Federico Etro (Department of Economics, University Of Venice Ca Foscari), Dirk Czarnitzki (K.U. Leuven) and Kornelius Kraft (Technical University of Dortmund) address Endogenous Market Structures and Innovation by Leaders: an Empirical Test.
ABSTRACT: Simple models of competition for the market with endogenous entry show that, contrary to the Arrow view, an endogenous entry threat in a market induces the average firm to invest less in R&D and the incumbent leader to invest more. We test these predictions based on a unique dataset and survey for the German manufacturing sector (the Mannheim Innovation Panel). In line with our predictions, endogenous entry threats as perceived by the firms reduce R&D intensity for the average firm, but they increase it for an incumbent leader. These results hold after a number of robustness tests with instrumental variable regressions.