Thursday, July 29, 2010

Innovation, Competition and Incentives for R&D

Posted by D. Daniel Sokol

Martin Woerter, ETH Zurich, Swiss Economic Institute (KOF), Christian Rammer, Centre for European Economic Research (ZEW) - Industrial Economics and International Management Research, and Spyros Arvanitis, Swiss Federal Institute of Technology Zurich (ETH) - Swiss Institute for Business Cycle Research (KOF) describe 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.

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