The Effect of Entry on R&D Investment of Leaders: Theory and Empirical Evidence

33 Pages Posted: 30 Sep 2008

See all articles by Dirk Czarnitzki

Dirk Czarnitzki

Centre for European Economic Research (ZEW); Catholic University of Leuven (KUL)

Kornelius Kraft

University of Dortmund - Department of Economics; IZA Institute of Labor Economics

Federico Etro

University of Milan, Bicocca - Department of Economics and INTERTIC; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Date Written: 2008

Abstract

We develop a simple model of competition for the market that shows that, contrary to the Arrow view, 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 with a Tobit model based on a unique dataset and survey for the German manufacturing sector (the Mannheim Innovation Panel). We confirm the empirical validity of our predictions and perform a number of robustness test with instrumental variables.

Keywords: R&D, Entry, Endogenous market structures, Leadership

JEL Classification: O31, O32

Suggested Citation

Czarnitzki, Dirk and Kraft, Kornelius and Etro, Federico, The Effect of Entry on R&D Investment of Leaders: Theory and Empirical Evidence (2008). ZEW - Centre for European Economic Research Discussion Paper No. 08-078, Available at SSRN: https://ssrn.com/abstract=1275330 or http://dx.doi.org/10.2139/ssrn.1275330

Dirk Czarnitzki (Contact Author)

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
Mannheim, 68034
Germany

Catholic University of Leuven (KUL) ( email )

Faculty of Economics and Business
Naamsestraat 69
Leuven, 3000
Belgium
+32 16 326906 (Phone)
+32 16 325799 (Fax)

HOME PAGE: http://www.econ.kuleuven.be/msi/faculty_members.htm

Kornelius Kraft

University of Dortmund - Department of Economics ( email )

D-44221 Dortmund
Germany
+49 231 755-3152 (Phone)
+49 231 755-3155 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Federico Etro

University of Milan, Bicocca - Department of Economics and INTERTIC ( email )

Italy

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

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