Endogenous Market Structures and Innovation by Leaders: An Empirical Test
37 Pages Posted: 29 Jun 2011
Date Written: June 1, 2011
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.
Keywords: Endogenous market structures, entry, leadership, innovation
JEL Classification: O31, O32
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