Foreign competition and innovation

Research output: Contribution to journalArticlepeer-review

Abstract

Empirical studies have found that enhanced foreign competition can encourage or discourage innovation. To address this relationship, I examine a market structure in which a small number of large multi-product oligopolists compete with a large number of small single-product firms in the same industry. The single-product firms are short-lived while the multi-product firms live forever, and the large firms invest in innovation in order to enlarge their product spans. All firms export. I show that an increase in the competitiveness of foreign firms can increase or reduce innovation efforts of a large multi-product firm. Moreover, changes in the incentives to innovate can be different for more-productive and less-productive oligopolists. As a result, aggregate sectoral innovation may rise or decline, depending on the productivity distribution of the oligopolists. I also show that changes in short-term operating profits may not be aligned with changes in the incentives to innovate.

Original languageEnglish
Article number104007
JournalJournal of International Economics
Volume152
DOIs
StatePublished - Nov 2024
Externally publishedYes

Funding

FundersFunder number
Harvard University

    Keywords

    • Firm dynamics
    • Innovation
    • Product span
    • Trade

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