Journal of Evolutionary Economics

, Volume 24, Issue 3, pp 653–687 | Cite as

Competition, R&D and innovation: testing the inverted-U in a simultaneous system

  • Michael PenederEmail author
  • Martin Woerter
Regular Article


To address the relationship between innovation and competition we jointly estimate the opportunity, production, and impact functions of innovation in a simultaneous system. Based on Swiss micro-data, we apply a 3-SLS system estimation. The findings confirm a robust inverted-U relationship, in which a rise in the number of competitors at low levels of initial competition increases the firm’s research effort, but at a diminishing rate, and the research effort ultimately decreases at high levels of competition. When we split the sample by firm types, the inverted-U shape is steeper for creative firms than for adaptive ones. The numerical solution indicates three particular configurations of interest: (i) an uncontested monopoly with low innovation; (ii) low competition with high innovation; and (iii) a ‘no innovation trap’ at very high levels of competition. The distinction between solution (i) and (ii) corresponds to Arrow’s positive effect of competition on innovation, whereas the difference between outcomes (ii) and (iii) captures Schumpeter’s positive effect of market power on innovation. Simulating changes of the exogenous variables, technology potential, demand growth, firm size and exports have a positive impact on innovation, while foreign ownership has a negative effect, and higher appropriability has a positive impact on the number of competitors.


Innovation Competition Inverted-U Technological regimes Simultaneous system 3-SLS estimation 

JEL Codes

L11 L22 L41 M13 O33 



This paper has benefitted from critical comments and thoughtful considerations provided at numerous discussions and presentations at conferences or seminars, e.g. at KOF-ETH, WIFO, SPRU, IPTS, IIOC, or ISS. Among these, we are most indebted to Michael Pfaffermayr and Serguei Kaniovski as well as Esben Sloth Andersen, Spyros Arvanitis, Harald Badinger, Harry Bloch, Herbert Dawid, Erik Dietzenbacher, Kurt Dopfer, Giovanni Dosi, Peter Egger, Peter Fleissner, Klaus Gugler, Heinz Hollenstein, Werner Hölzl, Andreas Reinstaller, Manuel Wäckerle, Carl-Christian von Weizsäcker, Ulrich Witt, Christine Zulehner and two anonymous referees. We are also grateful to Eva Sokoll and Astrid Nolte for their invaluable technical assistance.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Austrian Institute of Economic Research (WIFO)ViennaAustria
  2. 2.ETH Zurich, Swiss Economic Institute (KOF)ZurichSwitzerland

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