April 6, 2010

The relation between competition and innovation: Empirical results and implementation into WorldScan

We analyse the theoretical and empirical relation between changes in competition levels and innovation efforts.

Using OECD panel data we find a positive and significant elasticity of 1.8 between competition (measured as one minus the Lerner index) and innovation (measured as R&D intensity).

This result is similar to other studies that find a monotonic relation between both variables. However, we do not find and inverted-U relationship as in the influential paper by Aghion et al. (2005).

Using the theoretical insights and our own empirical results we include this relationship into WorldScan –CPB's multicountry recursive dynamic CGE model.

Although the impact of competition changes on R&D expenditures can be significant at the sectoral level, our simulations using WorldScan do not result in significant macroeconomic changes when the link between competition and innovation is present.


Clovis Hopman
Hugo Rojas-Romagosa