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Georgios Petropoulos, TSE Print
Friday, 27 May 2016, 12:15 - 13:15

ENTER Seminar

 Georgios Petropoulos, TSE

The Relationship Between Competition and Innovation: How Important are Firm's Financial Constraints ? 

Abstract: This paper studies the relationship between product market competition and innovation. It illustrates that apart from the well-studied impact of product market competition on the incentives of firms to innovate, it also affects their ability to have access to the necessary funds in order to innovate. Due to the fact that innovation projects are by definition risky and external financing subject to moral hazard concerns, lenders may be reluctant to finance projects in which the involved firms are not considered credible borrowers. I develop a step-by-step innovation model and show how product market competition may restrict the ability of firms to be credible borrowers. This effect can become the main driving force for R&D activities if firms are financial constrained. The relationship between competition and innovation depends on the intensity of financial constraints. For intermediate intensity the relationship is inverted-U shaped but the peak of the curve moves to lower levels of competition as financial constraints become more intense. If the intensity is high, then, the impact of competition to the ability of firms to finance their investments dominates and the relationship is monotonously negative. Moreover, the presence of financial constraints can increase investment in innovation in industries where firms have similar production technologies and the product market competition is low.Proposed market reforms that target to increase competition should be accompanied with other necessary policy initiatives such as appropriate credit reforms and well targeted industrial policies that secure the access of firms to sufficient funds for their R&D investments. 


Location: R42.2.113
Contact: Nancy De Munck, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it