Theory and Evidence from Firms and Nations
Edited by Mehmet Ugur
Chapter 1: Governance, regulation and innovation: new perspectives and evidence
For a long time, determinants of innovation were studied with an exclusive focus on market structure, industry characteristics, technology choice, and appropriability of innovation profits. This institution-free approach can be traced back to Schumpeter’s (1934, 1942) seminal work, which argued that large firms and concentrated market structures promote innovation. Arrow (1962) takes issue with the Schumpeterian hypothesis and demonstrates that a monopoly shielded against competition has less incentive to innovate compared to firms within a perfectly competitive market. According to Gilbert (2006), we are still far from a general theory of the relationship between innovation and market structure as industry characteristics, the nature of technological competition and the distinction between product and process innovation emerge as confounding factors. Yet, recent empirical work informed by Aghion et al. (2002a, 2005) demonstrate that the relationship between market structure and innovation is likely to be non-linear, with competition fostering innovation at low levels of competition but reducing innovation when the initial level of competition is already high (Peneder, 2012).
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