The impact of competition and innovation on firm performance

Sammanfattning: This PhD thesis consists of four papers analyzing the impact of competition and innovation on Swedish manufacturing firms’ performance.Paper [I] (co-authored with Patrik Gustavsson Tingvall) analyse determinants of firm R&D using matched Swedish employer-employee data spanning the period 1990-1999. We explore if predictions from the model of creative destruction are supported by data. Using various measures of competition, results indicate that competition is likely to contract rather than expand firm R&D expenditures. In addition, firm R&D is positively correlated with its own export and to the R&D-intensity of other firms within the same concern, indicating the existence of knowledge spillovers.Paper [II] investigates the association between total factor productivity growth and the R&D expenditures of Swedish manufacturing firms in the presence of domestic- and international R&D spillovers. The paper assumes that the principal channel of transmission of new technology is through I/O relations. Econometric evidence suggests that international as well as domestic inter-industry R&D spillovers are important determinants of firms’ productivity growth in the long run. The R&D spillovers generated within the industry and following I/O links seem to be of minor importance in explaining productivity growth. It seems likely that within-industry productivity spillovers follow other channels than I/O flows, such as horizontal spillovers through copying of new products and processes, or labour turnover. The use of a convergence parameter is one way to check for such within-industry technology flows. Our results indicate that a catch-up process exists by which the non-frontier firms in the Swedish manufacturing sector absorb knowledge spillovers from the leading firms in the industry. Finally, a firm’s own R&D efforts are found to be more or less positively correlated with the TFP growth, maybe the contribution from R&D efforts in some sense are underestimated.Paper [III] (co-authored with Patrik Gustavsson Tingvall) examines whether predictions of the Aghion and Howitt (2004) model are supported by firm level data. In particular, we analyze if there is an inverted U-shaped relation between competition and R&D. Results show that the inverted U-shaped relation is supported by the Herfindahl index but not by the price cost margin. Using the Herfindahl index results suggest that breaking up monopolies increases R&D while further increases in competition most likely leads to reduced R&D. Comparing different estimators, we find that time-series based estimators typically result in less clear-cut results, probably driven by a lack of time series variation in measures of competition.Paper [IV] examines the direct and indirect effect of firm R&D on total factor productivity growth. The R&D efforts do not only stimulate innovation but also enhance firms’ ability to assimilate outside knowledge. We assume that the principal channel of transmission of new technology is through I/O relations. Econometric evidence suggests that in addition to a firm’s own R&D expenditures, R&D spillovers embodied in traded goods within the industry, others imported from abroad, and technology spillovers transferred from the technological frontier within an industry are important determinants of firms’ productivity growth. Results suggest that domestic R&D spillovers following the I/O links between industries are of minor importance in this respect. We also analyze whether firms’ absorptive capacity matters for productivity growth. Analyzing absorptive capacity is particularly important for assessing the effective contribution of spillovers from other firms. The effect of a firm’s absorptive capacity is found to interact positively with imported R&D spillovers, domestic rents spillovers seem to play a minor role for productivity growth.