erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Catching-up or Leapfrogging? The Effects of Competition on Innovation and Growth

David Encaoua (EUREQua, Université de Paris I, France)
David Ulph (University College London, UK)

Abstract

The main objective of this paper is to analyze the links between product market competition, innovation and growth. We capture the idea that …rms innovate in order to try to escape -albeit temporarily - from the pressure of competition exerted on them by their rivals. There are two ways in which competitive pressure can be thought of as a driving force to innovate. In leveled industries where all the …rms have access to the same technological knowledge, the greater is the intensity of competition between the neck by neck …rms the lower will be their current pro…ts. Thus, as the competitive pressure increases, these …rms will devote a higher R&D e¤ort to obtain a leadership and escape from the unpro…table state. In unleveled industries, where one …rm has obtained a technological lead, the greater is the intensity of competition, the lower will be the current pro…t of the laggard …rm. This should increase the incentive of this …rm to eliminate its disad-vantage by catching-up or leapfrogging the current leader. We assume that if a laggard …rm succeeds in innovating, it will either leapfrog the leader with some probability or catch-up its technology with the complementary probability. The dynamics of industry are thus more complex than in pure leapfrogging models. By using a quadratic R&D cost function, we investigate how innovation and growth are a¤ected in the stationary state by the intensity of competition and by the probability of leapfrogging.

Economic Research Center
Middle East Technical University
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