IS THERE REALLY AN INVERTED U-SHAPED RELATION BETWEEN COMPETITION AND R&D?

We test whether predictions of the Aghion et al. (Aghion, P., Bloom, N., Blundell, R., Griffith, R. and Howitt, P. (2004) Competition and Innovation: An Inverted U Relationship. NBERWorking Paper series, No. 9269.) 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, whereas further increases in competition most likely lead 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.