The Effects Of Entry On Incumbent Innovation And Productivity

There is a long standing interest in the effects of firm entry, which are widely recognized as major drivers of economic growth. Entry can induce reallocation of inputs and outputs, trigger knowledge spillovers and affect innovation incentives in incumbent firms. Entry by foreign firms has been a focus of attention in recent years, particularly in countries or industries behind the technological frontier, and has spurred widespread policy reforms aimed at fostering the free movement of goods, services, capital and firm management. Empirical studies on the effects of market liberalizations and foreign direct investment provide mixed results on incumbent reactions, but a large number of empirical studies have shown different results. Because of such limitations, in this paper we take a new look at this issue. In this sense, there is great theoretical and practical significance on the research of the effects of entry on incumbent innovation and productivity.On the basis of analysis on the importance of the effects of entry on incumbent innovation and productivity, the paper leads to necessary of the study. Then its reviews the theory and empirical research literatures about relationship of innovation and productivity between entry and incumbent and sums up them briefly. Next it educes the theoretical explanation of the effects of entry on incumbent innovation and productivity. Then it focuses on China, and tests the effects of entry on different types of manufacturing of incumbent innovation and productivity. At last it puts forward relative suggestion. We show that technologically advanced entry spurs innovation incentives in sectors close to the technological frontier-successful innovation allows incumbents to prevent entry. In laggard sectors it discourages innovation-increased entry reduces incumbents'expected rents from innovating.The results of our theoretical and empirical analysis can be linked to the policy debates on market (de)regulation, competition policy, large scale privatization, and trade liberalization. The main implication is that policies aiming at decreasing or removing entry barriers alone may not be suffcient to foster growth of incumbent firms in all sectors of an economy. Therefore, we should be adopting different policies.