The E¤ects of Entry on Incumbent Innovation and Productivity

How does \u85rm entry a¤ect innovation incentives in incumbent \u85rms? Micro data suggest that there is heterogeneity across industries. Speci\u85cally, incumbent produc-tivity growth and patenting is positively correlated with lagged green\u85eld foreign \u85rm entry in technologically advanced industries, but not in laggard industries. In this paper we provide evidence that these correlations arise from a causal e¤ect predicted by Schumpeterian growth theory- the threat of technologically advanced entry spurs innovation incentives in sectors close to the technology frontier, where successful inno-vation allows incumbents to survive the threat, but discourages innovation in laggard sectors, where the threat reduces incumbentsexpected rents from innovating. We \u85nd that the empirical patterns hold using rich micro panel data for the United Kingdom (UK). We control for the endogeneity of entry by exploiting major European and UK policy reforms, and allow for endogeneity of additional factors. We complement the analysis for foreign entry with evidence for domestic entry and entry through imports