Can I count on U?

The theory of the inverted u-curve is a marriage of two competing theories of competition and innovation. Schumpeter (1943) suggests a negative relation, as firms need deep pockets and market power to invest in new technologies. On the other hand, Arrow (1962) suggests a positive relation, as innovation is mainly driven by competitors catching up with market leaders. Aghion et al. (2005) combines these two opposing theories, predicting an inverted u-curve from competition to innovation. I test this hypothesis on a broad sample of Norwegian micro data. By measuring innovation with patent counts and competition by industry markups, I find mixed evidence of an inverted u-curve in the Norwegian economy. Significance is restored when I exclude oil related activity, but the findings are not robust to alternative specifications of competition and innovation. I conclude that while the evidence is weak, it is not negligible, and the existence of an inverted u-curve can not be dismissed for the Norwegian economy