INNOVATION, PATENTS AND ECONOMIC GROWTH - Innovation in the Biopharmaceutical Industry - page 69

increases risk of failure, managers and workers (especially if there is rent sharing
by them) are encouraged to improve efficiency by innovating to ensure survival
(Haskel and Sanchis, 1995; Aghion and Howitt, 1998).
In high-tech industries with low concentration — characterised by “creative
destruction” — businesses engage in innovative activities to develop differentiated
product/services to capture or to maintain market share. This results in intense com-
petition that can reduce rents and lead to some companies going out of business. In
contrast, in high-tech industries with high concentration, where a few large firms
dominate, technological leadership through innovation — especially when com-
bined with “first-mover advantage” in introducing innovations to market — may
confer strong competitive advantage to a company and enable them to earn high
rents from their investment in innovation (OECD, 2003).
A positive relationship between competition and innovation has also been con-
firmed by Aghion et al. (2001), Boone and Van Dijk (1998), Porter (1990) and van
de Klundert and Smulders (1997). These findings have strongly influenced public-
and industrial-policies in many countries (Nickell, 1996).
But, this view of a positive relationship between competition and innovation con-
trasts with the assumptions inherent in the basic Schumpeterian approach where the
opposite is held — that innovation and growth decline with competition, increased
competition may reduce innovation (Cohen and Levin, 1989), and the gains from
innovation are quickly consumed, lowering the firm's expectations of the rents from
innovation, thereby discouraging investment in innovation. This negative relation-
ship between competition and innovation is also supported by other studies showing
that companies which have monopoly power and generate supernormal profits —
and hence, have less risk of bankruptcy — are better positioned (than companies
without monopoly power) to finance innovation activities that enhance their domi-
nant position. This might be especially true if, through internal financing, they can
maintain secrecy on technology to further reinforce their dominant position (Kamien
and Schwartz, 1982). However, many empirical studies refute these arguments,
demonstrating that increased competition does not decrease innovation (Geroski,
1990; Blundell et al. , 1999).
R&D plays an important role in a company's productivity (Baily and Chakrabarti,
1985; Georghiou et al. , 1986) while innovation positively influences profitability
as innovative companies generally have larger market shares, higher profitability
and greater resilience in times of economic downturn (Geroski et al. , 1993). Inno-
vative companies and those that adopt new technologies enjoy higher profits than
companies that are not innovative (Stoneman and Kwon, 1996). As information
on product and process innovations diffuse relatively rapidly and as these inno-
vations can be imitated by competitors (Mansfield et al. , 1981; Mansfield, 1985),