Innovation and the Evolution of Industry Structure

Abstract

Great advances have been made in recent decades enriching the economic theory of innovation and in understanding the role innovation plays in the survival and success of businesses. Advances have also been made in theoretical and empirical research into the relationship between innovation and industry structure. In what follows I comment on these advances and point to areas in which more theoretical work might extend our understanding of the links between innovation and industry structure.

Key Words:

• Innovation
• Market Structure
• Dynamic Competition
• Firm Heterogeneity

JEL Classifications:

• D4
• L1
• L2
• O31

Helpful comments from Mita Bhattacharya, Curtis Eaton, Stan Metcalfe and Eleanor Morgan are gratefully acknowledged, but they share no responsibility for any errors or omissions.

Notes

1. Alternative explanations for the cumulative nature of innovations emphasise technological connections with the introduction of a new general-purpose technology, such as the development of railways, electricity or computers (see e.g. Freeman and Louçã 2001; Perez 2002; Lipsey, Carlaw, and Bekar 2005).

2. Aghion et al. (2005) argue for an inverted-U shaped relationship between innovative activity and competition, pointing to an “escape-competition effect”, leading to higher R&D when competition is intense, offsetting the “Schumpeterian effect” of less intense competition promoting R&D. Peneder (2012) reviews the literature relating to the inverted-U relationship in the introduction to an issue of the Journal of Industry, Competition and Trade containing a series of empirical studies of the relationship.

3. This relationship is even stronger when these investments are treated as current expenses for accounting purposes, as is usually the case for advertising and R&D expenditures (see Bloch 1974).

4. Winter (2017) reflects on developments in the evolutionary approach to innovation and market structure that have occurred since the publication of Nelson and Winter (1982). He also criticises the resistance of mainstream economists to incorporating evolutionary insights into theorising about long-run economic change.

5. Andersen (2004) explains the analogy between the effect of this covariance and the “Price effect” identified by George Price in his work on the statistics of dynamic processes in evolutionary biology.

6. Pitelis and Runde (2017) discuss the further development of the resource-based view of the firm along with other non-mainstream approaches to the economics of business in the lead article of an issue of the Cambridge Journal of Economics devoted to “Post-classical Perspectives on the Interaction between Business Organisation and Public Policy”.

7. Agarwal et al. (2015) review the impact of Klepper’s work in the lead essay of a special issue of Industrial and Corporate Change dedicated to Klepper after his untimely death in 2013.