Schumpeter Calling - Firm-level Innovation in Times of Increased Competition

• Applicant: Professorin Dr. Katharina Erhardt
• Subject Area: Economic Policy, Applied Economics
• Term: since 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 537036406

The project proposal aims to understand how firm-level innovation responds to increased competition resulting from the sudden appreciation of the Swiss Franc in January 2015. While competition is widely believed to drive growth and innovation, conflicting views exist on its actual relationship with innovation. Some argue that competition fosters innovation, while others – going back to Schumpeter’s seminal work -- propose that larger firms and concentrated market structures are more conducive to innovation. This project aims to explore this relationship further, leveraging the unique opportunity provided by the Swiss exchange rate shock, which allows for the precise measurement of an exogenous shock to competition at the firm level. An essential aspect of this research proposal is to broaden the concept of innovation to include not only traditional measures like R&D and patents but also innovative adjustments in supply-chain organization, market access strategies, and firms' overall organizational structure. These different dimensions of firm-level adjustments have been recently linked to firm performance and play crucial roles in adapting to changing market conditions. In addition to examining various dimensions of innovation, the project aims to identify the factors that lead to heterogeneous responses across firms and industries. To accomplish this, Swiss transaction-level trade data will be combined with other relevant sources, including investment and innovation surveys, ownership linkages, and patent data. The research will employ firm-level information prior to the shock to isolate the causal impact of increased competition on innovation outcomes. It will analyze how firms' responses vary based on factors such as their age and innovative capacity. By shedding light on the long-term consequences of firm-level innovation, the project aims to derive policy implications for fostering innovation in the face of heightened competition. In conclusion, the project proposal seeks to contribute valuable insights into the intricate relationship between competition and innovation at the firm level, providing a better understanding of its implications for economic growth and overall welfare.

• DFG Programme: Research Grants