Endogenous Market Structures and Innovation by Leaders: An Empirical Test

Models of competition for the market with endogenous market structures show that, contrary to the Arrow view, an endogenous entry threat induces the average firm to invest less in R&D and the incumbent leader to invest more. We test these predictions using a unique dataset for the German manufacturing sector (the Mannheim Innovation Panel). In line with our predictions, endogenous entry threats as perceived by the firms (in survey data) reduce R&D intensity for an average firm, but they increase it for an incumbent leader. These results hold after a number of robustness tests with instrumental variable regressions.