The Relationship between Competition and Innovation – Philippe Aghion – June 2023 OECD discussion

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OECD Directorate for Financial and Enterprise Affairs

This presentation by Philippe Aghion, Professor at the College de France and London School of Economics, was made during the discussion “The Relationship between Competition and Innovation” held at the 140th meeting of the OECD Competition Committee on 14 June 2023. More papers and presentations on the topic can be found out at oe.cd/rbci. This presentation was uploaded with the author’s consent.

Presentations & Public Speaking

Competition and Innovation
through the lens of
Schumpeterian Growth Theory
Philippe Aghion

BASIC “SCHUMPETERIAN GROWTH” PARADIGM
• Long-run growth driven by cumulative process
of innovation
• Innovations result from entrepreneurial
activities motivated by prospect of innovation
rents
• Creative destruction: new innovations displace
old technologies

AT THE HEART OF THE PARADIGM
• Contradiction :
• The innovator is motivated by prospect of monopoly
rents
• But those rents can be used ex post to prevent future
innovations and to block new entry
• Regulating capitalism is largely about how to manage this
contradiction

WHY THIS PARADIGM CHANGES THE LANDSCAPE
• It gives centerstage to cross-firm heterogeneity
• Between incumbents and entrants
• Between leaders and followers
• Between small and large firms

WHY THIS PARADIGM CHANGES THE LANDSCAPE
• It gives centerstage to firm dynamics

TWO DISTINCTIVE PREDICTIONS ON
COMPETITION AND GROWTH

TWO DISTINCTIVE PREDICTIONS
• Growth is positively correlated with firm turnover
• More intense competition enhances innovation in
« frontier » firms but discourages it in « non-frontier »
firms

GROWTH AND TURNOVER
• Firm and job turnover
Positive correlation between GDP per capita growth and the rate of creative destruction.
Source: Eurostat.

POLICY IMPLICATION
Subsidizing incumbent firms may discourage
innovation by increasing entry costs
Acemoglu-Akcigit-Bloom-Kerr
Aghion-Bergeaud-Cette-Lecat-Maghin

COMPETITION, GROWTH AND DISTANCE TO FRONTIER

COMPETITION AND GROWTH: THE INVERTED-U RELATIONSHIP

POLICY IMPLICATION
Complementarity betwen competition policy and
patent policy
Aghion, Howitt, and Prantl

POLICY IMPLICATION
Rethink competition policy to be it more
innovation compatible
Gilbert (2020)

26
Over time, and particularly since the 1980s,
economists have come to dislike industrial
policy on two grounds: (i) it focuses on big
incumbents (‘national champions); and (ii)
governments are not great in ‘picking winners’.

WHY IS THE WIND CHANGING?
Vaccins: Coordination problems
• S-curve
Climate: Need to redirect innovation
• Clean versus dirty innovation

*DARPABLE* PROJECTS
• Research can be organized around a mission
• Mid-way between lab and application (nascent
S-curve)
• Frictions prevent financing and large-scale
experimentation of the technology

POLICY IMPLICATION
Reform industrial policy to make it competition
friendly

CONCLUSION
What do we learn from creative destruction paradigm?
1) Subsidizing incumbent firms may become detrimental to
innovation
2) Competition enhances innovation in frontiere firms and
frontier economies
3) Complementarity between competition policy and
patent policy
4) Innovation benefits from pro-competition industrial
policy

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