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Falck, Oliver; Heblich, Stephan and Kipar, Stefan (2011): Incumbent innovation and domestic entry. In: Small Business Economics, Vol. 36, No. 3: pp. 271-279

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This paper analyzes the escape-entry incentive for innovation by incumbent firms. The threat posed by the possibility of leading-edge firms entering the market influences incumbent innovation. To overcome problems of endogeneity, we apply an instrumental variable approach to analyze a rich firm-level dataset (1987-2000) for Germany. We find evidence that domestic entry has a negative effect on incumbent product innovation, which is a strong indication of new entrants’ comparative advantage in commercializing new ideas. In contrast, domestic entry has a positive effect on incumbent process innovations, an effect also known as the escape-entry effect.

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