Hayato Kato: Masahito Ambashi asks a fundamental question in the modern economy: Is product market competition good or bad for productivity growth? He empirically tackles this question by focusing on Japanese industry.

The author clearly reviews the theoretical underpinnings and states that the relationship between competition and productivity growth could be positive, negative, or even non-monotonic. Technologically laggard firms have stronger incentives to innovate than monopoly firms to achieve monopoly status. Thus, competition among technologically leading and laggard firms may foster innovation in the economy (the “replacement effect”). On the other hand, monopoly power and the resulting profits may be necessary for firms to engage in investment on technological innovation (the “Schumpeterian hypothesis”). Furthermore, considering the fact that firms with different technological levels have different degrees of incentive to innovate, the relationship may be non-monotonic (Aghion et al. 2005).

With mixed theoretical predictions in mind, it is an empirical...

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