Competition, Innovation and Within-Plant Productivity: Evidence from Chilean Plants

This paper studies the effect of competition on within plant-productivity, and a principal channel through which it may work - innovation. We employ a unique plant-level panel from Chile that allows backing out price-cost... [ view full abstract ]

This paper studies the effect of competition on within plant-productivity, and a principal channel through which it may work - innovation. We employ a unique plant-level panel from Chile that allows backing out price-cost markups, constructing direct measures of TFPQ, and tracking innovative activity in detail. We document a strong positive relationship between plant-level markups and within-plant physical productivity, and with innovation investment, with the latter accounting for about half of the productivity impact. These effects are only observed in lagging plants - productivity and innovation of plants at the frontier responds positively, although statistically insignificantly, to competition. Finally, we find that the link between markups and innovation is strong in industries that are more dependent on external financing, suggesting that part of the positive correlation is due to increased markups facilitating self-financing.