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The main objective of this paper is to analyze the links between product market competition, innovation and growth. In a step-by step innovation model we explicitly introduce the distinction between knowledge and technology information flows. Patents protect their holders from being imitated or copied but do not protect them against the possibility that less efficient rivals master the disclosed knowledge, allowing them to start a new race from the cutting edge of the tech- nology rather than from their own technology. We show that this dis- tinction has important consequences. The knowledge information flow increases the positive effect of competition on innovation and growth while the technology information flow has a negative effect. We also decompose the overall effect of competition as the sum of two opposite effects: a negative level effect (competition lowers individual profits in industries where all firms are symmetric) and a positive spread effect (the spread of profits between asymmetric firms increases with the intensity of competition). These effects encompass the selection effect of competition. Finally we give support to the idea that a higher short run competition does not favor the long run competition.

Catching Up or Leapfrogging? The Effects of Competition on Innovation and Growth