Liberalisation, industry turmoil and the balance of R&D activities

In this paper we investigate the relationship between market structure and the composition of R&D activities. We present an empirical model to demonstrate that when market structure is shuffled by an institutional discontinuity, such as liberalisation, basic and applied activities respond in opposite ways: the former decrease whereas the latter increase. As a consequence, market turmoil is likely to provide firms with short-term incentives, shifting the allocation of resources towards applied and development activities. The model is tested on an original data set including innovation measures from the incumbent Public Telecommunications Operators of 17 European countries. We argue that the dynamics outlined in the model are likely to prevent firms (industries) sustaining an appropriate rate of innovative activity.  2001 Published by Elsevier Science B.V.