advocate that patent policy and antitrust be pursued at the same time, at least not from the point of view of promoting dynamic efficiency.”<sup>6</sup> In the theoretical framework of Aghion et al., when firms innovate to compete and retain or even expand their market share because of threat of entry, they engage in “escapecompetition” tactics; when firms fail to innovate and compete, the authors argue that they are falling prey to the Schumpeterian effects. In their early models, price costs margins are used as the competition indicator and citation-weighted patents as a measure of innovation. In their more recent papers, the authors find that technologically advanced entry by foreign firms has a positive effect on innovation if the domestic firms are close to the frontier. The effect of entry on total factor productivity growth interacts negatively with respect to the distance to frontier. Aghion, Burgess, Redding and Zilibotti (2008) find support for the inverted U hypothesis by testing it with firm level data from Indian states for 1980-97, and Aghion, Blundell, Griffith, Howitt and Prantl (2004)) for the U.K. between 1970 and 1994. They also examine the effect of de-licensing and its effect on within industry inequality in productivity.

Carlin, Schaeffer and Seabright (2004) test the inverted U hypothesis using BEEPS data from transition economies. They conclude that innovation is higher in monopolistic industries, when there is low competition. Gorodnichenko, Svejnar and Terrel (2008) also conclude the same with additional data from BEEPS 2002 and 2005. Sabirianova, Svejnar and K. Terrel (2005, 2004) find support for the heterogeneous effect of firm entry on firm performance using data from Russian and Czech firms. In their most recent paper, Gorodnichenko, Svejnar and Terrel (2008) use data from 11,500 firms from over 27 countries and find that product market competition has a negative effect on innovation. However, their findings do not validate the inverted U shaped relationship between competition and innovation as proposed in Aghion and Griffith (2008). They support, however, the basic Schumpeterian view that monopolist market structures boost innovation.

In the remainder of this paper, using Aghion et al.’s framework, we will discuss how much the BICs have succeeded in catching up with Korea at the industry level.

# **3. Data limitations**

We use UNIDO’s ISIC2 - 3 digit industry level data for about 30 industries for Brazil, India, China and Korea to test the predictions of the Schumpeterian model at the level of a country. A finer level of disaggregation, i.e., ISIC2-4 digit is available for Brazil and India but not for China. Moreover, Brazilian data in the UNIDO dataset is available only for 1996-2005. Trade data is available for all countries and all industries for the 1976-2005 period. Data for weighted tariffs is available for industries and most countries from the 1980s onward. Unfortunately, a full time series for non-tariff barriers is not available. Data from the Penn World tables is used to calculate TFP growth at the national level for all 4 countries for the period 1964-2000.

> 6 For a more detailed discussion on the role of intellectual property rights in the process of economic development see Primo Braga, Fink and Sepulveda (2000).

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