This study uses a hwequation model and data for four‐digit SIC manufacturing industries to examine the joint endogeneily of output measures of innovation activity and market structure (industry concentration). Its results confirm recent studies finding high concentration to have a negative effect on innovation output (especially smabfinn innovations), and Anding that large‐firm innovations and small‐finn innovations respond Werently to economic and technological conditions. The study also reveals that, contrary to some previous research, and consistent with modern ‘Schumpeterian’ propositions, innovation output (especially largefirm innovations) has a significant positive effect on industry concentration.

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