| dc.description.abstract | In the age of knowledge with a rapid technology transition on the market, how to maintaining the firm’s competitiveness in the area of product as well as process innovation has become a major concern. In the traditional economic theory of the oligopoly market, there are few firms in the market and each firm restrains his rivals in an attempt to compete with price and thereby increase overall profitability. Besides, firms can also enhance their market position through a non-price approach, i.e., by setting up huge entry barriers so that their potential rivals could never impose a real threat to them. Baumol (2002) indicates that firms can actually enhance their competitiveness by constantly introducing new products and new processes into their oligopoly product market and thus form a strong entry barrier to his rivalry firms. As such, the R&D expenditures and innovation activities have actually become powerful competition tools and have, in turn, created an arms race relationship among the oligopolistic firms since all the competing firms are likely to react in the same manner.
The study investigates four major oligopolistic firms in the Thin Film Transistor– Liquid Crystal Display (TFT-LCD) market, namely, Samsung, LG in Korea and Chi Mei Optoelectronics (CMO), and AU Optronics (AUO) in Taiwan. By utilizing firm-level data on R&D and capital investment, and by testing such firm level data through empirical models such as: first difference, finite distributed lag and binominal test models we can test the validity of Baumol’s arms race hypothesis. The key findings of this paper are as follows: First, TFT-LCD oligopolistic firms in the international market create an arms race not only in regard to R&D expenses while engaging in innovative activities, but also to capital investment while engaging in production efficiency. Second, these four firms actually create an even stronger arms race relationship on the sum of R&D and capital inputs. Our empirical evidence confirms that the above mentioned arms race phenomena will actually become even more intensified between leader (Samsung) and followers (LG, CMO). In addition, the followers (LG, CMO) may actually leveraging both their R&D and capital expenses instantaneously so as to be more responsive to leader’s (Samsung) possible competitive strategies. | en_US |