Divestiture and its implications for innovation and productivity growth in US telecommunications

This study has sought, to determine the impact of policy changes that led to the breakup of the monopoly structure of U.S. telecommunications on productivity and research activities of AT&T. A simultaneous-equations model is used to examine the relationship between research intensity, market share, firm size, and total factor productivity (TFP) before and after divestiture. The results show that the effect of divestiture on productivity is negative but that competition has a significantly positive effect. Contrary to popular argument, competition led to significant increases in R&D investment by AT&T. The study also finds a strong and positive relationship between R&D and productivity in the postdivestiture period, marked by its absence in the predivestiture years. Scale economies remain important, indicating the industry continues to favor large firms.