The link between product market reform, innovation and EU macroeconomic performance

European Commission Directorate-General For Economic And Financial Affairs

Description

Competition policy
Target audience: Specialised/Technical

Informations

• Publié par: EUROPEAN-COMMISSION-DIRECTORATE-GENERAL-FOR-ECONOMIC-AND-FINANCIAL-AFFAIRS
• Nombre de lectures: 39
• Langue: English

Extrait

EUROPEAN


ECONOMY

EUROPEAN COMMISSION
DIRECTORATE-GENERAL FOR ECONOMIC
AND FINANCIAL AFFAIRS

ECONOMIC PAPERS

























ISSN 1725-3187
http://europa.eu.int/comm/economy_finance

Number 243 February 2006

The link between product market reform,
innovation and EU
macroeconomic performance
by
Rachel Griffith, Rupert Harrison and Helen Simpson
Institute for Fiscal Studies (IFS)


Economic Papers are written by the Staff of the Directorate-General for
Economic and Financial Affairs, or by experts working in association with
them. The "Papers" are intended to increase awareness of the technical work
being done by the staff and to seek comments and suggestions for further
analyses. Views expressed represent exclusively the positions of the author and
do not necessarily correspond to those of the European Commission.
Comments and enquiries should be addressed to the:

European Commission
Directorate-General for Economic and Financial Affairs
Publications
BU1 - -1/13
B - 1049 Brussels, Belgium














Institute for Fiscal Studies
7 Ridgmount Street
London WC1E 7AE UK
[phone]
www.ifs.org.uk





ECFIN/REP/50672-EN

ISBN 92-79-01184-7

KC-AI-06-243-EN-C

©European Communities, 2006
Executive Summary ........................................................................................................................5
1 Introduction.............................................................................................................................8
2 The literature.........................................................................................................................10
3 Empirical approach...............................................................................................................14
4 Data.......................................................................................................................................18
4.1 Innovative activity.........................................................................................................18
4.2 The mark-up..................................................................................................................20
4.3 Product market regulations and reforms .......................................................................23
4.3.1 Country-level indicators........................................................................................24
4.3.2 Industry-level indicator.........................................................................................25
4.3.3 Other regulations...................................................................................................29
5 Empirical findings.................................................................................................................30
5.1 Country-level results.....................................................................................................30
5.2 Industry level analysis32
5.2.1 The impact of product market reforms on R&D in the manufacturing sector ......33
5.2.2 Robustness to using only SMP countries ..............................................................37
5.2.3 The imarket reforms on productivity growth............................38
5.2.4 Service sector industries........................................................................................41
5.3 Is the impact on incumbents and/or entrants? ...............................................................42
5.4 Distance to the technological frontier ...........................................................................46
5.5 Other issues...................................................................................................................50
5.5.1 Non-linearities in the effect of competition ..........................................................50
5.5.2 Credit market regulations......................................................................................50
5.5.3 Labour ma ....................................................................................51
5.5.4 Sequencing of reforms..........................................................................................51
6 Summary and conclusions.....................................................................................................53
References .....................................................................................................................................55
7 Literature review...................................................................................................................60
7.1 Theoretical literature 61
7.1.1 Models of product differentiation and price competition......................................62
7.1.2 The rent dissipation effect.....................................................................................62
7.1.3 The importance of vertical differentiation ............................................................63
7.1.4 Agency cost literature............................................................................................63
7.1.5 The endogenous growth paradigm ........................................................................64
3
7.1.6 Recent developments in endogenous growth literature.........................................65
7.2 Empirical literature........................................................................................................67
7.2.1 The early literature................................................................................................67
7.2.2 Methodological challenges....................................................................................68
7.2.3 Evidence from UK micro data ..............................................................................69
7.2.4 Recent empirical work suggests the effect varies along several dimensions........71
7.2.5 Previous studies on product market reforms and macro-economic performance .73
7.3 Implications for our study .............................................................................................75
7.3.1 Product market reforms, entry and rents ...............................................................76
7.3.2 Competition, innovation and imitation..................................................................76
7.3.3 Interactions with firm, industry and country characteristics.................................77
8 Innovation and imitation .......................................................................................................78
8.1 Measuring innovation and imitation .............................................................................79
8.1.1 Innovation..............................................................................................................79
8.1.2 Imitation................................................................................................................83
8.2 Mapping innovative activity..........................................................................................88
8.2.1 Aggregate cross-country comparisons ..................................................................89
8.2.2 The role of industrial structure..............................................................................94
8.2.3 Entry and exit ........................................................................................................97
9 Product market regulations and reforms .............................................................................100
9.1 Overall Product Market Regulations...........................................................................101
9.2 Different types of regulation .......................................................................................104
9.3 Single Market Programme ..........................................................................................107
9.4 Other Regulations113
9.4.1 Labour market regulations ..................................................................................113
9.4.2 Financial market regulations...............................................................................113
10 Measuring the mark-up .......................................................................................................114
11 Additional results................................................................................................................119
11.1 Labour market regulations122
12 Data sources........................................................................................................................124


4
Executive Summary
This report analyses the impact of product market reforms, in the form of the EU Single
Market Programme, on the extent of product market competition and the subsequent effects of
competition on innovation activity and productivity growth.
The report first summarises the main messages from the existing theoretic