Competition and Economic Growth: an Empirical Analysis for a Panel of 20 OECD Countries

Scopelliti, Alessandro Diego (2009): Competition and Economic Growth: an Empirical Analysis for a Panel of 20 OECD Countries.

Abstract

This paper aims at analyzing, from an empirical point of view, the relationship between product market competition and economic growth, using the data on multi-factor productivity for a panel of 20 OECD countries over a period 1995-2005, and considering the role of the distance from the technological frontier in the growth process.

Section A examines the impact of economic freedom and of the distance to frontier on the level and on the growth rate of multi-factor productivity. The analysis distinguishes between the indicators of business freedom and trade freedom, as proxies for the competitive pressures coming from domestic market and from foreign market. Then, trade liberalizations are more beneficial for the countries far from the frontier, because they can exploit the opportunities given by international trade also in order to adopt the existing technologies developed by the advanced economies. On the other hand, business liberalizations are more advantageous for the countries close to the frontier, because the elimination of regulatory barriers increases the possibility of entry in the market and then rises the potential competition to the incumbent firms.

Section B studies the effect of product market regulation, employment protection legislation and of the distance to frontier on the level and on the growth rate of multi-factor productivity. Product market liberalization as well as labour market deregulation determine an increase of total factor productivity: moreover, the interaction of market rigidities with the distance to the frontier mostly displays an innovationenhancing effect, since the positive effect of market liberalizations on TFP is higher for the countries close to the frontier, where the existing technology level would reinforce the incentive for innovation.

• Item Type: MPRA Paper
• Language: English
• Keywords: multi-factor productivity; economic freedom; product market regulation; employment protection legislation; distance to frontier
• Subjects: L - Industrial Organization > L4 - Antitrust Issues and Policies > L44 - Antitrust Policy and Public Enterprises, Nonprofit Institutions, and Professional Organizations; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; L - Industrial Organization > L4 - Antitrust Issues and Policies > L43 - Legal Monopolies and Regulation or Deregulation

References

- Acemoglu D., Aghion P. and Zilibotti F. (2006), Distance to Frontier, Selection and Economic Growth, Journal of the European Economic Association, Vol. 4, Issue 1, pp. 37-74

- Aghion P., Askenazy P., Bourlès R., Cette G. and Dromel N. (2009), Education, Market Rigidities and Growth, Economics Letters, Vol.102, Issue 1, pp. 62-65

- Aghion P., Bloom N., Blundell R., Griffith R. and Howitt P. (2005), Competition and Innovation: an Inverted U Relationship, The Quarterly Journal of Economics, May

- Aghion P., Blundell R., Griffith R., Howitt P. and Prantl S. (2003), Entry and Productivity Growth: Evidence from Micro-Level Panel Data, Journal of the European Economic Association, Papers and Proceedings, Vol.2, pp.265-276

- Aghion P., Blundell R., Griffith R., Howitt P. and Prantl S. (2009), The Effects of Entry on Incumbent Innovation and Productivity, Review of Economics and Statistics, Vol. XCI, Issue 1

- Aghion P., Burgess R., Redding S. and Zilibotti F. (2008), The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India, American Economic Review, Vol.98, Issue 4, pp.1397-1412

- Aghion P. and Griffith R. (2005), Competition and Growth, MIT press

- Aghion P. and Howitt P. (1992), A Model of Growth through Creative Destruction, Econometrica, Vol. 60, No. 2, March, pp. 323-351

- Aghion P. and Howitt P. (2009), The Economics of Growth, MIT Press

- Amable B., Demmou L. and Ledezma I. (2009), Product Market Regulation, Innovation and Distance to Frontier, Industrial and Corporate Change

- Barro R. and Sala-i-Martin X. (2004), Economic Growth, MIT Press, Second Edition

- Beach W. W. and Kane T. (2008), Methodology: Measuring the 10 Economic Freedoms, in Heritage Foundation (2008), 2008 Index of Economic Freedom

- Blundell R., Griffith R. and Van Reenen J. (1999), Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms, Review of Economic Studies, Vol.66, pp.529-554

- Boone J. (2000), Competition, CEPR Discussion Paper no.2636, London

- Cohen D. and Soto M. (2007), Growth and Human Capital: Good Data, Good Results, Journal of Economic Growth, vol. 12, issue 1, March, 51-76

- Conway P., Janod V. and Nicoletti G. (2005), Product Market Regulation in OECD Countries:1998 to 2003, Working Paper no.419, OECD Economics Department

- Conway P. and Nicoletti G. (2006), Product Market Regulation in the Non Manufacturing Sectors of OECD Countries: Measurement and Highlights, Working Paper no.530, OECD Economics Department

- Geroski P. (1995), Market Structure, Corporate Performance and Innovative Activity, Oxford University Press

- Gjersem C. (2004), Policies Bearing on Product Market Competition and Growth in Europe, Working Paper no.378, OECD Economics Department

- Griffith R. and Harrison R. (2004), The Link between Product Market Reform and Macroeconomic Performance, Economic Paper n.209, European Commission, Directorate General for Economic and Financial Affairs, August

- Griffith R., Harrison R. and Simpson H. (2006), The Link between Product Market Reform, Innovation and EU Macroeconomic Performance, Economic Paper n.243, European Commission, Directorate General for Economic and Financial Affairs, February

- Griffith R., Redding S. and Van Reenen J. (2004), Mapping the Two Faces of R&D: Productivity Growth in a Panel of OECD Industries, The Review of Economics and Statistics, November, Vol. 86, Issue 4, pp.883-895

- Levin R.C., Cohen W.H. and Mowery D.C. (1985), R&D Appropriability, Opportunity and Market Structure: New Evidence on Some Schumpeterian Hypotheses, American Economic Review (Papers and Proceedings), Vol.75, No.2

- Nickell S. (1996), Competition and Corporate Performance, Journal of Political Economy, Vol.104, pp.724-746

- Nicoletti G. and Scarpetta S. (2003), Regulation, Productivity and Growth, Economic Policy, April, p. 9-72

- Nicoletti G. and Scarpetta S. (2005), Regulation and Economic Performance: Product Market Reforms and Productivity in the OECD, Working Paper no.460, OECD Economics Department

- OECD (2001), Measuring Productivity. Measurement of Aggregate and Industry-Level Productivity Growth, OECD Manuals, Paris

- Pitlik H. (2008), The Impact of Growth Performance and Political Regime Type on Economic Policy Liberalizations, Kyklos, Vol.61, No.2, pp.258-278

- Sanghoon A. (2002), Competition, Innovation and Productivity Growth: A Review of Theory and Evidence, Working Paper no.317, OECD Economics Department

- Scott J.T. (1984), Firm versus Industry Variability in R&D Intensity, in Griliches Z. (edited by), R&D, Patents and Productivity, University of Chicago Press, pp.233-45

- Voigt S. (2006), The Economic Effects of Competition. Cross-country Evidence Using Four New Indicators, Working Paper no.20, ICER, Turin