Market Power, Governance and Innovation: OECD Evidence

Ugur, Mehmet (2012): Market Power, Governance and Innovation: OECD Evidence.

Abstract

The aim of this paper is to investigate the relationship between market power, governance and patenting activity in a sample of 25 OECD countries from 1988-2007. Controlling for a wide range of innovation predictors, we report that governance quality is related positively with patenting activity in the full sample and in samples of countries with higher-than-average per-capita GDP, governance scores and economic openness. Secondly, the relationship between market power and innovation has a U-shape in the full sample, but inverted-U shape in split samples. Third, when interacted with governance, market power tends to have an offsetting effect that weakens the positive relationship between governance and innovation. These findings are robust to a range of control variables such as per-capita GDP, income inequality, depth of equity markets, labour share in national income, economic globalization and military expenditures. Our findings indicate that governance is a significant factor that explain innovation and that blanket statements about the relationship between competition and innovation as well as the kind of reforms necessary to foster innovation can be misleading.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic governance, innovation, patenting, market power
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; B - History of Economic Thought, Methodology, and Heterodox Approaches > B5 - Current Heterodox Approaches > B52 - Institutional ; Evolutionary; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights

References

Acemoglu, D. (2006), ‘A simple model of inefficient institutions’, Scandinavian Journal of Economics, 108(4): 515-546.

Acemoglu, D., P. Antràs and E. Helpman (2007), ‘Contracts and technology adoption’, American Economic Review, 97(3): 916-943.

Aghion, P., W. Carlin and M. Schaffer (2002), ‘Competition, innovation and growth in transition: Exploring the interactions between policies’, William Davidson Working Paper Number 501 (March).

Aghion, P., N. Bloom, R. Blundell, R. Griffith and P. Howitt (2005), ‘Competition and innovation: An inverted-U relationship”, The Quarterly Journal of Economics, 120(2), 701-728.

Altman, M. (2009), ‘A behavioural-institutional model of endogenous growth and induced technical change’, Journal of Economic Issues, 43(3), 685-713.

Akerlof, G. A., and J. L. Yellen. (1990). ‘The fair wage-effort hypothesis and unemployment’, Quarterly Journal of Economics 55: 255–283.

AMECO Database, http://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm

Baldwin, J. R. and W. Gu (2004), ‘Trade liberalization: Export-market participation, productivity growth, and innovation’, Oxford Review of Economic Policy, 20(3), 372-392.

Beck, N., and J. N. Katz (1995), ‘What to do (and not to do) with time-series cross-section data’, American Political Science Review, 89: 634–647.

Bergh, A. and T. Nilsson (2010), ‘Do liberalization and globalization increase income inequality?’, European Journal of Political Economy, 26(4): 488-505.

Berubé, C., M. Duhamel and D. Ershov (2012), ‘Market incentives for business innovation: results from Canada’, Journal of Industry, Competition and Trade, 12(1), 47-65.

Brown, J.R., S.M. Fazzari and B.C. Petersen (2009), ‘Financing innovation and growth: Cash flow, external equity, and the 1990s R&D boom’, Journal of Finance, 64(1): 151-183.

Chen, X., S. Lin and W. R. Reed (2009), ‘A Monte Carlo evaluation of the efficiency of the PCSE estimator’, Applied Economics Letters, 17(1): 7-10.

Clarke, G. R. G. (2001), ‘How institutional quality and economic factors impact technological deepening in developing countries’, Journal of International Development, 13(8): 1097–1118.

Dernis, H. and M. Khan (2004), ‘Triadic patent families methodology’, OECD Science, Technology and Industry Working Papers, 2004/02, OECD.

Dosi, Giovanni, Christopher Freeman, Richard Nelson and Luc Soete (1988). Technical Change and Economic Theory: Global Process of Development, London: Pinter.

Dreher, A. (2006), ‘Does globalization affect growth? Evidence from a new Index of Globalization’, Applied Economics, 38(10): 1091-1110.

Egger, P. (2002), ‘An econometric view on the estimation of gravity models and the calculation of trade potentials’, The World Economy, 25(2): 297-312.

ESA (1995), European System of Accounts, European Commission, http://circa.europa.eu/irc/dsis/nfaccount/info/data/esa95/en/een00348.htm

EU Commission (2005), Common Actions for Growth and Employment: The Community Lisbon Programme, COM(2005) 330 final, 20.7.2005, Brussels.

Faber, J. and A.B. Hesen (2004), ‘Innovation capabilities of European nations: Cross-national analyses of patents and sales of product innovations’, Research Policy, 33 (3), 193–207.

Foellmi, R. and J. Zweimüller (2006), ‘Income distribution and demand-induced innovations, Review of Economic Studies, 73(4), 941-960.

Freeman, Christopher (1987), Technology Policy and Economic Performance: Lessons from Japan, London: Pinter.

Galor, O., and D. Tsiddon (1997), ‘Technological progress, mobility and economic growth’, American Economic Review 87: 363–382.

Ganzach, Y. (1997), ‘Misleading interaction and curvilinear terms’, Psychological Methods, 2(3): 235-247.

Gilbert, Richard (2006), Looking for Mr. Schumpeter: Where Are We in the Competition-Innovation Debate? In Adam B. Jaffe, Josh Lerner and Scott Stern (eds), Innovation Policy and the Economy – Volume 6, Cambridge, Mass.: MIT Press, pp. 159-215.

Gilbert, R. and D. Newbery (1982), ‘Pre-emptive patenting and the persistence of monopoly’, American Economic Review, 72(2), 514-526.

Giménez, G. and J. Sanaú (2007), ‘Interrelationship among institutional infrastructure, technological innovation and growth: An empirical evidence’, Applied Economics, 39(10), 1267-1282.

Griffith, R., R. Harrison and H. Simpson (2006a), ‘The link between product market reform, innovation and EU macroeconomic performance’, European Economy, no. 243 (February): 1 – 123.

Griffith, R., R. Harrison and H. Simpson (2006b), ‘Product market reforms and innovation in the EU’, Institute of Fiscal Studies Working Papers, No. WP06/17.

Guan, J. and K. Chen (2012), ‘Modeling the relative efficiency of national innovation systems’, Research Policy, 41(1): 102–115.

Guloglu, B., R. T. R. Baris and E. Saridogan (2012), ‘Economic determinants of technological progress in G7 countries: A re-examination’, Economics Letters, 116(3), 604-608.

Hall, B. H., Z. Grilliches and J. A. Hausman (1986), ‘Patents and R&D: Is there a lag?’, International Economic Review, 27(2): 265-283.

Hassler, J., and J. V. Rodriguez Mora (2000). ‘Intelligence, social mobility and growth’, American Economic Review, 90: 888–908.

Hicks, A. (1994), ‘Introduction to pooling’, in T. Janoski and A. Hicks (eds), The Comparative Political Economy of the Welfare State, Cambridge: Cambridge University Press.

ICRG - International Country Risk Guide database, PRS Group. http://www.prsgroup.com/ICRG_Methodology.aspx

Jolliffe, I. T. (2002), Principal Component Analysis (2nd ed.), Heidelberg: Springer.

Kaufmann, D., Kraay, A. and Mastruzzi, M. (2007) The Worldwide Governance Indicators project: answering the critics. World Bank Policy Research Working Paper 4149.

Kentor, J. and E. Kick (2008), ‘Bringing the military back in: Military expenditures and economic growth 1990 to 2003’, Journal of World-Systems Research, 14(2): 142-172.

Knack, S. and P. Keefer (1997), ‘Does social capital have an economic payoff? A cross-country investigation, Quarterly Journal of Economics, 112(4), 1251-88.

Kurtz, M. J. and Schrank, A. (2007) Growth and governance: models, measures, and mechanisms. Journal of Politics, 69 (2): 538–554.

Lundvall, Bengt-Åke (1992), National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning, London: Pinter.

Mahutga, M. C., R. Kwon and G. Grainger (2011), ‘Within-country inequality and the modern world-system: A theoretical reprise and empirical first step’ Journal of World-Systems Research, 27(2): 279-307.

Menezes-Filho, Naercio and John Van Reenen (2005), 'Unions and innovation: A survey of the theory and empirical evidence', in John T. Addison and Claus Schnabel (eds), The International Handbook of Trade Unions, Cheltenham: Edward-Elgar, ch. 9.

MSTI - Main Science and Technology Indicators (MSTI) Database, OECD. http://www.oecd.org/sti/scienceandtechnologypolicy/mainscienceandtechnologyindicatorsmsti20122edition.htm

North, Douglass (1990), Institutions, Institutional Change, and Economic Performance, Cambridge and London: Cambridge University Press.

North. D.C. (1994), ‘Economic performance through time’, American Economic Review, 84 (3), 359–368.

OECD (2005), Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd edition, Paris: OECD.

OECD (2006), Economic Policy Reforms: Going for Growth, Paris: OECD. http://www.keepeek.com/Digital-Asset-Management/oecd/economics/economic-policy-reforms-2006_growth-2006-en

OECD (2007), Innovation and Growth: Rationale for an Innovation Strategy, Paris: OECD. http://www.oecd.org/edu/ceri/40908171.pdf

Pakes, A. and Z. Grilliches (1984), ‘Patents and R&D at the firm level: A first look’, in Z. Grillisches (ed.), R and D, Patents and Productivity, Chicago: Chicago University Press, pp. 55-72.

Peneder, M. (2012), ‘Competition and innovation: Revisiting the inverted-U relationship’, Journal of Industry, Competition and Trade, 12(1), 1-5

Peroni, C. and I.S. Gomes Ferreira (2012), ‘ Competition and innovation in Luxembourg’, Journal of Industry, Competition and Trade, 12(1), 93-117.

Pla-Barber, J. and J. Alegre (2007), ‘Analysing the link between export intensity, innovation and firm size in a science-based industry’, International Business Review, 16(3): 275-293.

Polder, M. and E. Veldhuizen (2012), ‘Innovation and competition in the Netherlands: testing the inverted U for industries and firms’, Journal of Industry, Competition and Trade, 12(1), 67-91.

Reinganum, J. F. (1983), ‘Uncertain innovation and the persistence of monopoly’, American Economic Review 73, 741-748.

Rodriguez, F. and A. Jayadev (2010), ‘The declining labour share of income’, UNDP Human Development Research Paper, no. 2010/36. http://hdr.undp.org/en/reports/global/hdr2010/papers/HDRP_2010_36.pdf

Scherer, F. M., D. Harhoff and J. Kukies (2000). Uncertainty and the size distribution of rewards from innovation, Journal of Evolutionary Economics, 10(1-2), pp. 175-200.

Schumpeter, Joseph A (1942), Capitalism, Socialism, and Democracy. New York: Harper and Brothers. (Harper Colophon edition, 1976.)

Solt, F. (2009), ‘Standardizing the World Income Inequality Database’, Social Science Quarterly, 90(2), 231-242. See also: http://dvn.iq.harvard.edu/dvn/dv/fsolt/faces/study/StudyPage.xhtml?studyId=36908

Stiglitz, J. E. and A. Weiss (1981), ‘Credit rationing in markets with imperfect information’, American Economic Review, 71: 393–410. Taskin, F. and O. Zaim (1997), ‘Catching-up and innovation in high- and low-income countries’, Economics Letters, 54(1): 93-100.

Tebaldi, E. and B. Elmslie (2013), ‘Does institutional quality impact innovation? Evidence from cross-country patent grant data’, Applied Economics, 45(7), 887-900.

Tselios, V. (2011), ‘Is inequality good for innovation?’ International Regional Science Review, 34(1), 75-101.

WDI - World Development Indicators Database, the World Bank. http://data.worldbank.org/data-catalog/world-development-indicators

Weinhold, D. and U. Nair-Reichert (2009), ‘Innovation, inequality and intellectual property rights’, World Development, 37 (5), 889-901.

Zweimüller, J. (2000), ‘Schumpeterian entrepreneurs meet Engel's Law: The impact of inequality on innovation-driven growth’, Journal of Economic Growth, 5(2), 185-206.