Product Market Reform and Innovation in the EU*

Abstract

European Union countries have implemented widespread reforms to product markets in order to stimulate competition, innovation and economic growth. We provide empirical evidence that the reforms carried out under the EU Single Market Programme (SMP) were associated with increased product market competition, as measured by a reduction in average profitability, and with a subsequent increase in innovation intensity and productivity growth for manufacturing sectors. In our analysis we exploit exogenous variation in the expected impact of the SMP across countries and industries to identify the effects of reforms on average profitability, and the effects of profitability on innovation and productivity growth. implemented widespread reforms to product markets, aiming to stimulate competition and improve economic performance. Economic theory also suggests that changes in the degree of product market competition can influence innovative activity, and policy-makers in many EU countries have appealed to further competition-enhancing reforms as a way to raise rates of innovation and growth. In order to shed light on whether product market reforms are likely to help in achieving these goals, this paper investigates the impact that past reforms, in the form of the Single Market Programme (SMP), had on innovation activity in the EU. KeywordsThe paper provides empirical evidence that the reforms carried out under the SMP were associated with increased product market competition, as measured by a reduction in average profitability, and with a subsequent increase in innovation intensity and productivity growth for manufacturing sectors. In our analysis we exploit exogenous variation in the expected impact of the SMP across countries and industries to identify the effects of reforms on average profitability, and the effects of profitability on innovation and productivity growth.Our results have a bearing on the expected effects of possible future reforms, for example those being considered under the Lisbon Agenda. Our findings suggest that reforms that put pressure on firm profitability are likely to lead to increased innovation, all else equal.This suggests that such reforms could at least go some way towards increasing innovation intensity within the EU.3

Patent Rights, Product Market Reforms, and Innovation

“…This prepares the ground for analyzing e §ects of the interaction between the two factors on innovation. We report OLS estimation results in Ta Our Örst Önding is that of a positive average e §ect of the product market reform intensity on R&D intensity in column 1 of Gri¢th et al (2010) use data on a similar set of industries in a di §erent set of countries (Belgium, Canada, Denmark, Finland, France, Netherlands, United Kingdom and the United States) and a di §erent, although related, measure of the SMP product market reform. 25 Using the time-varying patent protection index provided by Ginarte and Park (1997) and Park (2008) yields a very similar coe¢cient estimate.…”

“…21 Note that the industry ranking based on our main SMP measure corresponds to the ranking based on the SMP measure of Gri¢th et al (2010) for all industries in our data set, up to two deviations. Gri¢th et al (2010) constructed their SMP measure di §erently than we do due to di §erent data availability. See Appendix B.4 for details.…”

“…Positive average e §ects on product market competition have been documented (Badinger, 2007, Bottasso and Sembenelli 2001, and Gri¢th, Harrison and Simpson 2010.…”

“…Focussing on the SMP, like we do, 6 Bottasso and Sembenelli (2001) and Badinger (2007) show that this product market intervention reduced mark-ups in manufacturing industries. Gri¢th et al (2010) report that the SMP enhanced product market competition which, in turn, led to an increase in R&D expenditures, using panel data for manufacturing industries in OECD countries. 7 None of these papers, however, examines how the impact of a competition-increasing product market reform on innovation may interact with the strength of patent protection.…”

“…6 In Aghion et al (2005, the SMP provides the excluded instruments that are used in instrumental variable and control function models explaining innovation or productivity growth. 7 To capture product market competition, Gri¢th et al (2010) use the following inversely related measure: average proÖtability at the countryñindustryñyear level, deÖned as value-added divided by labour plus capital costs.…”