Service Regulation and Growth: Evidence from OECD Countries

Abstract

We study the effects of anti-competitive service regulation by examining whether OECD countries with less anti-competitive regulation see better economic performance in manufacturing industries that use less-regulated services more intensively. Our results indicate that lower service regulation increases value added, productivity and export growth in downstream service-intensive industries. The regulation of professional services and energy provision has particularly strong negative growth effects. Our estimates are robust to accounting for alternative forms of regulation (i.e. product and labour market regulation), alternative measures of financial development and a range of other specification checks.Do countries with less anti-competitive service regulation perform better economically? Policy makers appear to think so, as regulatory barriers have fallen in many countries, and their position is generally supported by a large empirical literature looking at the effects of entry barriers, red-tape costs or legal requirements on economic performance. Much of this literature examines the effects of regulation on the performance of the regulated sector. Less is known about the impacts on downstream manufacturing activities, which is surprising as regulation affects many key service inputs.In this article, we study how regulation in the supply of a variety of services affects the economic performance of downstream manufacturing industries. We do so by examining whether countries with less service regulation see faster value added, productivity and export growth in manufacturing industries using services more intensively (this methodology was pioneered for financial services by Rajan and Zingales, 1998). We measure service dependence across manufacturing industries using input-output account matrices. Our measures of service regulation are OECD indicators designed to capture anti-competitive regulatory settings for the energy sector (electricity and gas), the telecommunication and the transportation sectors and for professional services. These account for barriers to entry, for the integration between a priori competitive activities and natural monopolies (in the case of energy) and for the existence of restrictions on prices and fees, advertising or the form of business (in professional services).Our empirical findings indicate that lower service regulation has non-negligible positive effects on the value added, productivity and export growth rates of serviceintensive users. To get a sense for the size of the regulation effect, consider the annual value-added growth differential between an industry at the 75th percentile (Pulp, paper We are extremely grateful to Antonio Ciccone and Alfonso Rosolia for their help and suggestions. We thank Andrea Ichino, Tullio Jappelli, Giovanni Pica, Paolo Pinotti, Fabiano Schivardi, two anonymous referees and seminar participants at the Bank of Italy, University of Bologna, University of Cagliari, CSEF Salerno and MILLS 2007 for very useful comments. We are responsible for any mista...

The productive effect of transport infrastructures: does road transport liberalization matter?

“…When we compute the marginal effect of deregulation on industry production we find that, for low transport intensity sectors (25th percentile), a unit decrease in the entry barriers index is associated with a one for all 0.6% increase in gross output; in turn, for high transport intensity sectors (75th percentile), the effect on production is about 1.9%. 23 Barone and Cingano (2008) and Arnold et al (2008a,b)) found a positive impact of deregulation in service sectors (transports, electricity and telecommunication) on the productivity of downstream industries which use the liberalized services more intensively as an intermediate input.…”

“…This latter approach is related to the seminal paper by Rajan and Zingales (1998) who argued that the impact of cheaper external finance on productivity growth should be stronger in those sectors that rely more extensively on external finance. A similar approach is adopted by Barone and Cingano (2008) who examine whether OECD countries with less anti-competitive regulation in service sectors show a better economic performance of manufacturing industries that use less regulated services more intensively.…”

“…The use of a country-specific transport sector intensity is not ideal, as cross country differences might stem from country specific determinants, such as the development of the road network and/or regulation in the road transport sector, rather than from technological differences across sectors. In order to build a sector specific country-invariant road transport intensity variable, we follow a procedure outlined in Barone and Cingano (2008), and that was originally proposed by Ciccone and Papaioannou (2007), that helps alleviating possible endogeneity issues linked to the transport intensity variable.…”

Moving Towards a More Dynamic Business Sector in Spain

“…Countries with more competitive regulatory frameworks for services achieve higher added value, productivity and export growth in the manufacturing sectors that use services as inputs more intensively (Barone and Cingano, 2011). The potential beneficial effects are particularly strong for Spain, which is one of the OECD countries whose manufacturing exports embody higher value added from services (OECD, 2013d).…”

Multiple market imperfections, firm profitability and investment

“…Regulatory reforms that imply a reduction in entry barriers, in the markup of prices over costs and in adjustment costs tend to increase investment Alesina (2005). Recently, Barone and Cingano (2011) find that lower service regulation has non-negligible positive effects on the value added, productivity and export growth rates of serviceintensive users. For a survey of the literature on regulation and economic performance see Rincon-Aznar et al (2010) and Arnold et al (2011). variables and country-level financial variables, such as the size of capital markets, or measures of financial efficiency and financial development ECB (2013).…”