RØglementation, comportement stratØgique et …...RØglementation, comportement stratØgique et innovation : 2. Theoretical background Theoretical background Competition & innovation

Réglementation, comportement stratégique et innovation :

Réglementation, comportement stratégique etinnovation :

Application aux industries des pays de l�OCDE.

Ivan Ledezma ([email protected])

Séminaire Repères �Réglementation et innovation�

Octobre 2009


Introduction

Motivation

I Concerns about weak European innovation performancerelative to the US

I �Common wisdom�:I Product market competition would be a key engine ofinnovation, specially in leading industries/countries

I The solution : market liberalisation/deregulation (and othercomplementary reforms)

I However, this vision may neglect several important issues ininnovative activity such as strategic behaviour and leaders�innovation


Introduction

Plan

1. Motivation

2. Theoretical background

3. Two illustrations :

3.1 Market regulation, innovation and distance to frontier(Amable, Demmou and Ledezma, 2009)

3.2 Market regulation & R&D intensity (Ledezma, 2009)

4. Comparison with other empirical studies

5. Concluding remarks






Theoretical backgroundCompetition & innovation incentives : still an open question

I Negative sign: monopolistic pro�ts as innovation rewardsI From Schumpeter (1936) to most of innovation based growthmodels (ex: Grossman & Helpman,1991; Aghion et Howitt,1992; Segerstrom, 1998; Li, 2003; etc.)

I Positive sign: competition as a "slack-reducing" deviceI Managerial literature (Porter, 1990; Schmidt, 1997)

I Both:I inverted U-shape (Aghion et al., 2005)I U-shape (Tishler & Milstein, 2009)I non-monotone (Boone, 2001)



Theoretical backgroundCompetition & innovation incentives : still an open question (ctd.)

I Leaders do innovate (Chandler, 1990; Malerba, 1997)I If the leader�s innovation makes harder the leapfrogging offollowers the inverted U-shape pattern no longer holds(Amable, Demmou & Ledezma, 2009)

I This may change the relationship between competition andinnovation conditional on the distance to technological frontier

I Entry thread and innovative leadersI Leaders tend to be more aggressive than followers in terms ofR&D investment (Etro, 2007)

I This may discourage followers ! the monopoly may be there�ect of �erce competition

I But still yield more innovationI This may not be the case if they spend resources in obtainingadvantages (Ledezma, 2009)



Theoretical backgroundCompetition & innovation incentives : still an open question (ctd.)

I Leaders do innovate (Chandler, 1990; Malerba, 1997)I If the leader�s innovation makes harder the leapfrogging offollowers the inverted U-shape pattern no longer holds(Amable, Demmou & Ledezma, 2009)

I This may change the relationship between competition andinnovation conditional on the distance to technological frontier

I Entry thread and innovative leadersI Leaders tend to be more aggressive than followers in terms ofR&D investment (Etro, 2007)

I This may discourage followers ! the monopoly may be there�ect of �erce competition

I But still yield more innovationI Not the case if they spend resources in obtaining advantages(Ledezma, 2009)


3. Two Illustrations

3. Two illustrations



Regulation, innovation and distance to frontier (ADL 2009)The received argument

Aghion et al. (2005)�s model

Unleveled sector Leveled sectorFirm 1 Firm 1 Firm 2l gapFirm 2

Schumpeterian e¤ects should predominate for laggards but at theleading edge �rms innovate to "escape" from competition



Regulation, innovation and distance to frontier (ADL 2009)Allowing leaders to innovate

Assume that leading innovation changes the technologicalparadigm and makes the catching-up process of the follower moredi¢ cultResults

I Multiple equilibriaI If the e¤ect of the leader on laggard�s innovation is highenough, competition might be detrimental to innovation



Regulation, innovation and distance to frontier (ADL 2009)Allowing leaders to innovate (multiple equilibria)



Regulation, innovation and distance to frontier (ADL 2009)The e¤ect of competition on innovation (low impact of the leading innovation onfollowers)

Competition foster innovation, increasingly so as one moves closer to thetechnology frontier



Regulation, innovation and distance to frontier (ADL 2009)The e¤ect of competition on innovation (high impact of the leading innovation onfollowers)

Low equilibrium : the positive impact of competition on innovationdecreases as one moves closer to the frontier



Regulation, innovation and distance to frontier (ADL 2009)The e¤ect of competition on innovation (high impact of the leading innovation onfollowers)

High-equilibrium: detrimental e¤ect of competition on innovation,increasingly so as one move closer to the frontier



Regulation, innovation and distance to frontier (ADL 2009)Data

I 17 OECD countries; 15 manufacturing industriesI 1979-2003

Industry List Country List15-16 Food products, beverages and tobacco Austria17-19 Textiles, textile products, leather and footwear Belgium20 Wood and products of wood and cork Denmark21-22 Pulp, paper, paper products, printing and publishing Finland24 Chemicals and chemical products France25 Rubber and plastics products Germany26 Other non-metallic mineral products Greece27 Basic metals Ireland28 Fabricated metal products, except machinery and equipment Italy29 Machinery and equipment, n.e.c. Japan30 O¢ ce, accounting and computing machinery Netherland31 Electrical machinery and apparatus, nec Norway32 Radio, television and communication equipment Portugal33 Medical, precision and optical instruments, watches and clocks Spain34 Motor vehicles, trailers and semi-trailers Sweden

UKUS



Regulation, innovation and distance to frontier (ADL 2009)Data

I GGDC-60 Industry : value added, hours worked, implicitde�ators

I OECD-STAN : trade indicators, investment series, benchmarkfor GGDC series

I EUROSTAT: Patents (Technological areas linked to Industryclassi�cation; EPO )

I Timmer, Ympa and van Ark (2007): Purchasing powerparities at the industry level



Regulation, innovation and distance to frontier (ADL 2009)Regulation proxies (OECD)

I PMR: product market regulation (barriers); national scope (1998,2003) (cf. Conway, Janod & Nicoletti, 2005)

I PMR Public: Component of PMR relative to the size and the scopeof the State (Cf. Conway, Janod & Nicoletti, 2005)

I ETCR: Regulation in 7 network services (Cf. Conway & Nicoletti,2006). Time series by country.

I REGIMP: Knock-on e¤ect of regulation in (i) network services, (ii)�nancial services and (iii) retail sectors (Cf. Conway & Nicoletti,2006). Time series cross section (country-industry) data.



Regulation, innovation and distance to frontier (ADL 2009)Methodology

pit = α pit�1 + β1 clit + β2 rit � clit + β3 rit + β4xit + εit

where εit = ηi + µit and

I pit : InnovationI clit : Closeness to frontier

AitmaxfAi 0tg

I rit : Market regulationI rit � clit : Interaction term (regulation * closeness)I Controls xit : Externalities, K/L,import penetration, labourmarket protection, �nancial deepness, year dummies,country-industry �xed e¤ects



Regulation, innovation and distance to frontier (ADL 2009)



Regulation, innovation and distance to frontier (ADL 2009)Tests

I Within-group / Dynamic panel bias correction (Bruno, 2005)I System-GMMI +Full set of controlsI Translog speci�cation



Regulation, innovation and distance to frontier (ADL 2009)Marginal e¤ect of regulation

Bruno (2005) regression System-GMM regression



Regulation, innovation and distance to frontier (ADL 2009)Marginal e¤ect of regulation

System-GMM regression (extended) System-GMM regression translog



Regulation & R&D intensity (L 2009)Strategic entry barriers

I Firms use a set of multiple strategies to protect their rents(Levin et al., 1987; Cohen et al., 2000; Cohen et al., 2002;Nagaoka, 2009)

I The threat of competition can trigger defensive reactions (ofinsiders) and self-selection (of outsiders)

I Regulation, as constraining device, can have non trivial e¤ectson innovative e¤ort and on market structure



Regulation & R&D intensity (L 2009)Technological bias



Regulation & R&D intensity (L 2009)Game structure

Asymmetries

I The new innovator can change the quality mix and induce a"technological bias" ( i.e. θj > 0)

I Prospective entrants have to develop additional knowledge andcapabilities to replicate and improve the new version

Stackelberg game

I R&D will not be pro�table for outsiders if the leader makes acredible commitment of high R&D e¤ort

I The leader is credible if its relative advantage are high enough

I Regulation ψ increases the cost of "bias"



Regulation & R&D intensity (L 2009)Two possible equilibriums

ψ

1 −

Regulation ψ

Credibility level

[ ]11 −−− σγ

Schumpeterianreplacement

Permanent

Monopolist

Technologicalneutrality

θξcos



Regulation & R&D intensity (L 2009)Main theoretical results

Above a certain threshold of regulation ψ > ψ

I The leader is not credibleI Schumpeterian replacement (but with a "lag")I R1: Regulation increases the labour share allocated to R&D.Its e¤ect is all the more important that the size of innovativesteps are bigger

Bellow this threshold ψ � ψ

I The leader is credibleI Zero R&D investment from outsiders (self-selection)I Permanent and innovative monopolist (limit case)I R2: Regulation reduces the labour share allocated to R&D


Evidence

Regulation & R&D intensity (L 2009)Data

I Similar than ADL but for 14 countries and 14 manufacturingindustries

I ANBERD (OECD): R&D expenditure


Evidence

Regulation & R&D intensity (L 2009)Test on R1

yit = α1 rit + α2 rit �HTi + α3 HTi + α5xit + εit

where εit = ηi + µit

I yit : R&D intensity (R&D/Added value)I rit : RegulationI HTi : 1 if High-tech (industries 30-33 ISIC Rev-3 : ICT +medical, precision and optical instruments...)

I Controls xit : R&D externalities, K/L , distance to thetechnology frontier, �nancial assets, year indicators


Evidence

Regulation & R&D intensity (L 2009)Test on R1 (Dependent Variable: R&D/VA - Within-group estimates)

REGIMP ETCR PMR PMR-Public

R&D Spillovers 0.195*** 0.196*** 0.188*** 0.186***

(0.042) (0.040) (0.044) (0.050)

Regulation -0.166 0.019 -0.908*** 0.130

(0.125) (0.068) (0.240) (0.245)

Regulation x HT 1.739*** 0.715*** 0.826*** 2.076***

(0.225) (0.088) (0.144) (0.461)

Constant -1.789*** -2.768*** -2.050*** -3.797***

(0.628) (0.353) (0.385) (0.293)

Year dummies Yes Yes Yes Yes

Number of Obs 2754 2754 2754 2546

Number of groups 189 189 189 176

Marginal e¤ect 1.573*** 0.734*** -0.082 2.206***

(0.256) (0.117) (0.226) (0.438)

[0.597] [0.300] [0.384] [0.769][

Notes: Hubert-White corrected standard errors in round parentheses

and clustered at the industry level in squared brackets;

*, **,*** denote signi�cance at 10%, 5% and 1%, respectively


Evidence


Robustness checks

I Full controls

I intra-group correlation

I De�nition of HT industries

I Fixed e¤ect decomposition (Plümper & Troeger, 2007)


Evidence


Full ControlsREGIMP ETCR PMR PMR-Public

Regulation x HT 1.558*** 0.817*** 0.641*** 0.818*

(0.288) (0.123) (0.188) (0.418)

Marginal e¤ect 1.258*** 0.433*** 0.379 1.189***

(0.337) (0.147) (0.355) (0.396)


Evidence


HT De�nition


Regulation x HT2 1.088*** 0.481*** 0.568*** 1.314***

(0.167) (0.070) (0.114) (0.362)

Marginal e¤ect 0.891*** 0.501*** -0.367* 1.441***

(0.192) (0.101) (0.219) (0.319)


Evidence

Regulation & R&D intensity (L 2009)Test on R1 (Dependent Variable: R&D/VA - FEVD)

Fixed e¤ect decomposition


Regulation -0.166* 0.019 -0.666*** -0.550***

(0.090) (0.090) (0.027) (0.010)

Regulation x HT 1.739*** 0.715*** 0.826** 2.076**

(0.102) (0.048) (0.360) (0.973)

HT 5.226*** 0.466*** 0.893*** -0.643***

(0.015) (0.012) (0.060) (0.062)

Marginal e¤ect 1.573*** 0.734*** 0.161 1.526

(0.083) (0.058) (0.350) (0.975)


Evidence

Regulation & R&D intensity (L 2009)Test on R2

We split the sample by

1. Low- & High- regulation environments

2. Country groups (Market based, Social democratic, Amable2003)


Evidence

Regulation & R&D intensity (L 2009)Test on R2 (Dependent Variable: R&D/VA - FEVD estimates, REGIMP proxy)

�0.1 quantile > 0.5 quantile

R&D Spillovers -0.048*** 0.184***

(0.015) (0.012)

REGIMP -0.145 -0.733***

(0.164) (0.135)

REGIMP x HT -0.470** 4.153***

(0.216) (0.250)

HT 0.714 9.307***

(0.576) (0.467)

Marginal e¤ect -0.614*** 3.419***

(0.151) (0.223)


Evidence

Regulation & R&D intensity (L 2009)Test on R2 (Dependent Variable: R&D/VA - OLS estimates, REGIMP proxy)

Country groups

I MB: Market-based (US, UK)

I SD: Social Democratic (Finland, Sweden, Denmark)

I CE: Continental Europe (Belgium, France, Germany,Norway,Ireland, Netherlands)

I ME: Mediterranean Europe (Italy, Spain)

I JP: Japan


Evidence

Regulation & R&D intensity (L 2009)Test on R2 (Dependent Variable: R&D/VA - OLS estimates, REGIMP proxy)

MB SD CE ME JP

R&D Spillovers 0.329*** 0.074 -0.067 -0.202 0.187***

(0.096) (0.100) (0.098) (0.165) (0.037)

REGIMP -0.763*** -1.089*** 1.212*** 0.186 5.043***

(0.116) (0.181) (0.119) (0.525) (1.200)

Constant -4.534*** -6.134*** -2.515*** -6.483*** 14.166***

(0.479) (0.629) (0.522) (0.954) (2.350)

Year dummies Yes Yes Yes Yes Yes

ISIC 2-dig dummies Yes Yes Yes Yes Yes

Number of Obs 388 644 1118 396 208

Notes: Hubert-White standard errors in parentheses;


Evidence

Regulation & R&D intensity (L 2009)Other results (�rm entry)

REGIMP REGIMP REGREF REGREF

Regulation 1.014*** 1.421*** 0.184*** 0.476***(0.147) (0.252) (0.065) (0.166)

Capital 0.195 0.073 0.114 0.255*(0.123) (0.131) (0.135) (0.131)

Valueadded 0.064 0.113* 0.002 0.005(0.068) (0.066) (0.070) (0.066)

year dummies No Yes No YesNumber of Obs 584 584 584 584Number of groups 64 64 64 64Note: Standard errors in parentheses* p<0.10, ** p<0.05, *** p<0.01

FirmEntry


Other empirical studies

4. Comparison with other empirical studies



EvidenceSelected studies on regulation and innovation

Performace Level Indicators Result

Nicoletti and Scarpetta (2003) ∆MFP Industry OECD positive interaction

Gri¢ th et al. (2006) R&D Industry SMP positive SMP e¤ect, but...

Conway,et al. (2006) ∆Y/L Industry OECD positive interaction

Inklaar et al. (2007) MFP Industry OECD rarely signi�cant

Arnold et al. (2008) TFP Firm industry OECD negative interaction, but...



EvidenceCompetition and innovation (�rm level studies)

I Schumpeterian: Crépon, Duguet and Kabla (1995); Crépon, Duguetand Mairesse (1998); Crépon & Duguet (1997)

I "Trimming fat" : Nickell (1996); Bloom & Van Reenen (2007)

I Depending on proxy : Blundell, Gri¢ th and Van Reenen (1999)

I Inverted U-shape : Aghion et al. (2005); Aghion et al. (2009)

I Relativisation of the inverted U-shape : Askenazy, Cahn & Irac(2007); Tingvall & Poldahl (2006)


Conclusion

Conclusion

I No evidence of innovation boosting e¤ect of deregulation atthe leading edge or in high-tech industries

I On the contrary systematic positive correlations are foundI Assessments about "appropriate" or "inappropriate"regulation are no way obvious in a second best world

I Other issuesI Competition, risk and the choice of the size of innovationI What does competition mean? two coexisting dimensions(absence of strategic behaviour & rivalry)

I What about regulation and competition?


Conclusion

merci...


Appendix

The Model

Rationale of the model

SuccessfulInnovation

Technological bias

Enough R&DAdvantages

Not enough R&DAdvantages

LeaderundertakesR&D

R&D notprofitable foroutsiders

Leader doesnot undertakeR&D

Outsiders carryout all R&D,but with bias

Regulationreduces the biasand increaseR&D ofoutsiders

Regulation impliesmore labour tobias and less R&Deffort of the leader


Appendix

The Model


Appendix

The Model

NorwayItalyPortugalSpainAustriaGreeceFranceBelgiumGermany

IrelandJapanUKFinlandDenmarkNetherlaSwedenUS

.08

.1.1

2.1

4.1

6.1

8

country

Means of REGIMP, REGIMP

GreeceItalyFrancePortugalIrelandBelgiumNetherlaDenmarkAustriaSpainNorwayFinlandGermanyJapanSweden

UK

US23

45

6

country

Means of REGREF, REGREF

Italy

FranceSpainPortugalFinlandBelgiumGermanyNorwayJapanAustriaNetherlaSweden

IrelandDenmarkUSUK1

1.5

22.

53

country

Means of PMR, PMR

NorwayGreeceFranceAustriaItalyFinland

GermanyBelgiumIrelandNetherlaSwedenSpainPortugalDenmark

UK

US

Japan01

23

45

country

Means of PMR_Public, PMR(Public)


Appendix

The Model

Aggregate performance (% of the mean)

0%

50%

100%

150%

200%

250%

300%

350%

Austria

Belgium

Denmark

Finlan

d

France

German

y

Greece

Irelan

dIta

liaJa

pan

Netherl

and

Norway

Portug

al

Spain

Sweden UK US

Patenting Productivity PMR Firms/VA


Appendix

The Model

Economic regulation

Administrative regulation

1.The numbers in brackets indicate the weight given to each lower level indicator in the calculation of the higher level indicator immediately above it.

The weights were derived by applying principal components analysis to the set of indicators in each of the main regulatory domains (state control, barriers to

entrepreneurship, barriers to trade and investment, economic regulation and administrative regulation). The same approach was used to derive the weights used

to calculate the indicators of inward and outwardoriented policies and the overall PMR indicator. The principal components analysis was based on

the original 1998 data.

2. Two indicators from the 1998 version of the PMR indicators ('Special voting rights' and 'Control of public enterprise by legislative bodies') have been combined into this indicator.

Outwardoriented policies (0.41)

State control (0.49)Barriers to

entrepreneurship(0.51)

Barriers to trade and investment(1.0)

Public ownership(0.56)

Involvement inbusiness operation

(0.44)

Product market regulation

Inwardoriented policies (0.59)

Barriers tocompetition

(0.22)

Scope of publicenterprise sector

(0.30)Price controls (0.45)

Licenses and permitssystem (0.55)

Administrative burdens forcorporation (0.36)

Explicit barriers to tradeand investment (0.70)

Regulatory andadministrative opacity

(0.48)

Administrativeburdens on

startups (0.30)

Regulatory barriers(1.0)

Legal barriers (0.30) Discriminatoryprocedures (0.24)

Other barriers(0.30)

Foreign ownershipbarriers (0.45)

Size of publicenterprise sector

(0.30)Use of command &control regulation

(0.55)

Communication andsimplification of rules

and procedures(0.45)

Administrative burdens forsole proprietor firms (0.30)

Direct control overbusiness

enterprises2

(0.40)

Antitrust exemptions(0.70)Sector specific administrative

burdens (0.34) Tariffs (0.31)

{regulation data} {regulation data} {regulation data}{regulation data} {regulation data} {regulation data} {regulation data}

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RØglementation, comportement stratØgique et …...RØglementation, comportement stratØgique et innovation : 2. Theoretical background Theoretical background Competition & innovation