Do Product Market Reforms Raise Innovation? Evidence from Micro-data Across 12 Countries

47 Pages Posted: 1 May 2019 Last revised: 5 Nov 2019

See all articles by Anastasia Litina

Anastasia Litina

University of Ioannina

Christos Makridis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Georgios Tsiachtsiras

University of Barcelona

Date Written: November 3, 2019

Abstract

How does policy affect innovation and the digital economy? We revisit a classical question as to how standard product market regulation affects innovation and we develop a novel framework for thinking about digital regulation. Using new establishment-level micro-data across 12 countries between 1998 and 2012, this paper first estimates the effect of competition policy on innovation. We find that a standard deviation rise in product market regulation is associated with a 1.029% decline in innovation activities. These declines are a result of product market regulation on the incentives to invest in in-house R&D and make the appropriate capital acquisitions, as well as of the effects of regulation on the cost of innovation activities. We then theorize on the effect of digital regulation on innovation and we empirically test our hypothesis using a sub-sample of the years in our analysis. We find that “protective regulation” confers a positive effect on innovation, while “restrictive regulation” confers a negative effect on innovation. Thus, contrary to our findings about standard PMR, the digital regulation results are more sensitive to the content of regulation. We attribute this ambiguity to the fact that digital markers require an enhanced level of trust to be operative.

Keywords: competition; digital economy; product market reforms; innovation; regulation; research & development

JEL Classification: H59, O31, O38, O43

Suggested Citation

Litina, Anastasia and Makridis, Christos and Tsiachtsiras, Georgios, Do Product Market Reforms Raise Innovation? Evidence from Micro-data Across 12 Countries (November 3, 2019). Available at SSRN: https://ssrn.com/abstract=3363023 or http://dx.doi.org/10.2139/ssrn.3363023

Anastasia Litina

University of Ioannina ( email )

45110 Ioannina
Greece

Christos Makridis (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Georgios Tsiachtsiras

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

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