Do Product Market Reforms Raise Innovation? Evidence from Micro-data Across 12 Countries
47 Pages Posted: 1 May 2019 Last revised: 5 Nov 2019
Date Written: November 3, 2019
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
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