Upstream product market regulations, ICT, R&D, and productivity

Competition –and policies affecting it– has been found to be an important determinant of productivity growth in recent empirical research. Most empirical studies of the competition-growth link focused on competitive conditions within each sector (or market) as drivers of firm or industry-level productivity enhancements. However, Bourlès et al. (2010) focus on the influence of competition on sectors producing intermediate inputs (called upstream sectors) for productivity outcomes in sectors using these inputs (called downstream sectors). They find clear evidence that anti-competitive regulations in upstream sectors curb MFP growth downstream.

Our empirical investigation goes one step further. According to the endogenous growth theory, competition influence MFP through efficiency improvement incentives.  Therefore, upstream regulations should influence R&D and ICT investments. In order to check this proposition, we investigate the impact of upstream regulations on ICT and R&D capital accumulation and then we estimate the factors' elasticity in a function production framework.

The empirical investigation is done on country-industry panel data. We approximate competition by the OECD indicators of anti-competitive regulations on product market on 6 sectors: energy, transport, communication, retail, banking and professional services. The identification strategy of the upstream regulation impacts is based on the crossing of upstream regulation indicators with the intensity of use of the intermediate inputs (the result is called the 'regulatory burden' indicator) and on the introduction of country*year fixed effects in the estimated specification in order to take into account the average effects which could be highly endogenous. All equations also estimate industry fixed effects. The sensibility of our estimates to the introduction industry*year fixed effects is systematically analyzed.

The long-term relationships are estimated using the Dynamic Ordinary Least Square (DOLS). The 3 equations are estimated on 14 OECD countries, 13 manufacturing and service sectors and the 1989-2006 period (2560 observations). There is a significant at 1% negative important impact of upstream regulations on R&D capital stocks. The upstream regulations impact on ICT capital stock is also significant at 1% and negative, but much smaller. There is also a large impact of upstream regulations, additionally to the one through ICT and R&D capital accumulation.

In order to give more economic significance to the impacts of upstream regulations, the effects of a switch to the 'lightest practices' in 2007 are computed for each country. The lightest practices are measured by the less anti-competitive regulation indicator among our estimation sample for each of the 6 upstream sectors. On the long-term, the average R&D capital stock increase would be of 54% and the average ICT capital stock increase of 9%. The labor productivity increase would be of 6.0%. 30% of the impact on labor productivity goes through the R&D and ICT channels.