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Does competition stimulate innovation and productivity in Dutch retail trade? - PowerPoint PPT Presentation

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Does competition stimulate innovation and productivity in Dutch retail trade?

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  1. Does competition stimulate innovation and productivity in Dutch retail trade? Henry van der Wiel CPB Netherlands Bureau for Economic Policy Analysis & CentER OECD Workshop on Productivity Analysis and Measurement, Bern, 16-18 October 2006

  2. Outline • Introduction/background • Relation competition and innovation • 2 research questions • Model for innovation and productivity • Data and empirical results • Concluding remarks

  3. Background (I) • Dutch retail trade on its return? • Missed strong productivity growth of US since mid 1990s • Gradually losing its strong position in EU since end of 1980s Labour productivity (per hours worked) relative to EU-average (EU=100), 1979-2002 Source: GGDC,2005

  4. Background (II):lack of competition and innovation? • General belief that competition may stimulate productivity => static efficiency • lower price margins • efficient production (less X-inefficiencies) • Likewise, innovation enhances productivity (growth) => dynamic efficiency • Dutch policy measures in 1990s focussed on more competition • New Competition Act in 1998 • Regulatory reforms in retail trade => longer opening hours (1996)

  5. Competition and innovation:negative or positive? • Negative relationship: • Standard IO literature and most (early) endogenous growth models • Schumpeter model: competition reduces monopoly rents and thus the expected pay off from innovation • Positive relationship: mostly based on empirics • Paper of Nickell (1996): competition is good for innovation • New development => inverted U-shaped curve • Combining both theoretical ideas • Empirically supported by Aghion et al. (2005, QJE) for UK

  6. Competition and innovation: inverted U-curve? • Inverted U: composition effect • Weak competition: • industry is relatively often in a level state => • increase in competition stimulates innovation by the "escape" effect • Intense competition: • industry is often unlevelled=> • increase in competition reduces innovation because there is little incentive for laggards to catch up

  7. Two questions • Did competition affect innovation in Dutch retail trade? • Did competition and innovation contribute to productivity growth in this industry? • Conclusion: more competition in Dutch retail trade stimulates both innovation and productivity growth

  8. Outline • Introduction/background • Relation competition and innovation • 2 research questions • Model for innovation and productivity • Data and empirical results • Concluding remarks

  9. Basic idea of CIP-model • Assume no feedback from P to C or from I to C Competition (C) Static efficiency InvertedU-curve? Productivity (P) Innovation(I) Dynamic efficiency

  10. CIP-model • Presentation only focuses on results for innovation and productivity • Skip model for explaining competition (in paper!), but not how to measure competition • See also Creusen, Minne and Van der Wiel, 2006, in De Economist, September

  11. How to measure competition • We introduce a new measure, relative profits measure (RPM): • based on intuition that in a more competitive market, firms are punished more harshly for being inefficient • Firms differ in efficiency in terms of marginal costs (or productivity level). • Cost advantages lead up to higher profits • We estimate for an industry the following elasticity: percentage increase in profits due to a 1 percent increase in efficiency

  12. Cons traditional measures competition • Conventional ways of measuring competition (concentration (H) and price cost margin (PCM)) are not robust from a theoretical point of view • Problem with H is that more aggressive conduct forces inefficient firms out of the market thereby increasing concentration • It incorrectly suggests that competition is reduced • As conduct becomes more aggressive, market share is reallocated from inefficient firms (with low PCM) to efficient firms (with high PCM) which tends to raise industry wide PCM • It incorrectly suggests that competition is reduced

  13. Innovation: model • Explanation of innovation: inn = α0 + α1 RPM + α2RPM 2 +βms with inn log innovation rate (firm level) RPM competition indicator (5-digit industry level) ms log market share (firm level) • Expectations • If inverted U: α1 > 0 and α2< 0 • Scale effect: β > 0

  14. Productivity growth: model • Simple Cobb Douglas function: • Split TFP-growth in contribution of competition and innovation • Explanation of labour productivity growth: Δp = γ0+ γ1ΔRPM + γ2INN-1+ γ3 (Δk - Δl) + γ4 Δl ───────┬──────── TFP-growth with Δp labour productivity growth (firm level) (Δk - Δl) capital intensity (firm level) Δl labour (economies of scale, firm level)

  15. Outline • Introduction/background • Relation competition and innovation • 2 research questions • Model for innovation and productivity • Data and empirical results • Concluding remarks

  16. Data and method • Firm-level data • Two sources of Statistics Netherlands • CIS-innovation surveys: 1996,1998 and 2000 • Annual surveys ‘Production Census’:1993-2002 • Matched both sources • Number of observations ≈1150 • Regression methods: • Innovation based on TOBIT I-method • Innovation outlays left censored: no innovation in 75% of firms • Productivity based on OLS

  17. Innovation results (I) No inverted U-relation !!

  18. Innovation results (II):simplified model

  19. Productivity growth results

  20. Concluding remarks • No inverted U-relationship in Dutch retail trade! • positive relation between competition and innovation • Both competition and innovation have a positive impact on productivity growth • So more competition in Dutch retail trade may stimulate productivity growth • in the short term by reductions in X-inefficiency • in the longer term by innovation