ANTI-COMPETITIVE REGULATION OF PRIMARY SECTOR DAMAGES
PRODUCTIVITY OF THE WHOLE ECONOMY
Regulations that reduce competition in ‘upstream’ industries reduce productivity growth
in ‘downstream’ industries, such as the manufacturing sector. That is the central
conclusion of new research by Renaud Bourlès and colleagues, to be presented at the
Royal Economic Society’s 2012 annual conference.
Their study looks at policies, rules and regulations in 15 OECD countries between 1984
and 2007, broken down by sector. The research suggests that if competition in the
primary sector is stifled by any measures, the prices they charge to their clients – firms
in the manufacturing sector – will be higher.
This in turn will lower the margins in the manufacturing sector and will reduce the
incentives for manufacturing firms to increase productivity. As a result, multi-factor
productivity – a measure of how effective companies are at using their inputs to
produce one unit of output – in the manufacturing sector drops.
The authors also find that the number of firms affected by anti-competitive practices in
the manufacturing sector has increased over the period studied. Within this, the
negative effects are strongest for the most technologically advanced companies.
Raising multi-factor productivity is widely seen as essential for generating economic
growth. The much-publicised difference in economic fortunes of euro zone countries,
such as Germany and Greece, is at least partly caused by the different levels of overall
productivity in these economies.
More…
This study analyses the effect of anti-competitive regulations in non-manufacturing
industries (‘upstream’ industries) on the productivity growth of all industries that use the
non-manufacturing inputs (‘downstream’ industries). It finds clear evidence that anticompetitive regulations in upstream sectors curb multi-factor productivity (MFP) growth
downstream.
These effects are nonlinear and depend on distance to technological frontier (defined
as the most productive country in each sector). They are strongest for observations
(country/sector/period triads) that are close to the global technological frontier, but
remain generally negative for a large share of the data.
Interestingly, the share of observations whose MFP growth suffers from anticompetitive regulations increased over time. This could be due to increased integration
of the world economy in the context of the diffusion of new technologies.
Measured at the average distance to frontier and average level of anti-competitive
regulations, the effect of increasing competition by instantaneously and completely
eliminating such regulations is to increase MFP growth by between 1% and 1.5% per
year depending on the period covered.
This is of course a purely illustrative case because it would represent an unrealistically
ambitious reform agenda. More realistic scenarios, in which each country’s regulations
are aligned on actual best practices, suggest smaller but still sizeable yearly gains in
MFP growth.
Competition – and policies affecting it – has been found to be an important determinant
of productivity growth in recent empirical research. Evidence has generally supported
the idea that competitive pressures are a driver of productivity-enhancing innovation
and adoption.
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. Yet to the extent that expected rents from innovation or technology
adoption are underlying efforts to improve efficiency relative to competitors, focusing on
within-sector competition misses an important part of the story.
Indeed, these rents, and the corresponding within-sector incentives to improve
productivity, may be reduced by lack of competition in sectors that sell intermediate
inputs that are necessary to production.
In other words, if there is market power in these upstream sectors and if firms in
downstream industries have to negotiate terms and conditions of their contracts with
suppliers, part of the rents expected downstream from adopting best-practice
techniques will be grabbed by intermediate input providers. This in turn will reduce
incentives to improve efficiency and curb productivity in downstream sectors, even if
competition may be thriving there.
Moreover, lack of competition in upstream sectors can also generate barriers to entry
that curb competition in downstream sectors. For example, tight licensing requirements
in retail trade or transport can narrow access to distribution channels.
The influence of competition in upstream sectors for productivity improvements
downstream is likely to be particularly relevant in developed countries where most
industries are increasingly involved in global competition. Higher costs (or lower quality)
of intermediate inputs indirectly frustrate efforts of firms that purchase these goods and
services to improve efficiency in order to escape competition, because the expected
returns from such efforts are shrunk.
This study measures industry-level efficiency improvements and distance to frontier
through a multifactor productivity (MFP) index. Using OECD industry statistics, the
researchers construct MFP measures for 15 OECD countries and 20 sectors over the
1984-2007 period.
They proxy competition upstream with detailed time series information on policies, rules
and regulations that generate entry barriers upstream industries and measure the
importance of these barriers for all industries that use the non-manufacturing inputs
(‘downstream’ industries) by means of input-output relationships.
ENDS
‘Do product market regulations in upstream sectors curb productivity growth? Panel
data evidence for OECD countries’ by Renaud Bourlès, Gilbert Cette, Jimmy Lopez,
Jacques Mairesse and Giuseppe Nicoletti