Product market competition,R&D composition and growth

We revisit the relation between product market competition and leading-edge growth in a model where horizontal and vertical innovations simultaneously occur. We show that competition exerts an important effect on the composition of aggregate R&D (vertical versus horizontal). In fact, when product market competition gets more intense, a larger fraction of R&D is engaged in improving the quality of products; this occurs at the expense of a lower rate of horizontal innovation. This effect, which is absent in the basic endogenous growth model with only vertical innovations, may overturn the inverse relation between product market competition and leading-edge growth found in prior theoretical models.     

Trade and product market policies in upstream sectors and productivity in downstream sectors: Firm-level evidence from China

This paper explores the heterogeneous productivity impact of trade, product market and financial market policies over the last decade in China. The paper makes a critical distinction between downstream and upstream industries, focusing on the indirect effects of regulation in upstream industries on firm performance in downstream manufacturing industries. We identify the differential effect of these policies on firm productivity growth depending on how far incumbents are relative to the technological frontier. Trade and product market reforms are found to deliver stronger gains for firms that are closer to the industry-level technological frontier, while the reverse holds for financial market reforms. The key conclusion that can be derived from the empirical analysis is that further product, trade and financial market reforms would bring substantial gains in China and could therefore speed up the convergence process. Taken at face value, the empirical estimates would imply that aligning product, trade and financial market regulation to the average level observed in OECD countries would bring aggregate manufacturing productivity gains of respectively 9%, 3% and 6.5% after 5 years.     

GROWTH,INTER‐INDUSTRY AND INTRA‐INDUSTRY COMPETITION AND WELFARE*

In this paper we introduce strategic interaction between firms in an R&D growth model which captures both the intra‐industry competition between firms operating within an industry and the inter‐industry competition between firms in different industries. We show that the more substitutable the goods produced within each industry (across industries) are, that is, the more intense the intra‐industry (inter‐industry) competition, the higher is the growth rate. In the comparison between social optimum and a decentralized economy, it is shown that the market outcome is characterized by inefficiently high entry of firms within each industry and insufficient productivity growth.     

GROWTH, R&D AND WELFARE: THE ROLE OF PUBLIC POLICY

This paper analyzes the normative side of an R&D growth model in which market structure and growth are jointly determined in the equilibrium of a one‐sector economy under monopolistic competition. We find that a distortion in the allocation of R&D, namely the presence of technological spillovers between firms, generates two market failures: insufficient growth and excessive entry of firms. We show that this result is driven by the interplay between market structure and growth. A simple tax/subsidy scheme to support the efficient solution is proposed.     

What is the optimal rate of R&D investment to maximize productivity growth?

Governments in modern economies devote much policy attention to enhancing productivity and continue to emphasize its drivers such as investment in R&D. This paper analyzes the relationship between productivity growth and levels of R&D investments. The econometric analysis shows that more than 65 per cent of productivity growth variance is due to its dependence on gross domestic expenditure on R&D expressed as percentage of GDP (GERD). Economic analysis shows that productivity growth = f(GERD) is a concave function downwards due to diminishing returns to research investments. In addition, the research shows that the range of GERD between 2.3 per cent and 2.6 per cent maximizes the long-run impact on productivity growth and it is the key to sustained productivity and technology improvements that are becoming more and more necessary to modern economic growth.     

Asymmetry, stability and growth in a step-by-step R&D-race

We define a notion of stability of equilibrium in an infinitely repeated step-by-step R&D race. The unique symmetric equilibrium is shown to be unstable, and stable asymmetric equilibria arise, if product market competition is intense, firms are patient, imitation is difficult and innovations are large. Some predictions based on symmetric equilibria, e.g. that less patient firms always invest less in research, or that more intensive competition leads to higher economic growth, are reversed for “realistic” values of the underlying parameters.     

The emergence of hybrid-electric cars: Innovation path creation through co-evolution of supply and demand

Hybrid-electric vehicles have experienced a significant rate of growth in the last 10 years. This is remarkable, since the automotive sector is typically averse to the more radical technological change of engines. The internal combustion engine has been around for more than 100 years after all.In this paper we describe and explain the emergence of electric engines in the automobile market after 1990. We explicate the role of techno-economic mechanisms alongside social and regulatory mechanisms (including the social meaning of an engine). The co-evolutionary analysis is novel in the integrated conception of actor perspectives, feedback effects and competition between products. We find three sources of lock-in through path dependency: from demand, supply as well as the regulatory side. We conclude that automotive engines were significantly locked into a trajectory of internal combustion technology due to techno-economic mechanisms, which produced inertia despite social pressures. The creation of an alternative path, on the other hand, initially stalled. Various stakeholders were unsuccessful in marketing their electric or hybrid-electric vehicles in the 1990s, such as Peugeot/Citroen with various electric models, or Audi with their Duo in 1997. However, after 2000 we find that sustaining efforts of California's Air Resources Board and Toyota were triggering creation of a new innovation path of hybrid-electric engines.     

Competition and inter-firm credit: Theory and evidence from firm-level data in Indonesia

Using firm-level data we investigate the relationship between trade credit and suppliers' market structure and find a ∩-shaped relationship between competition and trade credit, with a discontinuous increase in credit provision between monopoly and duopoly. This “big jump” arises because monopolists are more likely to not offer any trade credit than firms in competitive environments. Our model exploits the fundamentally different nature between cash and trade credit sales, arguing that firms are unable to commit ex ante to a trade credit price. We show that monopolists will often sell only on cash, while credit is always provided in competitive environments.     

Franchise fee, competition and economic growth

This paper introduces the different kinds of franchise contract bargaining into a macroeconomic model and accordingly researches the relationship between competition and economic growth. In Nash bargaining model/vertical integration we find an inverted-U shaped or a monotonically increasing relationship between the competitive degree of the intermediate goods market and economic growth. In bargaining of the right to manage model/vertical non-integration our result shows an inverted-U shaped or a monotonically decreasing relationship between the competitive degree of the intermediate goods market and economic growth. In addition, there is an overall negative relationship between the competitive degree of the final goods market and economic growth. Especially, our interesting findings that the pricing rule for intermediate goods firm depends not only on market power but also bargaining power are more general. Therefore, we can further explain the firms' vertical control strategy.     

Product Market Reform and Innovation in the EU*

European Union countries have implemented widespread reforms to product markets to stimulate competition, innovation, and economic growth. We provide empirical evidence that the reforms carried out under the EU Single Market Programme (SMP) were associated with increased product market competition, as measured by a reduction in average profitability, and with a subsequent increase in innovation intensity and productivity growth for manufacturing sectors. Our analysis exploits exogenous variation in the expected impact of the SMP across countries and industries to identify the effects of reforms on average profitability, and the effects of profitability on innovation and productivity growth.     

Accounting for the effect of health on cross-state income inequality in India

We perform development accounting in accordance with [Weil, 2005] and [Weil, 2007] in a cross-state analysis of India. Results of similar magnitude are found, demonstrating that health can account for 1% to 18% of income differences depending on the health measure.     

Civil wars beyond their borders: The human capital and health consequences of hosting refugees

In early 1994, Kagera - a region in northwestern Tanzania - was flooded by more than 500,000 refugees fleeing from the genocides of Burundi and Rwanda. I use this population shock and a series of topographic barriers that resulted in variation in refugee intensity to investigate the short- and long-run causal effects of hosting refugees on outcomes of local children. This strategy provides evidence of adverse impacts over one year after the shock: a worsening of children's anthropometrics (0.3 standard deviations), an increase in the incidence of infectious diseases (15-20 percentage points) and an increase in mortality for children under five (7 percentage points). I also find that intra- and inter-cohort variation in childhood exposure to the refugee crisis reduced height in early adulthood by 1.8 cm (1.2%), schooling by 0.2 years (7.1%) and literacy by 7 percentage points (8.6%). Designs using the distance to the border with Rwanda as an alternative identification strategy for refugee intensity support the findings. The estimates are robust across different samples, specifications and estimation methods and provide evidence of a previously undocumented indirect effect of civil wars on the well-being of children and subsequent economic growth in refugee-hosting communities.     

Conflict displacement and labor market outcomes in post-war Bosnia and Herzegovina

The war in Bosnia and Herzegovina of the early nineties displaced 1.3 million people. This study uses longitudinal data to document the effects of this displacement on labor market outcomes. To account for endogeneity in displacement, I exploit the fact that the level of violence affected the decision to leave and that pre-war economic performance is orthogonal to local violence levels. I find that displaced Bosnians are less likely to be working relative to the people who stayed. Displaced men experience higher unemployment levels, and displaced women are more likely to drop out of the labor force.     

The effects of market structure on industry growth: Rivalrous non-excludable capital

We analyze imperfect competition in dynamic environments where firms use rivalrous but non-excludable industry-specific capital that is provided exogenously. Capital depreciation depends on utilization, so firms influence the evolution of the capital equipment through more or less intensive supply in the final-goods market. Strategic incentives stem from, (i) a dynamic externality, arising due to the non-excludability of the capital stock, leading firms to compete for its use (rivalry), and, (ii) a market externality, leading to the classic Cournot-type supply competition. Comparing alternative market structures, we isolate the effect of these externalities on strategies and industry growth.     

Do interest rates matter? Credit demand in the Dhaka slums

“Best practice” in microfinance holds that interest rates should be set at profit-making levels, based on the belief that even poor customers favor access to finance over low fees. Despite this core belief, little direct evidence exists on the price elasticity of credit demand in poor communities. We examine increases in the interest rate on microfinance loans in the slums of Dhaka, Bangladesh. Using unanticipated between-branch variation in prices, we estimate interest elasticities from − 0.73 to − 1.04, with our preferred estimate being at the upper end of this range. Interest income earned from most borrowers fell, but interest income earned from the largest increased, generating overall profitability at the branch level.     

Property rights protection and corporate R&D: Evidence from China

Following the recent literature on institutions and economic growth, we examine the effects of property rights protection on corporate R&D. Using a unique 2003 World Bank survey of over 2400 firms in 18 Chinese cities, we obtain the following findings: (1) property rights protection is positively and significantly related to corporate R&D activity (for both process and product R&D); (2) government services and helping hand are conducive to corporate R&D, while informal payments to government officials are not; and (3) government ownership of firms and direct appointment of CEOs are negatively associated with corporate R&D activities. We also find that corporate R&D is positively related to firm size, and access to finance, but negatively related to product market competition and firm age.     

Human capital, economic growth, and regional inequality in China

We show how regional growth patterns in China depend on regional differences in physical, human, and infrastructure capital as well as on differences in foreign direct investment (FDI) flows. We also evaluate the impact of market reforms, especially the reforms that followed Deng Xiaoping's “South Trip” in 1992 those that resulted from serious hardening of budget constraints of state enterprises around 1997. We find that FDI had a much larger effect on TFP growth before 1994 than after, and we attribute this to the encouragement of and increasing success of private and quasi-private enterprises. We find that human capital positively affects output and productivity growth in our cross-provincial study. Moreover, we find both direct and indirect effects of human capital on TFP growth. These impacts of education are more consistent than those found in cross-national studies. The direct effect is hypothesized to come from domestic innovation activities, while the indirect impact is a spillover effect of human capital on TFP growth. We conduct cost-benefit analysis of hypothetical investments in human capital and infrastructure. We find that, while investment in infrastructure generates higher returns in the developed, eastern regions than in the interior, investing in human capital generates slightly higher or comparable returns in the interior regions. We conclude that human capital investment in less-developed areas is justified on efficiency grounds and because it contributes to a reduction in regional inequality.     

Opening a stock exchange

A large body of theoretical and empirical literature has established a positive relationship between levels of stock market development and economic growth. However, previous empirical work has been based on samples of approximately 40 countries with the most highly developed financial systems. Since 1950, over 70 countries have opened their first national stock exchanges. Can such exchanges increase economic growth? I present a data set of my construction that describes the exchange openings that occurred between 1960 and 1998, and find that these exchanges have generated increases in growth during their first 5 years of existence, although the longer-term results are ambiguous.     

Market structure and market performance in E-commerce

We analyze the interaction between market structure and market performance and how it varies over the product cycle. To account for the potential endogeneity in this relation, we use an instrumental variable approach. We combine data from the largest Austrian online market for price comparisons with retail data on wholesale prices provided by a major hardware producer for consumer electronics. Our results show that instrumenting is important for estimating the empirical effect of competition on the markup of the price leader. One more firm in the market is associated with a reduction of the price leader׳s markup which is equivalent to competition between existing firms for an additional 3 weeks in the product life cycle. Our results support search theoretic models and contradict models of monopolistic competition. Moreover our results support the existence of price dynamics over the product cycle. They also highlight the substitutability between newly innovated and old expiring technologies and how it varies with respect to competitors׳ and own brand innovations.     

Policy competition for foreign direct investment between asymmetric countries

The present paper analyses policy competition for foreign direct investment between countries of different size and different market structure. We demonstrate how policy competition affects the location decision of the foreign investor and derive welfare implications. The key variables in our analysis are intra-regional trade costs, differences in market size, and minimum wages.