Tuesday, June 24, 2008
Regulation, Allocative Efficiency and Productivity in OECD Countries: Industry and Firm-level Evidence
Posted by D. Daniel Sokol
A newly posted OECD document, Regulation, Allocative Efficiency and Productivity in OECD Countries: Industry and Firm-level Evidence provides some interesting new evidence.
ABSTRACT: We first show, by means of an original set of OECD indicators of the “knock-on” effects of non-manufacturing regulation, that the burden of inappropriate regulations has been disproportionately high in ICT-using sectors of many continental EU countries. Then, relying on existing industry-level econometric results, we show that these regulatory burdens have led to slower productivity growth in the ICT-using industries of these countries. Finally, using harmonised industry-level and firm-level data we provide new evidence on the relationship between regulation and the efficiency of resource allocation across sectors and firms in countries for which these data are available. This leads to several conclusions:
• First, there is a significant heterogeneity of productivity performance across sectors in OECD countries and, within each of them, across firms. This heterogeneity, in turn, highlights the importance of an efficient allocation of resources to promote aggregate productivity growth.
• Second, across industries (and especially within the ICT-using set) resources are allocated less efficiently where anti-competitive regulations are severe.
• Third, anti-competitive regulations tend to be associated with a weaker ability of sectors and countries to allocate resources to the most dynamic and productive firms.
• Finally, the negative effects of anti-competitive product market regulations on firm productivity are concentrated in ICT-using sectors, with a particularly pronounced effect on firms that are in the process of catching up to the technology frontier and that are not far from international best practice. In other words, regulations hurt in particular those firms that have the potential to excel in domestic and international markets.
The rest of the paper is organised as follows. In Section 2, we review the theoretical linkages between anti-competitive product market regulations, investment, resource reallocation, innovation and ultimately productivity growth. Relying on OECD indicators, we also briefly discuss how differences across countries in these regulations have evolved over time and hit differently ICT-using sectors. We then move in Section 3 to the evidence on the regulation-productivity linkage at the aggregate, sectoral and firm levels. After a brief reminder of cross-country growth patterns, we show how differences in regulation have interacted with the ICT supply shock to shape divergence in growth performances over the past two decades, focusing on ICT investment and the performance of ICT-using sectors. We then examine more in detail how differential growth performances have been affected by the ability of OECD economies to reallocate resources to fast growing sectors and firms. In this context, we present new econometric evidence on how product market regulations affect productivity performance of different firms in a sample of EU countries. Section 4 provides some concluding remarks.