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Competition, Competition Policy, and Growth
studies have been useful in shedding light on the relationship between c ompetition and growth. One area of study has been the impact of product market competition on productivity gains, with key studies in this area confirming a positive relationship between competition and productivity growth.1 Product market competition is but one factor among many that affect aggregate performance indicators, such as employment and productivity. Nevertheless, work by the Organisation for Economic Co-operation and Development (OECD 2002, 155) “has identified an empirical connection between strong competition in markets for goods and services and better productivity and employment outcomes.” Moreover, differences in competitive pressures play an important part in explaining the differences in productivity across countries. Competition affects per capita growth through its effect on productivity. As noted, increases in productivity arise from both static and dynamic e fficiency gains. Regulatory reform that stimulates managerial effort is an example of 2 Medium- and long-term gains in p roductivity—dynamic a static efficiency gain. efficiency gains—arise from investments in research and development (R&D), product and process innovation, and the associated buildup of human capital (Høj et al. 2007). There is an established empirical relationship between innovation and growth, with some dispute on the effects of competition on innovation.3 The long-run effects of competition are likely to be positive on aggregate labor productivity growth. Lower price-cost margins arising from increased competition lead to job creation and upward pressure on average real wages. Further, lower product-market rents imply lower wage premium in some sectors, thus reducing labor costs and encouraging job creation. An increase of 1.5–2.5 percent in the employment rate may be observed where in-depth reforms have been adopted (Høj et al. 2007). On this point, see Høj et al. (2007), who refer to the work of Alesina et al. (2005), Nicoletti and Scarpetta (2003), and Conway et al. (2006).4 Høj et al. (2007) examine the data on price-cost margins (markups) for 17 countries in the OECD as a measure of competition. Figure 1.1 shows the results for the four different groups of manufacturing industries identified in table 1.1. These industries were identified along two dimensions5—the level of exogenous sunk costs (which identifies whether industries are fragmented or segmented) and the level of endogenous sunk costs (low or high R&D and advertising expenditures) and the markups for nonmanufacturing industries. The cross-country mean of markups for the four manufacturing industries, shown in figure 1.1, are not statistically different from one another. Greater variation is evident in the nonmanufacturing industry markups—average markups are estimated to be below 20 percent in the United Kingdom, Sweden, and the United States; higher for most European countries; and highest for the Republic of Korea (32 percent) and Italy (38 percent) (Høj 2007). Table 1.1 sheds light on the underlying data. Høj et al. (2007) attribute the greater variability in nonmanufacturing industries to a relative absence of competitive pressures in services compared to Clusters of Competitiveness • http://dx.doi.org/10.1596/978-1-4648-0049-8