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Dutch retail trade on the rise? Impact of competition on innovation and productivity

Dutch retail trade on the rise? Impact of competition on innovation and productivity. Harold Creusen*, Björn Vroomen, Henry van der Wiel, Fred Kuypers CPB Netherlands Bureau of Economic Policy Analysis *e-mail: hpwac@cpb.nl. Background. Competition may stimulate

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Dutch retail trade on the rise? Impact of competition on innovation and productivity

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  1. Dutch retail trade on the rise?Impact of competition on innovation and productivity Harold Creusen*, Björn Vroomen, Henry van der Wiel, Fred Kuypers CPB Netherlands Bureau of Economic Policy Analysis *e-mail: hpwac@cpb.nl

  2. Background • Competition may stimulate • lower prices and efficient production • innovation • Efficient production and innovation entail productivity growth • Many policy measures in 1990s focussed on more competition • New Competition Act in 1998 • Regulatory reform since 1996, also in retail trade

  3. Background • Labour productivity in Dutch retail • missed strong productivity growth of US • slightly lost its strong position in EU Labour productivity (per hours worked) relative to EU-average, 1979-2002

  4. Questions I. How are competition, innovation and productivity related? II. Did competition affect innovation in retail? III. Did competition and innovation contribute to productivity growth in retail? • Conclusion: more competition in Dutch retail may stimulate innovation and productivity growth

  5. I. Relations • Relation between three blocks: Competition Static efficiency InvertedU-curve? Productivity Productivity gap? Innovation Dynamic efficiency

  6. II. Innovation: model • Aghion et al.: • inverted U-relationship between competition and innovation • higher productivity gap between firms amplifies inverted U-relationship • Explanation of innovation: inn = (φ0 + φ1 RPM + φ2RPM 2 ) (1 + ψ1PG) +φ3ms with inn log innovation outlays (firm level) RPM competition indicator (5-digit industry level) PG productivity gap with leader (firm level) ms log market share (firm level)

  7. II. Innovation: data and method • Sources: • CIS-innovation surveys, Statistics Netherlands (1996,1998 and 2000) • annual surveys of ‘Production Statistics’, Statistics Netherlands (1993-2002) • Method: • innovation outlays left sensored: no innovation in 75% of firms • innovation estimated by TOBIT I-method

  8. II. Innovation: results

  9. II. Innovation: results

  10. II. Innovation: results • No inverted U-relation between competition and innovation • Estimation based on linear relation: inn = φ0 + φ1RPM+φ3ms with inn log innovation (firm level) RPM competition indicator (5-digit industry level)

  11. II. Innovation: results

  12. III. Productivity growth: model • Split TFP-growth (Solow decomposition) in contributions of competition and innovation • Explanation of productivity growth: Δp = Φ0+ Φ1 RPM + Φ2INN-1+ Φ3 (Δk - Δl) + Φ4 Δl ───────┬──────── TFP-growth with Δp productivity growth (firm level) (Δk - Δl) capital intensity (firm level) Δl labour (economies of scale, firm level)

  13. III. Productivity growth: data and method • Source: annual surveys of ‘Production Statistics’, Statistics Netherlands (1993-2002) • Method: simple OLS

  14. III. Productivity growth: results

  15. Conclusions • No inverted U-relationship but positive relation between competition and innovation • Both competition and innovation have a positive impact on productivity growth • So more competition in Dutch retail may stimulate productivity growth • on the short term by reductions in X-inefficiency • on the long term by innovation

  16. Issues for future research • Functional form of relation between competition and innovation ? • Feed back of (dispersion in) productivity levels on competition ?

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