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Trade Reforms, Competition, and Innovation in the Philippines

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  • Rafaelita M. ALDABA

    (Rafaelita M. ALDABA Philippine Institute for Development Studies, Manila, the Philippines)

Abstract

What is the impact on firmsf innovative activities of the removal of barriers to trade? Does the increase in competition arising from trade reforms lead to increases in innovation? This paper attempts to examine the link between trade liberalization and innovation, using firm panel data on the Philippine manufacturing industry. With the framework of Impulliti and Licandro (2009, 2010) as guide, a two-stage approach is tested, where trade and innovation are linked via competition. A reduction in tariffs leads to an increase in competition as price cost margins fall due to the increase in the number of players in the domestic market. With the reduction in price cost margins, profits fall and the productivity threshold above which firms can operate profitably increases. This forces inefficient firms out of the market and resources are reallocated from exiting firms to the higher productivity surviving firms, which innovate at a faster pace. The results show that trade liberalization, has significant positive impact, through competition, on innovation. Given the crucial role of competition in the relationship between trade liberalization and innovation, it is important for the government to maintain the contestability of markets. The presence of trade barriers or government regulations that limit market entry can create inefficiencies leading to reduced long-term growth. These weaken competition and prevent structural changes from taking place, resulting in resources being tied to low-productivity industries. Weak competition reduces the pressure on firms to adopt new technology or innovate, resulting in low growth of productivity and a loss of competitiveness. Despite two decades of implementing liberalization policy, competition and productivity growth remained weak in the Philippines, not only due to the presence of structural and behavioral barriers to entry, but also to the countryfs inadequate physical and institutional infrastructure. Due to the fundamental weakness of competition in many major economic sectors, the gains from liberalization remained limited, which slowed down the countryfs economic growth.

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Paper provided by Economic Research Institute for ASEAN and East Asia (ERIA) in its series Working Papers with number DP-2012-05.

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Length: 64 pages.
Date of creation: 01 Jun 2012
Date of revision:
Handle: RePEc:era:wpaper:dp-2012-05

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  1. Rafaelita M. Aldaba, 2008. "Assessing Competition in Philippine Markets," Microeconomics Working Papers 22607, East Asian Bureau of Economic Research.
  2. Aldaba, Rafaelita M., 2005. "Policy Reversals, Lobby Groups and Economic Distortions," Discussion Papers DP 2005-04, Philippine Institute for Development Studies.
  3. Aldaba, Rafaelita M., 2010. "Does Trade Protection Improve Firm Productivity? Evidence from Philippine Micro Data," Discussion Papers DP 2010-32, Philippine Institute for Development Studies.
  4. Wendy Carlin & Mark Schaffer & Paul Seabright, 2004. "A Minimum of Rivalry: Evidence from Transition Economies on the Importance of Competition for Innovation and Growth," William Davidson Institute Working Papers Series 2004-670, William Davidson Institute at the University of Michigan.
  5. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
  6. Siotis, Georges, 2003. "Competitive pressure and economic integration: an illustration for Spain, 1983-1996," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1435-1459, December.
  7. Harold Creusen & Björn Vroomen & Henry van der Wiel & Fred Kuypers, 2006. "Dutch retail trade on the rise? Relation between competition, innovation and productivity," CPB Document 137, CPB Netherlands Bureau for Economic Policy Analysis.
  8. Yuriy Gorodnichenko & Jan Svejnar & Katherine Terrell, 2008. "Globalization and innovation in emerging markets," NBER Working Papers 14481, National Bureau of Economic Research, Inc.
  9. Rachel Griffith & Rupert Harrison & Helen Simpson, 2006. "The link between product market reform, innovation and EU macroeconomic performance," European Economy - Economic Papers 243, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  10. Fernandes, Ana M. & Paunov, Caroline, 2009. "Does tougher import competition foster product quality upgrading ?," Policy Research Working Paper Series 4894, The World Bank.
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Cited by:
  1. Cassey Lee & Yoshifumi Fukunaga, 2013. "ASEAN Regional Cooperation on Competition Policy," Working Papers DP-2013-03, Economic Research Institute for ASEAN and East Asia (ERIA).

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