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Competition, Innovation and Growth in Transition: Exploring the Interactions between Policies

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  • Philippe Aghion
  • Wendy Carlin

    ()

  • Mark Schaffer

Abstract

Transition has entailed the introduction of policies to stimulate product market competition, to establish effective corporate governance and to harden enterprise budget constraints. How do these policies interact? Are they substitute policy instruments or does one policy reinforce the effect of another? Although early endogenous growth models predicted a negative relationship between competition and innovation, Aghion, Dewatripont and Rey (1999) showed that this could be reversed if agency considerations were introduced. In their model competition acts as an incentive mechanism to reduce managerial slack, which produces the additional prediction that competition and corporate governance are substitutable. But in a profit-maximizing framework in which incumbent firms innovate to escape competition, there will be complementarity between increased product market competition and governance and between competition and hard budget constraints (Aghion and Howitt 2002). We use the EBRD-World Bank Enterprise survey of over 3,000 firms in 25 transition countries to test for interaction effects between policies. We find that competition and hard budget constraints are complementary. We also find that competitive pressure (a) enhances the performance of old firms, which is suggestive of a role if agency effects and hence of policy substitutability and (b) enhances the performance of new firms, which is consistent with complementarity. Finally, the evidence points to the prevalence of financing constraints facing new firms.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 501.

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Length: 32 pages
Date of creation: 01 Mar 2002
Date of revision:
Handle: RePEc:wdi:papers:2002-501

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Keywords: transition; innovation; competition; corporate governance; hard budget constraints; policy interactions; enterprise survey;

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References

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  1. Wendy Carlin & Steven Fries & Mark Schaffer & Paul Seabright, 2001. "Competition and enterprise performance in transition economies: evidence from a cross-country survey," Working Papers, European Bank for Reconstruction and Development, Office of the Chief Economist 63, European Bank for Reconstruction and Development, Office of the Chief Economist.
  2. Stephen Nickell, 1993. "Competition and Corporate Performance," CEP Discussion Papers, Centre for Economic Performance, LSE dp0182, Centre for Economic Performance, LSE.
  3. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and Innovation: An Inverted U Relationship," NBER Working Papers 9269, National Bureau of Economic Research, Inc.
  4. Harris, Christopher & Howitt, Peter & Vickers, John & Aghion, Philippe, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Scholarly Articles 12375013, Harvard University Department of Economics.
  5. Aghion, Philippe, et al, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(3), pages 467-92, July.
  6. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1999. "Competition, financial discipline and growth," ULB Institutional Repository 2013/9619, ULB -- Universite Libre de Bruxelles.
  7. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  8. Blundell, Richard & Griffith, Rachel & van Reenen, John, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(3), pages 529-54, July.
  9. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1999. "Competition, Financial Discipline and Growth," Scholarly Articles 12490416, Harvard University Department of Economics.
  10. Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 771-782, April.
  11. Boone, J., 2000. "Competition," Discussion Paper, Tilburg University, Center for Economic Research 2000-104, Tilburg University, Center for Economic Research.
  12. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages S71-102, October.
  13. Grosfeld, Irena & Tressel, Thierry, 2001. "Competition, Corporate Governance: Substitutes or Complements? Evidence from the Warsaw Stock Exchange," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2888, C.E.P.R. Discussion Papers.
  14. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Philippe Aghion & Heike Harmgart & Natalia Weisshaar, 2010. "Fostering growth in CEE countries: a country-tailored approach to growth policy," Working Papers, European Bank for Reconstruction and Development, Office of the Chief Economist 118, European Bank for Reconstruction and Development, Office of the Chief Economist.
  2. László Halpern & Gábor Kõrösi, 2003. "Corporate performance and market structure during transition in Hungary," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 2003-606, William Davidson Institute at the University of Michigan.
  3. Dirk Czarnitzki & Kornelius Kraft, 2006. "R&D and Firm Performance in a Transition Economy," Kyklos, Wiley Blackwell, Wiley Blackwell, vol. 59(4), pages 481-496, November.
  4. Mitra, Pradeep & Muravyev, Alexander & Schaffer, Mark E, 2008. "Convergence in Institutions and Market Outcomes: Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition Economies," IZA Discussion Papers 3863, Institute for the Study of Labor (IZA).
  5. Hashem, Nawar & Ugur, Mehmet, 2011. "Product-market competition, corporate governance and innovation: evidence on US-listed firms," MPRA Paper 37481, University Library of Munich, Germany, revised Feb 2012.
  6. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and innovation: an inverted U relationship," IFS Working Papers, Institute for Fiscal Studies W02/04, Institute for Fiscal Studies.
  7. Nakhoda, Aadil, 2012. "The effect of foreign competition on product switching activities: A firm level analysis," MPRA Paper 39167, University Library of Munich, Germany.
  8. Rado Pezdir, 2006. "Thirteen Years of Gradualism — Inhibiting Transition in Slovenia?," Post-Communist Economies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 18(1), pages 51-68.
  9. Paul Conway & Sean Dougherty & Artur Radziwill, 2010. "Long-term growth and policy challenges in the large emerging economies," OECD Economics Department Working Papers 755, OECD Publishing.
  10. Itzhak Goldberg & John Gabriel Goddard & Smita Kuriakose & Jean-Louis Racine, 2011. "Igniting Innovation : Rethinking the Role of Government in Emerging Europe and Central Asia," World Bank Publications, The World Bank, number 2358, August.
  11. Amess, Kevin & Roberts, Barbara M., 2007. "The productivity effects of privatization: The case of Polish cooperatives," International Review of Financial Analysis, Elsevier, Elsevier, vol. 16(4), pages 354-366.
  12. Itzhak Goldberg & Lee Branstetter & John Gabriel Goddard & Smita Kuriakose, 2008. "Globalization and Ttechnology Absorption in Europe and Central Asia : The Role of Trade, FDI, and Cross-Border Knowledge Flows," World Bank Publications, The World Bank, number 6445, August.

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