Trade Reforms, Competition, and Innovation in the Philippines
What is the impact on firms f 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 country fs 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 country fs economic growth.
|Date of creation:||01 Jun 2012|
|Date of revision:|
|Contact details of provider:|| Postal: The ASEAN Secretariat Mezzanine Floor, 70A Jl.Sisingamangaraja, Jakarta 12110|
Web page: http://www.eria.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rafaelita M. Aldaba, 2005.
"Policy Reversals, Lobby Groups and Economic Distortions,"
Trade Working Papers
22312, East Asian Bureau of Economic Research.
- Aldaba, Rafaelita M., 2005. "Policy Reversals, Lobby Groups and Economic Distortions," Discussion Papers DP 2005-04, Philippine Institute for Development Studies.
- Yuriy Gorodnichenko & Jan Svejnar & Katherine Terrell, 2008.
"Globalization and Innovation in Emerging Markets,"
583, Research Seminar in International Economics, University of Michigan.
- Gorodnichenko, Yuriy & Svejnar, Jan & Terrell, Katherine, 2008. "Globalization and Innovation in Emerging Markets," IZA Discussion Papers 3299, Institute for the Study of Labor (IZA).
- Yuriy Gorodnichenko & Jan Svejnar & Katherine Terrell, 2008. "Globalization and innovation in emerging markets," NBER Working Papers 14481, National Bureau of Economic Research, Inc.
- 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.
- Rachel Griffith & Rupert Harrison & Helen Simpson, 2006. "The link between product market reform, innovation and EU macroeconomic performance," European Economy - Economic Papers 2008 - 2015 243, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
- Harold Creusen & BjÃ¶rn 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.
- Aldaba, Rafaelita M., 2008.
"Assessing Competition in Philippine Markets,"
DP 2008-23, Philippine Institute for Development Studies.
- 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.
- 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.
- Fernandes, Ana M. & Paunov, Caroline, 2009. "Does tougher import competition foster product quality upgrading ?," Policy Research Working Paper Series 4894, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:era:wpaper:dp-2012-05. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hiroshi Okasaki)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.