Regulations and technology diffusion in Europe: the role of Industry dynamics

This paper focuses on the dynamics of innovation diffusion by analysing the impact of the regulatory framework on the gap between top firms and the followers. It expands on the existing literature by explicitly investigating the relationship between the regulatory frameworks in the labour, goods and capital markets and innovation diffusion, both directly and indirectly through the intermediate effect of business dynamism. This is particularly relevant for small firms engaging in risky activities, such as innovation, for which barriers to access to finance are tighter than for incumbent companies. The authors developed an original index of potential technology diffusion following a consolidated approach that uses the total factor productivity distance to the technological frontier as proxy, which accounts for the potential transfer of knowledge and technology embodied in trade. The new proposed methodological approach informs on both the mediating and moderating role of business dynamism in the relationship between regulation in product, labour and capital markets and technology diffusion and thereby enriches existing literature on framework conditions and productivity.