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Trade Reforms, Competition, and Innovation in the Philippines

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  • Aldaba, Rafaelita M.

Abstract

What is the impact of the removal of barriers to trade on the firms` innovative activities? 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 increases the productivity threshold above which firms can operate profitably. 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 on innovation through competition. 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 the two decades of implementing liberalization policy, competition and productivity growth remained weak not only due to the presence of structural and behavioral barriers to entry, but also to the country`s inadequate physical and institutional infrastructure. Due to the fundamental weakness of competition in a lot of major economic sectors, the gains from liberalization remained limited and slowed down the country`s economic growth.

Suggested Citation

  • Aldaba, Rafaelita M., 2012. "Trade Reforms, Competition, and Innovation in the Philippines," Discussion Papers DP 2012-06, Philippine Institute for Development Studies.
  • Handle: RePEc:phd:dpaper:dp_2012-06
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    References listed on IDEAS

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    1. Yuriy Gorodnichenko & Jan Svejnar & Katherine Terrell, 2010. "Globalization and Innovation in Emerging Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 194-226, April.
    2. 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.
    3. Rafaelita M. Aldaba, 2005. "Policy Reversals, Lobby Groups and Economic Distortions," Trade Working Papers 22312, East Asian Bureau of Economic Research.
    4. Fernandes, Ana M. & Paunov, Caroline, 2009. "Does tougher import competition foster product quality upgrading ?," Policy Research Working Paper Series 4894, The World Bank.
    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. Rafaelita M. Aldaba, 2008. "Assessing Competition in Philippine Markets," Microeconomics Working Papers 22607, East Asian Bureau of Economic Research.
    7. 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.
    8. 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.
    9. Geroski, Paul A., 1995. "Market Structure, Corporate Performance, and Innovative Activity," OUP Catalogue, Oxford University Press, number 9780198288558.
    10. 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.
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    Cited by:

    1. Lee, Cassey & Fukunaga, Yoshifumi, 2014. "ASEAN regional cooperation on competition policy," Journal of Asian Economics, Elsevier, pages 77-91.
    2. Lassana Cissokho, 2015. "Power Outages and the Productivity of Small and Medium Enterprises: the role of Formality," EcoMod2015 8239, EcoMod.

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    Keywords

    competition; innovation; Philippines; trade; Philippine manufacturing;

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