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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.

Suggested Citation

  • Philippe Aghion & Wendy Carlin & Mark Schaffer, 2002. "Competition, Innovation and Growth in Transition: Exploring the Interactions between Policies," William Davidson Institute Working Papers Series 501, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2002-501
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    References listed on IDEAS

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    1. Philippe Aghion & Mathias Dewatripont & Patrick Rey, 1999. "Competition, Financial Discipline and Growth," Review of Economic Studies, Oxford University Press, vol. 66(4), pages 825-852.
    2. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    3. Boone, Jan, 2000. "Competition," CEPR Discussion Papers 2636, C.E.P.R. Discussion Papers.
    4. Philippe Aghion & Christopher Harris & Peter Howitt & John Vickers, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Oxford University Press, vol. 68(3), pages 467-492.
    5. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
    6. Carlin, Wendy & Fries, Steven & Schaffer, Mark E & Seabright, Paul, 2001. "Competition and Enterprise Performance in Transition Economies: Evidence from a Cross-country Survey," CEPR Discussion Papers 2840, C.E.P.R. Discussion Papers.
    7. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    8. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-746, August.
    9. Grosfeld, Irena & Tressel, Thierry, 2001. "Competition, Corporate Governance: Substitutes or Complements? Evidence from the Warsaw Stock Exchange," CEPR Discussion Papers 2888, C.E.P.R. Discussion Papers.
    10. Richard Blundell & Rachel Griffith & John van Reenen, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 529-554.
    11. Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, vol. 41(3-5), pages 771-782, April.
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    Citations

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    Cited by:

    1. Mehmet Ugur, 2013. "Governance, market power and innovation: evidence from OECD countries," Chapters,in: Governance, Regulation and Innovation, chapter 2, pages 25-57 Edward Elgar Publishing.
    2. Barbara Roberts & Steve Thompson, 2009. "Firm turnover, restructuring and labour productivity in transition: the case of Poland," Applied Economics, Taylor & Francis Journals, vol. 41(9), pages 1127-1136.
    3. Eshref Trushin, 2013. "Does regulation affect innovation and technical production efficiency? Evidence from the global pharmaceutical industry," Chapters,in: Governance, Regulation and Innovation, chapter 8, pages 197-215 Edward Elgar Publishing.
    4. 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.
    5. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
    6. Pradeep Mitra & Alexander Muravyev & Mark E. Schaffer, 2008. "Convergence in Institutions and Market Outcomes: Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition Economies," Discussion Papers of DIW Berlin 847, DIW Berlin, German Institute for Economic Research.
    7. Dirk Czarnitzki & Kornelius Kraft, 2006. "R&D and Firm Performance in a Transition Economy," Kyklos, Wiley Blackwell, vol. 59(4), pages 481-496, November.
    8. 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.
    9. Rado Pezdir, 2006. "Thirteen Years of Gradualism — Inhibiting Transition in Slovenia?," Post-Communist Economies, Taylor & Francis Journals, vol. 18(1), pages 51-68.
    10. Nakhoda, Aadil, 2012. "The effect of foreign competition on product switching activities: A firm level analysis," MPRA Paper 39167, University Library of Munich, Germany.
    11. International Monetary Fund, 2012. "Republic of Belarus; Selected Issues," IMF Staff Country Reports 12/114, International Monetary Fund.
    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, June.
    13. repec:eee:riibaf:v:42:y:2017:i:c:p:745-768 is not listed on IDEAS
    14. L??szl?? Halpern & G??bor K??r??si, 2003. "Corporate performance and market structure during transition in Hungary," William Davidson Institute Working Papers Series 2003-606, William Davidson Institute at the University of Michigan.
    15. 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, June.
    16. Frank Crowley & Philip McCann, 2015. "Innovation and Productivity in Irish Firms," Spatial Economic Analysis, Taylor & Francis Journals, vol. 10(2), pages 181-204, June.
    17. Amess, Kevin & Roberts, Barbara M., 2007. "The productivity effects of privatization: The case of Polish cooperatives," International Review of Financial Analysis, Elsevier, vol. 16(4), pages 354-366.

    More about this item

    Keywords

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

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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