Archived — Research Summaries: Working Paper 2008-01: Competition, Innovations and Productivity: A Critical Review of Recent Literature and Synthesis
by Malick Souare
According to conventional wisdom, greater competition enhances productivity directly, and indirectly through its effects on innovation and investments in technology adoption (i.e. fundamental and applied innovation, respectively). To ascertain this widespread view, this paper reviews some (recent and/or influential) theoretical literature and empirical evidence on the impacts of competition on innovations (fundamental and applied) and productivity. In addition, it neatly compares the advantages and disadvantages of the most widely used measures of competition in empirical studies. Although there is no obvious and accurate way to measure competition, the price-cost margin (or mark-up) and indicators of regulatory reforms seem preferable (despite some shortcomings) for cross-country and cross-industry studies. In addition, the literature review reveals that the effects of competition, particularly on innovations, are quite controversial at a theoretical level. However, apart from a handful of studies, the empirical literature on the whole (both cross-country and country-specific studies) points to a positive effect of competition on innovations and productivity.
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