Abstract
Abstract In this paper, we develop a new firm-level measure of distance to the productivity frontier that accounts for international technology spillovers stemming from the use of imported intermediate goods. The trade-weighted technological distance to frontier is matched with sector- and country-level data on regulation and firm dynamics (entry and exit rates) of 16 European countries. Using our measure of trade-adjusted technology gap, we investigate the role of labour, capital, and product market regulatory frameworks in the technology catch-up process, gauging the effect of firms’ dynamics in mediating and moderating the impact of regulation on the technology gap. Our study offers a novel perspective and insights to the analysis of the link between framework conditions and technological distance to frontier. While most scholars argue that less regulation always favours productivity growth and the diffusion of technology, our results provide a more nuanced picture. Deregulation is not a one-size-fits-all solution that leads to faster technology diffusion, instead heterogeneity in business dynamism and countries’ regulatory structures need to be considered.
Highlights
Despite the slowdown in aggregate productivity growth in Europe, differences in productivity between frontier and non-frontier firms have been growing since 2000 (Andrews et al, 2015; Berlingieri et al, 2020), and innovation is progressively more concentrated among few actors and places
When entry and exit are considered simultaneously in an recursive three equations model, the entry rate has a negative effect on the distance to the productivity frontier, indicating that favourable framework conditions14 encourage entrepreneurship and help firms getting closer to the frontier
Innovation diffusion is strongly affected by public policy (Stoneman and Diederen, 1994), there are few policy initiatives aimed at changing the speed of technology catch-up, as most of the policy instruments are aimed at improving the technological capabilities
Summary
Despite the slowdown in aggregate productivity growth in Europe, differences in productivity between frontier and non-frontier firms have been growing since 2000 (Andrews et al, 2015; Berlingieri et al, 2020), and innovation is progressively more concentrated among few actors and places. Firm-level data on productivity differences is aggregated to match country- and sector-level data on business dynamics, human capital, and regulatory frameworks, covering the three dimension of product, labour, and capital (access to finance) market regulation from different sources. We contribute to the existing literature on regulations, institutions and productivity with a new methodological approach and insights on the role of business dynamics in the relationship between regulation in product and labour market, access to finance and technology diffusion. Member states have been asked to implement structural reforms in order to promote growth in Europe, with a specific focus on innovation as the main lever to boost productivity gains2 These reforms target product, labour, and capital markets as some of the main bottlenecks to improved economic performance.
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