Product Market Regulation, Innovation, and Distance to Frontier

Abstract

This article contributes to the literature on competition and innovation. It tests the impact of market regulation on innovation conditional to the closeness to the technological frontier with a panel of 15 industries for 17 OECD countries over the period 1979–2003. One of the main conclusions of this literature is that of a negative impact of regulation growing in intensity with the proximity to the frontier. A simple model of innovation and growth shows that one should not necessarily expect this result. Empirical tests on a variety of specifications show that the impact of regulation can be positive when industries are close to the technological frontier. We argue that this result is in fact line with previous evidence.