Trade, Competition and Innovation in the ASEAN

pes1November last year, I attended the Philippine Economic Society (PES) annual conference. Several panel discussions to choose  in the afternoon sessions. I think I missed this STRIDE panel  because I attended the panel on energy policy. Copy-pasting portions of this  presentation by Dr. Rafaelita Aldaba, formerly with PIDS and been Assistant Secretary at the Department of Trade and Industry (DTI).

I think many of the analytical tools and recommendations here can apply to the rest of  ASEAN and other countries.

Some useful data on R&D spending for some ASEAN countries.

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Part II. Literature Review

Competition & Innovation

* Early endogenous growth & IO literature: competition is detrimental to innovation, rents are major source of innovation

* Opposite view: competition fosters innovation , forces firms to innovate to survive, firms escape competition from rivals

* Aghion et al (2001): inverted U-shaped relationship between competition & innovation

* Empirical studies: mixed results with more recent studies pointing to a positive relationship between competition & innovation

* Creusen et al(2006), Hopman & Rojas-Romagosa (2010): positive relationship, no evidence of inverted U

* Gorodnichenco et al (2009): negative relationship especially for firms far from frontier, no evidence of inverted U

* Trade has a pro-competitive effect, open trade regime is a powerful instrument to discipline firms that have market power

* Import discipline hypothesis: competition from imports constrains ability of firms to engage on anti-competitive activities

* Empirical work: strong evidence supporting IDH

* Erdem & Tybout (2003), Tybout (2001):mark-ups decline with import competition

* Harrison (1994), Krishna & Mitra (1998), De Melo & Urata (1986), Levinsohn (1993), Warzynski (2002), Warzynski et al (2002)

* Trade & productivity: industries facing greatest tariff reduction & import competition have faster productivity growth

* Pavcnik (2002), Topalova (2003), Muendler (2002), Amite & Konings(2007), Schor (2003), Fernandes (2007), Aldaba (2010)

* International trade affects innovation through competition

* Aghion & Burgess (2003): liberalization encourages innovation in industries close to frontier

* Griffith, Harrison & Simpson (2006): EU SMP product market reforms increased competition which led to an increase in R&D

* Fernandes (2009): import competition has a positive effect on product quality upgrading

* Bloom, Draca & V. Reenen (2010):Chinese import competition increases innovation & TFP within surviving European firms, it reduces employment & survival probabilities in low-tech firms & they exit much more rapidly than high-tech firms in response to Chinese competition

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Part V. Conclusions & policy Implications

* Trade liberalization affects firm innovation through competition

q  An increase in tariffs will increase profitability & reduce competition likely result in reduced innovation, holding all else equal

* For overall manufacturing, both IV & Tobit results show that with tariff as trade indicator, trade reform has a strong positive effect on competition which leads to a significant positive impact on innovation activity

* Mixed sector, where intense trade takes place, confirms the importance of market competition as channel through which trade liberalization affects innovation

* IV results with tariffs show that tariff & PCM have a highly significant positive relationship while R&D & PCM have a significant negative relationship

  • Considering the low level of R&D spending, overall innovation activity in the country, and role of competition in the relationship between international trade & innovation, maintaining effective competition is essential, market contestability important

–     Increasing globalization & regional economic integration

  • Government should design strategy that would ensure competition, innovation, & productivity growth of firms
  • Motivations for new industrial policy

–     Inclusive growth, ASEAN Economic Community

  • Transform & upgrade manufacturing – AEC opportunities & create more & better jobs
  • Strengthen human capital, infrastructure, institutions
  • Innovation Ecosystem to link business & academe

“ Innovations do not fall like manna from heaven. Instead, they are created by human beings……. to profit from opening up new markets….”  — Aghion and Howitt (1999)

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