This presentation by Chiara Criscuolo, Head of Division Productivity Innovation and Entrepreneurship Division, Science Technology, and Innovation Directorate, was made during the discussion “The Relationship between Competition and Innovation” held at the 140th meeting of the OECD Competition Committee on the 14th of June 2023. More papers and presentations on the topic can be found out at oe.cd/rbci. This presentation was uploaded with the author’s consent.

1. OECD COMPETITION COMMITTEE
HEARING ON
COMPETITION AND INNOVATION
Chiara Criscuolo
Head of Productivity Innovation and Entrepreneurship Division
Directorate for Science Technology and Innovation
OECD

2. • Innovation, in its rate and direction, both determines and
is affected by competition
• Relationship is theoretically complex and challenging to
measure
• Fundamental trade-off
– (Ex ante) market dynamism: entry of innovative firms, threat of
entry to incumbents, and exit of inefficient firms
– (Ex post) Market power: recovering the fixed costs of
innovation and presence of knowledge spillovers requires either
sufficient scale or profitability per unit
Competition and innovation: a complex relationship

3. • Firms that compete neck and neck may innovate to escape
competition (Aghion et al., 2005)
• Monopolists may find it less beneficial to innovate given
their pre-existing ability to make profits
• So, competition is necessary
Innovation requires some level of competition

4. OECD EVIDENCE SUGGESTS:
SLUGGISH INNOVATION,
SLOWING CATCH-UP
AND DECLINING COMPETITION
4

5. Slowdown in aggregate labour productivity (GDP per
hours worked) across countries
Source: OECD Stat

6. A widening labour productivity gap between global
frontier firms and other firms
Notes: Labour Productivity measured as Value Added per Worker. Frontier firms are defined as the top 5% most productive firms in each year-2 digit NACE sector. Countries included in the
sample are: Australia, Austria, Belgium, Denmanrk, Estonia, Finland, France, Germany, Hungary, Ireland, Italy, Korea, Netherlands, Portugal, Poland, Spain, Slovenia, Sweden, United
kingdom and United States. Firms with less than 20 employees are excluded,
Source: OECD calculations on Orbis based on Andrews, Criscuolo and Gal (2016)

7. Dynamism is steadily declining
Source: Calvino Criscuolo and Verlhac (2020) “Declining business dynamism: structural and policy determinants”, STI Policy Paper.
• On average, Job
Reallocation rate
and Entry Rates
have declined by 5
pp and 3 pp
respectively, over
15 years (i.e.
around 0.35 pp and
0.2 pp each year)

8. Markups are rising, driven by the highest markup firms
Mark-up growth across the distribution
Source: Updated version of Calligaris et al., (2018, 2022) “Mark-ups in the digital era”, STI WP

9. Industry concentration has risen
Source: Calligaris et al., (2019) “Industry Concentration in Europe and North America”, STI WP.

10. M&As activity increased over time
The number and value of M&As has been increasing
Source: Bajgar et al., (2021) .

11. • New ongoing work on the state of competition
• Multiple (non) competition measures analysed together
– Concentration trends across countries
• Very disaggregated industries to go as close as possible to a market
definition
• Accounting for international trade and integrated markets
• Industry vs product markets
– Mark-ups
– Entrenchment at the top
– Leaders vs the rest
Ongoing work on proxies of competition at STI/PIE

12. INDUSTRIAL POLICIES ARE NEEDED
FOR INNOVATION AND DIFFUSION
BUT SHOULD BE MULTI-FACETED TO
PRESERVE COMPETITION
12

13. • Knowledge externalities
– Spillovers across firms but also social returns to innovation may
exceed private returns
• Credit constraints
– Innovation is costly. On average, bigger firms have an inherent
advantage
• Coordination role
– High fixed cost and uncertain returns; missions (S-curve dilemma)
• (Re)direct technological change
– from dirty to clean technologies, in presence of path-dependency
Rationale for industrial policies? Market failures

14. Policies tools complementary to Competition
Policy areas
New Industrial
Policy (horizontal
and targeted)
Supply-Push measures Demand Pull tools
Within Between
Tax expenditures, grants, subsidies;
Financial instruments;
Skills policies;
public R&D, infrastructure, energy
Entrepreneurship
Policies
Product standards,
Public procurement,
Awareness raising
campaigns
Regulations and
framework
conditions
Increase business transparency, remove regulatory barriers (at country and EU level) and
red tape (especially important for “potential” entrants), Intellectual Property Systems,
judicial efficiency, financial markets, tax system
Trade policy Openness, level playing fields Single Markets (in products and services)
Bilateral agreements
Education/Skills
Policies, research
and Migration
STEM, training, Apprenticeships, Visas, etc.
Ecosystem/Coord
ination
University-Business linkages ; University entrepreneurship / incentives for
commercialisation

15. • Risk: Innovation policies may favour incumbents and firms
that already have the capacity to innovate
• Solution: Design of policies matters. Industrial policies
should:
– Not discriminate against entrants and potential entrants
– Facilitate exit of inefficient firms
• Insights from theory: R&D subsidies risk raising wages of
R&D workers and discouraging entry (inefficient selection).
Optimal policy supports reallocation by raising minimum
productivity threshold (Acemoglu et al., 2018)
Industrial policy must preserve contestability of markets

16. THANK YOU!
Chiara.criscuolo@oecd.org