Price Markups, Innovation, and Productivity:Evidence from Germany. Bertelsmann Stiftung July 2020.
2020
Productivity is seen as a driving force behind economic
growth and an indicator of a society’s material wellbeing.
Over the past decades, however, many industrialized
countries have experienced declining productivity growth
and an expansion of the productivity differential. Possible
explanations range from declining investment in R & D
to structural changes to more services and increased
measurement errors due to increasing digitalization.
In this report, we study the role that a firm’s competitive
environment plays for its own productivity development.
Is an increase in industry concentration – and the
expected decrease in competition – associated with lower
productivity? And what is the underlying driving force of
this effect?
Our findings of relatively strong direct effects of price
markups (in comparison to the innovation-centered
indirect effects) in all sectors but services highlight the
potential for a well-tailored competition policy approach
in society’s effort to tackle the productivity slowdown.
This is particularly true for the trade sector, where the
effect of competition on R & D and innovation is of limited
significance for the determination of firm-level productivity. For services, on the other hand, the interdependence of competition and innovation in their effect on productivity must be taken into account as the indirect effect partially offsets the direct effect of competition on productivity. Considering one without the other will be misguiding.
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