Competition and Competitiveness in the EU Economy

04 Dec 2013

The EU Competitiveness

  • The Global Competitiveness Index (World Economic Forum)

― 6 European countries in the top 10 (13 in the top 30)
― Highly contrasted situation

Country Rank
Slovenia 62
Hungaria 63
Croatia 75
Romania 76
  • Comparison with the US

― A persistent productivity gap

The persistent gap with the U.S. Economy

The persistent gap with the U.S. Economy

Double-dip of EU manufacturing production

Double-dip of EU manufacturing production

EU recovery is lagging behind

The EU comparative advantage

The structural change

Sources of gap in competitiveness

  • Labor productivity (2000 -2011)

― US = 3.5% versus EU = 2.4%
― Two factors

  • Higher flexibility of labor market in the US compared to EU
  • Shortage of skills and hoarding of labor
  • R&D expenditures

― US private spending: US = 2.7% versus EU = 1.8%
― More capital risk

  • Other factors of productivity growth

― Ease of entry and exit
― Adoption of information technology
― Improved communications
More Compettion

Competition and growth

  • Sources of growth

― Increase in the availability of inputs (lower prices)

  • Natural resources
  • Capital
  • Labor

― Improvement in management and innovation (products, processes)

  • Technology
  • Management
  • Role of competition

― A disciplining device to force managers to be more efficient
― A darwinian effect

  • Force the less productive firm to quit the market
  • Attract the more productive firm
  • An incentive scheme for innovation

Evidence on the impact of competition

  • Entry and exit can explain 20 to 40% of total factor productivity (Nickell, 1996)
  • More fast growing and shrinking firms boost productivity growth (Carfts – Mills, 2003)
  • Liberalization of European air routes or dregulation of international telephone calls has increased the consumer choice and drastically decreased prices
  • When monopoly affects 10% of the economy, then the losses in terms of GDP can reach 1.5%

But too much competition can kill competition

  • Too much competition prevents innovation

― Competition is innovation-inductive in neck-and-neck industries (more technologically advanced industries)
― Competition can be detrimental in laggard industries

  • The rise of the innovation economy

― High fixed costs, large economies of scale
― The winner takes all

  • The network industries

― Open access policy to network infrastructure can facilitate free riding by new entrants

Regulating competition

  • The role of government

― Providing a stable framework for business activities
― Providing stable regulatory environment
― Dealing with market failures

  • The role of competition authorities

― To drive compliance with competition law
― To advice businesses to comply with the law

Risk management and competition policy

  • Setting competition enforcement priorities

― Uncertainty

  • Risk of prohibiting competitive practices
  • Risk of approving anticompetitive practices
  • Regulating conduct and affecting competition

― Presumptive suspicion of cooperation between firms in an innovation economy
― Presumption against state aids to industry

  • Responding to market crisis

― Risk to exacerbate market failures

Concluding remarks

  • Competition is the main driver for competitiveness
  • The level playing field of competition must tailored for each industry

― Competition must be ‘’regulated’’

  • Permanent enhancement of competition policy is required to avoid business risk
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Marc Ivaldi

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