Title

Comments by Hayato Kato, on Competition Effects
and Industrial Productivity: Lessons fromJapanese Industry

Author(s)Kato, Hayato

Citation

Asian Economic Papers. 16(3) P.253-P.255

Issue Date 2017-11-01
Text Version publisher
URL

http://hdl.handle.net/11094/81776

DOI

10.1162/asep_a_00571

rights© 2017 by the Asian Economic Panel and theMassachusetts Institute of Technology

NoteOsaka University Knowledge Archive : OUKA
https://ir.library.osaka-u.ac.jp/
Osaka University

Comments

Comments by Hayato Kato, on Competition
Effects and Industrial Productivity: Lessons
from Japanese Industry

Hayato Kato: Masahito Ambashi asks a fundamental question in the modern economy: Isproduct market competition good or bad for productivity growth? He empirically tackles
this question by focusing on Japanese industry.
The author clearly reviews the theoretical underpinnings and states that the relationship between competition and productivity growth could be positive, negative, or evennon-monotonic. Technologically laggard ﬁrms have stronger incentives to innovate thanmonopoly ﬁrms to achieve monopoly status. Thus, competition among technologicallyleading and laggard ﬁrms may foster innovation in the economy (the “replacement effect”). On the other hand, monopoly power and the resulting proﬁts may be necessary forﬁrms to engage in investment on technological innovation (the “Schumpeterian hypothesis”). Furthermore, considering the fact that ﬁrms with different technological levels havedifferent degrees of incentive to innovate, the relationship may be non-monotonic (Aghionet al. 2005).
With mixed theoretical predictions in mind, it is an empirical issue to evaluate how competition affects productivity growth. Using Japanese industry-level panel data, the author253Asian Economic Papers

Comments

constructs a measure of competition based on the Learner index (i.e., the price cost margin)and examines its impact on TFP growth. The novelty of his study is to divide the wholeindustries into two groups: manufacturing and non-manufacturing industries.
His main ﬁndings are summarized as follows.
• In the manufacturing industries, competition promotes TFP growth in both the whole(1980–2008) and sub-sample periods. In the non-manufacturing industries, on the otherhand, competition may reduce TFP growth in a sub-sample period (1995–2008).
• In the whole industries, TFP growth has an inverted-U relationship with competition.

The author interprets these results taking into account the Japanese context and cautions
against drawing decisive policy implications from his analysis. The paper is well organized
and the issue is crucial for the Japan’s stagnating economy. Nevertheless, some reservations may be proposed.
My points are twofold. First, it is not perfectly clear what is the channel through which
competition affects TFP growth. From the theoretical perspectives reviewed in the paper,
intense competition may dis-incentivize ﬁrms to make an effort to improve their TFP. The
empirical counterparts of the effort for innovation should be R&D and IT investment. The
author puts these investments and measures of competition all into the same regression
model as independent variables. A “partialling out” interpretation of multiple regressions(e.g., Wooldridge 2015, chapter 3), however, tells us that the coefﬁcients of competition
measures represent the effect on TFP growth, holding R&D and IT investments ﬁxed. In
other words, the coefﬁcients do not capture the effect of competition through innovation
effort so that the arguments based on the previous theoretical studies seem inconsistent
with the econometric speciﬁcation. In fact, Aghion et al. (2005), who ﬁrst proposed theinverted-U theory, do not include both measures of competition and those of innovation
effort as independent variables to be consistent with their theory.
What is the direct effect of competition on TFP growth, not the indirect one through innovation effort? The coefﬁcients of competition measures may capture a “spillover effect,”which is close to the one found in the literature studying the impact of foreign direct investment on local ﬁrms (e.g., Crespo and Fontoura 2007). One such example is that competitive
pressure surrounding ﬁrms may motivate or discourage managers to restructure their organizations. The interpretation of results needs more careful examination.
Second, it is worth investigating dividing industries not just by manufacturing vs. nonmanufacturing, but also by other industry characteristics. Some examples include exposure
to international trade, and the degree of regulation and the technological distance from the254

Asian Economic Papers

Comments

world’s frontier (e.g., U.S. industries). By dividing industries according to how technologically distant a Japanese industry is from its U.S. counterpart, one could capture technologically leading and laggard industries. As the inverted-U theory by Aghion et al. (2005)
suggests, neck-and-neck industries and laggard ones respond differently to competition.
Accordingly, one could clearly understand the regression results based on the theoreticalpredictions.

References
Aghion, P., N. Bloom, R. Blundell, R. Grifﬁth, and P. Howitt. 2005. Competition and Innovation: An
Inverted-U Relationship. Quarterly Journal of Economics 120(2):701–728.
Crespo, N., and M. P. Fontoura. 2007. Determinant Factors of FDI Spillovers—What Do We ReallyKnow? World Development 35(3):410–425.
Wooldridge, Jeffrey M. 2015. Introductory Econometrics: A Modern Approach. Boston, MA: Nelson
Education.

doi:10.1162/ASEP_a_00571

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Asian Economic Papers