providing needed business information and training.<sup>9</sup> Access to financial investment and credit may well be the most problematic among essential business inputs for vulnerable enterprises in developing economies.<sup>10</sup> Government regulations can be sources of entry barriers, mobility barriers, excessive business costs, heightened entrepreneurial risks and distortionary incentives that impede innovation and the opportunities for enterprise expansion that would motivate innovation. Even seemingly well-intended regulations can have powerfully negative unintended consequences, like a legal rule that protects workers by requiring employers to pay a year‘s salary upon severance. Such a rule would much discourage an enterprise from hiring in order to launch a new uncertain line of business. Other regulatory rules in many countries require large numbers of permits and licenses and bureaucratic approvals for a business launch or expansion, and the resulting inordinate costs and delays are daunting to growth and stifling of incentives to invest in expansion and entrepreneurship. Recent empirical work suggests that the most important negative impacts of regulation on economic performance are through its negative effects on the incentives of firms to invest and innovate.<sup>11</sup> Another source of limitations on the ability of an innovator to grow is lack of output market opportunity. There may be few distribution channels available to or even known by a local enterprise, powerful interests may block market access, or the country may not have organized the institutions necessary for an efficient portal to international trade.<sup>12</sup> Within the limitations of an enterprise‘s market access there may be no other rival suppliers. As a result, the enterprise may have market power, but also may find that it cannot expand output without significantly dropping price. While even monopolists have incentives to expand output when they innovate, these incentives are systematically less than those experienced in a highly competitive market inasmuch as price need not necessarily fall very far for an innovator to divert

> 9 Dutz, Ordover and Willig (2000) make the case for a pro-innovation competition policy that facilitates the entry and expansion of vulnerable (typically young and small but potentially fast-growing) firms led by grassroots entrepreneurs by focusing on access policies on the supply side. Such a more activist supply-side competition policy emphasizes: preserving rewards from productive innovation through the protection of commercial freedom, property rights and contracts; eliminating barriers to grassroots entry; and promoting access to essential business services by opening  ̳strategic bottlenecks‘ to competition. According to this view, advocacy for improving the competitiveness of the business environment is one of the most important roles for competition agencies.

> 10 Gorodnichenko and Schnitzer (2010) show how financial constraints restrain firms‘ innovation and export activities. Ayyagari, Demirguc-Kunt and Maksimovic (2007) show that positive factors for firms‘ innovations in emerging markets include external finance, private ownership without control by a financial institution, export activity, and in a separate paper, freedom from unfortunately pervasive corruption. Aterido, Hallward-Driemeier and Pages (2009) focus on how enterprise size is crucial to the impact of finance on its employment growth. 11 See Crafts (2006) for a survey of this literature.

> 12 Melitz (2003, 2008) pioneered the view that firms‘ trade activities are themselves endogenous and heavily influenced by productivity. Gorodnichenko, Svejnar, and Terrell (2010) emphasize how exposure to globalization promotes firms‘ innovations in products and technology.

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