perspective these studies put forward the neo‐Shumpeterian growth theory in the sense that both innovation and imitation activities also have a separate bearing on growth and productivity. This approach has found empirical underpinnings in studies such as Nicoletti and Scarpetti (2003), Greffith _et al_ . (2004), Aghion _et al_ . (2004; 2005) and more recently by focusing on EU countries using industry‐level data by McMorrow _et al_ . (2010). The bottom line of these studies is that certain economic or policy characteristics such as factor endowments or regulatory policies have a different effect depending on the fact in which type of industry firms are placed, i.e. an industry that is characterized with many firms relatively close or relatively far away from the technology frontier.

Since we have firm‐level data we calculate the technology gap as developed in Aghion _et al_ . (2005) so as to derive a within‐industry specific measure which is the proportional distance of a firm relative to the technology frontier in terms of TFP as defined by the following equation: in which the technology gap is measured for each firm within an industry by country over time. In this equation firm _F_ is the firm with the highest TFP while all other firms which are non‐frontier firms are indicated with the usual _i_ . As in Aghion _et al_ . (2005), the technology gap for the frontier firm is set at zero. Similarly, as in their work this measure of firm‐specific technology gap is then transformed into an average over each industry and services sector for each country and year. Hence, industries showing a low value of the technology gap are those industries which are characterized by a “neck‐and‐neck” situation in which firm share equal technology levels whereas a higher value of the gap reflects so‐called “unleveled” sectors in which sectors are marked by many followers with unequal technology levels compared to the leader firm. Table A16 in the annex sets out the value of the technology gap for each 2‐ digit NACE sectors across the EU for the years 2013‐14 in our sample for both goods and services.

Note that a lower value of the technology gap indicates that on average firms in a sector are technologically closer to the frontier (or best performing firm) which on the whole are more sensitive to the fact that competition may increase rewards from R&D and innovation in these neck‐and‐neck sectors.<sup>25</sup> On the other hand, a higher value of the technology gap stands for the so‐called unleveled industries in which a higher level of competition may actually reduce the incentive to innovate since increased competition creates a fall in the reward for the lagging firms to catch up with the technological leader. Note furthermore that a negative coefficient result on the interaction term between regulation and technology gap indicates that regulation has a negative effect on TFP which is increasing with distance to the frontier, i.e. especially important for industries marked as unleveled while a positive coefficient outcome on the interaction term stands for the negative effects of regulation that is

> 25 More precisely, Aghion _et al_ . (2005) indicate that these industries are comprised of oligopolistic firms facing more similar production costs. On the other hand, the firm with lower (resp. higher) unit costs is referred to as the technological leader (resp. follower) in the corresponding industry, and when both firms have the same unit costs they are referred to as neck‐and‐neck firms.

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