# **1. INTRODUCTION**

Several theoretical and empirical studies are devoted to examining the question of whether less productive economies are catching up with their more productive counterparts. A particular strand of the empirical literature has tried to highlight the channels through which institutional settings can affect productivity differences across countries. The regulatory dimension is identified as one such channel, based on the premise that inappropriate regulation can shape the incentives to invest and adopt new technologies, as well as effectively curb competitive pressures, thus limiting the effects that the spur of competition can have on productivity enhancements.

Based on a set of OECD countries and using industry-level data, Nicoletti and Scarpetta (2003)<sup>5</sup> measure the extent to which multi-factor productivity (MFP) growth is affected by measures of product market regulation (reflecting the intensity of competition). They find that restrictive regulation in manufacturing tends to reduce MFP growth mainly via the process of technological catch-up. Using a similar approach, Conway et al. (2006)<sup>6</sup> and Arnold, Nicoletti and Scarpetta (2008)<sup>7</sup> find evidence that anti-competitive regulation is harmful particularly for technology-driven productivity improvements in ICT-intensive sectors.<sup>8</sup> Using a different approach, Anos Casero and Udomsaph (2009)<sup>9</sup> analyze microlevel data from countries in Europe and Central Asia to estimate total-factor productivity (TFP) and examine how changes in business environment and productivity growth are correlated in the 2001-2004 period. Successful efforts to improve the business environment are found to have a strong impact on firm productivity.

Openness to trade can also expected to positively affect productivity growth. Traditional models of the innovation-focused growth literature (see Grossman and Helpman (1991)<sup>10</sup> and Romer (1990)<sup>11</sup> for seminal interpretations) highlight three main channels through which trade could raise productivity: through diffusion of intermediate goods (or, implicitly, technologies); through an expansion of the market for the output of innovation; and through diffusion of general knowledge. The effective impact of increasing openness to trade on income and productivity growth is likely to depend on the country’s

> 5 Nicoletti, G. and S. Scarpetta (2003) “Regulation, productivity and growth: OECD evidence”, _Economic Policy_ 18 (36), 9–72

> 6 Conway, P., D. De Rosa, G. Nicoletti and F. Steiner (2006), "Product Market Regulation and Productivity Convergence", _OECD Economic Studies_ No. 43: 39-76

> 7 Arnold, J., G. Nicoletti and S. Scarpetta (2008),"Regulation, Allocative Efficiency and Productivity in OECD Countries: Industry and Firm-Level Evidence", _OECD Economics Department Working Papers_ , No. 616

> 8 All these studies use the framework proposed by Aghion and Griffith (2005) in which productivity growth in a country/sector depends on the pace with which the country/sector grows in relation to the country/sector leader. In this sense, productivity growth of a lagging country depends on how fast the leader grows and the speed at which the productivity gap is being closed. This, in turn, depends on the policy environment in the follower country/sector, especially with reference to policies that promote firm rivalry and market entry. Apart from this common framework, these three studies have some differences. Arnold, Nicoletti and Scarpetta (2008) use micro-level data and focus on MFP growth. Nicoletti and Scarpetta (2003) also measure MFP but using industry level information, while Conway et al (2006) also rely on industry level data but measuring labor productivity growth. Finally, all these studies rely on the OECD sample of countries.

> 9 Anos Casero, P. and C. Udomsaph, (2009) “What Drives Firm Productivity Growth?” _World Bank Policy Research Working Paper Series_ N.4841,.

> 10  Grossman, G.M., and E. Helpman. (1991). _Innovation and growth in the global economy_ . Cambridge, MA: MIT Press.

> 11 Romer, P (1990) “Endogenous Technological Change” _The Journal of Political Economy_ , Vol. 98, No. 5, Part 2

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