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Report Home

  • Report Highlights
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  • Interactive Heatmap
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  • [ — Divider — ]
  • Preface
  • Chapter 1.1 Reaching Beyond the New Normal: Findings from the Global Competitiveness Index 2015–2016
    • Introduction
    • Methodology
    • The Global Competitiveness Index 2015–2016
    • Results overview
    • Country highlights
    • Conclusions
    • References
    • Box 1: The Inclusive Growth and Development Report
    • Box 2: The Case for Trade and Competitiveness
    • Box 3: The most problematic factors for doing business: Impacts of the global crisis
    • Box 4: China’s new normal
    • Appendix: Methodology and Computation of the Global Competitiveness Index 2015–2016
  • Chapter 1.2 Drivers of Long-Run Prosperity: Laying the Foundations for an Updated Global Competitiveness Index
    • Introduction
    • What competitiveness is and why it matters
    • Institutions
    • Infrastructure and connectivity
    • Macroeconomic environment
    • Health
    • Education
    • Product and service market efficiency
    • Labor market efficiency
    • Financial market efficiency
    • Technological adoption
    • Market size
    • Ideas ecosystem
    • Ideas implementation
    • Conclusions
    • Bibliography
    • Appendix A: Measurement of Key Concepts and Preliminary Index Structure
    • Appendix B: Acknowledgments
  • Chapter 1.3 The Executive Opinion Survey: The Voice of the Business Community
    • Introduction
    • The Survey in numbers
    • Survey structure, administration, and methodology
    • Data treatment and score computation
    • Conclusions
    • Box 1: Example of a typical Survey question
    • Box 2: Insights from the Executive Opinion Survey 2015
    • Box 3: Score calculation
  • Competitiveness Practices
  • FAQs
  • Partner Institutes
  • Downloads
  • Competitiveness Library
  • About the Authors
  • Contact Us
Global Competitiveness Report 2015 Home
  • Report Home
  • Report Highlights
  • Competitiveness Rankings
  • Interactive Heatmap
  • Competitiveness Dataset (XLS)
  • Blogs and Opinions
  • Top 10 Infographics
  • Videos
  • Press Releases
  • [ — Divider — ]
  • Preface
  • Chapter 1.1 Reaching Beyond the New Normal: Findings from the Global Competitiveness Index 2015–2016
    • Introduction
    • Methodology
    • The Global Competitiveness Index 2015–2016
    • Results overview
    • Country highlights
    • Conclusions
    • References
    • Box 1: The Inclusive Growth and Development Report
    • Box 2: The Case for Trade and Competitiveness
    • Box 3: The most problematic factors for doing business: Impacts of the global crisis
    • Box 4: China’s new normal
    • Appendix: Methodology and Computation of the Global Competitiveness Index 2015–2016
  • Chapter 1.2 Drivers of Long-Run Prosperity: Laying the Foundations for an Updated Global Competitiveness Index
    • Introduction
    • What competitiveness is and why it matters
    • Institutions
    • Infrastructure and connectivity
    • Macroeconomic environment
    • Health
    • Education
    • Product and service market efficiency
    • Labor market efficiency
    • Financial market efficiency
    • Technological adoption
    • Market size
    • Ideas ecosystem
    • Ideas implementation
    • Conclusions
    • Bibliography
    • Appendix A: Measurement of Key Concepts and Preliminary Index Structure
    • Appendix B: Acknowledgments
  • Chapter 1.3 The Executive Opinion Survey: The Voice of the Business Community
    • Introduction
    • The Survey in numbers
    • Survey structure, administration, and methodology
    • Data treatment and score computation
    • Conclusions
    • Box 1: Example of a typical Survey question
    • Box 2: Insights from the Executive Opinion Survey 2015
    • Box 3: Score calculation
  • Competitiveness Practices
  • FAQs
  • Partner Institutes
  • Downloads
  • Competitiveness Library
  • About the Authors
  • Contact Us

Product and service market efficiency

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When markets for goods and services function efficiently, each factor of production is allocated to its most productive use. That means businesses produce the goods and services most desired by customers and sell them for the lowest possible price. The efficiency of product markets can be reduced by lack of competition and distortionary fiscal policies and regulations. For the most part, aspects related to these topics are already captured in the current GCI. In the updated GCI, we plan to also include the effects of bankruptcy law on competition and market efficiency.

Industries where competition is more intense are more efficient and produce more innovation, thus improving productivity.57 Competition-enhancing policies enable the market to select the best firms, thereby creating incentives for firms to reduce costs and for new, more efficient firms to enter the market.58 The presence of dominant players in a market—for example, in oligopolies and monopolies—drives up prices but also, importantly, can decrease the level of innovation. Effective antitrust policies should avoid the creation of such dominant positions while preserving economies of scale and incentives for innovation, especially in resource-intensive and high-tech sectors.

In most cases,59 opening a market to foreign competition forces the least-productive companies to exit the market and rewards the most productive;60 removing domestic barriers to entry into and exit from markets can increase productivity through the “creative destruction” of less-productive firms.61 When firms can easily enter and exit markets, resources can be reallocated to emerging sectors and capital reinvested in new technologies with higher productivity.

The legal and regulatory environment can directly impact the entry and exit of firms. An efficient framework for settling bankruptcy is necessary to ensure that investors can close a failing entrepreneurial experience and move on to new challenges. Barriers to entry include licensing (especially of professional or public services), public monopolies, and administered prices.62 There is evidence that reforms to market regulation policies in Organisation for Economic Co-operation and Development (OECD) countries intended to promote competition tend to also boost productivity.63 These specific factors are not fully captured in the current GCI, but they will be reflected in the updated competitiveness index.

Beyond lack of competition and restrictive regulations, fiscal policies can also reduce the efficiency of product markets by distorting investment choices and artificially favoring sectors based on political selection.64 Although there can be arguments for such interventions, in many cases they have negative effects on a country’s overall productivity—for example, by subsidizing traditional but declining industries at the expense of new and more vibrant sectors.

It is well established that taxation in general affects productivity by reducing investment, because it effectively increases the cost of investment capital.65 Specific tax structures can exacerbate the effect: for example, Fatica (2013) finds that the structure of tax incentives for capital investment in advanced economies has led to a significantly higher share of investment in machinery and equipment and a significantly lower share in ICTs.

57
57 Blundell et al. 1999 find that industries characterized by more intense competition produce more innovation and that firms with higher market share tend to have a more intense patent activity. For the sake of completeness, some economists have also pointed out that competition may discourage firms from entering the market by driving down post-entry rents (Dasgupta and Stiglitz 1980), or reduce innovation as dominant firms innovate more (Scherer 1967) since they can overcome financial market failures resorting to internal cash flows (Bhattacharya and Ritter 1985). Market competition can discourage investments in innovation by reducing the rents generated by successful innovation (Aghion and Howitt 1992).
58
58 Aghion and Schankerman 2004. The effect on productivity of market selection among firms has been confirmed by empirical studies such as Nickell 1996 and Buccirossi et al. 2011. Nickell 1996 finds that increased competition, measured as lower rents or a higher number of competitors, is associated with significantly higher TFP growth. Buccirossi et al. 2011 find that better competition policy fosters TFP growth, especially in countries that lag further behind the technological frontier and where the overall regulatory environment and the judicial system work better.
59
59 Although openness and international competition is beneficial in most cases, there might be cases for which the protection of the infant industry can increase welfare. Melitz 2005 provides a model for optimal infant industry protection and argues that the decision to protect the industry should depend on the industry’s learning potential, the shape of the learning curve, and the degree of substitutability between domestic and foreign goods. In terms of methods of protection, he argues that quotas achieve a higher welfare than tariffs.
60
60 Melitz 2003. Moreover, trade reallocates market share toward more productive firms and reduces mark-ups, which implies increased competition; see Melitz and Ottaviano 2008.
61
61 Schumpeter 1942.
62
62 Blanchard and Giavazzi 2003.
63
63 Nicoletti and Scarpetta 2003.
64
64 We focus on the distortionary effect of taxes on productivity rather than their redistribution effect.
65
65 This finding stretches back to Jorgenson and Hall 1967. More recently, Vartia 2008 finds that corporate tax rates negatively affect TFP by reducing company profitability. Similarly, Arnold and Schwellnus 2008 find a negative effect of corporate taxation on both firm-level TFP and investment, especially in sectors with higher average profitability and in firms that lag more behind the technological frontier. An analysis of the link between taxation and private investment (the crowding-out effect) should also take into account the efficiency of public spending and preferences in public supply of good and services. However, such a discussion is beyond the scope of this work.
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