Innovation, Competition Policy and Industrial Policy

A Cloud-friendly and Cloud-active Europe by L. Franchin (2013)

Refusals to License IP: are we closer to an optimal legal standard after Microsoft vs. Commission? by Y. Katsoulacos (2008).

Economic theory suggests that refusals to license intellectual property rights are on average benign, and thus presumptively legal, taking into account both long-run and short-run considerations. If, as the US authorities indicated in Xerox, the presumption of legality is quite strong, this article shows that a Per Se Legality standard should be adopted, as it is then superior in welfare terms to any discriminating standard including EU’s ‘exceptional circumstances’ one (even though Per Se Legality maximizes false acquittals). The scope for reduced costs of decision errors by discriminating standards is not sufficiently large to compensate for negative indirect effects. If, on the other hand, the presumption of legality is not very strong - the Commission’s point of view regarding interoperability information in Microsoft, endorsed recently by the CFI - then a discriminating rule is expected to be superior to Per Se Legality. This article shows that the ‘exceptional circumstances’ standard is likely to be optimal under these circumstances. However, this will be the case not because, as the existing literature suggests, it minimizes the costs of decision errors relative to other standards, such as the one adopted in Microsoft, but because it minimizes negative deterrence effects, not taken into account in the existing literature.

Contrasting Europe’s decline: do product market reforms help? by R. Faini, J. Haskel, G. Navaretti, C. Scarpa, and C. Wey (2006, in Structural Reforms Without Prejudices, Edited by T. Boeri, M. Castanheira, R. Faini and V. Galasso, Oxford University Press)..

There is considerable agreement that widespread rigidities in European markets are among the main culprits of Europe’s growth record. Pervasive inefficiencies and distortions are not limited to labour markets but are significant features of product markets as well. The tertiary sector accounts for most of the unfinished reform agenda. Well designed product markets reforms can play a key role in boosting productivity. Moroever, many labour market rigidities are intrinsically linked to product market distortions. In particular, inefficient regulations typically generate economic rents that in turn foster additional labour market rigidities. Hence, reforming product markets may facilitate structural changes in labour markets as well.
The features and the effects of these reforms in Germany, Italy and UK are bexamined for individual sectors, as regulatory issues and their effects are industry specific: the problems faced by network industries like energy or communications are completely different from those concerning business services. The key finding is that, although reforms are difficult to implement and they do not always deliver the expected gains, particularly in the short term, deregulation of services in all the three countries analysed is found to be associated with faster productivity growth and competitiveness both in the service sector and in the rest of the economy. This latter result is largely due to the fact that services play a much more pervasive role in the overall economy than generally acknowledged, as they are fundamental inputs to most non-service activities like manufacturing and agriculture. Consequently, changes in efficiency, quality and costs of the services delivered trickle down in large competitive gains in the overall economy. The bottom line is that liberalization in services has the potential to bring large welfare gains and governments need to persevere in their effort to reform the service sector.

The R&D drop in European utilities. Should we care about it? by A. Sterlacchini (2006).

By using accounting data from the largest utility companies of Europe, this note illustrates the recent R&D performance in energy and telecommunication. Although not all the companies under consideration behaved symmetrically, most of them reduced substantially their R&D investment. Over the period 2000-05, their total R&D expenditures at current prices decreased by 33%, while their R&D intensity (on sales) diminished from 1.1 to 0.7%. In discussing the above findings, it is argued that a drop of this size is hardly justifiable and weakens the EU economy in a non-negligible manner.

The Impact of R&D State aid and its appraisal on the level of EU research expenditures in the context of the Barcelona European Council Objectives by Y. Katsoulacos, L. Tsipouri and K. Guy (2005).

Governments help shape technological change in their economies via the provision of State aid. One of the main reasons for governments to provide support is the acknowledged contribution of technological change to increased productivity, economic growth and, ultimately, improved living standards. A second, complementary reason is based upon the notion that private markets are unable to generate optimal levels of investment of R&D. The current EU R&D State aid framework has been in force since February 1996 and a revision is in preparation. In view of this, the European Commission authorised this study, the main objective of which was to enhance the state of knowledge in relation to the current and potential role of State aid to R&D in the EU and to assist decision making in the formulation of a new R&D aid framework.  Specifically, the terms of reference called for the study to: 1) ascertain the role R&D aid plays in the overall public R&D support context; 2) describe and analyse functional changes affecting public research establishments (PRE) such as universities and public research institutes in the last decade; 3) describe and analyse public support for R&D activities used by the Community’s major trading partners; 4) describe and analyse the categorisation of research activities and 5) analyse the leverage effect of R&D aid, i.e. the potential of aid to stimulate additional private R&D investment.

To meet these objectives, this report of the study’s results starts by describing overall R&D activity in the EU and elsewhere from 1992 onwards before locating State aid to R&D within this overall context (Section 2).  Sections 3 to 6 then cover the remaining objectives by exploring four of the main factors governing the potential role of State aid to R&D in Europe. First, Section 3 examines in detail one of the main potential market failures in the R&D process, that of the link between firms, universities and other Public Research Establishements (PREs). Second, given that the way other countries treat State aid can affect EU activities and decisions in a strategically interdependent world economy, the support activities of the EU’s main trading partners are examined in Section 4. Third, the categories of R&D activities used to determine the legitimacy and level of State aid to R&Dare examined in Section 5. Section 6 then examines the extent to which public support to R&D in the form of State aid has a significant leverage effect on private R&D investment.  Finally, in Section 7, the report presents the results of a questionnaire survey to European policymakers – designed to ascertain their stance on a number of key issues of relevance to the revision of the State aid framework. By addressing all the above issues, the report provides a substantial amount of background information of relevance to the Commission’s task of formulating a new R&D State aid framework.

State aid to R&D and Competition: An Economic Assessment Methodology by Y. Katsoulacos (2005).

The fundamental principle behind the European Commission’s state aid (or, subsidy) policy can be thought of as this: aid can be authorised only if it contributes to the achievement of a Community objective in such a way that the distortion of competition and trade is justifiable (principle of compensatory justification) and is thus “compatible with the common market ex Article 87(3) EC”. In practice, the principle of compensatory justification implies that: 1) the aid should serve a purpose of general Community interest (and it is accepted that R&D satisfies this criterion); 2) its objective is to correct a market failure (and R&D aid again satisfies this criterion); 3) the intended result is balanced against the distortion of competition. One should add here that: 4) the intended result is balanced against a potential distortion to trade.

This paper describes a methodology for the economic assessment of subsidies (state-aid) to R&D. In principle this methodology can be thought of as building on the foundations already established by the Commission in the recent Communication on “A new framework for the assessment of State aid of lesser concern” (2004), in which the Commission espouses the premise that in the area of state aid policy an economic assessment procedure could be applied. The document points out that “The Commission considers that there is scope for a simplified assessment of measures providing sufficient guarantees of a limited effect on trade… (and that) the following factors appear to be particularly relevant in assessing the impact on trade of different aid measures: 1) the amount of aid; 2) the tradable/non-tradable nature of the aided activity; 3) the competitive structure of the markets concerned; 4) the possible market power of the beneficiaries; 5) the availability of the aid to different operators in the market”. Specific conditions limiting potential negative effects must also apply, in particular: 1. aid is linked to eligible expenses directly incurred in carrying out the activities concerned and the amount of aid granted in connection with the project is limited to the minimum necessary; 2. there is a reasonable limit to the amount of aid that can be granted to a single beneficiary; 3. aid is granted in a way that does not create impediments to the development of the internal market and does not alter significantly the competitive position of the beneficiary vis-à-vis other firms carrying out the same activity.

Building on the above, the paper proposes a general framework in which the author attempts to take into account all the factors that could potentially affect the economic assessment of a measure of state aid to R&D. In particular, the author considers that such a state aid measure (1) will have an impact on the market failures associated with R&D activities, (2) will have other efficiency effects (3) will have distortionary effects on competition and trade and (4) will have other distortionary effects (related to the opportunity cost of government revenue used to finance state aids). The assumption made, in relation to the objective of a policy measure, is particularly important in delineating the factors that will be considered in the assessment. The author will make the assumption that the objective of a state aid to R&D measure in a Member State is fundamentally to increase social welfare in that State. In turn, the assumption as to the criterion to be used by a supra national authority such as the Commission in assessing such a measure will be that the criterion is that of the total welfare of all Member States that could be affected by the measure. A measure will improve total welfare if the total benefits created – by correcting market failures in research and generating other efficiencies – outweigh possible costs from distortions. An obvious shortcoming of this criterion is that it does not attach any importance to the distribution of welfare among Member States. Thus, according to this criterion, the Commission should find that a measure is benign if it increases total social welfare even if that happens because social welfare is increased in the Member State implementing the measure more than social welfare is reduced in the other States affected by the measure. Further the criterion puts equal weights on effects on consumers as it does on effects on firms and their profits. This is again a simplification – indeed a simplification that runs counter to standard practice in CEU (and other countries such as USA) where in assessing the impact on competition of firms’ actions in antitrust and merger cases, greater weight is given to consumer welfare.

Nevertheless, the criterion of the total welfare of all Member States affected by a measure is the most appropriate one to use in the context of formulating a general framework for the economic assessment of state aid to R&D measures. One of the main advantages of using this criterion is that it provides the most general benchmark, thus directing one to take into account the greatest possible set of relevant factors. A policy maker, in practically implementing the methodology, can then put his/her own specific set of weights in the various elements of the methodology taking into account other (distributional or political) considerations. In each case, the consequences of the choices in weights for the final assessment will be rather obvious. For example, a quite substantial trade distortion may be given greater weight than the gain in welfare in the Member State implementing the measure, or, this may be thought of as appropriate at least when the substantial trade distortion is associated with no or negligible benefits for the consumers of other Member States. Also, the policy maker could make a partial utilisation of the various elements in the methodology to make sequential decisions on the basis of any given prioritisation of objectives. For example, a state aid could be in the first place considered compatible with the common market if it increases the social welfare of the Member States in which it is introduced: only if it found that this is the case do we go on to consider the implications for other Member States.

Competition, Productivity and Prices in the Euro Area Service Sector by the Task Force of the Monetary Policy Commitee of the European System of Central Banks (2006, European Central Bank).

Given the growing importance of the services sector in the economy, this report addresses issues related to competition, productivity and prices in that sector. Limited competition in the services sector is often referred to in policy debates as one of the factors hindering labour productivity growth in that sector and contributing to higher inflation there than in the manufacturing sector. More competition in services markets is an important objective of the Lisbon strategy and the call for a fully operational internal market for services in the European Union is at the top of the European policy agenda. Moreover, the gap in labour productivity growth between the euro area and the United States recorded since the 1990s is often related to a poor labour productivity performance in key services sectors, in particular wholesale and retail trade, where the capacity of the euro area to innovate and make use of new technologies has lagged behind that of the United States. Additionally, empirical studies conducted within the Eurosystem Inflation Persistence Network (IPN) found that, when compared with manufactured goods, services are characterised by less frequent, larger and mostly upward price changes. In particular, a higher degree of price stickiness could lead to a more persistent output loss following a negative cost-push shock. Finally, services inflation is one of the factors behind aggregate inflation differentials in Economic and Monetary Union (EMU).

These issues are important per se. They are even more so because the importance of the euro area services sector has significantly increased over time, with it now accounting for around 70% of the euro area’s total value added and employment. Given its large and growing share of the total economy and the fact that
services represent an important input for other sectors of the economy, developments in the services sector in terms of labour productivity and prices are important for the conduct of monetary policy in the euro area. The main objective of this report is to analyse the degree of competition in the euro area services sector and its effects on productivity and prices in that sector, in order to contribute to a better understanding of price dynamics and the monetary policy transmission mechanism in the euro area. The data available for this report cover the period 1980-2003.

The following policy conclusions may be drawn from the analysis in this report. Measures aimed at increasing services market competition may increase economic efficiency and economies of scale. This would support a higher level and growth rate of labour productivity in the services sector and promote a more dynamic economy. Moreover, results tend to suggest that measures aimed at increasing services market competition may have a dampening impact on relative price changes in some services sectors and thus temporarily on aggregate inflation. In addition, according to the IPN, this could contribute to the reduction of price stickiness in some services industries. Gains in price flexibility brought about by increased competition are likely to be of a permanent nature. Overall, a higher level of competition in the services sector would tend to support more efficient and flexible services markets, facilitate adjustment processes and increase the resilience of the euro area to economic shocks.

The Market for Knowledge Brokers by J. Hinloopen (2003).

A widely-used policy to diminish the market failure on the market for innovations is the provision of R&D subsidies. However, the absence of competition at several stages of the procurement process could lead to inefficient use of these subsidies. To introduce more competition, a market for knowledge brokers could be created. The role of these knowledge brokers would be at four stages of the procurement process: (i) placing the call for tender; (ii) obtaining research proposals; (iii) monitoring the research efforts; and (iv) disseminating the research results. It can be expected that creation of such a market yields a better match between demand and supply on the market for R&D, yields a higher quality research product for a given price and that it increases the dissemination of research results.

Innovation performance across Europe by J. Hinloopen (2002).

The innovation performance of Þrms is primarily determined by their own innovative activities and the interaction with their innovation- related environment. This environment typically differs among countries. We assess empirically these differences on Þrms’ innovation performance. To that end we Þrst estimate the relationship between an aggregate innovation input measure and an aggregate innovation output measure, thereby explicitly controlling for structural differences between countries. We then consider the extent to which Þrms located in a particular country perform better or worse than this estimated benchmark performance. The analysis is based on a panel dataset that we have constructed from Eurostat’s Þrst and second Community Innovation Survey. In order to control for possible data contamination we employ an outlier-robust estimator. It appears that among the fourteen countries considered Italy, Germany and Ireland offer an environment that facilitates most the transformation of innovation-related inputs into commercial outputs while the environment in Denmark is the least facilitating.

Market Structure and the Incentives to Innovate by B. Sastry (2005)