The influence of regulations on innovation: A quantitative assessment for OECD countries

Abstract: Regulatory framework conditions have been identified as important factors influencing the innovation activities of companies, industries and whole economies. However, in the empirical literature, the impacts of regulation have been assessed as rather ambivalent for innovation. Different types of regulations generate various impacts and even a single type of regulation can influence innovation in various ways depending on how the regulation is implemented. The endogenous growth approach developed by Carlin and Soskice, 2006 W. Carlin and D. Soskice, Macroeconomics: Imperfections, Institutions & Policies, Oxford University Press, Oxford (2006). Carlin and Soskice (2006) and empirically applied by Crafts (2006), which determines endogenously the rate of technological progress and therefore innovation, allows a conceptual analysis of the influence of different types of regulation on innovation. In general, the negative effect of compliance costs should be compared with the more dynamic effect of regulations generating additional incentives for innovative activities. Based on this approach, we derive hypotheses on the impact of different specific regulations on innovation. We differentiate between economic, social and institutional regulations following the OECD taxonomy on regulations. Existing economic analyses are surveyed, which are characterised by rather heterogeneous approaches, data bases and results. The paper aims to apply a comprehensive and comparative approach to investigate quantitatively the innovation impacts in 21 OECD countries using panel data for the period between 1998 and 2004. In summary, the empirical results confirm the hypotheses derived from the conceptual theoretical framework determining technical progress and innovation endogenously and allowing a distinction between short-term and long-term effects. Consequently, the theoretical approach is an appropriate starting point for the empirical analysis of the influence of different regulations on innovation. Highlights: ► Modifications in regulatory and legal framework conditions have a significant influence on the dynamics of innovations OECD countries. ► Positive influence of general legal and regulatory framework conditions, of an efficient IPR regime and of unrestricted price setting. ► Also positive impact of product and service legislation deterring business activities and environmental laws hindering competitiveness.

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