Competitive Intensity as Driver of Innovation and Productivity Growth: A Synthesis of the Literature

The objective of the report is to survey and assess the existing economic theoretical literature and empirical evidence on the linkages between open and competitive markets (competitive intensity) and innovation and productivity growth. The report is divided into three main parts. The first part examines the state of economic theory on the relationship between competitive intensity, innovation and productivity. The second section examines relevant empirical work that has been done on the role of firm dynamics in sustaining a competitive environment. The third section surveys evidence of linkages provided by the international case studies of the effects of open and competitive markets on innovation and productivity. The report concludes that the weight of the evidence indicates that competitive intensity has a strong positive effect on innovation and productivity. Accordingly, Canada should pay closer attention to the competitive implications of public policy than has been the case in the past. The international experience provides strong support for this conclusion. While there can be negative implications for certain groups from such policy changes, the evidence shows that they are often smaller than anticipated. Restrictions on competition should only be allowed when it can be demonstrated that they are needed to achieve overriding societal interests.