Regulation and ICT Capital Input : Empirical Evidence from 10 OECD Countries

According to recent literature, competition is assumed to have a growing positive impact on innovation when the distance to the technological frontier is decreasing (Aghion et al. [2005]). Using industry-level indicators, this paper empirically tests the effect of regulation on ICT capital inputs taken as a proxy for innovative activity. The sample consists in a panel of 11 manufacturing industries for 10 OECD countries over the period 1980-2005. The results show no evidence of a negative effect of regulation when an industry is getting closer to the technological edge. Two main results can be obtained from this research. Firstly, regulation has always a positive effect when industries are close to the technological frontier. Secondly, the marginal effect of regulation on ICT capital inputs increases when the industry gets closer to the technological frontier. These results are thus contradictory to beliefs that deregulation is an input for innovative activity and competitiveness