The effect of entry liberalization on productivity

The effect of entry liberalization on productivity,
innovation and job creation
Researchers show the considerable interests in whether firm entry could
promote economic growth and development for many years. For some
countries, market failure is a direct reason for government involvement to
promote productive economic activities in developing countries.
Government involvement in productive activities is an effective way to
avoid the negative effect on market failures. It has been showed that
economic liberalization drive to the upgrading of technological capability.
The state is able to benefit from the process of economic liberalization by
creating policy to improve the environment of institution (Aghion,
Burgess, Redding and Zilibotti 2005).
Entry regulation is one of the measurements for government involvement
to achieve economic growth. Originally, entry regulation is issued to
protect the small shopkeepers in response to the increasingly involved
large market (Bertrand and Kramarz 2001). This paper will explore the
role of firm entry in the growth of economy with several aspects. To be
more specific, this paper presents the assessment of the firm entry on
economic performance especially the influence on productivity,
innovation and job creation. The effect of economic liberalization on the
industrial performance will also be evaluated in this paper. The result
confirms that entry liberalization increase the employment for retail
industry and promote the technology and innovation for the firms who is
close to technology frontier.
1.How does firm entry affect innovation and productivity?
The forms of regulations adopted by different countries have changed in
recent years (Loayza, Oviedo and Serven 2004) .The flexibility to take
advantage of opportunities and reverse the negative impacts during
economic activities is one of the key steps to keep a healthy economy for
a country. The economic planning is not simply technical supporting, it is
also related to effectiveness of these regulatory planning. Effective
regulatory structures are associated with higher economic growth. An
effective regulation is aimed to balance the relationship between
transparency, accountability and consistency (Parker 1999). Transparency
means the availability on reliable data and information to smooth
function of economic activities. Accountability helps to ensure companies
arriving their goals within legal power. Evidence is that companies may
have the incentives to work outside the legal framework without the
guide of policy (Loayza, Oviedo and Serven 2005). Consistency is
concerned with regulatory legitimacy to be provided consistently. It was
found that better policy pushed the amalgamation of these three elements
and is therefore to promote economic development as a whole. Actually,
government has issued some economic regulations that exerted beneficial
influences on enhancing competition in market (Loayza, Oviedo and
Serven 2005). For instance, according to Rosson, Runge, and Moulton
(1996), policies that make an economy open to trade and invest with the
rest of the world by reducing the restriction of trade barriers to increase
efficiency and foster economic growth.
The objective to achieve productivity growth is tightly connected with the
policy issued such as entry liberalization. Improving industrial
performance by providing environment for innovation creation is an
important role of efficient planning. Data shows that growth of economy
is associated with economic liberation especially in manufacturing area
(Besley and Burgess 2004). Entry liberalization is a measurement of
government policy which issued to affect industrial performance. The
effects of entry are widely regarded as on of the key drivers of economic
growth. It can not only help to achieve reallocate the resources, but also
can trigger innovative incentives for incumbent companies (Aghion,
Blundell, Griffith, Howitt and Prantl 2009). In order to guide the research,
Schumpeterian growth model is listed to show how companies response
to entry threat (Aghion, Burgess, Redding and Zilibotti 2005). It showed
that industry that close to the technology frontier gain from entry
liberalization. The threat of entry encourages the growth of innovation
and productivity for incumbent firms. However, it may pose negative
effect to the companies that further behind the frontier (Aghion, Burgess,
Redding and Zilibotti 2005). Some evidence shows that investing
advanced technologies and production process is a significant strategy for
most of firms to compete with the potential entrants. To be more specific,
the ability to response to the new entrants is largely determined by
technological capability of incumbent enterprises. Schumpeterian’s
model shows that if the outside company competes with the exiting low
productivity companies, they are able to occupy most of the market
shares. However, on the contrary, if they compete with high productivity
company, both of the firms will gain nothing. The outside company is
willing to entry the market if the existing company is controlled by a firm
who has low productivity. Therefore, entry liberalization is a mechanism
for survival of the fittest.
The outside firms with high productivity and innovative technology
compete with the firms that existing in the market. As a result, in order to
response to the increasing threat from outside, the incumbent firms are
encouraged to correct their shortcomings and invest more in advanced
technology. The higher the threat from outside entrants, the more
innovative the incumbent firms will be. In order to retain the local market,
both of the outside and incumbent firms are devoted to improving the
system of their companies. As a result, the improvement of industrial
performance can be achieved by entry liberalization (Aghion, Burgess,
Redding and Zilibotti 2005). This policy emphasis on technology and
incentives and provides an environment to increase the productivity and
innovation of a company. The shift of the resources from less productive
to more efficient units is the core in market economics. In order to
compete with the new entrants, adopting the last technology is a key
strategy. However, the high level of threat can only help the companies
who are close to the technological frontier, there is no chance to win over
the new entrant for the ones that far behind the frontier (Aghion, Burgess,
Redding and Zilibotti 2005). Therefore, this policy could help the firms
who have high technology becomes increasingly stronger, but pose a
threat to the small firms.
2. The effect on job creation
The effect of entry policy on job creation has drawn great attention for
both developing and developed countries. In this paper, more attention
will be paid to the employment rate on retail industry in developed
countries. The growth of unemployment rate in European labor market
happened since the mid-seventies (Bertrand and Kramarz 2001).
Evidence shows that entry barriers weaken the employment growth by
more than 10% in retail industry (Bertrand and Kramarz 2001). Under
this situation, reform is highly needed. Therefore, for the countries with
low employment performance, product market competition should be
promoted. In order to study the relationship between firms entry and job
creation, Branstetter, Lima, Taylor and Venâncio (2014) did a research in
an European country. From the data they gathered, they found the effect
of opening an additional office in a country. It is interesting to find that
approximately 14 new jobs every 100,000 country citizens per month and
3 new companies are created by opening a second office (Bertrand and
Kramarz 2001). The result confirms that new entry brings opportunities
for job creation in that country without heavy entry regulation. It is also
suggested that reduced job creation is associated with entry regulation
which increase the employment rate.
Moreover, from the perspective of an imperfect competition, incumbent
market power could be increased by entry regulation within an industry,
resulting in higher markups, low demand of product and low employment
(Bertrand and Kramarz 2001). Since it is predicted that the constrained
product demand will lead to a reduction in employment. On the contrary,
the positive effects for entry liberation within retail industry have been
noted by many researchers. Firstly, for some large retailers, they may
compete largely on the services they provide to the customer rather than
the price which leads to more labor intensive in retail trade. The large
customer traffic encourages the creation of new stores and additional jobs
creation. If an entry regulation is issued to impose restrictions on new
entrants, as a result, they may lose the chance to provide more job
opportunities in that country (Bertrand and Kramarz 2001). The effect
can be seen obviously from food retailer. Not surprisingly, the food
retailer provides job opportunities to both full-time and part-time jobs. As
more stores are allowed to enter, more jobs can be created (Bertrand and
Kramarz 2001). Therefore, reduce entry barriers is important for
developed counties providing more jobs to the citizens especially for
retail industry.
There has been heated debate between whether entry liberation should be
issued. It has been provided the importance of achievement of equity and
sustainable development of economy. Economic development cannot
only be seen from the increase in economic resources such as physical
capital, but also create incentives to economic activities (Jalilian,
Kirkpatrick and Parker 2007). Some evidence shows that heavy entry
regulation is associated with low economic growth. Entry liberation
allows companies providing more job opportunities especially for retail
industry. Moreover, entry liberation can help the companies who close to
technological frontier achieving their goals, however, there might be no
chance to survive for the small firms to compete with the stronger entrant.
Even though it may pose threat to small companies, after trade-off, the
policies aim to decrease the market barriers during economic activities to
achieve the growth of economic performance are necessary.
Aghion, Philippe, Richard Blundell, Rachel Griffith, Peter Howitt, Susanne Prantl. 2009.
“The effects of entry on incumbent innovation and productivitY.” The Review of
Economics and Statistics 20-32.
Aghion, Philippe, Robin Burgess, Stephen Redding, and Fabrizio Zilibotti. 2005. “Entry
liberalization and inequality in industrial performance.” Journal of the European
Economic Association 291-302.
Beasley, T. and Burgess. 2002. “Can Labor Market Regulation Hinder Economic
Performance.” Quarterly Journal of Economics 91-134.
Bertrand, Marianne, and Francis Kramarz. 2001. “Does entry regulation hinder job
creation.” National Bureau of Economic Research.
Branstetter, Lee, Francisco Lima, Lowell J. Taylor, and Ana Venâncio. 2014. “Do entry
regulations deter entrepreneurship and job creation?” The Economic Journal
Jalilian, Hossein, Colin Kirkpatrick, and David Parker. 2007. “The impact of regulation on
economic growth in developing countries: A cross-country analysis.” World
development 87-103.
Loayza, Norman, Ana Maria Oviedo, and Luis Servén. 2004. “Regulation and
macroeconomic performance.” World Bank Policy Research Working Paper 3469.
Loayza, Norman, Ana Maria Oviedo, and Luis Serven. 2005. “The impact of regulation on
growth and informality cross-country evidence.” World Bank Policy Research
Working Paper 3623.

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