This report analyses the impact of product market reforms, in the form of the EU Single Market programme, on the extent of product market competition and the subsequent effects of competition on innovation activity and productivity growth.

The report first summarises the main messages from the existing theoretical and empirical literature on the relationship between competition and innovation and uses this to inform the subsequent empirical analysis. The theoretical literature on competition and growth emphasises the importance of economic profits, or rents, in providing incentives for firms to innovate to compete for market position or in order to enter new markets. Increased competition may increase incentives for firms to increase efficiency or to innovate in order to protect or enhance their market position. However, competition may reduce the rewards to innovation or entry into a market and thus discourage these activities.

The main empirical analysis carried out in the report is centred on the manufacturing sector, as this is where the product market reforms that analysed have the greatest impact and where the majority of research and development expenditure and patenting activity is carried out. The analysis exploits country-industry level information on the expected degree of impact of the Single Market Programme in order to identify effects of changes in the extent of competition on innovation and productivity growth.

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