Product and Labour Market Regulations and Patenting Activity

A large literature has focused on labour market institutions as a reason for slow growth in Europe. How important have product market regulations been? Recent work has shown that less regulation encourages investment, increases employment and leads to faster productivity growth. Empirical work at the firm level, within individual countries, suggests that the impact may differ in important ways e.g. on entrants and incumbents. In this paper we use individual level data on patenting activity across countries to look at what impact product market deregulation has had on patenting activity, and how this varies depending on the level of employment protection legislation. The findings suggest that tougher competition increases innovation by incumbents, but discourages entrants. Employment protection legislation dampens the impact of competition. JEL: L10, O31, D21, F21 Correspondence: [email protected] Acknowledgement: The author is grateful to Laura Abramovsky, Philippe Aghion, James Bessen, Richard Blundell, Gareth Macartney and Helen Simpson for useful comments and suggestions.