Murat Seker's blog

Many studies since the emergence of endogenous growth theory have identified technological innovation as the main determinant of growth. There are structural factors like human and physical capital that contribute to achieving higher innovation rates. However, improving these factors is not sufficient to succeed in innovation. A country’s regulatory environment and investment climate also play important roles in the success of technology adoption strategies and innovation efforts. In a recent paper on the Effects of Licensing Reform on Firm Innovation, I provide an empirical analysis of how the regulatory environment can be crucial for innovation. The paper focuses on regulation of a particular product market that was reformed in India in the mid 1980s and then again in early the 1990s. Before the reform all firms were required to obtain a license to establish a new factory, significantly expand capacity, start a new product line, or change location. Licensing reform meant freedom from constraints on outputs, inputs, technology usage, and location choice as well as easier entry into delicensed industries. Freedom from these constraints allowed firms to take advantage of economies of scale, more efficient input combinations, and newer technologies.

Editor's Note: Murat Seker recently presented the findings of the paper discussed in the following blog post at a session of the FPD Academy. Please see the FPD Academy page on the All About Finance blog for more information on this monthly World Bank event series.

Many studies point to the importance of firms that export to economic growth and development. These firms tend to be larger, more productive, and grow faster than non-exporting firms. These findings have focused policymakers’ attention on the importance of international trade for economic growth. From the 1980s to the 2000s traditional trade policies have improved significantly—applied tariff rates across a wide range of countries with varying levels of income have decreased from around 25 percent to 10 percent. However, improvements in trade policies are often not enough to reap the full benefits of international trade. To be fully effective, they require complementary reforms that improve the business environment for firms. In a recent paper on Rigidities in Employment Protection and Exporting, I focus on a particular aspect of the business environment, namely employment protection legislation (EPL), and show how these regulations relate to the decisions of firms to enter export markets.¹

Evidence shows that export market entry is associated with significant changes and adjustments in firm performance around the time at which exporting begins. In data collected via the Enterprise Surveys project, the employment levels of firms that subsequently enter export markets ("future-exporters") grow by 13%, four times higher than the growth rate of firms that don’t enter export markets.² Bernard and Jensen (1999) find that the growth premium for these future-exporters as compared to non-exporters in the U.S. is 1.4% per year for employment and 2.4% for shipments.