2011年-世界发展银行全球_Effects_of_Licensing_Reform_on_Firm_Innovation___Evidence_from_India_28页_1mb

Summary of "Effects of Licensing Reform on Firm Innovation: Evidence from India"

Core Content

This working paper by Murat Seker examines the impact of India's licensing reform on firm innovation, focusing on the introduction of new product varieties in the formal manufacturing sector. The study uses a firm-level panel dataset from the Prowess Database, which offers a more detailed view of firm dynamics compared to other data sources. It presents a dynamic model of firm and industry evolution to explain the relationship between licensing reform and innovation performance.

Main Points

• Licensing Reform Context:

  • Before the reform, all firms in India were required to obtain licenses for new factory establishment, significant capacity expansion, new product lines, or location changes.
  • The reform removed these license requirements, leading to greater freedom in output, inputs, technology usage, and location choice, as well as easier entry into previously delicensed industries.

• Innovation Measure:

  • The study uses the introduction of new product varieties as the innovation measure, which is a direct indicator of firm innovation and available for a large number of firms over a six-year period.
  • This measure is preferred over traditional indicators like patenting activity or total factor productivity (TFP), which are subject to biases and limited coverage, especially in developing countries.

• Empirical Findings:

  • The removal of license requirements led to a roughly 5 percentage point increase in the innovation rate.
  • The results are robust to the inclusion of other policy reforms that occurred during the licensing reform period.

• Model and Theoretical Framework:

  • The model is derived from Seker (2009) and extends the work of Klette and Kortum (2004).
  • It incorporates the concept of monopolistic competition, where firms produce different product varieties, and uses a CES production function to model the consumption of composite goods.
  • The model explains how firms evolve by introducing new products and how licensing reform can influence this process by affecting the innovation rate and firm dynamics.

• Key Variables and Data:

  • The Prowess Database provides firm-level data on the number of products, total sales, and R&D investment.
  • The dataset covers the period from 1989 to 1995 and includes 752 to 2293 firms, with an unbalanced panel.
  • Around 85% of the firms in the manufacturing sector have product-level data, allowing for the tracking of product creation and destruction.

• Innovation Dynamics:

  • The model suggests that higher firm efficiency and lower R&D costs lead to higher innovation rates.
  • Multi-product firms, which constitute 45% of the firm population, are more likely to innovate due to their higher knowledge capital.
  • The average number of products per firm is 1.9, and the average product growth rate is 6%.
  • Firms tend to add more products than drop existing ones, which is consistent with the model's predictions.

• Policy Reforms in India:

  • The licensing reform was part of broader economic liberalization efforts starting in the 1980s.
  • It was implemented in two major phases: 1985 and 1991.
  • The reform was influenced by the balance of payments crisis in 1991, which led to a Stand-By arrangement with the IMF and further structural reforms.
  • Other reforms included trade liberalization and reductions in foreign direct investment (FDI) barriers, which also influenced firm innovation.

• State-Level Labor Regulations:

  • Labor regulations varied across states, with some being more pro-worker and others more pro-employer.
  • The study investigates whether the effect of licensing reform on innovation differs based on the labor regulations in the states where firms are located.

• Empirical Approach:

  • The analysis controls for other policy reforms and firm-specific factors that may influence innovation.
  • The model incorporates the concept of innovation cost distortion, either as a tax on profit or R&D investment, to analyze the impact of licensing reform on innovation.

Key Information

• Data Source: Prowess Database (CMIE), covering 1989–1995.
• Innovation Measure: Introduction of new product varieties.
• Policy Reforms:
  • Licensing reform (1985, 1991).
  • Trade liberalization (tariff rates decreased from 97% in 1989 to 46% in 1995).
  • FDI liberalization (allowed majority ownership for foreign firms).
• Findings:
  • Licensing reform increased the innovation rate by about 5 percentage points.
  • The effect was robust to controls for other reforms.
  • Multi-product firms are more innovative due to higher knowledge capital.
• Model:
  • Dynamic and analytically tractable.
  • Explains the relationship between licensing reform, innovation, and firm evolution.
  • Incorporates the CES production function and Poisson hazard rates for product creation and destruction.

Conclusion

The study provides evidence that India's licensing reform had a positive impact on firm innovation, particularly in the formal manufacturing sector. The use of a direct innovation measure and a dynamic model allows for a more accurate analysis of the reform's effects on firm dynamics. The findings are consistent with the theoretical framework and suggest that reducing regulatory distortions can significantly enhance innovation and productivity.