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Edited by David B. Audretsch, Oliver Falck, Stephan Heblich and Adam Lederer
Chapter 5: Industrial Policy, Entrepreneurship and Growth
Philippe Aghion INTRODUCTION New growth theories, particularly the Schumpeterian approach (see Aghion and Howitt, 2009), emphasize the central role of entrepreneurial investments and of institutions and policies that maximize innovation incentives. Of particular importance for innovationled growth appears to be free entry and product market competition, with the idea that increased competition or entry threat induces firms to invest more in innovation in order to escape the competitive threat. That competition or entry should enhance innovation and growth is supported by a whole set of empirical contributions. Thus Frankel and Romer (1999) and Wacziarg (2001) point to a positive effect of trade liberalization on growth. Wacziarg (2001) showed that increasing trade restrictions by one standard deviation would reduce productivity growth by 0.264 percent annually. Similarly, Keller (2002, 2004) showed that 70 percent of international R&D spillovers are due to cross-country trade flows. More recently Aghion et al. (2008) pointed to large growth-enhancing effects of the trade liberalization and delicensing reforms introduced in India in the early 1990s, particularly in more advanced sectors or in Indian states with more flexible labor market regulations. And several studies summarized in Aghion and Griffith (2006) point to a positive effect of liberalizing product market competition and entry on innovation and productivity growth by incumbent firms, particularly those that are more advanced in their sector. All these studies have lent support to the recent waves of product and trade liberalization worldwide, and have lent support to an argument against any form of government intervention...
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