nep-eec New Economics Papers
on European Economics
Issue of 2007‒12‒08
twenty-two papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. In Search of a Euro Effect: Big Lessons from a Big Mac Meal? By Parsley, David; Wei, Shang-jin
  2. The term structure of euro area break-even inflation rates - the impact of seasonality By Jacob Ejsing; Juan Angel García; Thomas Werner
  3. Explaining and forecasting euro area exports - which competitiveness indicator performs best? By Michele Ca’ Zorzi; Bernd Schnatz
  4. Theoretical models of fiscal policies in the Euroland: The Lisbon Strategy, Macroeconomic Stability and the Dilemma of Governance with Governments By Stefan Collignon
  5. Potential output growth in several industrialised countries: a comparison By Christophe Cahn; Arthur Saint-Guilhem
  6. The Double Majority Voting Rule of the EU Reform Treaty as a Democratic Ideal for an Enlarging Union : an Appraisal Using Voting Power Analysis By Leech, Dennis; Aziz, Haris
  7. Deficit sustainability and inflation in EMU: An analysis from the fiscal theory of the price level By Oscar Bajo-Rubio; Carmen Díaz-Roldán; Vicente Esteve
  8. A Proposal of a Synthetic Indicator to Measure Poverty Intensity, With an Application to EU-15 Countries By José Javier Núñez-Velázquez; Juana Domínguez-Domínguez
  9. Exports and productivity - comparable evidence for 14 countries By The Interna tional Study Group on Exports and Productivity
  10. Self-Assessed Health Status and Satisfaction with Health Care Services in the Context of the Enlarged European Union By Popescu, Livia; Rat, Cristina; Rebeleanu-Bereczki, Adina
  11. Measurement of national intellectual capital – application to EU countries By Weziak, Dorota
  12. An Assessment of OECD Health Care System Using Panel Data Analysis By Mohan, Ramesh; Mirmirani, Sam
  13. Convergence and Inequality : the case of Western Balkan countries. By JALAL EL OUARDIGHI; RABIJA SOMUN- KAPETANOVIC
  14. How is real convergence driving nominal convergence in the new EU Member States?. By Sarah M. Lein-Rupprecht; Miguel A. León-Ledesma; Carolin Nerlich
  15. Does Italy need family income taxation? By Arnstein Aassve; Maria Grazia Pazienza; Chiara Rapallini
  16. Are the facts of UK inflation persistence to be explained by nominal rigidity or changes in monetary regime? By David Meenagh; Patrick Minford; Eric Nowell; Prakriti Sofat; Naveen Srinivasan
  17. Minimum wages and youth employment: Evidence from the Finnish retail trade sector By Böckerman, Petri; Uusitalo, Roope
  18. Distribution and Growth in France (1982-2006): A Cointegrated VAR Approach By Olivier Allain; Nicolas Canry
  19. The influence of supplementary health insurance on switching behaviour: evidence on Swiss data By Brigitte Dormont; Pierre-Yves Geoffard; Karine Lamiraud
  20. Pension Reform in Norway. Microsimulating effects on government expenditures, labour supply incentives and benefit distribution By Kyrre Stensnes and Nils Martin Stølen
  21. Are flexible contracts bad for workers? Evidence from job satisfaction data By John S Heywood; Colin Green
  22. Barriers to innovation and public policy in Catalonia By Agustí Segarra-Blasco; José García-Quevedo; Mercedes Teruel-Carrizosa

  1. By: Parsley, David; Wei, Shang-jin
    Abstract: We investigate whether the adoption of the euro was accompanied by an increase in prices in member countries, and whether it promoted goods market arbitrage in the form of faster convergence to a common price. By comparing the experience of eurozone countries to non-euro European countries in a ‘difference-in-differences’ specification we net out effects on prices unrelated to the euro. We conclude that (a) there is no evidence of significant price increases associated with the adoption of the euro even for food items; and (b) there is little systematic evidence of a significant improvement in goods market integration following the euro’s introduction.
    JEL: F3
    Date: 2007–09
  2. By: Jacob Ejsing (Capital markets and financial structure division, DG-E, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Juan Angel García (Capital markets and financial structure division, DG-E, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Thomas Werner (Corresponding author: Capital markets and financial structure division, DG-E, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides a toolkit for extracting accurate information about inflation expectations using inflation-linked bonds. First, we show how to estimate term structures of zero-coupon real rates and break-even inflation rates (BEIRs) in the euro area. This improves the analysis of developments in inflation expectations by providing constant maturity measures. Second, we show that seasonality in consumer prices introduces misleading and quantitatively important time-varying distortions in the calculated BEIRs. We explain how to correct for this in the estimation of the term structure, and thus provide a unified framework for extracting constant maturity BEIRs corrected for seasonality. JEL Classification: E31, E43, G12.
    Keywords: Term structure, break-even inflation rates, inflation-linked bonds, inflation seasonality.
    Date: 2007–11
  3. By: Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Bernd Schnatz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: From a conceptual point of view there is little consensus of what should be the “ideal indicator” of international cost and price competitiveness as each of the standard measures typically employed has its own merits and drawbacks. This calls for addressing the question from an empirical angle, searching for the indicator that best explains and helps forecast export developments. This paper constitutes a first attempt to systematically compare the properties of the alternative cost and price competitiveness measures of the euro area. Although they diverge sometimes, we find little evidence that there is one indicator consistently outperforming the other in terms of explaining and forecasting euro area exports. This suggests that the measures based on consumer and producer prices, which offer some advantages in terms of quality and timeliness, are good approximations of euro area price and cost competitiveness. JEL Classification: F17, F31, F41.
    Keywords: Real exchange rate, trade, exports, price competitiveness, euro area, forecast.
    Date: 2007–11
  4. By: Stefan Collignon
    Abstract: Due to collective action problems, the Eurozone is stuck in a sub-optimal macro-policy mix of too expansionary fiscal policy and too restrictive monetary policy. Although the Lisbon Strategy pays lip service to macro-economic policy coordination, no mechanisms, institutions or effective rules are established in order to overcome the collective action problem. Empirically, the failure is demonstrated by comparing the Eurozone policy mix with the US policy mix and attributing it to the low investment performance which resulted in low average GDP growth and low average productivity growth – contrary to the aims of the Lisbon Strategy to make the EU the world’s most dynamic economy. The paper also argues that in order to overcome these difficulties, a proper government for the European Union is needed. More delegation to the European level is only legitimate if European citizens can exert their democratic rights.
    Keywords: democracy; economic growth; European Central Bank; fiscal policy; legitimacy; policy coordination
    Date: 2007–11–15
  5. By: Christophe Cahn (Corresponding author: Banque de France, DAMEP, 31 rue Croix des Petits Champs, 75049 Paris Cedex, France.); Arthur Saint-Guilhem (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper, we present international comparisons of potential output growth among several economies — Canada, the euro area, France, Germany, Italy, Japan, the Netherlands, the United Kingdom, and the United States — for the period 1991-2004. The main estimates rely on a structural approach where output of the whole economy is described by a Cobb-Douglas function. This framework enables us to take temporal considerations into account, depending on the assumed volatility of potential output. Moreover, this study presents two original features, in other words, the construction of consistent and homogenous capital stock series, and long-run estimates including capital-deepening effects based on a stable capital/output ratio in value terms, whereas standard estimations assume a stable ratio in volume terms. Lastly, we use univariate methods as a benchmark. Even though the final estimates are obviously sensitive to each method and the assumptions made for each of them, this paper might help to understand why some economies remained below their potential growth rate during the recent period by identifying the sources of long-run potential. JEL Classification: C51, E32, O11, O47.
    Keywords: potential growth, production function, total factor productivity, age of equipments.
    Date: 2007–11
  6. By: Leech, Dennis (Economics Department, University of Warwick); Aziz, Haris (Computer Science Department, University of Warwick)
    Abstract: The Double Majority rule in the Treaty is claimed to be simpler, more transparent and more democratic than the existing rule. We examine these questions against the democratic ideal that the votes of all citizens in whatever member country should be of equal value using voting power analysis considering possible future enlargements involving candidate countries and then to a number of hypothetical future enlargements. We find the Double Majority rule to fails to measure up to the democratic ideal in all cases. We find the Jagiellonian compromise to be very close to this ideal.
    Keywords: European Union ; Reform Treaty ; Nice Treaty ; Qualified Majority Voting ; Power Indices
    Date: 2007
  7. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha and Instituto de Estudios Fiscales); Carmen Díaz-Roldán (Universidad de Castilla-La Mancha); Vicente Esteve (Universidad de Valencia)
    Abstract: Price determination theory typically focuses on monetary plicy, while the role of fiscal policy is ussually neglected. From a different point of view, the Fiscal Theory of Price Level takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level, even if monetary authorities pursue an inflation targeting strategy. In this paper we try to test empirically whether the time path of the government budget in EMU countries would have affected price level determination. Our results point to the sustainability of fiscal policy in all the EMU countries but Finland, although no firm conclusions can be drawn about the prevalence of either monetary or fiscal dominance.
    Keywords: Fiscal Theory of the Price Level, monetary and fiscal dominance, central bank independence, fiscal solvency, inflation
    JEL: E62 H62 O52
    Date: 2007–04
  8. By: José Javier Núñez-Velázquez (Departamento de Estadística, Estructura Económica y O.E.I. Universidad de Alcalá); Juana Domínguez-Domínguez (Departamento de Estadística, Estructura Económica y O.E.I. Universidad de Alcalá)
    Abstract: This paper deals with the proposal of a synthetic indicator to measure intensity of poverty. So, whereas incidence of poverty can be clearly measured using the headcount ratio indicator, according to Sen (1976) dimensions of poverty, the choice of a better intensity poverty measure is still an open question to resolve. Thus, in this paper, a new procedure to obtain a synthetic indicator from a set of well-performed poverty intensity indices as a start is proposed, using an adaptation of Principal Component Analysis (PCA). Conditions needed to make longitudinal comparisons possible are studied and properties of these synthetic indicators will also be analyzed, connected to TIP curves as well. As an illustration, this paper analyzes the evolution of poverty in the 15 countries of E.U., whose household income data are available through the information contained in the European Community Household Panel (ECPH). This analysis allows static and dynamic comparisons, related to the period from 1993 to 2000. Furthermore, the determination of groups of countries according to their characteristics in poverty will be accomplished.
    Keywords: Economic Poverty, TIP’s poverty curves, Poverty in EU countries, PHOGUE.
    JEL: C43 D31 I32 O52
    Date: 2007
  9. By: The Interna tional Study Group on Exports and Productivity
    Abstract: The authors use comparable micro level panel data for 14 countries and a set of identically specified empirical models to investigate the relationship between exports and productivity. The overall results are in line with the big picture that is by now familiar from the literature: Exporters are more productive than non-exporters when observed and unobserved heterogeneity are controlled for, and these exporter productivity premia tend to increase with the share of exports in total sales; there is strong evidence in favour of self-selection of more productive firms into export markets, but nearly no evidence in favour of the learning-by-exporting hypothesis. The authors document that the exporter premia differ considerably across countries in identically specified empirical models. In a meta-analysis of their results the authors find that countries that are more open and have more effective government report higher productivity premia. However, the level of development per se does not appear to be an explanation for the observed cross-country differences.
    Keywords: E-Business,Labor Policies,Economic Theory & Research,Labor Markets,Education for Development (superceded)
    Date: 2007–11–01
  10. By: Popescu, Livia (Faculty of Sociology and Social Work, Babes-Bolyai University Cluj-Napoca); Rat, Cristina (Faculty of Sociology and Social work, Babes-Bolyai University Cluj-Napoca); Rebeleanu-Bereczki, Adina (Faculty of Sociology and Social work, Babes-Bolyai University Cluj-Napoca)
    Abstract: The paper aims at analysing the relationship between self-rated health-status, satisfaction with health care services and socio-economic factors, in the context of different national health care systems in the enlarged European Union. The effects of socio-economic deprivation and the functioning of national health care systems on self-rated health status and satisfaction with health care services are investigated using the European Social Survey 2006 dataset (ESS3), and macro data provided by Eurostat (2007) and the World Health Organization (2007). Socio-economic deprivation is measured both at the micro-level (using indicators of economic strain, household income, education, employment status and belonging to discriminated groups), and the macro-level (national poverty rates, the values of poverty thresholds, quintile ratios and GDP per capita). The performance of national health care systems is quantified with the help of two indexes, designed for the purpose of the present study: an index of total health care provisions and an index of governmental commitment to health care. The following countries are included in the analysis: Belgium, Bulgaria, Denmark, Finland, France, Germany, Hungary, Poland, Portugal, Romania, Slovenia, Slovakia, Spain, Sweden, and the United Kingdom.
    Keywords: self-assessed health ; health care systems ; health inequalities ; governmental policies
    JEL: I18 H51
    Date: 2007–11
  11. By: Weziak, Dorota (Warsaw School of Economics, Institute of Statistics and Demography)
    Abstract: The aim of the article is to present both an alternative approach to measurement of intellectual capital of a country (IC) and a calculation of IC index. In order to achieve it, at first a definition of IC was adopted and a conceptual model of IC was worked out. Then, a method of operationalisation of conceptual model was elaborated, which comprised: 1. method of transforming the theoretical concept and relations into more concise ones that enabled the measurement sensu stricto, 2. selection of indicators of each component of IC, 3. adoption of appropriate method of aggregation of indicators. Finally the measurement of each component of IC and IC itself for UE countries was executed. Proposed method of IC measurement can be regarded as the extension of the proposals of Bontis (Bontis, 2004) and Andriessen and Stam (Andriessen, Stam, 2004). Thanks to the application of different approach to data aggregation the subjective decision concerning weights imposed on IC indicators made by Bontis was confirmed. Different factor loadings and resulting from them factor scores for each measurement model of components of IC and IC itself proved the indicators are not of the same importance. Although it could be useful and interesting to compare their relative importance, unfortunately it was impossible to conduct due to the lack of entire comparability of the indicators used. Strong correlation between IC index and GDP per capita indicated that there was a significant level of information carried by the IC index. First of all, it should be pointed out that IC probably explains significant part of the difference in the level of development of various countries. Secondly, it does not carry the full information about the value of the GDP in economy, so it possibly carries also information about the future development of a country.
    Keywords: intellectual capital; EU countries ; factor analysis ; SEM
    Date: 2007–11
  12. By: Mohan, Ramesh; Mirmirani, Sam
    Abstract: The health care delivery system of twenty five OECD nations is analyzed in this paper. This study seeks to assess the significance of various factors contributing to life expectancy and infant mortality for the 1990-2002 period. A fixed-effects panel data model was used to examine the factors influencing life expectancy and infant mortality. More specifically the impact of economic, institutional, and social factors in determining the dependent variables are measured and evaluated.
    Keywords: Analysis of health care; Quality of life; OECD
    JEL: I11 I31
    Date: 2007–12–05
    Abstract: This paper analyses the convergence process of inequality in income among five Balkan countries in the 1989-2005 period. This study is carried out in comparison with the situation in the European Union of 27 countries. The originality of our approach is to consider the convergence of country contributions to the international income inequality. The model allows simultaneously to test the convergence process of income and inequality. The results indicate a real convergence process between Balkan countries, while persistence is detected between European Union countries. However, the development gap between Balkans and European Union remains important.
    Keywords: Convergence ; Inequality ; Panel Data ; Balkan countries; European Union.
    JEL: C23 O40 O52
    Date: 2007
  14. By: Sarah M. Lein-Rupprecht (KOF Swiss Economic Institute ETH Zurich, Weinbergstrasse 35, CH-8092 Zürich, Switzerland.); Miguel A. León-Ledesma (Department of Economics, University of Kent, Canterbury, Kent, CT27NP, United Kingdom.); Carolin Nerlich (European Central Bank, DG-Economics, Kaiserstraße 29, 60311 Frankfurt, Germany.)
    Abstract: The purpose of this paper is to evaluate the empirical relevance of real convergence on the process of nominal convergence for the new EU Member States. We discuss two of the main channels through which real convergence could affect relative prices with respect to the euro area - productivity growth and increased trade openness. Productivity growth can have a positive effect on price levels via the Balassa Samuelson effect, whereas increased openness leads to reductions in mark ups and costs and therefore can have a negative impact on prices. In order to assess their empirical relevance, we used a Structural VAR model to which we applied a model reduction algorithm. This method accounts for endogeneity and simultaneity and circumvents the problem of limited data availability. Our findings show that, in general, openness has had a negative impact and productivity growth a positive one on price level convergence with respect to the euro area. JEL Classification: O52, E31.
    Keywords: Real convergence, nominal convergence, inflation, new EU Member States.
    Date: 2007–11
  15. By: Arnstein Aassve (Istituto Metodi Quantitavi Quantitativi, Università Bocconi); Maria Grazia Pazienza (Dipartimento Studi sullo Stato, Università degli Studi di Firenze); Chiara Rapallini (Dipartimento Studi sullo Stato, Università degli Studi di Firenze)
    Abstract: The possible implications of using the family as opposed to the individual as the unit of taxation are not clear. This applies both to work incentives and distributional outcomes. In this paper we evaluate the effects of a hypothetical reform for Italian income taxation with respect to labour supply. In particular, we analyze potential labour supply effects by considering a shift from the current system of individual taxation to a system of family taxation similar to the French family splitting approach. The analysis is based on an econometric model of labour supply that is embedded in a tax–benefit model. Using data from the Bank of Italy Survey of Household Income and Wealth, our simulation results show relatively small effects on the total labour supply but a decrease in female labour supply.
    Keywords: tax benefit system, fiscal reform, labour supply, microsimulation
    JEL: D31 H24 H31 J22 C15
    Date: 2007
  16. By: David Meenagh (Cardiff University); Patrick Minford (Cardiff University / CEPR); Eric Nowell (University of Liverpool); Prakriti Sofat (IDEAglobal (Singapore)); Naveen Srinivasan (Indira Gandhi Institute of Development Research)
    Abstract: It has been widely argued that inflation persistence since WWII has been widespread and durable and that it can only be accounted for by models with a high degree of nominal rigidity. We examine UK post-war data and find that the varying persistence it reveals is largely due to changing monetary regimes and that models with moderate or even no nominal rigidity are best equipped to explain it.
    Date: 2007–07
  17. By: Böckerman, Petri; Uusitalo, Roope
    Abstract: Following an agreement between the trade unions and the employer organisations, Finnish employers could pay less than the existing minimum wage for young workers between 1993 and 1995. We examine the effects of these minimum wage exceptions by comparing the changes in wages and employment of the groups whose minimum wages were reduced with simultaneous changes among slightly older workers for whom the minimum wage regulation was still binding. Our analysis is based on the payroll record data and minimum wage agreements from the retail trade sector over the period 1990-2005. We discover that average wages in the eligible group declined only modestly despite the fact that the excess supply of labour during high unemployment should make it relatively easy to attract workers even with low wages. The minimum wage exceptions had no positive effects on employment.
    Keywords: Labour demand; employment; minimum wages; trade unions
    JEL: J31 J51
    Date: 2007–12–05
  18. By: Olivier Allain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Universite Paris Descartes - Université Paris Descartes - Paris V); Nicolas Canry (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: In this article, we propose a simple Post Keynesian model so as to test whether French economy is wage or profit-led i.e. whether a wage share increase has a negative or positive impact on economic growth. In that perspective, we estimate econometrically the three behaviour equations of our model (consumption, investment and net exports equations) by using a VECM. Once these equations estimated, we solve our model by using the estimated coefficients and can then conclude on the nature of the French economic regime. Our main conclusion is that French economy would be profit-led. However, although an increase of wage share would have a negative impact on economic growth, this negative impact is very weak, as a one point increase of profit share increases economic growth of only 0.1 %. <br />According to our econometric analysis, wage share increase has a positive impact on consumption and no significant direct effect on the balance of trade. Nevertheless, imports are very sensitive to any output increase, which implies a strong negative impact on the multiplier. Moreover, as the accelerator coefficient (in the investment equation) is not very important, the positive effect of a wage share increase on capital accumulation through consumption is not strong enough to outweigh the negative impact of a wage share increase on investment, consecutive to the decline of profitability. Finally, these two elements –weak accelerator and multiplier effects– well explain why any support of consumption through a wage increase would not have a positive and important impact on French economic growth nowadays. Symmetrically, no positive effect of a wage austerity policy on growth must be expected.
    Keywords: Income distribution; Wage moderation; Economic growth; VECM
    Date: 2007–10–26
  19. By: Brigitte Dormont; Pierre-Yves Geoffard; Karine Lamiraud
    Abstract: This paper focuses on the switching behaviour of sickness fund enrolees in the Swiss health insurance system. Even though the new Federal Law on Social Health Insurance (LAMal) was implemented in 1996 to promote competition among health insurers in basic insurance, there still remains large premium variations within cantons. This indicates that competition has not been able so far to lead to a single price, and reveals some inertia among consumers who seem reluctant to switch to less expensive funds. We investigate one possible barrier to switching behaviour, namely the influence of the supplementary insurance. Our aim is to analyse two decisions (switching decision in basic insurance, subscription to supplementary insurance contracts). We use survey data on health plan choice and import some market data related to the sickness funds (number of enrollees, premiums). The decision to switch and the decision to subscribe to a supplementary contract are estimated both separately and jointly. The results suggest that holding a supplementary insurance contract substantially decreases the propensity to switch. However the impact of supplementary insurance is not significant when the individual assesses his/her health as "very good" ; to the contrary, holding a supplementary contract significantly reduces the propensity to switch when the indivual's subjective health status deteriorates. Futhermore, the switching decision is positively influenced by the expected gain of switching. In comparison with the range of the premium difference, the limitations to switch due to the supplementary insurance is moderate, though non negligible. As for the decision to subscribe a supplementary contract, the results show that the income level has a direct positive influence on the propensity to buy a supplementary insurance. Our results suggest that a major mechanism is going on in relation to supplementary insurance: holding a supplementary contract might stop individuals from switching when the individual thinks that she/he could be regarded as a bad risk due to the selection practices that are allowed in supplementary insurance markets. This result bears major policy implications concerning the regulation of basic and supplementary insurance markets.
    Date: 2007
  20. By: Kyrre Stensnes and Nils Martin Stølen (Statistics Norway)
    Abstract: A much higher old-age dependency ratio, together with more generous pension benefits, will lead to a substantial increase in the future public pension expenditures burden in Norway. A pension reform implemented from 2010 will imply a shift to a quasi-actuarial system, seeking to neutralise the expenditure effect of further growth in life expectancy and strengthen ties between former earnings and pension benefits. Labour supply will be stimulated by lowering implicit tax rates and by aligning the social and private costs of early retirement. Using a large dynamic microsimulation model we find that the reform will stimulate labour supply and reduce the future tax burden, but also increase inequality in the benefits received by old age pensioners.
    Keywords: Pension reform; social security; retirement; pension expenditures
    JEL: H53 H55 J26
    Date: 2007–12
  21. By: John S Heywood; Colin Green
    Abstract: If workers can choose between permanent and flexible contracts, compensating wage differentials should arise to equalize on-the-job utility in the two types of contracts. Estimating job satisfaction using the British Household Panel Survey shows that agency and casual contracts are associated with routinely lower satisfaction. This results because the low job satisfaction associated with less job security is not offset by higher compensation or other job characteristics. Job security is sufficiently important that holding constant this one facet of satisfaction eliminates the overall gap in job satisfaction between flexible and permanent contracts.
    Keywords: Flexible Contracts; Job Satisfaction; Job Security
    Date: 2007
  22. By: Agustí Segarra-Blasco (Research Group of Industry and Territory (GRIT); Rovira i Virgili University (URV)); José García-Quevedo (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)); Mercedes Teruel-Carrizosa (Research Group of Industry and Territory (GRIT); Rovira i Virgili University (URV))
    Abstract: The present paper analyses the link between firms’ decisions to innovate and the barriers that prevent them from being innovative. The aim is twofold. First, it analyses three groups of barriers to innovation: the cost of innovation projects, lack of knowledge and market conditions. Second, it presents the main steps taken by Catalan Government to promote the creation of new firms and to reduce barriers to innovation. The data set used is based on the 2004 official innovation survey of Catalonia which was taken from the Spanish CIS-4 sample. This sample includes individual information on 2,954 Catalan firms in manufacturing industries and knowledge-intensive services (KIS). The empirical analysis reveals pronounced differences regarding a firm’s propensity to innovate and its perception of barriers. Moreover, the results show that cost and knowledge barriers seem to be the most important and that there are substantial sectoral differences in the way that firms react to barriers. The results of this paper have important implications for the design of future public policy to promote entrepreneurship and innovation together.
    Keywords: Obstacles to innovation, industrial policy, innovation system.
    JEL: O31 O38 D21
    Date: 2007

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