EU Harmonization of Regulations, Competition and Firm-Level Productivity Growth in the Dutch Food Industry

Evidence broadly confirms that EU harmonization of food regulations can be considered as a trade-promoting and market-integrating instrument in the Single market. However, little is known on how these particular trade liberalization measured may impact total factor productivity (TFP). One of the general presumptions is that trade liberalization has a positive impact on productivity through the effect of competitive pressures to which domestic firms are exposed. For instance, as a result of lowering or removing regulatory barriers to trade, entry costs of foreign and domestic competitors decrease. This leads to more competitive pressures which have a downward effect on prices (and markups) and whereby a better reallocation of inputs are developed. Our contribution on this research is to test these predictions in one empirical framework. First, we lay out the empirical underpinnings on TFP measurement under markups and variable returns to scale. The estimation enables us to verify the cyclical behavior of the market structure and scale economies over time. Second, our empirical model (panel) disentangles the impact of harmonization of regulations on markups and markups on TFP. The analysis is carried out at the level of Dutch food processing firms for the period 1979-2005. We extend and built upon a new database on EU harmonization of regulations in the food industry. The product classification of this database follows the detailed CN classification that codes the relevant harmonization initiatives of technical regulations at the product level.