New evidence on the sources of EU countries' productivity growth.

Recent studies on productivity growth show how competition affects innovation and TFP growth in OECD countries, but do not explicitly account for sectoral parameter heterogeneity. This paper examines whether competition and innovation have a direct effect on labour productivity growth in EU goods-producing industries separated by three different industry types. The results show that the effect of R&D on labour productivity growth is not equal across industries, but rather depends on the innovation activities of sectors. The same is true for competition and labour productivity growth. The empirical evidence indicates that in unlevelled industries (i.e., industries characterised by technologically unequal firms) like Specialised goods suppliers and science-based innovators strong labour productivity growth originates with decreased competition and increased R&D, thereby supporting Schumpeterian arguments. The findings suggest Schumpeterian effects in supplier-dominated goods-producing industries, but reveal decreasing labour productivity growth in these sectors when competition is strongly restricted.