Innovation and market regulation: evidence from the European electricity industry

This paper studies the effects of changes in the level of product market regulation on the industry-level innovation intensity in the EU electricity sector during years 1990–2009. In order to test the impact of deregulatory policies on the propensity to innovate in energy technologies, we match data on R&D budgets and European Patent Office patent applications from International Energy Agency and Eurostat Databases with the Organisation for Economic Cooperation and Development indexes of product market regulation. The analysis addresses innovations in the traditional electricity-related technologies, but keeping aside renewable energy technologies. Findings show an increase in patenting activities following market deregulation, measured along three factors: entry barriers, public ownership and vertical integration. In particular, econometric results suggest that policies aimed at reducing vertical integration – i.e. to unbundle networks from energy generation and supply – have a positive impact on innovation activity. Results are robust to the introduction of controls for country-level public R&D expenditures in the electricity field.