Do Dominant Firms Provide More Training?

• DOI: http://doi.org/10.1111/jems.12177
• Published date: 01 February 2017
• Date: 01 February 2017

Do Dominant Firms Provide More Training?

CHRISTOS BILANAKOS

Department of Management Science and Technology

Athens University of Economics and Business

Greece

xmpilan@aueb.gr

COLIN P. GREEN

Department of Economics

Lancaster University

UK

c.p.green@lancaster.ac.uk

JOHN S. HEYWOOD

Department of Economics

University of Wisconsin-Milwaukee

P.O.Box 413, Milwaukee, WI 53201

heywood@uwm.edu

NIKOLAOS THEODOROPOULOS

Department of Economics

University of Cyprus

Cyprus

n.theodoropoulos@ucy.ac.cy

A canonical Cournot competition model shows that the profitability of training can increase as

the number of competitors decreases. British establishment evidence from 1998, 2004, and 2011

confirms that firms in less competitive markets provide more formal training. This persists within

three separate cross-sections and in two separate panel estimates. It persists with alternative

measures of training, with alternative measures of market competition and in estimates designed

to account for endogeneity. These results suggest that a dominant product market position,

indeed, increases the incentives to invest in training.

1. Introduction

Workplace training by employers creates important human capital (Acemoglu, 1997)

that directly matches the needs of firms and so becomes immediately valuable (Booth

and Snower, 1996). This training increases worker productivity and has been identi-

fied as reducing the marginal cost of production (Moretti, 2004; Dearden et al., 2006;

Zwick, 2006), increasing wages and profitability (Lynch,1994; Jones et al., 2012; Konings

We acknowledge the Department of Trade and Industry, the Economic and Social Research Council, the

Advisory, Conciliation and Arbitration Service and the Policy Studies Institute as the originators of the

WorkplaceEmployee Relations Survey data, and the Data Archive at the University of Essex as the distributor

of the data, and thank the Office of National Statistics for providing the concentration indices. None of these

organizations bears any responsibility for our analysis and interpretations of the data. Wethank John Forth

and Stephanie Freeth for data advice, and thank participants at the 2014 meetings of the Work Pensions

Employment Group, an associate editor and three referees for comments.

C2016 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume26, Number 1, Spring 2017, 67–95

68 Journal of Economics & Management Strategy

and Vanormelingen, 2015) and generating positive externalities for the entire economy

(Blundell et al., 1999). Understanding the determinants of such training is of clear im-

portance. This paper concentrates on product market competition as an understudied

determinant. We argue that employers’ incentive to invest in training can decreasewith

the extent of product market competition and provide survey evidence from Britain that

supports this prediction.

In contrast to the relatively clear-cut prediction on labor market competition (de-

scribed in the next section), the relationship between product market competition and

employer training appears highly dependent upon assumptions (see Wolter and Ryan,

2011, pp. 533–534). While we argue that more competition reduces potential rents from

training, competition may influence innovation (Aghion et al., 2005) and so the need for

training. It may also influence union bargaining power and so negotiations over training

(Boheim and Booth, 2004). Indeed, the three theoretical contributions to date differ in

their conclusions, predicting a positive, negative, and ambiguous relationship between

training and product market competition (Bassanini and Brunello, 2011; Gersbach and

Schmutzler, 2012; Lai and Ng, 2014). The existing empirical evidence remains similarly

mixed, with some finding no effect of product competition on firm sponsored training

(G¨

orlitz and Stiebale, 2011; Picchio and Van Ours, 2011) and others finding a positive

effect of competition (Lai and Ng, 2014) and of product market deregulation (Bassanini

et al., 2007; Bassanini and Brunello, 2011) on training.

Wereturn to the issue, using a canonical model of Cournot competition to consider

the effect of an exogenous change in the number of firms on the profitability of training

investments. Decreasing the number of competitors generates off-setting influences but

for illustrative functional forms the dominant influence is a scale or rent effect which

increases per firm output and so the profitability of a cost reducing investment in

training. Dominant firms provide more training.

We then use British establishment data to test the relationship between product

market competition and training. Britain provides an interesting setting due to its rel-

atively competitive product market and the view that it has increased the extent of

employer provided training relative to other European countries. For example, contrast

the relatively low estimates by Finegold and Soskice (1988) with more recent estimates

by Arulampalam et al. (2004), Bassanini et al. (2007) and Boeri and van Ours (2013).

Moreover, interestin training remains high in the UK because government programmes

to increase employer provided training appear to have had only modest success in doing

so (Abramovsky et al., 2011).

We examine several measures of training that revealsimilar patterns but we focus

on “cross-training” which has been identified as particularly effective in lowering the

cost of production as it uniquely reduces the cost associated with absence and turnover

(Cappelli and Rogovsky, 1994; Inman et al., 2005; Morita, 2005). Critically for our pur-

poses, cross-training often reflects the particular tasks and processes of a given firm and

is almost exclusively firm-provided and more likely to be firm-specific (Cappelli and

Rogovsky, 1994). Thus, we estimate the determinants of cross-training as a firm-

provided, cost reducing investment that is likely to have a large shareof specific training.

Wedemonstrate a robust negative relationship between product market competition and

this form of training. Moreover, examining two other training measures reinforces this

relationship by further demonstrating that dominant firms provide more training. The

relationship also remains across a wide variety of specifications, for alternative mea-

sures of market dominance, in panel estimates and when attempting to account for the

possible endogeneity of market dominance.