‘Innovation rate’ defined as R&D expenditure as a proportion of the previous year’s total assets. ‘TFP’ defined as (the exponential of) the log of net sales, minus the log of cost of goods sold (COGS), log of net property, plant and equipment level (PPE) multiplied by their respective coefficients retrieved in the estimation of mark-ups, and minus the estimated measurement error.. ‘TFP distance’ defined as the gap in a firm’s TFP from the most productive firm (in TFP terms) in a given year within the industry (measured at the 1-digit SIC level). Labour productivity defined as sum of operating income (before depreciation, depletion and amortization costs) plus labour expenses (to capture value-added), divided by number of employees (in line with Imrohoroğlu and Tüzel (2014)). To deal with outliers, and similar to De Loecker and Eeckhout (2018) and Díez et al (2018), we trim the top and bottom of 2% of observations for the investment rate, innovation rate, labour productivity and TFP before running regressions.
14  Within that, this rise in mark-ups among foreign relative to domestic sales-focussed firms is largest in the manufacturing and ICT sectors. Taken together, this evidence is consistent with a story of rising mark-ups being concentrated among internationally-operating firms, who perhaps benefit disproportionately from global network economies of scale and scope. These firms tend to occupy the fat and fattening upper tail of the mark-up distribution. These are firms that might legitimately be termed “superstars” (Autor et al (2017)). Given this diagnosis, what impact might the rise in mark-ups have had on the macro-economy? One aspect is what impact increased market power may have had on firms’ incentives to invest and innovate and hence on firms’ productivity. With investment and productivity each having under-performed over recent years, the relationship with market power has been subject to increased academic scrutiny recently (for example, Eggertsson, Robbins and Wold (2018)). The relationship between mark-ups and productivity is vital in understanding their macro-economic effects (Van Reenen (2018)). On the one hand, if highly productive ‘superstar’ firms, benefitting from network economies of scale and scope, have become more dominant, then higher mark-ups could be the side-effect of a positive supply shock in the economy. On the other hand, if mark-ups are the counterpart to increased market power and reduced competitive pressures, that would suggest a negative supply shock. These effects are not mutually exclusive. For example, Aghion et al (2005) develop a model which generates a concave relationship between competition and investment.