The Global Productivity Slowdown, Technology Divergence and Public Policy: A Firm Level Perspective

THE GLOBAL PRODUCTIVITY

SLOWDOWN, TECHNOLOGY

DIVERGENCE AND PUBLIC

POLICY: A FIRM LEVEL

PERSPECTIVE

Dan Andrews† and Chiara Criscuolo††

Based on joint work with Peter N. Gal †

† Economics Department †† Directorate for Science, Technology and Innovation

2016 Conference of the Global Forum on Productivity

Lisbon | 7 July 2016

• Did aggregate productivity growth slow because:

1. Slowing growth at the global productivity frontier?

2. Stalling diffusion: productivity convergence to the global frontier (GF) has slowed?

3. Rising resource misallocation?

• Debate (i.e. Gordon vs Brynjolfsson) has generally centred on #1 but we know little about GF firms.

• Our firm level analysis suggests:

– Labour productivity (LP) at GF remained robust but laggard firms fell increasingly behind

– LP Divergence reflects MFP divergence and most probably technological divergence.

– This divergence was to some extent inevitable, due to structural changes in the global economy.

– But there was scope for policy to lean against the wind.

Our contribution: bringing micro

evidence to a largely macro debate

PRODUCTIVITY DIVERGENCE:

NEW EVIDENCE

Frontier

Non-frontier

Frontier

Non-frontier

Rising labour productivity gap

between global frontier and laggards Average of labour productivity across each 2-digit sector (log, 2001=0)

Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence

and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming.

Divergence is robust (slide A2).

Average of MFPR across each 2-digit sector (log, 2001=0)

... largely reflects MFPR divergence



Frontier

Frontier

Non-frontier Non-frontier

Capital deepening plays

less of a role (slide A3).

... which may reflect technological

divergence (MFPQ) Average of mark-up corrected MFP across each 2-digit sector (log, 2001=0)

Correcting for GF firms ability to charge

higher mark-ups (slide A4) does not

substantively change the story.



Frontier

Frontier

Non-frontier

Non-frontier

TECHNOLOGICAL DIVERGENCE:

THE ROLE OF STRUCTURAL

DRIVERS

The increasing potential for digital technologies to unleash winner take all dynamics in global markets may have allowed frontier firms to pull away.

If winner takes all dynamics are relevant, we should see:

MFPR divergence coupled with divergence in sales [slide A5];

Larger MFP divergence in: ICT-intensive sectors and within the global frontier grouping in ICT intensive sectors.

Technological divergence: winner

takes all dynamics?

A: MFPR in ICT-intensive services B: MFPR in total business services

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

Frontier firms

Non-frontier firms

Top 10%

Top 5%

Top 2%

Importance of tacit knowledge (TK) as a source of

competitive advantage for GF firms may have risen if new

technologies have become more complex:

This could raise the amount and sophistication of

complementary investments (e.g. MQ) required for adoption.

The rising importance of TK could act as a barrier to the catch-

up of laggard firms.

Smoking gun: it is increasingly difficult for firms situated

outside the top 20% of the MFP distribution to enter the GF,

especially in services where TK is more important [slide A6].

We estimated that the pace of MFP convergence to the GF

may have slowed by ~30% since the late 1990s [slide A7].

Technological divergence: stalling

technological diffusion?

TECHNOLOGICAL DIVERGENCE:

THE ROLE OF POLICY

Pro-competitive product market reforms can promote the

diffusion of frontier technologies by:

1. Sharpening the incentives for incumbent firms to adopt better

technologies.

2. Raising managerial quality, which is complementary to

adoption.

3. Reducing entry barriers: young firms possess a comparative

advantage in commercialising leading technologies.

4. Raising returns to “innovation” in downstream manufacturing

sectors via input-output linkages.

5. More efficient reallocation.

Competition, innovation and

diffusion

Structural changes in the global economy meant that some increase

in MFP divergence was somewhat inevitable but there was scope for

diffusion-enhancing policy reforms to lean against these headwinds.

The pace of PMR reform in services

has slowed over time



The restrictiveness of product market regulations over time, 1998-2013

Notes: The horizontal line in the boxes represents the median,

the upper and lower edges of each boxes reflect the 25th and

75th percentiles and the markers on the extremes denote the

maximum and the minimum across countries.

The need for reforms in services – esp.

professional services – has become

increasingly urgent, and divergence was

most marked in these sectors (slide A8).

Sluggish market reform effort in

services amplified MFP divergence

2.3% 2.4%

3.8% 3.9%

4.4%

1.0%

1.4%1.7% 1.7%

2.0%

0%

1%

2%

3%

4%

5%

Energy Retail Legal andaccounting

services

Technicalservices

Air transport

Observed increase in gap

Increase in gap due to slow deregulation


and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming. Based on estimates in A9.

Estimated contribution to the annual change in the MFP gap of the

slower pace of reform relative to the best practice industry (telecoms)

• The slowdown in aggregate productivity growth masks an increasing divergence between GF and laggard firms:

– Structural changes in the global economy unleashed winner takes all dynamics and made adoption more difficult.

– Thus, MFP divergence was partly inevitable but policy could have worked harder

– The opportunity cost of poorly designed PMR has risen

• If diffusion stalled, what other factors may matter?

– Role of digitalisation and network economies

– Role of complementary factors (e.g. managerial quality, skills)

– IPR regimes need updating?

– Lobbying blocking penetration of ICT and new business models in services

• Inclusiveness: MFP divergence and wage inequality.

Diffusion: some conjectures and

future work

SPARES

A1. Characteristics of the global frontier

A2. Divergence: robustness

A3. Divergence: capital deepening

A4. Divergence: mark-ups

A5. Divergence: sales

A6. Entrenchment at the global frontier

A7. Slowing convergence to the frontier

A8. Divergence & market reform in services: descriptives

A9. Divergence & market reform in services: econometrics

A1. The globally most productive

firms: Who are they?

• Robustness – not driven by:

– Productivity measure: LP, TFP

– Frontier definition: Top 50, 100, 5%

– Robustness to different time periods:

– Industry-level analysis from 1985 shows a bigger

divergence from the early 2000s

– Robustness to retaining only HQ-s (their

consolidated accounts, i.e. everything is at the

group level) and standalone firms (not part of any

group)

A2. Productivity divergence:

robustness

Average capital deepening across each 2-digit sector (log, 2001=0)

A3. How much is it a capital

deepening story?



Frontier

Frontier

Non-frontier

Non-frontier

A4. Mark-ups for frontier firms has grown

in services but not in manufacturing



Frontier

Frontier

Non-frontier

Non-frontier

Average estimated mark-up across each 2-digit sector (log, 2001=0)

A5. Frontier firms are getting larger

in terms of sales! Average of log sales for global frontier firms and the rest

Based on top 5% of MFP; index, 2001=0



Frontier

Frontier

Non-frontier

Non-frontier

A6. Entry into the global frontier has become

more entrenched amongst top quintile firms

Proportion of frontier firms in time t according to their frontier status in t-2

A: MFPR

B: Mark-up corrected MFP (MFPQ)

Manufacturing Services

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

Fromtop

20%

Fromtop

10%

Fromtop

5%

Manufacturing Services

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

Fromtop

20%

Fromtop

10%

Fromtop 5%

A7. The speed of convergence to the

frontier slowed, even before the crisis

Estimated convergence parameter from neo-Schumpeterian model and 95% confidence intervals

A: MFPR

B: Mark-up corrected MFP (MFPQ)

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

0.22

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

0.22

A8. Slower product market reform, a

larger increase in the MFP gap



Selected industries; annual average change over time and across countries

Note: The figure shows the annual change in the (log) MFPR gap between the frontier and laggard firms and

the change in the (log) PMR indicator. Technical services refer to architecture and engineering.

A9. Higher MFP divergence when

market reforms in services lagged

(1) (2) (3) (4)

0.205*** 0.231*** 0.332*** 0.311**

(0.065) (0.083) (0.103) (0.132)

Country fixed effects YES NO YES NO

Industry fixed effects YES YES YES YES

Year fixed effects YES NO YES NO

Country X year fixed effects NO YES NO YES

Observations 458 458 376 376

R-squared 0.201 0.323 0.327 0.463

Y: Δ MFP gap Y: Δ Mark-up corrected MFP gap

Δ Product Market

Regulations,c,t

Notes: Cluster robust standard errors (at the industry-year level) in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Both the

MFP gap and the PMR indicator are measured in log terms. The MFP gap is calculated at the country-industry-year level,

by taking the difference between the global frontier and the average of log productivity of non-frontier firms.

MFP divergence and product market regulation in services

Estimation method – five-year long differences; 1998-2013



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The Global Productivity Slowdown, Technology Divergence and Public Policy: A Firm Level Perspective