The Best and the Rest

the-best-and-the-restAnother turn of the screw to the heated debate about productivity growth: In a new working paper(1), The Best versus the rest, Dan Andrews, Chiara Criscuolo, and Peter N. Gal argue that the productivity debate has been mainly conducted from a macroeconomic perspective, and they present a new micro (firm level) analysis of the global productivity slowdown.

Their main insight is very interesting: Slow productivity growth of the “average” firm masks the fact that a small cadre of firms are experiencing robust gains. The global productivity slowdown could reflect a slowdown in the innovation and technological diffusion process.

The authors characterise global frontier firms as the top 5% of firms in terms of labour productivity or multi-factor productivity (MFP), and they find that the slowdown is not a straight consequence of a slowing in productivity growth at the global frontier, but rather a rising productivity at the global frontier together with an increasing productivity gap between the global frontier and laggard firms. This productivity divergence remains after controlling for differences in capital deepening and market power, suggesting a technological divergence in a broad sense.

This pattern of divergence might seem surprising for at least two reasons. First, neo-Schumpeterian growth theory (…) and models of competitive diffusion (…) imply productivity convergence: that is, firms further behind the global frontier should grow faster, given the larger stock of unexploited technologies and knowledge that they can readily implement. Second, the extent of productivity divergence observed in the data is difficult to reconcile with models of creative destruction and a world where the process of market selection is productivity-enhancing, (…) raising questions about the competitiveness of markets

The paper explores a set of structural factors underlying productivity divergence.

  • The increasing potential for digital technologies to unleash winner takes all dynamics in the global market has enabled technological leaders to increase their performance gap with laggard firms.
  • Stalling technological diffusion can be the consequence of a growing importance of tacit knowledge and the complexity of new technologies.
  • The concomitant decline in market dynamism and rising market power of frontier firms suggests that the stagnation in the productivity growth of laggard firms may be connected to rising barriers to entry and a decline in the contestability or competitiveness of markets.
  • productivity divergence is more extreme in sectors where pro-competitive product market reforms or deregulation were least extensive. Part of the observed rise in MFP divergence may be traced to policy failure to encourage the diffusion of best production practices in OECD economies.

had the pace of product market reforms in retail trade and professional services been equivalent to that observed in the best practice service sector (i.e. telecommunications), then the extent of MFP divergence may have been up to 50% less than what was actually observed.

The following figure is dramatic, because it suggests that part of the problem of declining average productivity growth, is the result of an increasing number of what we could call living-death firms (non-viable old firms)

the-best-and-the-rest

If you think twice there is consistent pattern here. These results reflect a similar problem to the rising wealth/income “inequality”. At firm level, there would be also a privileged 5%, the best, which is basically reaping all the benefits of innovation, and the “stock of knowledge and wealth” they accumulate is not tricking down to the rest.

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(1) Andrews, Dan, Chiara Criscuolo, and Peter N. Gal. ‘The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy’. OECD Productivity Working Papers, 2 December 2016. https://ideas.repec.org/p/oec/ecoaac/5-en.html.

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