BACKGROUND PAPER THE GLOBAL PRODUCTIVITY SLOWDOWN, TECHNOLOGY DIVERGENCE AND PUBLIC POLICY: A FIRM LEVEL PERSPECTIVE DAN ANDREWS, CHIARA CRISCUOLO AND PETER GAL #GFPLisbon TABLE OF CONTENTS THE GLOBAL PRODUCTIVITY SLOWDOWN, TECHNOLOGY DIVERGENCE AND PUBLIC POLICY: A FIRM LEVEL PERSPECTIVE ............................................................................. 4 1. Introduction and main findings........................................................................................... 4 2. The productivity slowdown ................................................................................................ 6 2.1 Techno-pessimists and techno-optimists ................................................................... 6 2.2 Macroeconomic factors ............................................................................................. 7 2.3 Rising resource misallocation ................................................................................... 8 2.4 Measurement issues ................................................................................................... 8 2.5 Our contribution ........................................................................................................ 8 3. Data and identification of the global productivity frontier ................................................. 9 3.1 Productivity measurement ......................................................................................... 9 3.2 Correcting for mark-ups .......................................................................................... 10 3.3 Measuring the productivity frontier......................................................................... 11 3.4 Representativeness issues ........................................................................................ 12 3.5 Characteristics of frontier firms .............................................................................. 13 4. Productivity divergence between the global frontier and laggard firms ........................... 14 4.1 Labour productivity divergence .............................................................................. 14 4.2 Labour productivity divergence: capital deepening or MFP? ................................. 16 4.3 MFP divergence: mark-ups or technology? ............................................................ 18 4.4 MFP divergence: winner takes all dynamics vs stalling diffusion? ........................ 20 5. Productivity divergence: the role of product market regulation ....................................... 24 5.1 Technological diffusion and product market regulation.......................................... 24 5.2 Product market reforms in OECD countries ........................................................... 25 5.3 Empirical strategy.................................................................................................... 27 5.4 Empirical results ...................................................................................................... 29 6. Conclusion and future research ........................................................................................ 31 REFERENCES ............................................................................................................................ 33 APPENDIX A: DIVERGENCE INDICATORS......................................................................... 37 APPENDIX B: MFP CONVERGENCE AT THE FIRM LEVEL ............................................. 45 APPENDIX C: POLICY ANALYSIS – DESCRIPTIVES AND ROBUSTNESS .................... 47 Tables Table 1. Mean firm characteristics: frontier firms vs other firms...................................... 14 Table 2. MFP divergence and product market regulation in services ............................... 29 Table B1. The pace of productivity convergence has slowed over time .............................. 46 Table C1. MFP divergence and PMR in services: long difference window ........................ 47 Table C1. MFP divergence and PMR in services: long difference window ........................ 47 Table C2. MFP divergence and PMR in services: median MFP of laggard firms ............... 48 Table C3. MFP divergence in manufacturing and upstream product market regulation ..... 49 Figures Figure 1. A widening labour productivity gap between global frontier firms and other firms15 Figure 2. The widening labour productivity gap is mainly driven by MFP divergence ..... 17 Figure 3. The widening MFP gap remains after controlling for mark-ups ......................... 19 Figure 4. A widening gap in mark-up corrected MFP ........................................................ 20 Figure 5. Developments within the global frontier: the emergence of a global elite .......... 21 2 Figure 6. Entry into the global frontier has become more entrenched amongst top quintile firms 23 Figure 7. The pace of convergence slowed, even before the crisis ..................................... 24 Figure 8. The restrictiveness of product market regulations over time, 1998-2013 ........... 26 Figure 9. Slower product market reform, a larger increase in the MFP gap ....................... 27 Figure 10. MFP divergence and market reforms in services ............................................ 30 Figure A1. Divergence: average industry level productivity ............................................. 37 Figure A2. Divergence: alternative labour productivity definition ................................... 38 Figure A3. Divergence: alternative frontier definitions ..................................................... 39 Figure A4. Divergence: excluding firms part of a MNE group ......................................... 40 Figure A5. Divergence: firm size indicators ...................................................................... 41 Figure A6. Divergence: alternative MFPR definitions ...................................................... 42 Figure A7. Divergence: by ICT intensity .......................................................................... 43 Figure A8. Divergence: mark-up corrected MFP using intermediates as flexible inputs .. 44 3 THE GLOBAL PRODUCTIVITY SLOWDOWN, TECHNOLOGY DIVERGENCE AND PUBLIC POLICY: A FIRM LEVEL PERSPECTIVE Dan Andrews, Chiara Criscuolo and Peter N. Gal 1. Introduction and main findings 1. Aggregate productivity growth has slowed in many OECD countries over the past decade, igniting a spirited debate on the future of productivity. Some argue that the low-hanging fruit has already been picked: the IT revolution has run its course and other new technologies like biotech have yet to make a major impact on our lives (Gordon, 2012). Others see the IT revolution continuing apace, fuelling disruptive new business models and enabling a new wave of productivity growth across the economy (Brynjolfsson and McAfee, 2011; Mokyr, 2014). Either technological progress is slowing down, or it’s speeding up. Which view is right? 2. This paper martials firm level evidence to shed new light on the factors behind the global slowdown in productivity growth – a debate which has by and large been conducted from a macroeconomic perspective. While the Gordon-Brynjolfsson controversy is essentially a debate about prospects at the global productivity frontier, it is remarkable how little is actually known about the characteristics of firms that operate at the global frontier. The same is true with respect to the productivity growth performance of global frontier firms over time both in absolute terms and relative to laggard firms. Interestingly, even less is known about the policies that might help laggard firms close their productivity growth gap with the frontier. This is even more surprising given that cross- country differences in aggregate-level productivity are increasingly being linked to the widespread heterogeneity in firm performance within sectors (Bartelsman et al., 2013; Hsieh and Klenow, 2009). 3. Accordingly, we highlight a number of policy-relevant issues related to the performance of frontier firms and laggards, with a view to also shed light on recent aggregate productivity developments in OECD countries. Using a harmonised cross-country firm-level database for 23 countries, we essentially define global frontier firms as the top 5% of firms in terms of labour productivity or multi-factor productivity (MFP) levels within each two-digit industry in each year since the early 2000s. The characteristics of these firms are then analysed along a number of observable dimensions, with a view to build a profile of firms at the global frontier. Global frontier firms are not only more productive than laggards but they are also more capital intensive, have larger sales, more patents and are more profitable. They are also more likely to be part of a multinational group, in line with new models of trade (Melitz, 2003) and literature on multinationals (Dunning, 1991). 4. After examining these cross-sectional differences, we explore the evolution over time of productivity performance at the global frontier. This analysis suggests that the most striking feature of the productivity slowdown is not so much a slowing in the rate of innovation at the global frontier, but rather rising productivity at the global frontier coupled with an increasing productivity divergence between the global frontier and laggard firms. In fact, slow productivity growth of the “average” firm masks the fact that a small cadre of firms are experiencing robust gains. Between 2001 and 2013, for example, average labour productivity at