Financial Frictions and the Great Productivity Slowdown

Abstract

We study the role of financial frictions in explaining the sharp and persistent productivity growthslowdown in advanced economies after the 2008 global financial crisis. Using a rich cross-country,firm-level data set and exploiting quasi-experimental variation in firm-level exposure to the crisis,we find that the combination of pre-existing firm-level financial fragilities and tightening creditconditions made an important contribution to the post-crisis productivity slowdown. Specifically:(i) firms that entered the crisis with weaker balance sheets experienced decline in total factorproductivity growth relative to their less vulnerable counterparts after the crisis; (ii) this declinewas larger for firms located in countries where credit conditions tightened more; (iii) financiallyfragile firms cut back on intangible capital investment compared to more resilient firms, which isone plausible way through which financial frictions undermined productivity. All of these effectsare highly persistent and quantitatively large-possibly accounting on average for about a third ofthe post-crisis slowdown in within-firm total factor productivity growth. Furthermore, our resultsare not driven by more vulnerable firms being less productive or having experienced slowerproductivity growth before the crisis, or differing from less vulnerable firms along otherdimensions.