Productivity Spillovers from Competitive Reallocation: Evidence from Canadian Manufacturing Plants

Abstract

This paper uses plant-level data on productivity growth and changes in market share over different periods during the 1970s, 1980s, and 1990s to investigate whether plants with declining market shares obtain productivity spillovers from more successful producers and whether the impact of spillovers is affected by the distance between plants. We are primarily interested in the extent to which productivity externalities moderate the centrifugal forces that separate growing plants from declining rivals because of the productivity advantages enjoyed by the former.The paper focuses on the productivity performance of plants with declining market shares, as potential receivers of productivity spillovers. Two possible sources for these spillovers are examined - rival plants operating at the technological frontier and rivals that are actively gaining market share. The analysis advances a model of the externality process in which the productivity of declining plants is influenced by (1) the economic distance of the declining plant from its technological frontier at the beginning of any period, (2) contemporaneous productivity gains in rival plants that are actively wresting market share away from decliners, and (3) the distance between rival plants.We evaluate the existence and magnitude of these sources of spillovers - frontier plants and market-share gainers - because of what they reveal about the types of productive information that struggling plants may be able to assimilate from rivals. Spillovers from the plants at the existing frontier are likely to reflect the established best practices of industry leaders; spillovers coming from market-share gainers involve new sources of productive knowledge that emerge as the frontier is actively being re-established. Our model also incorporates geographic information on the proximity of declining plants to both frontier plants and market-share gainers to test whether productivity spillovers are spatially circumscribed. The results provide evidence that productivity improvements in more successful plants benefit their struggling rivals and that these benefits are inversely related to distance; however, the magnitude of spillovers from growing plants to decliners is relatively small. Spillovers do not offer much of a safety net for producers that are losing the productivity race. The paper also shows that declining plants that start out behind the technological frontier are likely to fall further behind, after the impact of mean reversion is taken into account.