Aggregate Productivity Growth Research Articles

Revisiting Baumol’s growth disease in Japan

This study analyzes the cause of secular stagnation in Japan after the economic bubble and its association with industrial structural change, specifically Baumol’s growth disease (BGD). Our analysis updates Nishi and focuses on the period between 1995 and 2018 using the latest version of the JIP (Japan Industrial Productivity) database. Then, we ask “Is Japan suffering from BGD?” Our approach includes decomposition of the aggregate labor productivity growth rate, fixed-share growth rate (FSGR) measurement, and a transition probability matrix. The decomposition reveals that the within-sector effect (WSE) is the main source of aggregate labor productivity. The reallocation growth effect (RGE), which measures BGD, was negative for both the short- and long-run averages of the post-1995 period. This period is different from the previous one, as the WSE declined significantly, and the considerable decline in the WSE can be seen as a major factor in Japan’s stagnation over the past 30 years. During this stagnation, BGD silently undermined the Japanese economy, albeit as a secondary effect. Furthermore, our FSGR and transition probability matrix show that persists and is infectious in Japan. Sectors that undergo BGD tend to persist in this state, and even when one sector is in a non-BGD state, it is more likely to develop BGD.

Productivity Slowdown, Tax Havens and MNEs’ Intangibles: Where is Measured Value Creation?

Based on French firm-level data over 15 years we evaluate the contribution of the microlevel profit shifting –through tax haven foreign direct investments to the aggregate productivity slowdown measured in France. We show that firm measured productivity in France declines over the immediate years following the establishment in a tax haven, with an average estimated drop by 3.5% in labor apparent productivity. We argue that this productivity decline, following a presence in a tax haven, is most likely explained by multinationals’ tax optimization, where domestic productivity is underestimated as profits are not recorded anymore in the home country. The fall in productivity is especially strong for firms that are intensive in intangible capital and is equivalent to 4.1% (versus 2.7% for low intangible intensive firms), reflecting the fact that these types of assets are more easily shifted across countries and facilitate tax planning. Our results additionally suggest that the mismeasurement has strong dynamic effects, as the decline becomes more important the longer the firm remains in a tax haven.Finally, given these firms’ weight in the economy, our results imply an 8% loss at the aggregate in terms of the level of the labor productivity throughout the whole sample period, which is equivalent to an annual loss of 9.7% in terms of the aggregate annual labor productivity growth.

An Elementary Model of VC Financing and Growth

This article uses an endogenous growth model to study how the improvements in financing for innovative start-ups brought by venture capital (VC) affect firm innovation and growth. Partial equilibrium results show how lending contracts change as financing efficiency improves, while general equilibrium results show that better screening and development of projects by VC investors leads to higher aggregate productivity growth.

Firm Entry and Exit and Aggregate Growth

Applying the Foster, Haltiwanger, and Krizan (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. To analyze this relationship, we develop a model of firm entry and exit based on Hopenhayn (1992). When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as they do in the data from Chile and Korea. (JEL D24, E23, L13, L60, O14, O32, O47)

Loan renegotiation and the long-term impact on total factor productivity

When a loan is close to becoming non-performing, banks have stronger incentives to renegotiate it in favourable conditions for the borrower (loan forbearance) rather than for recognising and resolving the non-performing loan. At the aggregated level and looking at borrowers (non-financial corporations), the preference for loan renegotiation may affect total factor productivity and aggregate productivity growth, as new entrants, typically using technologies that are more advanced, may be crowded out from bank funding by incumbent non-financial corporations (this would particularly be the case in the absence of well-developed financial markets). The empirical analysis finds that a wider use of loan renegotiation, seen through lower values of provisions to total loans, has a negative effect on the change of total factor productivity (in addition to the influence of consumption growth). These results provide useful insights when considering the resolution of non-performing loans and the long-term consequences on the real economy.

Agency frictions, managerial compensation, and disruptive innovations

Whether a manager leads the innovation efforts of a firm in line with shareholder preferences is key for firm value and growth. This, in turn, influences aggregate productivity growth and welfare. Data on US public firms reveals that (i) firms with better corporate governance tend to adopt highly incentivized contracts rich in stock options and (ii) such contracts are more likely to lead to disruptive innovations – patented inventions that are in the upper tail of the distribution in terms of quality and originality. Motivated by these empirical results, we develop and estimate a new dynamic general equilibrium model of firm-level innovation with agency frictions and endogenous determination of executive contracts. The model is used to study the joint dynamics of corporate governance, managerial compensation, and disruptive innovations, as well as the consequent aggregate implications on growth and welfare. Better corporate governance can reduce the influence of the manager in determining the compensation structure. This leads to more incentivized contracts and boosts innovation, with substantial benefits for the shareholders as well as the broader economy through knowledge spillovers. Removing agency frictions leads to contracts richer in stock options, boosting growth by 0.51pp, and welfare by 7.3% in consumption-equivalent terms. These findings are robust to incorporating short-termism. Short-termism itself is also detrimental, the removal of which increases welfare by 1.5%. Alleviating both frictions at the same time leads to amplified gains in growth and welfare.

Structural change and productivity growth in Europe — Past, present and future

This paper studies the effect of structural change on the historical path of aggregate labor productivity growth for a large sample of European countries, and it builds a quantitative multi-sector growth model to analyze the potential impact that structural change may have on future productivity growth. We document that the observed reallocation of economic activity since the 1970s towards the service sector has exerted a strongly negative effect on aggregate productivity growth in most European countries. Moreover, we perform a quantitative analysis to show that the expected path of structural change might continue to have a sizeable dent on future productivity growth in Europe. By contrast, the impact in the U.S. is expected to rapidly diminish. We show that this differential result can be explained by the large expansion, in Europe, of certain service sub-sectors characterized by stagnant productivity.

The effects of EU-funded enterprise grants on firms and workers

This paper investigates the effects of non-repayable enterprise grants on Hungarian SMEs, financed from the European Union’s Structural and Cohesion Funds between 2004–2014. Comparing firm- and worker level outcomes of successful and unsuccessful applicants, we find that subsidized firms increase their employment, sales, capital-to-labor ratio and labor productivity, but we find conflicting results for total factor productivity. The skill composition of workers is not affected by the grant, but wages increase, although only for skilled workers and especially managers. These results suggest that the program generates additional investment, but that investment leads to limited technology upgrading at best. According to our simple calculations, the cost of creating an additional job with this program was equivalent to 3 years average wage and each year’s grants contributed to aggregate SME labor productivity growth by 0.2-0.6 percentage points — with an annual cost often in excess of 1 percent of total SME value added.

The granular nature of emerging market economies: The case of Kazakhstan

AbstractThis paper analyzes the granularity hypothesis in a large emerging economy, Kazakhstan. We use a new longitudinal dataset at the firm level and at quarterly frequency between 2012 and 2018 to document the size distribution of firms and to provide evidence that it follows a power law. We find that the largest 30 firms explain nearly 80 percent of the growth in aggregate total factor productivity. This confirms earlier research for the U.S. and other developed countries. However, the granular nature of the Kazakh economy is even more outspoken than in other countries. Thus idiosyncratic shocks and the way they ripple through the production network matter to understand changes in aggregate productivity growth. Moreover, since these granular firms are concentrated in the oil industry it exposes the vulnerability of the economy more to unexpected shocks in one industry in particular.

High-growth firms’ contribution to aggregate productivity growth

This paper investigates the contribution of high-growth firms (HGFs) to aggregate productivity growth, using Hungarian firm-level data. Three stylized facts emerge. First, output-based HGFs substantially outperform employment-based ones in terms of their productivity contribution: on average, sales-based HGFs contribute 5 times as much as employment-based ones. Further, the contribution of employment-based HGFs is negative in 48-50% of industry-years, compared to 25-31% for sales-based HGFs. Second, HGFs tend to contribute to productivity growth only during their high-growth phase but not afterwards. Third, HGFs’ contribution to productivity growth is higher in industries with more effective reallocation and with more young firms, but none of these are strong predictors of the HGFs’ contribution. Finally, we present a simple benchmark model to show that these patterns arise naturally under realistic correlation structures.

FOREIGN INVESTMENT AND PRODUCTIVITY OF LOCAL CHINESE FIRMS

In this paper, we examine how foreign investment affects the productivity of local Chinese firms based on data from Chinese manufacturing firms. A series of robustness tests reveal that foreign investment significantly improves the productivity of local Chinese firms. Further analysis shows the varying impacts of foreign investment on the productivity of different types of local firms and indicates significant heterogeneity. We decompose the aggregate productivity growth into components, including the effects of technology progress, resource reallocation, firm entry and firm exit. Results show that foreign investment mainly promotes aggregate productivity growth by improving the resource allocation effect and technology progress effect.

The impact of new varieties on aggregate productivity growth*

AbstractAlthough there is an extensive body of literature on aggregate productivity growth, reallocation, and firm turnover, the contribution to overall productivity growth from new firms that produce new varieties is not well understood. In this paper, we propose a framework for aggregating productivity that identifies the contribution from new firms that produce new varieties. Our framework generalizes the frameworks currently used in the literature. To illustrate the decomposition, we analyse the case of firm turnover in Norway. We find that the net creation of new varieties due to firm turnover contributes about half a percentage point to annual aggregate labour productivity growth in the manufacturing sector.

Credit constraints, selection and productivity growth

This paper presents a tractable model of innovation and growth with firm heterogeneity and financial frictions. The model is used to uncover new mechanisms linking access to credit and productivity growth, highlighting the role of selection and firm heterogeneity emerging from recent empirical findings. Three key results emerge. First, better access to credit to finance fixed operating costs allows less productive firms to survive, thereby depressing the average level of productivity and, via its effect on innovation incentives, aggregate productivity growth. Second, cheaper access to credit decreases these costs, thereby freeing resources to increase production and firm size. Larger firm size leads to more innovation and growth. The overall impact of finance on growth hinges on the relative strength of the selection and market size effect. Third, cheaper access to credit to finance the cost of entry leads to stronger product market competition which, in turn, foster stronger selection, innovation and growth.

Assessing production efficiency by farm size in Rwanda: A zero-inefficiency stochastic frontier approach

This study investigates the relationship between farm size and technical efficiency for the production of maize in Rwanda. Since levels of technical efficiency tend to vary considerably across farms in sub-Saharan Africa, with a mixture of both inefficient and fully efficient farms, the use of the conventional stochastic frontier method is not appropriate. In this paper, we apply a zero-inefficiency stochastic frontier method that manages both efficiency and inefficiency in the studied sample. The average technical efficiency of maize farms for the full sample is estimated at 0.64, demonstrating that maize output can be improved by approximately 36% without increasing the proportion of farm inputs used. Regarding the relationship between farm size and technical efficiency, the study results show a positive relationship between farm size and technical efficiency for maize production in Rwanda. Thus, the enforcement of land reforms such as land consolidation and enhanced aggregate productivity growth is needed. The results also indicate that education, cooperative membership, extension services, access to credit, off-farm income, land tenure, and livestock ownership have significant and positive effects on technical efficiency.

Environmental investment is a powerful "support" for the progressive and sustainable growth of the post-pandemic economy of Russia

The objective need for environmental investment to overcome the reproduction of anti-sustainable environmental trends in the modern Russian economy and its post-pandemic recovery is substantiated. Environmental investments that meet the criteria of the global ESG agenda are positioned as responsible in their essence and transformative in their functional role. Original scientific judgments are presented on the impact of such investments on the dynamics and intensity of "green" innovations (new technologies, production processes, supply chains capable of solving issues of waste processing and industrial reproduction of raw materials from waste resources, as well as the use of alternative energy sources, etc.), which are able to generate long-term and sustainable growth of aggregate factor productivity (TFP) and ensure the radical transformations of the economic system associated with the formation of a "green" circular economy. Regressive models (growth curves) have been constructed for the current domestic economy, taking into account the volume of environmental investment, confirming the hypothesis of the "weakness" of this process in the Russian Federation, including due to the lack of significant changes in the state environmental policy. The minimum necessary economic tools of the state policy in the field of stimulating environmental investment in Russia have been formed in order to post-pandemic recovery of its economy and ensure long-term sustainable growth of TFP. The conducted research makes a certain contribution to the development of the theory of endogenous economic growth by taking into account the impact of environmental investment, which is initially focused on the effective use of natural capital, on the maximum involvement of waste resources in economic turnover, the replacement of traditional production technologies with environmentally friendly or low-carbon, the improvement of ecosystems, the production potential of the economy, the quality of the environment and social changes.

Decomposition of Output, Productivity and Market Structure Changes

Building on the recent development in the literature on production function identification and decomposition methods, in this paper we examine the sources of output and productivity growth in China’s manufacturing industries from 1998 to 2007 using firm-level data. We first decompose the industry output growth into contributions stemming from the growth of the surviving firms and market dynamics, and then further decompose the former into the input factor deepening and firm productivity growth. To accommodate heterogeneity across firms in terms of production technology and sources of growth, we consider a nonparametric production function and decompose firm output growth at both the mean and different quantiles of the output distribution. Nonparametric estimation techniques and recentered influence functions are used to facilitate our decomposition. In addition, we decompose the aggregate industry productivity growth into three sources, viz., survivors’ productivity growth, market dynamics, and reallocation of market shares. Given the market-oriented economic reforms undergoing in China during our sample period, contributions to aggregate productivity coming from dynamic ownership changes are also examined.

A Satellite Account for Health in the United States.

This paper develops a satellite account for the US health sector and measures productivity growth in health care for the elderly population between 1999 and 2012. We measure the change in medical spending and health outcomes for a comprehensive set of 80 conditions. Medical care has positive productivity growth over the time period, with aggregate productivity growth of 1.5% per year. However, there is significant heterogeneity in productivity growth. Care for cardiovascular disease has had very high productivity growth. In contrast, care for people with musculoskeletal conditions has been costly but has not led to improved outcomes.

Estimating the role of labor resources reallocation between sectors on the growth of aggregate labor productivity in the Russian economy

Relevance. Economic growth can be achieved in two different ways: through technological improvements and reallocation of market shares from less to more productive units. Despite the significant research literature on innovation in Russia, the literature on market selection, especially at the sectoral level, is relatively scarce. This is the research gap that this study aims to address. Research objective. The article assesses how labor resource reallocation between sectors has influenced the dynamics of aggregate labor productivity in the Russian economy over the past two decades. Data and methods. For this purpose, the growth of aggregate labor productivity was decomposed into the growth of productivity within the sectors themselves and the reallocation of labor resources between them. This allowed us to conduct a quantitative estimation of the role of market selection at the sectoral level. For our study, we used data from Rosstat (from 2002 to 2018) and the World Input-Output Database (from 2000 to 2014). Results. For Rosstat data, the ratio of the effect of changes in labor productivity and labor resource reallocation by sector on total labor productivity over the period was 0.71/0.29, and for WIOD data it was 0.44/0.56. This indicates that labor resources are more likely to be reallocated to related sectors (e.g. between manufacturing industries). Conclusions. The results suggest that there is competitive market selection at the sectoral level and that labor has generally been reallocated to more productive sectors of the economy, contributing significantly to the growth of aggregate productivity in the economy. Our study shows the sectors of the economy where this reallocation has taken place, which may help to determine where this process is successful and where it needs additional stimulation.

The Impact of Trade Competition on Managerial Incentives and Productivity

We study a model of monopolistic competition with firm heterogeneity –in terms of productivity- in which firms provide incentives to managers to reduce marginal cost. In our model managerial incentives are endogenously determined by firm’s productivity and the intensity of competition. We show how tougher competition, generated by large market size or trade, induces stronger incentives to reduce marginal cost for the more-productive firms while the opposite holds for the less-productive firms; this further affects the selection of heterogeneous producers into the domestic and foreign markets. Aggregate productivity growth is decomposed in two sources, within-firm growth and between-firm growth, a decomposition that has not been theoretically analyzed before. We provide a useful theoretical model to analyze how exposure to competition leads to firm productivity growth and how this further affects aggregate performance measures and selection.

Low Interest Rates, Market Power, and Productivity Growth

This study provides a new theoretical result that a decline in the long‐term interest rate can trigger a stronger investment response by market leaders relative to market followers, thereby leading to more concentrated markets, higher profits, and lower aggregate productivity growth. This strategic effect of lower interest rates on market concentration implies that aggregate productivity growth declines as the interest rate approaches zero. The framework is relevant for antitrust policy in a low interest rate environment, and it provides a unified explanation for rising market concentration and falling productivity growth as interest rates in the economy have fallen to extremely low levels.