The Global Productivity Slowdown, Technology Divergence and Public Policy: A Firm Level Perspective

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Information about The Global Productivity Slowdown, Technology Divergence and Public...

Published on July 12, 2016

Author: Structuralpolicyanalysis

Source: slideshare.net

1. THE GLOBAL PRODUCTIVITY SLOWDOWN, TECHNOLOGY DIVERGENCE AND PUBLIC POLICY: A FIRM LEVEL PERSPECTIVE Dan Andrews† and Chiara Criscuolo†† Based on joint work with Peter N. Gal † † Economics Department †† Directorate for Science, Technology and Innovation 2016 Conference of the Global Forum on Productivity Lisbon | 7 July 2016

2. • Did aggregate productivity growth slow because: 1. Slowing growth at the global productivity frontier? 2. Stalling diffusion: productivity convergence to the global frontier (GF) has slowed? 3. Rising resource misallocation? • Debate (i.e. Gordon vs Brynjolfsson) has generally centred on #1 but we know little about GF firms. • Our firm level analysis suggests: – Labour productivity (LP) at GF remained robust but laggard firms fell increasingly behind – LP Divergence reflects MFP divergence and most probably technological divergence. – This divergence was to some extent inevitable, due to structural changes in the global economy. – But there was scope for policy to lean against the wind. Our contribution: bringing micro evidence to a largely macro debate

3. PRODUCTIVITY DIVERGENCE: NEW EVIDENCE

4. Frontier Non-frontier Frontier Non-frontier Rising labour productivity gap between global frontier and laggards Average of labour productivity across each 2-digit sector (log, 2001=0) Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming. Divergence is robust (slide A2).

5. Average of MFPR across each 2-digit sector (log, 2001=0) ... largely reflects MFPR divergence Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming. Frontier Frontier Non-frontier Non-frontier Capital deepening plays less of a role (slide A3).

6. ... which may reflect technological divergence (MFPQ) Average of mark-up corrected MFP across each 2-digit sector (log, 2001=0) Correcting for GF firms ability to charge higher mark-ups (slide A4) does not substantively change the story. Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming. Frontier Frontier Non-frontier Non-frontier

7. TECHNOLOGICAL DIVERGENCE: THE ROLE OF STRUCTURAL DRIVERS

8.  The increasing potential for digital technologies to unleash winner take all dynamics in global markets may have allowed frontier firms to pull away.  If winner takes all dynamics are relevant, we should see:  MFPR divergence coupled with divergence in sales [slide A5];  Larger MFP divergence in: ICT-intensive sectors and within the global frontier grouping in ICT intensive sectors. Technological divergence: winner takes all dynamics? A: MFPR in ICT-intensive services B: MFPR in total business services -0.20 0.00 0.20 0.40 0.60 0.80 1.00 Frontier firms Non-frontier firms Top 10% Top 5% Top 2%

9.  Importance of tacit knowledge (TK) as a source of competitive advantage for GF firms may have risen if new technologies have become more complex:  This could raise the amount and sophistication of complementary investments (e.g. MQ) required for adoption.  The rising importance of TK could act as a barrier to the catch- up of laggard firms.  Smoking gun: it is increasingly difficult for firms situated outside the top 20% of the MFP distribution to enter the GF, especially in services where TK is more important [slide A6].  We estimated that the pace of MFP convergence to the GF may have slowed by ~30% since the late 1990s [slide A7]. Technological divergence: stalling technological diffusion?

10. TECHNOLOGICAL DIVERGENCE: THE ROLE OF POLICY

11. Pro-competitive product market reforms can promote the diffusion of frontier technologies by: 1. Sharpening the incentives for incumbent firms to adopt better technologies. 2. Raising managerial quality, which is complementary to adoption. 3. Reducing entry barriers: young firms possess a comparative advantage in commercialising leading technologies. 4. Raising returns to “innovation” in downstream manufacturing sectors via input-output linkages. 5. More efficient reallocation. Competition, innovation and diffusion Structural changes in the global economy meant that some increase in MFP divergence was somewhat inevitable but there was scope for diffusion-enhancing policy reforms to lean against these headwinds.

12. The pace of PMR reform in services has slowed over time Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming. The restrictiveness of product market regulations over time, 1998-2013 Notes: The horizontal line in the boxes represents the median, the upper and lower edges of each boxes reflect the 25th and 75th percentiles and the markers on the extremes denote the maximum and the minimum across countries. The need for reforms in services – esp. professional services – has become increasingly urgent, and divergence was most marked in these sectors (slide A8).

13. Sluggish market reform effort in services amplified MFP divergence 2.3% 2.4% 3.8% 3.9% 4.4% 1.0% 1.4% 1.7% 1.7% 2.0% 0% 1% 2% 3% 4% 5% Energy Retail Legal and accounting services Technical services Air transport Observed increase in gap Increase in gap due to slow deregulation Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming. Based on estimates in A9. Estimated contribution to the annual change in the MFP gap of the slower pace of reform relative to the best practice industry (telecoms)

14. • The slowdown in aggregate productivity growth masks an increasing divergence between GF and laggard firms: – Structural changes in the global economy unleashed winner takes all dynamics and made adoption more difficult. – Thus, MFP divergence was partly inevitable but policy could have worked harder – The opportunity cost of poorly designed PMR has risen • If diffusion stalled, what other factors may matter? – Role of digitalisation and network economies – Role of complementary factors (e.g. managerial quality, skills) – IPR regimes need updating? – Lobbying blocking penetration of ICT and new business models in services • Inclusiveness: MFP divergence and wage inequality. Diffusion: some conjectures and future work

15. SPARES A1. Characteristics of the global frontier A2. Divergence: robustness A3. Divergence: capital deepening A4. Divergence: mark-ups A5. Divergence: sales A6. Entrenchment at the global frontier A7. Slowing convergence to the frontier A8. Divergence & market reform in services: descriptives A9. Divergence & market reform in services: econometrics

16. A1. The globally most productive firms: Who are they?

17. • Robustness – not driven by: – Productivity measure: LP, TFP – Frontier definition: Top 50, 100, 5% – Robustness to different time periods: – Industry-level analysis from 1985 shows a bigger divergence from the early 2000s – Robustness to retaining only HQ-s (their consolidated accounts, i.e. everything is at the group level) and standalone firms (not part of any group) A2. Productivity divergence: robustness

18. Average capital deepening across each 2-digit sector (log, 2001=0) A3. How much is it a capital deepening story? Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming. Frontier Frontier Non-frontier Non-frontier

19. A4. Mark-ups for frontier firms has grown in services but not in manufacturing Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming. Frontier Frontier Non-frontier Non-frontier Average estimated mark-up across each 2-digit sector (log, 2001=0)

20. A5. Frontier firms are getting larger in terms of sales! Average of log sales for global frontier firms and the rest Based on top 5% of MFP; index, 2001=0 Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming. Frontier Frontier Non-frontier Non-frontier

21. A6. Entry into the global frontier has become more entrenched amongst top quintile firms Proportion of frontier firms in time t according to their frontier status in t-2 A: MFPR B: Mark-up corrected MFP (MFPQ) Manufacturing Services 0 10 20 30 40 50 60 70 80 0 10 20 30 40 50 60 70 80 From top 20% From top 10% From top 5% Manufacturing Services 0 10 20 30 40 50 60 70 80 0 10 20 30 40 50 60 70 80 From top 20% From top 10% From top 5%

22. A7. The speed of convergence to the frontier slowed, even before the crisis Estimated convergence parameter from neo-Schumpeterian model and 95% confidence intervals A: MFPR B: Mark-up corrected MFP (MFPQ) 0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20 0.22 0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20 0.22

23. A8. Slower product market reform, a larger increase in the MFP gap Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming. Selected industries; annual average change over time and across countries Note: The figure shows the annual change in the (log) MFPR gap between the frontier and laggard firms and the change in the (log) PMR indicator. Technical services refer to architecture and engineering.

24. A9. Higher MFP divergence when market reforms in services lagged (1) (2) (3) (4) 0.205*** 0.231*** 0.332*** 0.311** (0.065) (0.083) (0.103) (0.132) Country fixed effects YES NO YES NO Industry fixed effects YES YES YES YES Year fixed effects YES NO YES NO Country X year fixed effects NO YES NO YES Observations 458 458 376 376 R-squared 0.201 0.323 0.327 0.463 Y: Δ MFP gap Y: Δ Mark-up corrected MFP gap Δ Product Market Regulations,c,t Notes: Cluster robust standard errors (at the industry-year level) in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Both the MFP gap and the PMR indicator are measured in log terms. The MFP gap is calculated at the country-industry-year level, by taking the difference between the global frontier and the average of log productivity of non-frontier firms. MFP divergence and product market regulation in services Estimation method – five-year long differences; 1998-2013 Source: Andrews, D. C. Criscuolo and P. Gal (2015), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, OECD Productivity Papers forthcoming.

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