THE FUTURE OF PRODUCTIVITY

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1 MEX MEX TUR TUR CHL CHL HUN HUN POL POL EST EST GRC GRC SVK SVK PRT PRT SVN SVN CZE CZE ISR ISR KOR KOR ESP ESP NZL NZL ITA ITA JPN JPN 5 EU 5 EU OECD OECD GBR GBR FRA FRA FIN FIN BEL BEL ISL ISL CAN CAN DEU DEU DNK DNK SWE SWE AUS AUS AUT AUT IRL IRL NLD NLD 4 NOR 4 NOR USA USA CHE CHE LUX³ LUX³ 09/11/2015 THE FUTURE OF PRODUCTIVITY productivity isn't everything, but in the long run it is almost everything. Paul Krugman, 1994 Nick Johnstone Head, Structural Policy Division Directorate for Science Technology and Innovation Cross-country gaps in GDP per capita mainly reflects productivity shortfalls A. Percentage GDP per capita difference compared with the upper half of OECD countries¹ Note: GDP/Population=(GDP/Employment) * (Employment/Population) B. Percentage difference in labour resource utilisation and labour productivity² 60 Labour productivity Labour resource utilisation Source: OECD (2015), Economic Policy Reforms: Going for Growth 2 1

2 Productivity growth slowed across the OECD, even before the crisis Labour productivity growth since 1990 GDP per hour worked (China and India refer to GDP per worker) Source: OECD calculations based on the Conference Board Total Economy Database. 3 Productivity will be the key driver of future growth but uncertain outlook Techno-pessimists vs techno-optimists The debate is not settled Why the slow-down? Taking a granular approach: A) Is it because the productivity frontier is slowing? B) Is it because of misallocation and declining business dynamism? C) or something else which is discouraging diffusion (i.e. IPRs)? D) What is the role of policies? Economic odd couple Robert Gordon, left, and Joel Mokyr encapsulate the debate on the future of innovation. ROB HART FOR THE WALL STREET JOURNAL Economists Debate: Has All the Important Stuff Already Been Invented? By Timothy Aeppel, June 15, :38 p.m. ET 4 2

3 Analytical framework (1) 1. Widespread heterogeneity: very high MFP and very low MFP firms coincide within narrowlydefined industries. 2. Adoption lags for new technologies across countries have fallen, but long-run penetration rates once technologies are adopted have diverged (Comin & Mestieri, 2013). 3. MFP growth of laggard firms is more closely related to productivity developments at the national frontier (NF), as opposed to the global frontier (GF) (Bartelsman, Haskel & Martin, 2008) 5 Analytical framework (2) Global frontier National Adoption convergence Laggards Penetration divergence 6 3

4 160 Mind the Gap: Productivity of Firms and the Rest Manufacturing Sector Labour productivity; index 2001= Services Sector Most advanced firms (3.5% per annum) Most advanced firms (5.0% per annum) All firms (1.7% per annum) Other firms (0.5% per annum) All firms (0.3% per annum) Other firms (-0.1% per annum) firms corresponds to the average labour productivity of the 100 globally most productive firms in each 2-digit sector. On a rolling basis. Non-frontier firms is the average of all other firms. All firms is the sector total. AAGR shown in parentheses. Source: 7. the case of some heavy industry sectors 0.5 A. Steel 0.5 C. Chemicals Others Others 0.5 B. Non-Ferrous 0.5 D. Plastics Others Others Source: Silva (2015, forthcoming) 8 4

5 Focus on the laggards Source: Silva (2015, forthcoming) 9 The globally most productive firms who are they? Mean firm characteristics: frontier firms and non-frontier firms Selected OECD Countries, 2005 (unless otherwise noted) Global Firms Non- Firms Mean Std Dev Number Mean Std Dev Number Difference in means Multi Factor Productivity (Solow) Productivity *** Employment Capital stock ( m) ** Turnover ( m) *** Profit rate *** Age *** MNE status* Probability *** Patenting status Depreciated patent stock *** Source:

6 The globally most productive firms: Coming from various countries 11 Knowledge based capital accumulation has been slowing too Investment in KBC; annual average growth Source: Corrado et al., (2012). 12 6

7 Firms at the global productivity frontier have become older Average age (years) of firms in the frontier and non-frontier groups Manufacturing Services 30 Non-frontier 30 Non-frontier Notes: is measured by the top 100 firms in each 2-digit industry and each year, based on Solow residual-based MFP. Source: Andrews, D. C. Criscuolo and P. Gal (2015), firms, technology diffusion and public policy: micro evidence from OECD countries, OECD Mimeo. 13 consistent the broader decline in business dynamism Declining start-up rates across OECD countries Source: C. Criscuolo, P. N. Gal and C. Menon (2014), The Dynamics of Employment Growth: New Evidence from 18 Countries, OECD Science, Technology and Industry Policy Papers, No

8 Business Dynamism and The Life Cycle of the Firm Preliminary Results from Dynemp V2: Note: the graph illustrates the four components of the growth decomposition normalized over the maximum value across all countries included in the sample. Source: OECD DynEmp v.2 database. Data for some countries are still preliminary. 15 Some policies shape the diffusion of innovations from the global frontier Estimated frontier spillover (% pa) associated with a 2% point increase in MFP growth at the global productivity frontier Entry and Exit Innovation policies Source: Saia, A., D. Andrews and S. Albrizio (2015), Public Policy and Spillovers From the Global Productivity : Industry Level Evidence, OECD Economics Department Working Papers, No

9 The question of exit Japan s efforts to address overcapacity 17 Encouraging the right level of exit (1) Establishment of a policy framework which doesn t excessively penalise failure Recent work at OECD on business dynamics indicates that while the survival share of entrants is not related to policies, the survival of incumbent firms is, especially in financially dependent industries Some policies (especially inefficient bankruptcy regulations) seem to slow down the reallocation process 18 9

10 Encouraging the right level of exit (2) Ensure that regulatory and support measures do not favour incumbents relative to entrants To the extent that measures favour incumbents relative to entrants this will discourage exit There is a rent that is accrued to those in the market relative to those who are not (but could be) or have only recently entered the market 19 Age-differentiated sticks: New Source Bias in Environmental Regulations Note: NSB = New Source Bias (to date, no regulation has been set on old plants); NR = No Regulation (Iceland and Luxembourg do not have coal power plants); PR= Plant Regulation (case by case regulation)

11 Age -differentiated carrots: Provision of R&D Support Source: OECD, R&D Tax Incentive Indicators, July See OECD STI Scoreboard Issue of structural excess capacity Case for supplementary measures above and beyond good framework policies and vintage-neutral regulations and support measures Importance of minimising information requirements (of government) and administrative costs And to the extent possible letting the market forces determine exitors Arguably Chinese white list is a soft version of such an approach through the provision of information to market participants (downstream customers, financial markets) Could be assessed empirically i.e. relative cost of and access to finance Assessment of harder measures (i.e. restructuring support) could be envisioned need to know characteristics of entrants, suvivors and exitors = > and incentives for the three groups 22 11