A recent OECD report “The Future of Productivity” (pdf) presents a new perspective on what drives national productivity growth. The OECD explains that in every world economy there are some ‘frontier firms’ which are internationally competitive and match global high standards in productivity. However, the majority of firms – up to 80 per cent – are not in this category. These firms may have a more domestic market orientation, and much lower average productivity and the OECD calls them ‘non-frontier firms’. The OECD illustrate the productivity gap between frontier firms and non-frontier firms over the last decade for OECD countries. Productivity growth in frontier firms has been around 3.5-5.0% per annum compared to -0.1 to 0.5% per annum in non-frontier firms (see graph below).
Source: ‘The Future of Productivity’, OECD, 2015, Figure 11
The OECD explains that the ‘productivity slowdown is not so much a slowing of innovation by the world’s most globally advanced firms, but rather a slowing of the pace at which innovations spread through the economy: a breakdown of the diffusion machine … the gap between those high productivity firms and the rest has risen’.
What should policy-makers take from these findings? The frontier firms have a competitive advantage from their investments in knowledge-based capital, but also how they tacitly combine computerised information, innovative property and economic competencies in the production process. These firms are leaders in new-to-the-market innovations. But it is not only new-to-the-market innovation which matters for productivity. Policy-makers must focus on improving the take up of new innovations by the vast number of non-frontier firms which are more likely to find success with ‘me-too’ or ‘new-to-the-firm’ innovations. To maximise productivity gains we must aid the acceleration of the diffusion of innovations to non-frontier firms. The diffusion of innovations is good for growth, and the OECD argue that more effective diffusion may also promote inclusiveness. A recent study by Card et al. (2013) suggests that the observed rise in wage inequality appears to at least reflect the increasing dispersion in average wages paid across firms. Thus, raising the productivity of laggard (late adopter) firms could also contain increases in wage inequality, while reducing costs and improving the quality and variety of goods and services.
4 replies on “Thinking about productivity”
Productivity is difficult to measure and in the US in modern times it has outpaced jobs growth. Offshoring can raise it but that is of little benefit to the people who lose their jobs.
In recent decades the dominance of a small number of big companies in the key sectors of the modern economy has reduced competition and the big companies often rely on acquiring startups to buy-in innovation, thus reducing the opportunity for new competitors to emerge.
Last year the Economist reported that the dominance of big firms also increases wage inequality and in the US the best-paid 1% of workers earned 191% more in real (ie, inflation-adjusted) terms in 2011 than they did in 1980, whereas the wages of the middle fifth fell by 5%. Similar trends can be observed all over the world, despite widely varying policies on tax, the minimum wage and corporate pay. Meanwhile the number of workers employed by the country’s 100 biggest firms rose by 53% between 1986 and 2010; in the UK the equivalent figure is 43.5%. On the other hand, in places where the size of firms has not changed much, such as Sweden, or where it has shrunk, such as Denmark, wage inequality has grown much less. Part of what is perceived as a global trend towards greater disparity in wages may actually be the result of the biggest firms employing a greater share of workers.
As for diffusion from so-called frontier firms, Dutch research has shown that only 25% of innovation success depends on the investments in ICT and related technologies. But 75% comes from other factors such as management innovation, leadership style, methods of organising, investment in human capital and co-creation with partners.
Typically policy makers rely on tax breaks and training incentives but wonder after 60 years of that, why the performance of the Ireland’s indigenous international trading sectors remain poor?
http://www.finfacts.ie/Irish_finance_news/articleDetail.php?Irish-tax-break-addiction-and-failed-entrepreneurship-651
Thanks Michael
Agreed – there are many drivers of innovation. Recently I have done some interesting work (I think!) on the impact of management practices, ICT, advanced manufacturing technologies….. on innovation, some of which uses Irish data. Intend to post on this work over the next while.
Jane
The big issue regarding productivity is who gets the associated monetary benefit. In the US for the last 30 years productivity growth has been good but payrises have not been forthcoming . Capital has taken the money. This restricts demand growth and messes up DSGE models. Capital vs Labour drives modern macro.
On Productivity, Capital, and Labour
Real Macro:
http://www.nakedcapitalism.com/2016/06/michael-hudson-the-slow-crash.html