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.