Productivity growth: what proportion is driven by firms’ internal smarts (or luck) and what proportion by entry and exit?

Restructuring and productivity growth in uk manufacturing

We analyse productivity growth in UK manufacturing 1980-92 using the newly available ARD panel of establishments drawn from the Census of Production. We examine the contribution to productivity growth of ‘internal’ restructuring (such as new technology and organisational change among survivors) and ‘external’ restructuring (exit, entry and market share change). We find that (a) ‘external restructuring’ accounts for 50% of establishment labour productivity growth and 80-90% of establishment “TFP” growth; (b) much of the external restructuring effect comes from multi-establishment firms closing down poorly-performing plants and opening high-performing new ones, and (c) external competition is an important determinant of internal restructuring.

Read the whole paper here (pdf) if you want. HT Chris Dillow.

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Dave
Dave
9 years ago

Thanks for this reference. Pretty sure no one else will ever read this.

However, it’s worth pointing out that the conclusions may be erroneous due to the decomposition employed.

The methodology ignores an aggregation problem highlighted by Kevin Fox (www.treasury.govt.nz/publications/…/productivity/pdfs/pw-fox.pdf).

Also see the paper by Bert Balk which compares various decompositions (http://www.cbs.nl/NR/rdonlyres/56ECAA73-AC65-4859-9E0D-B9D9BBD1BD83/0/Discussionpaper03001.pdf) and how they influence the conclusion of whether it’s entry/exit or reallocation/technical efficiency that drives productivity growth.

For a more recent effort see Petrin and Levinsohn’s paper “Measuring Aggregate Productivity Growth Using Plant-Level Data”. But be aware that the treatment of entry and exit is questionable. Half a log ain’t what it used to be!

kelly liddle
9 years ago

For the general lay person it is all meaningless. The main way to have productivity growth is high inflation. If you asked people on the street they most would actually believe it has something to do with unit production such as with the warves. This comment “multi-establishment firms closing down poorly-performing plants and opening high-performing new ones” seems to actually be talking about physical productivity this is what is so confusing. This is an indication that capital has not been put aside for replacement of plant and equipement and this is common even though the business world in the developed countries always blame labour rates (for some factories this is correct) despite the fact countries like China often have state of the art plant with factories in countries like Australia or US built 40 years ago and operating at a much lower efficiency. So when mentioning productivity growth I think it would be a good idea to say economic productivity or physical productivity growth. First one being meaningless and the second one having some meaning, it also should have a standard methodology to work it out adjusting for inflation and industry groups.