The bottom also matters: policies for productivity catch-up in the digital economy

AuthorSara Calligaris, Chiara Criscuolo, Nicolas Gonne and Rudy Verlhac, Organisation for Economic Co-operation and Development (OECD) Gaetano D'Adamo, Directorate-General for Economic and Financial Affairs, European Commission Julien Ravet, Directorate-General for Research and Innovation, European Commission
Pages609-648
609
CHAPTER 10
THE BOTTOM ALSO
MATTERS: POLICIES
FOR PRODUCTIVITY
CATCH-UP IN THE
DIGITAL ECONOMY
Sara Calligarisa, Chiara Criscuoloa, Gaetano D’Adamob,
Nicolas Gonnea, Rudy Verlhaca, Julien Ravetc
aOrganisation for Economic Co-operation and Development (OECD)
b
Directorate-General for Economic and Financial Af‌fairs,
European Commission
c
Directorate-General for Research and Innovation,
European Commission
610
1. Introduction
The productivity gap between successful f‌irms
and the rest of businesses within the same
industries has been increasing since the 2000s
across OECD countries (Andrews, Criscuolo
and Gal, 2016; Berlingieri, Blanchenay and
Criscuolo, 2017). Productivity developments
at the f‌irm level point to impediments to
technology dif‌fusion from the productivity
frontier to the rest of the distribution, with
too many f‌irms stuck at the bottom – the so-
called ‘laggards’. The evidence suggests that
the increase in the productivity gap has come
mainly from the bottom half of the distribution,
where the distance in terms of performance
between the very bottom and the median f‌irm
has increased more over time than at the top
of the distribution (Berlingieri, Blanchenay and
Criscuolo, 2017). Yet, this does not imply that
the le tail of the productivity distribution only
includes zombie f‌irms that survive due to weak
market selection. Rather, the evidence shows
that a substantial share of low-productivity
f‌irms are businesses at an early stage of
their development and operating below their
ef‌f‌iciency level (Berlingieri, Calligaris, Criscuolo
and Verlhac, 2019). While allowing for the exit
of zombie f‌irms, ef‌f‌icient bankruptcy legislation
is key; a dynamic business environment with
productivity-enhancing creative destruction is
key to enabling these young, small and dynamic
f‌irms to achieve their growth potential.
Importantly, the productivity divergence seems
to be larger in sectors providing information
and communication technology services (e.g.
computer programming, soware engineering
and data processing) and in industries
that are intensive in intangible assets (e.g.
data, proprietary soware, human and
organisational capital). The increasing potential
of digital technologies to create global winner-
takes-most dynamics might have helped
Summary
Research into the slowdown in global produc-
tivity has brought to the forefront of the policy
debate the importance of understanding the
nature of f‌irm-level productivity developments.
This has become particularly relevant follow-
ing evidence showing a signif‌icant increase in
the productivity gap between highly product-
ive f‌irms and the rest of businesses within the
same industries since the 2000s. This diver-
ging trend in productivity performance would
eventually lead to broader social implications
in terms of wage inequality and inclusiveness.
This chapter provides an overview of recent
and ongoing analysis of these issues and
discusses policies that af‌fect the catch-
up by laggards in the context of the digital
transformation. First, it introduces productivity
divergence in the context of the global
phenomenon linked to digital transformation
and the knowledge economy. Later, it examines
trends in productivity divergence and business
dynamism, respectively, with a focus on the
bottom of the productivity distribution. Beyond
common trends, a few examples highlight
cross-country and cross-sector heterogeneity.
The descriptive sections conclude with f‌irm and
sector characteristics and discussions about
possible explanations behind the documented
trends at the bottom, including the role of
openness. The f‌inal analytical section provides
a framework and summarises the main results
of the analysis of the role of policies on the
speed of catch-up by laggards.
611
CHAPTER 10
frontier f‌irms to increase their performance
disproportionally more than laggards within
these industries (Criscuolo, 2019) and gain
larger market share (Andrews et al., 2016,
and Bajgar et al., 2019). Ongoing OECD work
suggests that intangible assets are associated
with productivity dispersion through their
complementarity with digital technologies,
and that the ef‌fect arises from laggards’
worsening productivity performance vis-à-vis
the median f‌irm (Berlingieri, Corrado, Criscuolo,
Haskel, Himbert and Iona Lasinio, 2019).
Intangible assets are also linked to increased
concentration, especially in sectors that are
open and digital intensive (Bajgar, Criscuolo
and Timmis, 2019). The rise of the intangible
economy exacerbates productivity dispersion,
as laggards may not be able to af‌ford and
f‌inance the necessary intangible investments
to reap the benef‌its of technological change
(Berlingieri et al., 2019).
This chapter provides an overview of recent and
ongoing analysis on these issues and discusses
policies that af‌fect the catch-up of laggards in
the context of the digital transformation. It is
organised as follows: section 2 brief‌ly puts the
productivity divergence in the context of other
manifestations of the same multifaceted global
phenomenon linked to digital transformation
and the knowledge economy. Sections 3 and
4 document trends in productivity divergence
and business dynamism, respectively, with
a focus on the bottom of the productivity
distribution. Beyond common trends, a few
examples highlight cross-country and cross-
sector heterogeneity. Section 5 identif‌ies f‌irm
and sector characteristics that may explain the
documented trends at the bottom, including
the role of openness. Section 6 provides
a framework and summarises the main results
of the analysis on the role of policies on
laggards’ rate of catch-up. Section 7 concludes
with a policy discussion.
2. A multifaceted phenomenon
The global productivity slowdown has brought
to the forefront of the policy debate the
importance of understanding the nature of
f‌irm-level productivity developments. Recent
OECD research has documented the signif‌icant
increase in the productivity gap between
successful f‌irms and the rest of businesses
within the same industries since the 2000s,
both at the global level and within countries.
The divergence in productivity performance
has implications in terms of wage inequality
and inclusiveness. Indeed, increases in wage
inequality and in productivity dispersion are
linked. Therefore, policy responses to the
increasing productivity divergence could
potentially produce a ‘double dividend’ in terms
of both greater productivity growth and reduced
income inequality (see Criscuolo, 2018 and
references therein). Importantly, productivity
policies need to account for local and sectoral
specif‌icities as countries and industries have
experienced heterogeneous productivity and
wage developments beyond well-established
common trends (Box 10-1).
Productivity divergence is observed in the
context of ongoing digital transformation that
radically alters the way f‌irms produce, upscale
and compete. In particular, digital technologies
may af‌fect the two microeconomic processes
that shape aggregate productivity trends.
First, they impact within-f‌irm productivity
growth, thanks to the ef‌f‌iciency gain that f‌irms
can achieve by adopting digital technologies
and enhancing their innovation capabilities
– if they have the necessary complementary

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