Economics in a picture
The exit of low productivity firms contributed to productivity growth in Portugal
The computation of productivity using firm-level data allows identifying the contribution of the different types of firms for aggregate productivity growth. In each year, can be identified three types of firms operating in the economy: new or entering firms (firms that initiate their activity in that year), exiting firms (firms that cease their activity) and surviving firms (firms which were active and survive to the next year). Productivity growth may be seen as the result of efficiency gains within the surviving firms (within effect), efficiency gains from reallocation of resources between these firms (between effect) and efficiency gains from the reallocation of resources through the exit and entry of firms.
The Chart shows the decomposition of productivity growth for non-financial firms during 2006-2015, for two common productivity measures: gross value added (GVA) per worker and total factor productivity (TFP). Even though its relative importance varies across the two measures, it is seen that productivity growth was affected positively by exiting firms and negatively by entering firms (especially so, in case of TFP). This reflects the fact that both entering and exiting firms display, on average, lower productivity levels than surviving firms. In turn, for surviving firms there is a positive contribution of the within effect and a negative contribution of the between effect. That is, the increase in productivity stemming from innovation, creation of better and more efficient technologies or adoption of better management practices by firms, was partially offset by intensified resource reallocation towards low productivity firms.
For further details, see Daniel A. Dias and Carlos Robalo Marques, “From Micro to Macro: A Note on the Analysis of Aggregate Productivity Dynamics Using Firm-Level Data” Banco de Portugal, WP/201920.
Prepared by Carlos Robalo Marques. The analysis, opinions, and findings expressed above are those of the author and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.
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