Productivity and GlobalizationProductivity and Globalization

Eric BartelsmanEric BartelsmanVrije Universiteit Amsterdam and Tinbergen InstituteVrije Universiteit Amsterdam and Tinbergen Institute

EPC 2006EPC 2006, , HelsinkiHelsinkiAugust 31,August 31, 200 20066

This work is partially funded by the European Commission, Research Directorate This work is partially funded by the European Commission, Research Directorate General as part of the 6th Framework Programme, Priority 8, "Policy Support and General as part of the 6th Framework Programme, Priority 8, "Policy Support and

Anticipating Scientific and Technological Needs".Anticipating Scientific and Technological Needs".

OverviewOverview

IntroductionIntroduction

Understanding ProductivityUnderstanding Productivity

Recent FindingsRecent Findings

IntroductionIntroduction

Why are we hereWhy are we here

What is GlobalizationWhat is Globalization

What is ProductivityWhat is Productivity

Why are we here?Why are we here?

Trade and IndustryTrade and Industry Your job, your futureYour job, your future Threats and opportunitiesThreats and opportunities

Policy makersPolicy makers Politics of globalizationPolitics of globalization Innovation policyInnovation policy Framework/LisbonFramework/Lisbon

Research communityResearch community Fun new results?Fun new results?

What is Globalization?What is Globalization?

IncreasingIncreasing intensity intensity of international ‘interactions’ of international ‘interactions’Goods, servicesGoods, servicesCapital, laborCapital, labor(Culture, Value Systems)(Culture, Value Systems)

Relentless turmoil brought on by owners of capital in Relentless turmoil brought on by owners of capital in order to increase profits by circumventing rules of order to increase profits by circumventing rules of law and decencylaw and decency

source: Axel Dreher, 2006

Globalization Intensity(Trade, FDI, portfolio, factor payments)

0.00

0.50

1.00

1.50

2.00

1970 1975 1980 1985 1990 1995 2000 2005

rela

tive

to

GD

P

FIN NLD USA DEU

7

Globalization of Goods and Service FlowsGlobalization of Goods and Service Flows

Economic EnvironmentEconomic Environment– WagesWages

– Infrastruction (phys/legal)Infrastruction (phys/legal)

– RegulationRegulation Transportation CostsTransportation Costs

– Bulk/valueBulk/value

– ObsolescenceObsolescence

– Time sensitivityTime sensitivity

Transaction costsTransaction costs– ‘‘Coaseian’ span of controlCoaseian’ span of control

– Market structureMarket structure

– Reputational issuesReputational issues

Location DecisionLocation Decision

Control DecisionControl Decision

Con

trol

Con

trol

LocationLocation

Mar

ket

Mar

ket

Wit

hin

Fir

mW

ithi

n F

irm

DomesticDomestic GlobalGlobal

Domestic Domestic outsourcingoutsourcing

Shared Shared servicesservices

Captive Captive GlobalizationGlobalization

Global Global outsourcingoutsourcing

Specialization Intl’ Trade

FDIOffshoring

source: derived from MGI 2005

What is Productivity?What is Productivity?

Output per unit of inputOutput per unit of inputE.g. GDP per hour workedE.g. GDP per hour workedReal quality adjusted production per unit of aggregate Real quality adjusted production per unit of aggregate

input (KLEMS)input (KLEMS)

Increases in productivity are bound only by our own Increases in productivity are bound only by our own imaginationimagination

…….subject to optimal accumulation of physical and .subject to optimal accumulation of physical and human capital and hard resource constraintshuman capital and hard resource constraints

Productivity improvements may ‘buy’ goods, leisure, Productivity improvements may ‘buy’ goods, leisure, environment etc…environment etc…

Long run productivity growthLong run productivity growth

CommodityCommodity Time to earn Time to earn 1885 (hours)1885 (hours)

Time to earn Time to earn 2000 (hours)2000 (hours)

Productivity Productivity multiplemultiple

1-speed 1-speed BicycleBicycle

260260 7.27.2 36.136.1

Office chairOffice chair 2424 2.02.0 12.012.0

Hair brushHair brush 1616 2.02.0 8.08.0

Silver SpoonSilver Spoon 2626 34.034.0 0.80.8

Source: Brad DeLong, 1991-2000

  Growth rate

2004-2000

  Sectoral growth contribution

2004-2000

Sectoral contribution to acceleration

2004-2000 vs 2000-1995

  Sectoral Production

  TFP ICT TFP ICT

Non-farm Private Business

2.3   2.3 0.5 1.2 -0.6

Non High-Tech 2.0   1.7 0.4 1.4 -0.4

Manufacturing 0.6   0.4 0.0 0.3 -0.1

Construction 0.9   0.0 0.0 0.1 0.0

Distr and Trade 3.1   0.7 0.1 0.0 -0,1

FIRE 2.8   0.6 0.2 0.8 -0.2

Pers. Services 2.1   0.0 0.0 0.2 0.0

High-tech 3.2   0.6 0.0 -0.2 -0.2

Source: Corrado, Lengermann, Bartelsman, Beaulieu; 2006

Growth Accounting – USA

Unanswered questionsUnanswered questions

Why has ICT-capital not contributed as much in EU?Why has ICT-capital not contributed as much in EU? Why do EU firms invest less in ICT Why do EU firms invest less in ICT Does ICT contribution depend on characteristics of firms?Does ICT contribution depend on characteristics of firms?

Why is US TFP growth now broad based.Why is US TFP growth now broad based. Is TFP growth high in all firms?Is TFP growth high in all firms? Does it depend on firm characteristic?Does it depend on firm characteristic?

OverviewOverview

IntroductionIntroduction

Understanding ProductivityUnderstanding Productivity

Recent FindingsRecent Findings

Firms matterFirms matter Productivity in industry depends on compositionProductivity in industry depends on composition Could have e.g. long tail problem:Could have e.g. long tail problem:

Global frontier

country2

country1

long tail

•Mean productivity could be bad estimate of frontierMean productivity could be bad estimate of frontier

Firms in the UK and the global frontierFirms in the UK and the global frontier

0.0

5.1

.15

0.0

5.1

.15

0.0

5.1

.15

0.0

5.1

.15

0 2 4 6 0 2 4 6 0 2 4 6

0 2 4 6 0 2 4 6

Aero BasicMetals Chem excl pharm Computers ElectMach

FabMetals FoodTobacco MachEquipNEC MedicalOptical MotorVehicles

Non-metallic mins PaperPubPrint Pham RadioTVComm RubberPlastic

Textiles Wood

Fra

ctio

n

Dgl_froGraphs by stan0label

0

1000

2000

3000

4000

5000

6000

0 20 40 60 80 100 120 140

productivity

freq

uen

cy

Aggregate productivity depends not only on

the distribution of firms within an industry…

0

1000

2000

3000

4000

5000

6000

0 20 40 60 80 100 120 140

productivity

freq

uen

cy

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

firm i

sale

s

…but also on size

Drivers of the productivity frontierDrivers of the productivity frontier

InnovationInnovation R&DR&D Experimentation with business concepts and processesExperimentation with business concepts and processes

Incentives for increased innovationIncentives for increased innovation IPR (but see Boldrin and Levine)IPR (but see Boldrin and Levine) Subsidy to cover wedge social and private returnSubsidy to cover wedge social and private return Availability of ‘innovation inputs’Availability of ‘innovation inputs’ Rapid scale expansion of new goods/services/business concepts. (Because Rapid scale expansion of new goods/services/business concepts. (Because

knowledge and other intangible assets are non-rival in production, return knowledge and other intangible assets are non-rival in production, return goes up)goes up)

Productivity growth below the Productivity growth below the frontierfrontier

Reallocation from low to high productivity Reallocation from low to high productivity firmsfirms– flexibility in product marketsflexibility in product markets– low hiring/firing costslow hiring/firing costs– low entry/exit barrierslow entry/exit barriers

Diffusion of existing technologyDiffusion of existing technology– Market pressureMarket pressure– Human capitalHuman capital– National innovation systemNational innovation system

OverviewOverview

IntroductionIntroduction

Understanding ProductivityUnderstanding Productivity

Recent FindingsRecent Findings

0.0

0.2

0.4

0.6

0.8

Data for Hungary, Indonesia and Romania use Three-Year Differencing.Excluding Brazil and Venezuela.

Five-Year Differencing, Real Gross Output, Manufacturing

The Gap Between Weighted and Un-WeightedLabor Productivity, 1990s

The indirect effect: market contestabilityThe indirect effect: market contestability

-1.0

-0.5

0.0

0.5

1.0

1.5

Incum

bents

' Pro

ductivity G

row

th

0.0 0.5 1.0 1.5Firm Turnover Rate(f)

Note: Excluding Brazil and Venezuela. Outliers Excluded.

Correlation Coefficient: 0.3349***

Five-Year Differencing, Real Gross OutputCountry and Industry Time Averages

Labor Productivity - Pooled Manufacturing

The indirect effect: market contestabilityThe indirect effect: market contestability

-0.5

0.0

0.5

1.0

1.5

Incum

bents

' Pro

ductivity G

row

th

-1.0 -0.5 0.0 0.5 1.0 1.5Net Entry Productivity Growth

Note: Excluding Brazil and Venezuela. Outliers Excluded.

Correlation Coefficient: 0.5800***

Five-Year Differencing, Real Gross OutputCountry and Industry Time Averages

Labor Productivity - Pooled Manufacturing

Productivity growth below the Productivity growth below the frontierfrontier

– Convergence to which frontier? National or Global?Convergence to which frontier? National or Global?

– Bartelsman, Haskel and Martin, 2006Bartelsman, Haskel and Martin, 2006 Both frontiers matterBoth frontiers matter Pull from Global frontier declines with distance to frontierPull from Global frontier declines with distance to frontier Pull from National frontier does notPull from National frontier does not

Baseline resultsBaseline results(1)(1) (2)(2) (3)(3)

DTFDTFNN only only DTFDTF

GG only only DTFDTFNN & DTF & DTF

GG

DTFDTFNN 0.3200.320 0.2110.211

(39.25)(39.25) (8.13)(8.13)

DTFDTFGG 0.2870.287 0.1010.101

(39.66)(39.66) (4.68)(4.68)

RD_salesRD_sales 0.5810.581 0.4580.458 0.5420.542

(1.53)(1.53) (1.20)(1.20) (1.43)(1.43)

MNE DummyMNE Dummy 0.0720.072 0.0720.072 0.0730.073

(15.87)(15.87) (15.76)(15.76) (16.02)(16.02)

ΔAΔAGit-1Git-1 -0.061-0.061 0.1030.103 -0.004-0.004

(1.97)(1.97) (3.31)(3.31) (0.11)(0.11)

ObservationsObservations 2758227582 2758227582 2758227582

R-squaredR-squared 0.180.18 0.180.18 0.180.18

Robust t statistics in parenthesesRobust t statistics in parentheses

Varying Convergence SpeedsVarying Convergence Speeds

DTF top vs botDTF top vs bot

DTFDTFNN 0.2040.204

(7.92)(7.92)

DTFDTFGG _top _top 0.1810.181

(6.62)(6.62)

DTFDTFGG _bot _bot 0.1150.115

(5.30)(5.30)

RD_salesRD_sales 0.5490.549

(1.45)(1.45)

MNE dummyMNE dummy 0.0730.073

(16.00)(16.00)

ΔAΔAGit-Git- 0.0070.007

(0.22)(0.22)

ConclusionsConclusions

Drivers of productivity are different for firms at the Drivers of productivity are different for firms at the ‘technology frontier’ and behind the frontier‘technology frontier’ and behind the frontier

At frontier: leveraging intangible assets matters: At frontier: leveraging intangible assets matters: potential scale is importantpotential scale is important

Inside frontier: Inside frontier: adoption of technology adoption of technology resource reallocationresource reallocation