Eric Bartelsman, John Haltiwanger

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How important is allocative efficiency for
productivity growth?A cross-country
cross-sectoral analysis
BDL/CAED Conference Cardiff, 7-9 September 2005

• Eric Bartelsman, John Haltiwanger
• and Stefano Scarpetta

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Outline

• Question Given heterogeneity of firms, large
  job-flows and firm dynamics
• How important is firm and job churning for
  productivity
• Distributed micro data analysis
• Resource reallocation and productivity
• Theory
• Job flows
• Static Allocation
• Dynamic Allocation
• Links between allocation and within-firm growth

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Research questions

• Does churning of workers and firms boost
  productivity and output growth?
• What are the margins used for adjustment?
• How does their use vary across countries/sectors?
• To what extent do the various types of churn
  affect productivity directly?
• Are there indirect effects of good resource
  allocation?

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Distributed micro analysis

• OECD sample
• Demographics (entry/exit) for 10 countries
• Productivity decompositions for 7 countries
• Survival analysis 7 countries
• World Bank sample
• Same variables, 14 of Central and Eastern Europe,
  Latin America and South East Asia
• EU Sample (10 countries), updates and a few new
  countries
• Productivity decompositions
• Sample Stats and correlations by quartile

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Data sources

• Business registers for firm demographics
• Firm level, at least one employee, 2/3-digit
  industry
• Production Stats, enterprise surveys for
  productivity analysis
• Countries
• 10 OECD
• 5 Central and Eastern Europe
• 6 Latin America
• 3 East Asia
• Data are disaggregated by
• industry (2-3 digit)
• size classes 1-9 10-19 20-49 50-99 100-249
  250-499 500 (for OECD sample the groups between
  1 and 20 and the groups between 100 and 500 are
  combined)
• Time (late 1980s late 1990s)

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Cross-country Comparisons

• Harmonization
• Sample frames Variable definitions
  Classifications Aggregation Methods
• Make comparisons that take into account
  measurement problems
• By exploiting the different dimensions of the
  data (size, industry, time)
• By using difference in differences techniques
• Even in absence of measurement error,
  interpretation of cross-country indicators
  requires careful analysis

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Job Flows stylized facts

• Magnitudes Large in excess of 10 percent
  annually for job creation and destruction
• Between vs. Within Sector Most accounted for by
  within sector (about 10 percent accounted for by
  NAICS between sector reallocation)
• Size, Age and Industry
• Much larger flows for young and small businesses
• Systematic variation across industries (e.g.,
  retail trade, construction have higher flows)
• High pairwise correlations between U.S. industry
  flows and other countries
• Entry and Exit Substantial fraction accounted
  for by entry and exit. More generally, flows
  dominated by large changes (employment growth
  distribution is kurtotic)
• Business Cycles Manufacturing recessions in
  OECD characterized by sharp rise in destruction
  relative to fall in creation

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Firm demographics stylized facts

• Size and growth The probability of survival
  tends to increase with firm size but,
  conditional on survival, the proportional rate of
  growth of a firm is decreasing in size (see Evans
  1987a, 1987b Dunne et al. 1988, 1989).
• The firm life cycle For any given size of firm,
  the proportional rate of growth is smaller the
  older the firm, but its survival probability is
  greater (see Foster et al. 2001 and
  International Journal of Industrial Organization,
  1995).
• Shakeouts The number of producers in a given
  market tends first to rise to a peak, and later
  to fall to some lower level. (Klepper and Graddy,
  1990 Klepper and Simons, 1993 Geroski, 1995).
• Churning There is a high pace of the
  reallocation of outputs and inputs across
  businesses (e.g. Geroski, 1995, Ahn, 2000 and
  Davis and Haltiwanger, 1999 for surveys of the
  literature).
• Reallocation and Productivity In well-developed
  market economies, the evidence is overwhelming
  that the pattern of reallocation is productivity
  enhancing. (see e.g. Olley and Pakes, 1996,
  Griliches and Regev, 1995, and Foster,
  Haltiwanger and Krizan, 2001, 2002).

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Assessing the role of firm dynamics on
productivity

• Types of churn
• Reallocation of resources (eg job flows, POS
  NEG) among incumbents
• Firm exit and entry
• Many hypotheses
• Churn represents productive reallocation
• On net, static allocation improves. NEG increases
  prod, POS increases prod (or at least does not
  offset impact from NEG)
• Matching process at low end of productivity
  distribution
• On net, churn does not affect productivity. NEG
  increases prod, POS decreases prod
• Still could be long run net impact (churning at
  lower end may be part of experimentation)

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Assessing the role of firm dynamics on
productivity (2)

• Other hypotheses
• General matching process
• Unrelated to productivity. The flows may or may
  not be wasteful (matching process may be
  efficient, given search and other transactions
  costs)
• Reallocation dynamics driven by demand/cost
  factors
• Improper churn
• Various market imperfections and bad policy cause
  sub-optimal decisions regarding factor adjustment
• Technological sclerosis and/or unbalanced
  restructuring
• No reallocation effect, by assumption
• Representative agent model. All resources at
  representative firm, at productivity frontier.
• Firms are heterogeneous, but no adjustment
  frictions and productivity growth can occur
  within firms. Allocation always is optimal, so
  all productivity growth is within-firm. (Petrin
  and Levinsohn, 2005).

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Assessing the role of firm dynamics on
productivity (3)

• Many Empirical issues
• Static vs. Dynamic Allocative Efficiency
• Static In a given industry/country, are
  resources allocated to more productive
  establishments?
• Dynamic Over time, are resources reallocated
  towards more productive establishments?
• Allocative efficiency effects may take time
• Market experimentation
• Learning and selection effects
• More generally, adjustment costs may be
  internal so adverse impact on productivity in
  times of intense reallocation
• No general prediction about correlation between
  pace of reallocation and productivity growth in
  country j, industry i, at time t
• Natural experiments rare (transition
  economies/market reforms?)

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The impact of reallocation and firm churning on
jobs
Manufacturing, 1989-2000, firms with 20
employees)
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Aggregate productivity and allocation

• Olley and Pakes (1996) static decomposition
• where N of firms in a sector
• The first term is the unweighted average of
  firm-level productivity,
• The second term reflects allocation of resources
  do firms with higher productivity have greater
  market share.
• Caution
• Over time, both terms may reflect changes in
  allocative efficiency
• E.g., If entering establishments more productive
  than exiting establishments, first term will
  increase over time

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The cross-sectional efficiency of the allocation
of activity

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The cross-sectional efficiency of the allocation
of activity

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The decomposition of productivity growth

• Foster, Haltiwanger and Krizan (FHK , 2001) in
  this decomposition, each term is weighted by the
  average (over 3/5 years) market shares as
  follows
• The within-firm effect is within-firm
  productivity growth weighted by initial output
  shares.
• The between-firm effect captures the gains in
  aggregate productivity coming from the expanding
  market of high productivity firms, or from
  low-productivity firms shrinking shares weighted
  by initial shares.
• The cross effect reflects gains in productivity
  from high-productivity growth firms expanding
  shares or from low-productivity growth firms
  shrinking shares.
• The entry effect is the sum of the differences
  between each entering firms productivity and
  initial productivity in the industry, weighted by
  its market share.
• The exit effect is the sum of the differences
  between each exiting firms productivity and
  initial productivity in the industry, weighted by
  its market share.

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Within-firm productivity growth makes the bulk of
overall productivity growth
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Dynamic allocative efficiency the importance of
technology factors
We decompose our data for manufacturing into a
low technology group and a medium high tech
group ? Stronger contribution of entry to
productivity growth in medium high tech industries
Contribution of entry to labor productivity
growth, five year differencing, gross output
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Net Entry effect, 3 vs 5 years

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BG vs FHK decomp

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Links between dynamic reallocation and within
growth

• Wider productivity dispersion in newer, dynamic
  industries
• Wider productivity dispersion in US than in EU
• Why?
• Incentives for firms to experiment to push out
  frontier if large potential gain in market

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Labor Productivity Dispersion
Units Thousand US per worker
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High productivity firms expand in some countries
but not in others
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The indirect effect market contestability
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The key features of firm churning

• The magnitude of firm churning
• The characteristics of entrants and exiting firms
• The survival of new firms
• The post-entry performance of successful entrants

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Evidence of firm turnover
Total business sector, firms with at least 1
employee

• No major differences across OECD countries,
  especially after controlling for sector and size
  effects
• But large differences in size at entry
• Large net entry in transition economies filling
  the gaps (?)

Total business sector, firms with at least 20
employees
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Gross and net firm turnover in transition
economies
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Post-entry employment growth varies more across
countries
Average firm size growth relative to entry, by
age
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Concluding remarks and future work

• Process of creative destruction in ALL countries
• Differences in the nature of the process of
  creative destruction
• Strong contribution of resource reallocation on
  productivity from both static and dynamic
  perspectives
• Differences in the role of creative destruction
  on productivity growth across countries and
  technology groups
• Differences in degree of firm heterogeneity
  across countries
• We still need to explore how the process of
  creative destruction affect productivity and job
  creation in industries at different stages of
  maturity and technology
• We need to explore more what drives post entry
  performance of firms