The Role of Policy and Institutions for Productivity and Firm Dynamics: Evidence from Micro and Industry Data
Social Science Research Network
and conclusions 1. From an accounting point of view, two main factors seem to have played an important role in explaining the growing disparities in growth paths across the OECD countries over the past decade: differences in productivity patterns of certain high-tech industries; and differences in the pace of adoption of the new information and communication technology (ICT) (see Scarpetta et al., 2000) . These two facts, in turns, raise the question as to why OECD countries --that have access
... o common technologies and have intensive intra-trade and foreign direct investment --differ in their ability to innovate and adopt new technologies. This paper looks at the possible role of regulations and institutional settings, in both product and labour markets, in explaining them. Product market regulations may contribute to both innovation and adoption by creating different conditions for the birth and expansion of innovative firms as well as for the exit of obsolete ones. Likewise, policy and institutions in the labour market may affect the costs of adjustment associated with the shift to a new technology, as well as the returns to innovation activity. 2. The paper comprises two main sections. Section 1 presents a number of stylised facts emerging from firm-level data. It starts by reporting evidence on productivity effects generated by the expansion and contraction of existing units, as well as by the entry and exit of firms. A decomposition of productivity growth is performed for different manufacturing industries, as well as for some service sectors. The Section then characterises the process of firm dynamics --entry, exit and post-entry growth --in different industries and countries. Section 2 sheds some light on how policy and institutions influence firm and industry performance. First, it assesses whether policy settings in product and labour markets help to explain the observed differences in entry rates. Second, it presents industry-level productivity regressions that include policy variables for a wide set of OECD countries. Finally, it summarises the existing micro evidence on the potential effects of certain firm-specific characteristics on the survival, growth and productivity of individual firms.