“Is there a contrast between country and firm competitiveness? NO” Filippo di Mauro CompNet Chairman, Visiting Fellow at the National University of Singapore “Is there a contrast between country and firm competitiveness? NO” In Search of New Forms of Prosperity Rencontres Économiques d’Aix-en-Provence July 8 2017

“Should Countries Competition, As Between Businesses, Be Encouraged?” Introduction “Should Countries Competition, As Between Businesses, Be Encouraged?” Question is misleading. There is complementarity (no contrast) between the country institutional set-up and firm dynamics. Both therefore should be fostered in parallel. That’s it The real MOST important issue however is another: Within each individual countries Firms productivity is diverging…..the Best are doing even better, the worse …worse Why is it so? Will show you some results out of the CompNet project…a novel EU dataset based on firm level information… It shows for instance that policies affect differently firms depending on their relative SIZE and PRODUCTIVITY. There is NOT such as thing as ONE POLICY FITS ALL, and that Policies should take this into consideration ➔WE HAVE THE DATA NOW!

The macro perspective European countries, on average, display a more efficient market environment for firms. More specifically, we can see that countries with the highest level of productivity (Germany, UK) are associated with very low levels of bureaucratic costs Note: Ease of doing business ranks economies from 1 to 190, with first place being the best. A high ranking (a low numerical rank) means that the regulatory environment is conducive to business operation. The index averages the country's percentile rankings on 10 topics covered in the World Bank's Doing Business. The ranking on each topic is the simple average of the percentile rankings on its component indicators.

Using firm level information is critical The CompNet Project Using firm level information is critical Poland France Italy Spain Portugal Germany Romania Finland Estonia Denmark Czech Republic Slovakia Malta Latvia Croatia Belgium We have built a database based on firm level data …comparable across EU countries ➔ We can now distinguish – within country/sector - Productive vs. Unproductive firms

The issue is: why there is this gap? And, how do we fill it? The firm level perspective: why is it important? In this complex environment, the most efficient firms are diverging from others and from the aggregate trend Productivity growth (left chart) in all countries is declining…but not for all firms (right chart) The issue is: why there is this gap? And, how do we fill it? Recent productivity developments Productivity growth France Japan Germany Frontier Firms (OECD) Laggards (OECD) Laggards (EA) Advanced Economies UK US

The firm level perspective: what makes a firm successful? Most efficient firms are typically large exporters operating in the global economy, thus less subject to domestic regulations Share of top exporters on total exports Productivity premia

The impact on export varies a lot across Firms One example: do exchange rate devaluations work The impact on export varies a lot across Firms Firm size Firm productivity (TFP) very large for smallest and the least productive very small for largest/most productive Are we sure we want to keep afloat fragile companies via the “drug“ of a weak exchange rate? Better aim at pushing firms to grow and get larger

World production is fragmented The production of most goods and services around the world is vertically fragmented along GVCs Assembling & final phases Final market Trade in intermediate products & services Gross Export Trade in inputs (2nd tier suppliers) Localisation choices are complex and firm specific …depend on a series of factors, including but certainly not limited only to, tax considerations

Competition is one of the key drivers of economic growth Conclusions Competition is one of the key drivers of economic growth It triggers innovation and market efficiency And this is true for firms and countries Firms within an economy are very different from each other Policy makers need to understand and consider the typology of firms existing in the economy and derive policies accordingly In the global economy this is even more important as the national dimension is getting blurred and is obviously loosing in importance ➔ USE MORE GRANULAR Information …visit www.comp-net.org

Reserve slides

The macro perspective All major European and international organizations are advocating for structural reforms Recent research shows that lower regulation in product and labour markets brings positive benefits to the economy although it entails some short-term costs. More specifically: Higher value added and productivity levels Larger employment and lower unemployment More firms operating in the markets and higher investments Better allocative efficiency

Least productive/small Most productive/large One example: Do exchange rate devaluations work? Frontier firms are different from the average …for instance they are much less sensitive to exchange rate moves as driver of their export performance Least productive/small Most productive/large Source: CompNet (2016)