Productivity and Globalization Eric Bartelsman Vrije Universiteit Amsterdam and Tinbergen Institute EPC 2006, Helsinki August 31, 2006 This work is partially funded by the European Commission, Research Directorate General as part of the 6th Framework Programme, Priority 8, "Policy Support and Anticipating Scientific and Technological Needs".

Overview Introduction Understanding Productivity Recent Findings

Introduction Why are we here What is Globalization What is Productivity

Why are we here? Trade and Industry Policy makers Research community Your job, your future Threats and opportunities Policy makers Politics of globalization Innovation policy Framework/Lisbon Research community Fun new results?

What is Globalization? Increasing intensity of international ‘interactions’ Goods, services Capital, labor (Culture, Value Systems) Relentless turmoil brought on by owners of capital in order to increase profits by circumventing rules of law and decency

source: Axel Dreher, 2006

Globalization of Goods and Service Flows Location Decision Economic Environment Wages Infrastruction (phys/legal) Regulation Transportation Costs Bulk/value Obsolescence Time sensitivity Domestic outsourcing Global outsourcing Market Specialization Intl’ Trade Control Captive Globalization Control Decision Shared services Transaction costs ‘Coaseian’ span of control Market structure Reputational issues Within Firm FDI Offshoring Domestic Global Location source: derived from MGI 2005

What is Productivity? Output per unit of input E.g. GDP per hour worked Real quality adjusted production per unit of aggregate input (KLEMS) Increases in productivity are bound only by our own imagination ….subject to optimal accumulation of physical and human capital and hard resource constraints Productivity improvements may ‘buy’ goods, leisure, environment etc…

Long run productivity growth Commodity Time to earn 1885 (hours) Time to earn 2000 (hours) Productivity multiple 1-speed Bicycle 260 7.2 36.1 Office chair 24 2.0 12.0 Hair brush 16 8.0 Silver Spoon 26 34.0 0.8 Source: Brad DeLong, 1991-2000

Growth Accounting – USA   Growth rate 2004-2000 Sectoral growth contribution Sectoral contribution to acceleration 2004-2000 vs 2000-1995 Sectoral Production TFP ICT Non-farm Private Business 2.3 0.5 1.2 -0.6 Non High-Tech 2.0 1.7 0.4 1.4 -0.4 Manufacturing 0.6 0.0 0.3 -0.1 Construction 0.9 0.1 Distr and Trade 3.1 0.7 -0,1 FIRE 2.8 0.2 0.8 -0.2 Pers. Services 2.1 High-tech 3.2 Source: Corrado, Lengermann, Bartelsman, Beaulieu; 2006

Unanswered questions Why has ICT-capital not contributed as much in EU? Why do EU firms invest less in ICT Does ICT contribution depend on characteristics of firms? Why is US TFP growth now broad based. Is TFP growth high in all firms? Does it depend on firm characteristic?

Overview Introduction Understanding Productivity Recent Findings

Firms matter Productivity in industry depends on composition Could have e.g. long tail problem: country1 long tail Mean productivity could be bad estimate of frontier country2 Global frontier

Firms in the UK and the global frontier

Aggregate productivity depends not only on the distribution of firms within an industry…

…but also on size

Drivers of the productivity frontier Innovation R&D Experimentation with business concepts and processes Incentives for increased innovation IPR (but see Boldrin and Levine) Subsidy to cover wedge social and private return Availability of ‘innovation inputs’ Rapid scale expansion of new goods/services/business concepts. (Because knowledge and other intangible assets are non-rival in production, return goes up)

Productivity growth below the frontier Reallocation from low to high productivity firms flexibility in product markets low hiring/firing costs low entry/exit barriers Diffusion of existing technology Market pressure Human capital National innovation system

Overview Introduction Understanding Productivity Recent Findings

The indirect effect: market contestability

The indirect effect: market contestability

Productivity growth below the frontier Convergence to which frontier? National or Global? Bartelsman, Haskel and Martin, 2006 Both frontiers matter Pull from Global frontier declines with distance to frontier Pull from National frontier does not

Baseline results (1) (2) (3) DTFN only DTFG only DTFN & DTFG DTFN 0.320 0.211 (39.25) (8.13) DTFG 0.287 0.101 (39.66) (4.68) RD_sales 0.581 0.458 0.542 (1.53) (1.20) (1.43) MNE Dummy 0.072 0.073 (15.87) (15.76) (16.02) ΔAGit-1 -0.061 0.103 -0.004 (1.97) (3.31) (0.11) Observations 27582 R-squared 0.18 Robust t statistics in parentheses

Varying Convergence Speeds DTF top vs bot DTFN 0.204 (7.92) DTFG _top 0.181 (6.62) DTFG _bot 0.115 (5.30) RD_sales 0.549 (1.45) MNE dummy 0.073 (16.00) ΔAGit- 0.007 (0.22)

Conclusions Drivers of productivity are different for firms at the ‘technology frontier’ and behind the frontier At frontier: leveraging intangible assets matters: potential scale is important Inside frontier: adoption of technology resource reallocation