Determinants of productivity catching-up among European firms

The existence of wide and persistent productivity gaps among countries, including within the EU, has been a long-debated issue that is still unsettled. A common feature of this literature has been the use of aggregated data, and hence, it firm heterogeneity has been overlooked. However, there is evidence that cross-country differences in aggregate productivity relate to differences in the within-industry productivity dispersion across firms. Despite this evidence, few studies have examined the drivers behind convergence of laggards to the productivity frontier in their industry. The aim of this paper is to fill this gap by providing new evidence on the factors contributing to the within-industry catching-up of laggards to the most productive firms at the European level. In particular, we analyse how firms’ characteristics and country-level economic and institutional factors may influence the distance of laggard firms to their industrial technological frontier. We also investigate the moderating effect of the Great Recession on the impact of these factors as well as the effect of productivity improvements at the frontier. Using European firm-level data from the AMADEUS dataset for the period 2003 to 2014, we estimate total factor productivity (TFP) and identify the technological frontier firms in each industry within the European Union. To analyse the determinants of the within-industry distance to the TFP frontier we first provide a description of the characteristics of the most productive firms, that is, the frontier firms, in comparison to the non-frontier firms. We then explore, using regression analysis, the determinants of firms’ TFP gaps, that is, we investigate which firm and country-level characteristics contribute to the catching up of laggards to the within-industry EU frontier firms. To take into account the moderating effect of the Great Recession, we analyse two different sub periods, namely, the period prior to the last financial crisis, which we call the pre-recession period, 2003-2007, and the recession period, 2008-2014. We find that larger, more capital-intensive, and more labour skilled firms are closer to the productivity frontier. In contrast, older firms are further away from the frontier. In addition, a number of economic and institutional factors at the country level, such as tertiary education, trade openness, R&D stock, ease in obtaining credit and governance quality, positively affect the catching-up of laggards towards the productivity frontier. We also examine the moderating effect of the Great Recession as well as the effect of productivity improvements at the frontier.