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Micro Level Dynamics of Productivity Growth. An Empirical Analysis of the Great Leap in Finnish Manufacturing Productivity in 1975-2000

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  • Maliranta, Mika

Abstract

This study analyses the dynamics of productivity growth at the micro level in Finnish manufacturing industries. It is shown that productivity-enhancing restructuring (so-called “creative destruction”) has played a crucial role especially since the mid-1980s. Empirical evidence is provided that R&D efforts and exposure to global competition through imports and exports have affected positively with a few years’ lag. The results for R&D are in accordance with the views that innovations and technological progress entail experimentation, selection and reallocation of resources at the microlevel that are important for economic development. An increase in productivity divergenceseems to precede increases in creative destruction, which also fits the picture. However, at the same time creative destruction also compresses productivity dispersion by cleansing low productivity units. No empirical evidence is found that wage dispersion between plants has a positive effect. The positive effect of international trade, in turn, points to the importance of product market competition which is emphasised in the recent theoretical literature. Finally, the main part of productivity-enhancing restructuring can be attributed to newly established plants, which indicates the importance of entrants to creative destruction. Various aspects of identifying and measuring the components of aggregate productivity growth by means of productivity decomposition methods are discussed in detail. It is demonstrated that there is a great variation between the results obtained by different methods. Some new variants of the methods are proposed. These tools have two main advantages. Firstly, they yield components that are useful when evaluating the usefulness of the representative firm model. Secondly, the results are not very sensitive to the usual measurement problems inherent in micro data. The usual caveat of ignoring labour quality in productivity decompositions is tackled by using linked employer-employee data. These data allow the measurement of labour input in so-called “efficiency units”. No empirical evidence is found that the productivity steps taken have been just factitious increases gained by the displacement of the lower educated and less experienced workers through micro level restructuring. Productivity-enhancing restructuring also has implications for the dynamics of factor income shares. The payroll shares of plants have been reallocated from plants having a low capital-to-value-added ratio to those having a high capital-to-value-added ratio. The reshuffling of the payroll shares of plants has contributed positively to an increase in the capital’s factor income share at the aggregate level. Because micro level restructuring is of vital importance for economic growth, the factors that affect this process deserve careful consideration when the policy actions or reforms of institutions are designed. Innovations and R&D are important, but alone they may not be enough. Product market competition is likely to have a decisive role. In addition, well-functioning financial and labour markets and a high skill level in the workforce are also key factors facilitating the renewal of the economy at the micro level.

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Bibliographic Info

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This book is provided by The Research Institute of the Finnish Economy in its series ETLA A with number 38 and published in .

Order: http://www.etla.fi/en/publications/a38-en/
Handle: RePEc:rif:abooks:38

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Related research

Keywords: Micro-level dynamics; productivity decompositions; competition; R&D; catching-up;

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References

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  1. Petri Böckerman & Mika Maliranta, 2001. "Regional disparities in gross job and worker flows in Finland," Finnish Economic Papers, Finnish Economic Association, vol. 14(2), pages 84-103, Autumn.
  2. Kauhanen, Antti & Piekkola, Hannu, 2002. "Profit Sharing in Finland: Earnings and Productivity Effects," Discussion Papers 817, The Research Institute of the Finnish Economy.
  3. Plutarchos Sakellaris & Daniel J. Wilson, 2004. "Quantifying Embodied Technological Change," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 1-26, January.
  4. Dmitriy Stolyarov & Boyan Jovanovic, 2000. "Optimal Adoption of Complementary Technologies," American Economic Review, American Economic Association, vol. 90(1), pages 15-29, March.
  5. Fosgerau, Mogens & Jensen, Svend E Hougaard & Sorensen, Anders, 2002. "Measuring Educational Heterogeneity and Labor Quality: A Note," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(2), pages 261-69, June.
  6. Pekka Ilmakunnas & Mika Maliranta & Jari Vainiomäki, 2004. "The Roles of Employer and Employee Characteristics for Plant Productivity," Journal of Productivity Analysis, Springer, vol. 21(3), pages 249-276, May.
  7. Oswald Andrew J., 1996. "A Conjecture on the Explanation for High Unemployment in the Industrialized Nations : Part I," The Warwick Economics Research Paper Series (TWERPS) 475, University of Warwick, Department of Economics.
  8. Maliranta, Mika, 2002. "Factor Income Shares and Micro-Level Restructuring. An Analysis of Finnish Manufacturing," Discussion Papers 796, The Research Institute of the Finnish Economy.
  9. Disney, Richard F & Haskel, Jonathan & Heden, Ylva, 2000. "Restructuring And Productivity Growth In UK Manufacturing," CEPR Discussion Papers 2463, C.E.P.R. Discussion Papers.
  10. Maliranta, Mika, 2002. "From R&D to Productivity Through Micro-Level Restructuring," Discussion Papers 795, The Research Institute of the Finnish Economy.
  11. Kapur, Sandeep, 1993. "Late-mover advantage and product diffusion," Economics Letters, Elsevier, vol. 43(1), pages 119-123.
  12. Ilmakunnas, Pekka & Maliranta, Mika, 2003. "Worker Inflow, Outflow, and Churning," Discussion Papers 861, The Research Institute of the Finnish Economy.
  13. Brezis, Elise S & Krugman, Paul R & Tsiddon, Daniel, 1993. "Leapfrogging in International Competition: A Theory of Cycles in National Technological Leadership," American Economic Review, American Economic Association, vol. 83(5), pages 1211-19, December.
  14. Steve Dowrick & Mark Rogers, 2002. "Classical and technological convergence: beyond the Solow-Swan growth model," Oxford Economic Papers, Oxford University Press, vol. 54(3), pages 369-385, July.
  15. Jukka Jalava, 2002. "Accounting for Growth and Productivity: Finnish Multi-Factor Productivity 1975-99," Finnish Economic Papers, Finnish Economic Association, vol. 15(2), pages 76-86, Autumn.
  16. David E. Bloom & David Canning & Jaypee Sevilla, 2002. "Technological Diffusion, Conditional Convergence, and Economic Growth," NBER Working Papers 8713, National Bureau of Economic Research, Inc.
  17. Bockerman, Petri & Maliranta, Mika, 2007. "The micro-level dynamics of regional productivity growth: The source of divergence in Finland," Regional Science and Urban Economics, Elsevier, vol. 37(2), pages 165-182, March.
  18. Pekka Ilmakunnas & Mika Maliranta, 2004. "Hiring from unemployment and separation to unemployment," Applied Economics Letters, Taylor & Francis Journals, vol. 11(2), pages 91-95.
  19. Andrea Bassanini & Stefano Scarpetta & Philip Hemmings, 2001. "Economic Growth: The Role of Policies and Institutions: Panel Data. Evidence from OECD Countries," OECD Economics Department Working Papers 283, OECD Publishing.
  20. Ripatti, Antti & Vilmunen, Jouko, 2001. "Declining labour share – Evidence of a change in underlying production technology?," Research Discussion Papers 10/2001, Bank of Finland.
  21. van Ark, Bart, 1998. "Productivity," Journal of the Japanese and International Economies, Elsevier, vol. 12(2), pages 171-174, June.
  22. Ilmakunnas, Pekka & Maliranta, Mika, 2003. "Technology, Labor Characteristic and Wage-productivity Gaps," Discussion Papers 860, The Research Institute of the Finnish Economy.
  23. Stefano Scarpetta & Philip Hemmings & Thierry Tressel & Jaejoon Woo, 2002. "The Role of Policy and Institutions for Productivity and Firm Dynamics: Evidence from Micro and Industry Data," OECD Economics Department Working Papers 329, OECD Publishing.
  24. Bottasso, Anna & Sembenelli, Alessandro, 2001. "Market power, productivity and the EU Single Market Program: Evidence from a panel of Italian firms," European Economic Review, Elsevier, vol. 45(1), pages 167-186, January.
  25. Jacques Mairesse & Elizabeth Kremp, 1993. "A look at productivity at the firm level in eight French service industries," Journal of Productivity Analysis, Springer, vol. 4(1), pages 211-234, June.
  26. Maliranta, Mika, 2001. "Productivity Growth and Micro-level Restructuring. Finnish experiences during the turbulent decades," Discussion Papers 757, The Research Institute of the Finnish Economy.
  27. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
  28. Pekka Ilmakunnas & Mika Maliranta & Jari Vainiomaki, 2005. "Worker turnover and productivity growth," Applied Economics Letters, Taylor & Francis Journals, vol. 12(7), pages 395-398.
  29. Petri Rouvinen, 2002. "R&D-Productivity Dynamics: Causality, Lags, and "Dry Holes"," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 123-156, May.
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Cited by:
  1. Lars Jonung & Jaakko Kiander & Pentti Vartia, 2008. "The great financial crisis in Finland and Sweden - The dynamics of boom, bust and recovery, 1985-2000," European Economy - Economic Papers 350, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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