Total Factor Productivity Growth: Drivers, Components and Frontier Firms

Total factor productivity at the aggregate levels of economies or sectors of activity can be broken down to firm-specific TFP, where considerable heterogeneity between firms can be found. It is therefore necessary to consider the entire TFP distribution across firms to derive correct policy implications. An important aspect in this connection is the allocation of productive resources between firms: a free flow of resources from low-productivity to high-productivity firms is likely to shift the entire distribution of TFPs in a positive direction, while aggregate TFP will suffer if resources are stuck in an inefficient allocation. The study will therefore assess to what extent the reallocation of productive resources can be attributed within-firm effects or between-firm effects and whether this process has changed over time in different EU manufacturing and services industries. The study characterises the TFP distribution, for the EU as well as for member countries, in important manufacturing sectors such as machinery, transport equipment, food and beverages, and fabricated metal products, and studies the characteristics of "frontier firms" at EU level in these industries. It assesses the dynamics of TFP developments over time across EU countries.