Catching up in total factor productivity through the business cycle : evidence from Spanish manufacturing surveys

Spain has recently experienced more than a decade of price stability and economic growth however now is showing one of the most significant slowdowns in economic activity of the EU economies. There is a general consensus that this slowdown in economic activity is particularly important in Spain due to the low level and low rates of growth experienced by total factor productivity (TFP) during more than a decade. Among the key policy elements that could enhance TFP of manufacturing firms in Spain we find those related to human capital, foreign direct investment, and process innovations. We evaluate the effect of recessions on the productivity growth of firms with different level of productivity. We present evidence on the dynamic of firm’s TFP through the business cycle allowing for a differentiated behavior for technological leaders and followers. We observe lower persistence and faster convergence in TFP during recessions and, higher persistence and non convergence in TFP during expansions. These empirical findings are consistent with the predictions obtained from the technological diffusion literature and from the fact that firm’s innovation is pro-cyclical. These conclusions are obtained from a microeconometric analysis of surveys of Spanish manufacturing firms (ESEE) from 1991 to year 2005.