The Industry Sources of Productivity Growth and Convergence

Industry-level productivity analysis can be a useful diagnostic tool to better understand why some countries show faster overall productivity growth and to direct research attention to parts of the economy that warrant more detailed scrutiny. This chapter illustrates these strengths in three applications, namely the Europe-US productivity growth gap since the mid-1990s, the sectoral sources of rapid convergence of productivity levels between advanced and emerging economies, and an analysis of the determinants of productivity growth and convergence. One conclusion is that a better understanding of productivity growth (or lack thereof) in services industries should still be an important goal of researchers aiming to understand cross-country growth differences.

Business Model Innovation and Replication

Productivity gains play a crucial role in value creation and distribution in firms. This chapter connects the strategy framework of value creation and value capture with the tools from the productivity literature in order to understand better how returns are distributed between different stakeholders in the business and how this distribution might evolve over time. The authors distinguish between business model innovation and replication as two genuine sources of value creation. The historical analysis of Southwest Airlines in the US airline industry illustrates the insights that can be gained using a formal model to measure productivity gains at the firm level.

Dynamic Efficiency and Productivity

The focus of this chapter is to move the measurement of efficiency and productivity from a static to a dynamic approach using distance functions. Since distance functions represent technology, the authors first specify that technology in a dynamic framework is amenable to data envelopment analysis (DEA)–type estimation, explicitly allowing current (or past) decisions to affect future production possibilities. This includes notions of intermediate products, investment, time substitution, supply chain, networks and possible reallocations across time. The chapter shows how to estimate dynamic distance functions and specify a multi-period dynamic model in the spirit of Ramsey (1928), as well as an adjacent-period model familiar from the Malmquist productivity literature, providing an empirical illustration of the former. Extensions of these dynamic models is relatively straightforward for other distance function–based productivity indices, both parametric and nonparametric, as well as for production in the presence of good and bad outputs.

Effect of International Competition on Firm Productivity and Market Power

This chapter proposes a framework to evaluate the potential impact of international competition on firm performance and highlights two points. First, it is important to consider effects on productive efficiency and market power in an integrated framework. The popular concept of (revenue) total factor productivity (TFP) combines both effects, which can lead to problems of estimation and interpretation. Second, greater international competition enlarges the relevant market and can affect both the number and the type of competitors a firm faces, as well as the nature of competition. While it is possible that firms respond by adjusting their production operations, pricing adjustments are all but guaranteed. The chapter contrasts three estimation approaches that start, respectively, from the demand side, the product extensive margin, and the production side. It concludes with a few avenues for future research.

Measuring Productivity Dispersion

Measuring the dispersion of productivity or efficiency across firms in a market or industry is rife with methodological issues. Nevertheless, the existence of considerable dispersion now is well documented and widely accepted. Less well understood are the economic features and mechanisms underlying the magnitude of dispersion and how dispersion varies over time or across markets. On the one hand, selection mechanisms in both output and input markets should favor the most productive units through resource reallocation, thereby reducing dispersion. On the other hand, innovation and technological uncertainty tend to increase dispersion. This chapter presents a guide to the measurement of dispersion and provides empirical evidence from a selection of countries and industries using a variety of methodologies.

Productivity Measurement in the Public Sector

Governments either provide various goods and services at no cost or at highly subsidized prices. It is usually possible to measure the quantities of these government-sector outputs and inputs as well as input prices, but the problem is how to estimate the corresponding output prices. Once meaningful output prices have been estimated, the measurement of productivity growth using index numbers can proceed in the usual manner. This chapter suggests three possible general methods for measuring public-sector output prices and quantities. Specific measurement issues in the health and education sectors are discussed. Similar output and productivity measurement issues arise in the regulated sectors of an economy since regulated producers are forced to provide services at prices that are not equal to marginal or average unit costs. Finally, the problems associated with measuring capital services are discussed.

The Labor Productivity of Family Firms

This chapter analyzes the relationship between family control of the firm and its labor productivity. It builds upon the socioemotional wealth (SEW) perspective of family firms to develop a set of propositions that connect SEW priorities, trust, leadership style, nonfamily managers, and the implementation of high performance work practices with labor productivity. The authors argue that SEW priorities warrant adoption of a set of policies and behaviors among the controlling family managers that shape the behaviors and attitudes of the workforce, and these in turn affect labor productivity. This model helps explain observed differences in labor productivity between family and nonfamily firms across different firm sizes, as well as differences in labor productivity among family firms.

Productivity and Welfare Performance in the Public Sector

The purpose of this chapter is to suggest a definition and a way to measure the performance of the public sector, or that of its main components. The approach is explicitly rooted in the principles of welfare and production economics. First the authors present what they call the “performance approach” to the public sector. They then move to the issue of measuring the productivity of some canonical components of the public sector (railways, transportation, waste collection, secondary education, and health care). In the third stage the authors try to assess the performance of the overall public sector. They argue that for such a level of aggregation, one should restrict the performance analysis to the outcomes and not relate it to the resources involved. As an illustration they evaluate the performance of the European welfare states and its evolution over time, using frontier techniques.

Theory, Techniques, and Applications of Regulatory Benchmarking and Productivity Analysis

State-of-the-art benchmarking methods, and in particular data envelopment analysis (DEA) and stochastic frontier analysis (SFA), are well-established and informative tools in economic regulation to set reasonable revenue caps for energy network operators. However, regulatory benchmarking is not just another application of productivity analysis. This chapter reviews the economic theory upon which these applications are based and the additional stages in activity analysis, data analysis, and model development that are necessary. The chapter also provides detailed analyses of the applications in international electricity transmission and for the Norwegian electricity distribution networks.

The Productivity of Nations

This chapter scrutinizes research on the productivity of nations, with a particular focus on the preceding 50 years. First, it briefly synopsizes “classic” studies on economic growth and convergence of nations. The main criticism of these studies is that they did not account for potential inefficiency of countries. The production frontier literature attempts to deal with this issue, and the chapter gives a brief introduction to it with a focus on data envelopment analysis. One central point of this review is the analysis of sources of productivity growth before and after 1990, a period of time that appears to be a point of structural change in growth patterns around the world. The second thread of this chapter concerns the forces behind the transformation of the worldwide productivity distribution from a unimodal to a bimodal distribution during the 1990s. Finally, it emphasizes caveats and outlines possible directions for future research.