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.

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.

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.

The World KLEMS Initiative

The World KLEMS Initiative generates industry-level data on outputs, inputs, and productivity. Productivity is output per unit of all inputs. The inputs consist of the primary factors of production—capital (K) and labor (L)—and the intermediate inputs: energy (E), materials (M), and services (S). Industry-level data are indispensable for analyzing the sources of economic growth. Productivity gaps between two countries are defined in terms of differences in productivity levels. These differences are measured by linking productivity levels for each country by purchasing power parities for outputs and inputs. The large productivity gap between the United States and Japan in 1955 gradually closed until 1995. Since then, Japanese productivity has been stagnant, while US productivity has continued to grow. The widening productivity gap can be traced to a small number of sectors, mainly in trade and services.

Efficiency Measures in Regulated Industries

This chapter begins by providing a historical account of the liberalization in regulated sectors. This sets the stage for a discussion on how productivity and efficiency measures have become both a goal and a tool in some of these sectors. The chapter also presents an extensive overview of case studies both across industries and countries. Subsequently, it provides a review on how the literature has tried to deal with the many empirical challenges related to measuring productivity and efficiency. Finally, it makes the case for a switch to the structural ETC approach (first economics, then technology, and finally empirical challenges) to performance measurement in policy areas as a solution to many of the issues surveyed in the chapter.