Is there a panacea for low productivity ?

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By Ema Talam   on twitter as @ematalam

Productivity differences between different producers exist and persist, even among those operating within the same industries (Syverson, 2011; Van Reenen, 2011). Achieving higher productivity is of an utmost importance for firms as it leads to better firm performance and leads to increased profits. These increased profits can be used for future investment and wage rises.  The panacea for low productivity is often sought, however, the factors determining productivity are numerous, differing in their scope, level of influence and complexity.

One of the factors determining productivity is innovation. While some studies establish that innovation in general is positively linked with productivity (Movahedi et al., 2017), some limit this link to product innovation (Cassiman and Golovko, 2011). Porter (1990) argues that firms often have no choice but to innovate, as they face competitive pressures coming from their buyers or competitors.

The productivity of a firm may be determined by talents and practices of its managers. Bloom and Van Reenen (2010) have shown that firms that employ better management have higher labour productivity. Management practices differ widely both among different firms and different countries. They are influenced by numerous factors, some of them being: product market competition, labour market regulations, relationship between ownership and management of a firm, education of managers and workers, etc. (Bloom and Van Reenen, 2010).

Quality of inputs is another factor that determines productivity. Rather than clinging on basic resources (or lack of those), it can be argued that productivity is mainly determined by superiority of labour and capital inputs (Porter, 1990; Syverson, 2011). Education, training and experience can all affect quality of labour inputs. Quality differences of capital inputs can influence productivity (Syverson, 2011). The lack of basic resources can push firms to innovate and improve (Porter, 1990). It has been shown that differences in intangible capital and IT can also affect productivity (Syverson, 2011).

Another significant factor that can influence productivity are different decisions regarding the organisation and structure of a firm. Different process improvements through learning-by-doing can also influence productivity (Syverson, 2011).

Productivity spillovers and competition are important external determinants of productivity of a firm. Productivity spillovers occur mainly within the same or similar industries. Competition can hugely affect productivity and firms can face competitive pressures from both other domestic and foreign firms (Syverson, 2011).

The theoretically established ‘learning-by-exporting’ hypothesis states that exporting can improve productivity of a firm. On the one hand, a firm participating in an export market is exposed to a larger competition. On the other hand, by participating in an export market, a firm can gain new knowledge from its buyers and competitors (Wagner, 2007). Some empirical research has confirmed this hypothesis (Damijan et al., 2010).

As discussed above, productivity of a firm is influenced by a numerous factors. Some of the above-mentioned factors can be influenced to a greater extent than the others and some of those factors require shorter periods to be adjusted than the others. However, given that there is variety of factors, their complexity and the level of their potential interactions, the question still remains: is there really a panacea for low productivity?

References:

  1. Bloom, N. and Van Reenen, J. (2010) ‘Why do management practices differ across firms and countries’, The Journal of Economic Perspectives, 24(1), pp. 203-224. Available at: https://www-jstor-org.ezproxy.staffs.ac.uk/stable/25703489 (Accessed: 24th June 2018)
  2. Cassiman, B. and Golovko, E. (2011) ‘Innovation and internationalization through exports’, Journal of International Business Studies, 42(1), pp. 56-75. Available at: http://www.jstor.org.ezproxy.staffs.ac.uk/stable/25790105 (Accessed: 28th March 2018)
  3. Damijan, J.P., Kostevc, C., & Polanec, S. (2010) ‘From innovation to exporting or vice versa?’, The World Economy, 33(3), pp. 374-398. Available at: http://onlinelibrary.wiley.com.ezproxy.staffs.ac.uk/journal/10.1111/%28ISSN%291467-9701/issues (Accessed: 24th March 2018)
  4. Movahedi, M., Shahbazi, K., & Gaussens, O. (2017) ‘Innovation and willingness to export: Is there an effect of conscious self-selection?’, Economics: The Open-Access, Open-Assessment E-Journal, 11(25), pp. 1-22. Available at: http://www.economics-ejournal.org/economics/journalarticles/2017-25 (Accessed: 1st May 2018)
  5. Porter, M. (1990) ‘The competitive advantage of nations’, Harvard Business Review. Available at: https://hbr.org/1990/03/the-competitive-advantage-of-nations (Accessed: 4th June 2018)
  6. Syverson, C. (2011) ‘What determines productivity?’, Journal of Economic Literature, 49(2), pp. 326-365. Available at: http://www.jstor.org.ezproxy.staffs.ac.uk/stable/23071619 (Accessed: 30th April 2018)
  7. Van Reenen, J. (2011) ‘Does competition raise productivity through improving management quality’, International Journal of Industrial Organisation, 29(3), pp. 306-316. Available at: https://ac-els-cdn-com.ezproxy.staffs.ac.uk/S0167718711000208/1-s2.0-S0167718711000208-main.pdf?_tid=48b828f4-40fc-4fad-a130-5cec9cbc83ab&acdnat=1530139607_684e48c04c59ac476baa4ece54f7c606 (Accessed: 22nd June 2018)
  8. Wagner, J. (2007) ‘Exports and productivity: A survey of the evidence from firm-level data’, The World Economy, 30(1), pp. 60-82. Available at: http://onlinelibrary.wiley.com.ezproxy.staffs.ac.uk/journal/10.1111/%28ISSN%291467-9701/issues (Accessed: 16th April 2018)