Inward Foreign Direct Investment, Superstar Firms and Wage Inequality Between Firms: Evidence from European Regions. Juan Duran Vanegas and Iulia Siedschlag (ESRI Working Paper No. 770, November 2023). –
Show/Hide Abstract Theoretical models and international evidence have established that foreign direct investment is associated with new technologies, productivity gains, higher wages, and wage inequality in the host countries. While most existing studies on foreign direct investment and wage inequality have examined relative wages across skills, occupations and sectors, recent contributions to the theoretical and empirical literature highlight the role of wage dispersion between firms as an important driver of overall income inequality. Against this background, this paper examines wage dispersion between firms across European regions and the role played by multinational firms with dominant market shares, the so-called “superstar firms”. Firstly, we document the evolution of wage dispersion between firms and the regional presence of foreign affiliates across European regions. Second, we empirically investigate the role of inward foreign direct investment as a driver of wage dispersion between firms across European regions. The analysis uses firm-level data from the ORBIS Europe data set over 2012-2021 combined with a range of data for European regions. Using a shift-share instrumental variables approach, we find that foreign direct investment, particularly international superstar firms, contributed to increased wage inequality between firms across European regions.
2022
Synergies and gaps between farm and non-farm micro-level data for sustainable rural development Amr Khafagy, Janet Dwyer University of Gloucestershire –
Show/Hide Abstract The article discusses the importance of high-quality microdata for monitoring countries' progress towards achieving the SDGs. The focus is on the synergies and gaps between farm and non-farm micro-level data in understanding the socio-economic performance of the agriculture sector and rural areas. The Farm Accountancy Data Network (FADN) and the Competitiveness Research Network (CompNet) are analyzed, showing how combining them could improve the assessment of economic performance. However, social and environmental indicators are under-represented in both datasets, limiting the ability to produce key information for understanding the drivers of social and environmental performance in the rural economy.
Productivity and Business Dynamism in Japan — Comparison with the EU Countries Using Firm-level Data (Japanese) Daisuke Miyakawa, Miho Takizawa Research Institute of Economy, Trade and Industry (RIETI) –
Show/Hide Abstract How can we evaluate the performance of the Japanese economy in terms of business activities? To answer this question, both the performances of the Japanese economy and that of other countries need to be measured under a common methodology and compared. Furthermore, such comparison should be done based not only on measures of productivity but also on the so-called "measures of business dynamism ". Those measures account for how numerous heterogeneous firms are growing and declining, how market concentrations change, how markups are evolving, and so on. Toward this end, we measure productivity and various determinants of business dynamism for Japanese firms using the "Basic Survey of Japanese Business Structure and Activities" and compare them with those of EU countries (CompNet 8th Vintage firm-level data), based on a common methodology. The comparison of those two sets of results for the period after 2000 reveals that while continuous productivity improvements were observed in several EU countries, productivity growth in Japan has been stagnating over the 2010s. Such improvement in EU countries is accompanied by the increase in allocative efficiency while the allocative efficiency in Japan has been deteriorating. We also find that the decline in capital intensity in Japan is pronounced.
Corporate economic profits in the euro area: The relevance of cost competitive advantage Javier Vallés, Vicente Salas Fumás, Lucio San Juan International Review of Economics & Finance –
Show/Hide Abstract We estimate aggregate and industry cost and profit shares for the corporate sectors of France Germany, Italy and Spain, in the period 1995–2018, and compare them with estimates for US corporations. The results indicate an upward trend in economic profits in the United States and Germany since the year 2000 that it is not evident in other euro area countries. There is supporting evidence that, in the United States, the rising economic profits are the result of increasing corporate market power resulting from increasing market concentration across industries and over time. However, the research of this paper shows that in the case of Germany the rising profits of the corporate sector are better explained by its cost competitive advantage, both in terms of labour and capital unit costs, over the rest of the euro area's corporate sectors within the single market of the monetary union.
The Geography of the Sharing Economy in Europe Camilla Lenzia, Elisa Panzera Romanian Journal of Regional Science –
Show/Hide Abstract The sharing economy, intended as the creation of new markets for idle resources managed by digital intermediary platforms, is spreading in most economies. This paper offers new evidence on the geography of this phenomenon in the NUTS2 regions of the EU27 + UK by proposing a methodology to identify its stages and intensity of development. Results suggest that the sharing economy develops unevenly across countries and across regions, highlighting exceptional cases of mismatch between the intensity of the sharing economy and the most favourable socio-economic context conditions and warning against the possible detrimental effects of its development for wage inequalities.
Increase in Turbulence and Market Power Agnieszka Markiewicz, Riccardo Silvestrini Erasmus University Rotterdam and Tinbergen Institute –
Show/Hide Abstract During the last four decades, the U.S. industries have experienced heterogeneous increases in market power. This paper argues that this heterogeneity can be explained by the different dynamics of turbulence across sectors. To show it, we build a model of a sector where firms differ by their productivity level, and they compete under oligopolistic competition. Business dynamics are captured in the model by sequential idiosyncratic entry, exit, and productivity shocks. A sector-specific increase in turbulence accelerates the turnover of leaders and the mobility of firms over the productivity distribution. This leads to reallocation of market shares towards the most productive firms that charge the lowest price. Their cost leadership allows them to charge the highest markups and gain the steepest profits, driving the increase in sectoral market power. The model can explain between 35% and 57% of the cumulative increase in the observed markups, and its predictions are supported by the U.S. and European data.
Globalization in Europe: Consequences for the Business Environment and Future Patterns in Light of Covid-19 Sergio Inferrera In: Economic Challenges for Europe After the Pandemic –
Show/Hide Abstract In this paper, I study the consequences of globalization, as measured by the involvement of firms in GVC, on the business environment. In particular, I focus on concentration and productivity, firstly by estimating robust elasticities and then isolating the exogenous component of the variation in the participation in GVC. To this aim, I exploit the distance between industries in terms of upstreamness and downstreamness along the supply chain. The evidences suggest that involvement in international supply chains is positively related to concentration at the sector level and positively associated with aggregate productivity, an effect that is driven by the firms at the top of the productivity distribution. Finally, I relate these findings to the current pandemic, going beyond the lack of official statistics and estimating GVC participation for 2020 at the country-level through real time world-seaborne trade data, providing evidences on the re-absorption of the Covid shock in several European economies.
The Political Economy of the EU Approach to the Rohingya Crisis in Myanmar Arlo Poletti, Daniela Sicurelli Politics and Governance –
Show/Hide Abstract European institutions have repeatedly represented the EU as an actor that can use the attractiveness of its market to promote human rights internationally. From this perspective, EU trade sanctions represent a hard power tool to push the government of states accused of major human rights violations to abide by international law. In its reaction to the Rohingya crisis in 2018, despite the European Parliament’s call for the lifting of Myanmar’s trade preferences, the Council of the EU stated that it would rather tackle the problem by taking a “constructive approach” based on dialogue. We provide a political-economy explanation of this choice, making a plausible case that the political pressures from European importers and exporters, not to jeopardise trade relations with Myanmar, prevailed over the demands of European protectionist groups and NGOs advocating a tougher position. The firms interested in maintaining preferential trade relations with Myanmar were primarily motivated by a desire to avoid a disruption of trade and investment links within global value chains (GVCs) so that they could continue competing with Chinese enterprises.
Estimating market power for the European manufacturing industry between 2000 and 2014 Adrián Rodríguez del Valle, Esteban Fernández‑Vázquez Empirica –
Show/Hide Abstract The study of market power has gained a lot of attention by scholars and policy-makers since De Loecker and Eeckhout (Global market power. Working paper 24768, National Bureau of Economic Research, 2018). In their work, they show the temporal evolution of market power worldwide using detailed data from the financial statements of thousands of firms. In this paper, we propose an alternative way of estimating market power using sectoral-based data. By utilizing the aggregates observable in a series of input–output tables and by applying an estimation procedure based on entropy; indicators of market power can be derived without requiring the use of micro-data. We document a heterogeneous evolution of market power across 28 European countries and 14 manufacturing sectors between 2000 and 2014. Market power is found to be rising for several central- and East-European countries, while decreasing in multiple South- and West-European nations. Globalisation and value chain positioning are both seen to have a significantly decreasing impact on markups.
Labor Share, Industry Concentration and Energy Prices Çürük Malik; Rozendaal, Rik Tilburg University –
Show/Hide Abstract Climate change policies are often met with resistance due to fears over the loss of competitiveness and employment. This paper studies the effect of energy prices, which are a proxy for carbon tax, on the labor share of income and industry concentratiion. Using aggregated administrative data from 15 European countries and 56 sectors for the years 2000-2016, and applying a shift-share instrumental variable approach, we find that the energy price has a negative and quantitatively significant effect on thelabor share. Exploring the potential mechanisms, we document strong evidence that the degree of substitution between energy and labor is lower than the substitution between energy and capital. Reallocation among firms, changes in aggregate markups or the value-added to output ratio induced by energy price shocks do not lead to sizable changes in the labor share. We find no robust evidence that energy prices affect industry concentration and markups. These results indicate sizable potential redistributional impacts of climate change policies, at least in the short-run, as the transnational costs differ across the primary factors.
The diffusion of technological progress in ICT Elstner, Steffen; Grimme, Cristian; Kecht, Valentin; Lehmann, Valentin (2022). European Economic Review Vol. 149 No. 104277 –
Show/Hide Abstract We study whether technology gains in sectors related to Information and Communications Technology (ICT) increase productivity in the rest of the economy. To separate exogeneous gains in ICT from other technological progress, we use the relative price of ICT goods and services in a structural VAR with medium-run restrictions. Using local projections to estimate the effect of ICT-related technology gains on sectoral technology (TFP), we find two sets of results. First, since the mid-2000s there have been positive and persistent technology spillovers to sectors intensively using ICT. Second, neglecting leasing activity leads to an overestimation of the TFP response for all sectors except the leasing sector, where it is strongly underestimated.
Startup Types and Macroeconomic Performance in Europe Ralph De Haas, Vincent Sterk, and Neeltje Van Horen CEPR –
Show/Hide Abstract Can policymakers improve macroeconomic performance by encouraging the entry of high-performance startups? To answer this question, we construct a novel and comprehensive data set on 1.3 million startups in ten European countries. We apply cluster analysis to identify distinct startup types and trace their development over time. Three stylized facts transpire. First, we uncover five well-separated startup types that are consistently present across countries, industries, and cohorts. We label these Basic, Large, Capital-intensive, Cash-intensive, and High-leverage. Second, the initial differences between these startup types are persistent. Third, each startup type displays a characteristic life cycle in terms of productivity, employment generation, and exit rates. We feed these empirical results into an agnostic firm dynamics model to quantify how much structural policy could improve macroeconomic performance by shifting the composition of startups. We find that substantial gains in aggregate employment and productivity can be made through policies that benefit high-performance startups (such as large and capital-intensive ones) while discouraging the entry of underperforming firms (such as highly leveraged ones).
Covid-19 pandemic, state aid and firm productivity Tommaso Bighelli, Tibor Lalinsky, Juuso Vanhala Bank of Finland –
Show/Hide Abstract We study the consequences of the COVID-19 pandemic on productivity by matching firm performance outcomes with corresponding firm-level information on government support. Our cross-country evidence for five EU countries shows that the pandemic led to a significant short-term decline in productivity predominantly driven by the within-firm growth component. A thorough comparative analysis of the distribution of employment and overall direct subsidies, considering separately also relative firm-level support and the probability of being supported, reveals several common characteristics. In general, the pandemic support was distributed rather efficiently, i.e. towards “deserving” firms and only marginally towards “zombie” and non-viable firms. However, government subsidies appear to have had a limited effect on aggregate productivity developments.
2021
Market Power, Productivity and Sectoral Labour Shares in Europe Martina Lawless, Luke Rehill Open Economies Review –
Show/Hide Abstract The stability of the labour share of income is a fundamental feature of many macroeconomic models. Empirically however, the labour share varies considerably across countries and across sectors within countries. In addition, gradual declines in the labour share have been documented in many countries leading to much debate on the causes of the reduction. This paper examines several of the potential drivers of variation in the labour share across countries and sectors in Europe. Beginning with a simple shift-share analysis, we demonstrate that observed changes has been primarily driven by changes within rather than between sectors. We then use aggregated microdata to investigate the strength of correlation between sectoral distributions of labour shares and measures of productivity and market power. Our main findings are that the advance of globalisation and a widening productivity gap from the rise of “superstar firms” are negatively related to the labour share, and that this negative relationship is stronger for the reallocation margin within sectors compared to its link to between sector reallocation.
How European Markets Became Free: A Study of Institutional Drift Gutiérrez, Germán; Philippon, Thomas National Bureau of Economic Research NBER Working Paper No. 24700 –
Show/Hide Abstract Over the past twenty years, Europe has deregulated many industries, protected consumer welfare, and created strongly independent regulators. These policies represent a stark departure from historical traditions in continental Europe. How and why did this turnaround happen? We build a political economy model of market regulation and we compare the design of national and supra-national regulators. We show that countries in a single market willingly promote a supranational regulator that enforces free markets beyond the preferences of any individual country. We test and confirm the predictions of the model. European institutions are indeed more independent and enforce competition more strongly than any individual country ever did. Countries with ex-ante weaker institutions benefit more from the delegation of competition policy to the EU level.
Regional economic impact of Covid-19: the role of sectoral structure and trade linkages Philipp Meinen, Roberta Serafini, Ottavia Papagalli National Bureau of Economic Research European Central Bank, Working Paper Series No 2528 / February 2021 –
Show/Hide Abstract The paper provides an ex-post analysis of the determinants of within-country regional heterogeneity of the labour market impact of COVID-19. By focussing on the first wave of the pandemic in the four largest euro area economies, it finds that the propagation of the economic impact across regions cannot be explained by the spread of infections only. Instead, a region’s economic structure is a significant driver of the observed heterogeneity. Moreover, our results suggest that a region’s trade relations, both within and across countries, represent a relevant indirect channel through which COVID-19 related disruptions affect regional economic activity. In this regard, the analysis depicts vulnerabilities arising from potential disruptions of the highly integrated EU supply chains.
2020
EIB Group Survey on Investment and Investment Finance: A technical note on data quality Brutscher, Philipp-Bastian; Coali, Andrea; Delanote, Julie; Harasztosi, Peter (2020). European Investment Bank EIB Working Papers, No. 2020/08 –
Show/Hide Abstract This paper reviews the data quality of the EIB Group Survey on Investment and Investment Finance (EIBIS). It finds that the chosen sampling framework (the Bureau van Dijk ORBIS database) captures the business population of interest well and that there is little evidence of selection bias during fieldwork, suggesting that EIBIS is a reliable data source to study the corporate investment situation in the EU. This result is predicated on the following observations: 1) the ORBIS database has sufficient coverage relative to the actual population; 2) a benchmarking exercise of the final survey sample against randomly drawn samples from the sampling frame shows there is no systematic sampling bias in EIBIS. Efforts to create firm panel do not jeopardize randomness. 3) A comparison of the final sample with two other databases: the Eurostat Structural Business Statistics as well as the CompNetdatabase shows that EIBIS portrays both cross-country differences and dynamics of key variables in a satisfactory way.
What drives export market shares? It depends! An empirical analysis using Bayesian model averaging Konstantins Benkovskis, Benjamin Bluhm, Elena Bobeica, Chiara Osbat, Stefan Zeugner, Empirical Economics (2020) 59: p.817–869 –
Show/Hide Abstract What drives external performance of countries? This is a recurring question inacademia and policy circles. The factors underlying export growth are receiving greatattention, as countries endeavoured to grow out of the crisis by increasing exports andas protectionist discourses take foot again. Despite decades of debates, it is still unclearwhat the common characteristics of countries that have a very good external perfor-mance are and, importantly, which ones policy makers can influence. We use Bayesianmodel averaging in a panel setting to investigate variables related to export marketshares in 25 EU countries, considering a wide range of traditional indicators alongwith novel ones developed within the CompNet Competitiveness Research Network.We find that export market share growth is linked to different factors in the old andin the new member states, with one exception: for both groups, competitive pressuresfrom China have strongly affected export performance since the early 2000s. In thecase of old EU member states, investment, quality of institutions and available liquid-ity to firms also appear to play a role. For the new EU member states, labour and totalfactor productivity are particularly important, while inward FDI matters rather thandomestic investment. Price competitiveness does not seem to play a very importantrole in either set of countries: relative export prices do show correlation with exportperformance for the new member states, but only when they are adjusted for quality.
Rising Concentration and Wage Inequality Guido Matias Cortes, Jeanne Tschopp, Working Paper Series, January 2020 –
Show/Hide Abstract Wage inequality has risen in many countries over recent decades. At the same time, production has become increasingly concentrated in “superstar” firms. In this paper, we show that these two phenomena are linked. Theoretically, we show that shocks that increase concentration, such as an increase in consumers' price sensitivity, will also lead to an increase in wage dispersion between firms. Empirically, we use industry-level data from 14 European countries over the period 1999–2016 and show robust evidence of a positive and statistically significant correlation between concentration and the dispersion of firm-level wages.
Trade, Productivity and (Mis)allocation Antoine Berthou, John Jong-Hyun Chung, Kalina Manova, Charlotte Sandoz Dit Bragard, CEP Discussion Paper No 1668 , January 2020 –
Show/Hide Abstract We examine the gains from globalization in the presence of firm heterogeneity and potential resource misallocation. We show theoretically that without distortions, bilateral and export liberalizations increase aggregate welfare and productivity, while import liberalization has ambiguous effects. Resource misallocation can either amplify, dampen or reverse the gains from trade. Using model-consistent measures and unique new data on 14 European countries and 20 industries in 1998-2011, we empirically establish that exogenous shocks to export demand and import competition both generate large aggregate productivity gains. Guided by theory, we provide evidence consistent with these effects operating through reallocations across firms in the presence of distortions: (i) Both export and import expansion increase average firm productivity, but the former also shifts activity towards more productive firms, while the latter acts in reverse. (ii) Both export and import exposure raise the productivity threshold for survival, but this cut-off is not a sufficient statistic for aggregate productivity. (iii) Efficient institutions, factor and product markets amplify the gains from import competition but dampen those from export access.
2019
The fall of the labor share and the rise of superstar firms Show/Hide Abstract The fall of labor's share of GDP in the United States and many other countries in recent decades is well documented but its causes remain uncertain. Existing empirical assessments of trends in labor's share typically have relied on industry or macro data, obscuring heterogeneity among firms. In this paper, we analyze micro panel data from the U.S. Economic Census since 1982 and international sources and document empirical patterns to assess a new interpretation of the fall in the labor share based on the rise of “superstar firms.” If globalization or technological changes advantage the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms with high profits and a low share of labor in firm value-added and sales. As the importance of superstar firms increases, the aggregate labor share will tend to fall. Our hypothesis offers several testable predictions: industry sales will increasingly concentrate in a small number of firms; industries where concentration rises most will have the largest declines in the labor share; the fall in the labor share will be driven largely by between-firm reallocation rather than (primarily) a fall in the unweighted mean labor share within firms; the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; and finally, such patterns will be observed not only in U.S. firms, but also internationally. We find support for all of these predictions.
Productivity Report 2019 Katarina Ivas, Rotija Kmet Zupančič, Janez Kušar, Urška Lušina, Nataša Todorović Jemec; Universitat Pompeu Fabra, Kingdom of Spain, 2019
Standing up for competition: Market concentration,regulation, and Europe's quest for a new industrial policy Guinea Oscar; Erixon Fredrik, ECIPE Occasional Paper, No. 01/2019, 2019 –
Show/Hide Executive Summary(part) After the failed merger of Alstom and Siemens – the two giants of Europe ́s railway manufactur-ing sector – the French and the German governments presented a manifesto with a set of radical proposals designed to reshape EU industrial and competition policy. In an article addressed to all European citizens, the President of France, Emmanuel Macron, urged for reform of EU competi-tion policy, to protect Europe from foreign competition1. MEP Guy Verhofstadt, the leader of the European liberals, supports similar claims that Europeans cannot compete with Chinese or Ameri-can firms2. One of the Franco-German suggestions would empower the European Council to veto European Commission decisions on competition policy. French and German Ministers argue that Europe ́s competitiveness in manufacturing is in decline. Somehow weakening EU competition policy, the manifesto claims, will strengthen Europe ́s competitiveness. This argument is wrong. To be competitive, European firms need more not less competition. Measures to promote market competition in Europe should be at the front and centre of any future industrial policy. Unfortu-nately, the evidence shows that market competition in Europe is not rising but declining.
Revisiting the Global Decline of the (Non-Housing) Labor Share German Gutierrez Gallardo, Sophie Piton, SSRN 3384356, June 2019 –
Show/Hide Abstract We identify two undocumented measurement challenges affecting corporate sector labor shares outside the United States: the inclusion of dwellings and the inclusion of self-employed workers in the corresponding sectoral accounts. Both issues have become more important over time, biasing corporate labor shares downward. We propose two methods to correct for these challenges and obtain 'true' non-housing labor share series. Contrary to common wisdom, the corrected series exhibit stable labor shares across all major economies, except the US, where the corrected labor share declines by 6 percentage points since 1980.
Firm heterogeneity and trade in EU countries: a cross-country analysis Claire Giordano, Paloma Lopez-Garcia, Occasional Paper Series No 225, June 2019 –
Show/Hide Abstract Firms are heterogeneous, even within narrowly defined sectors. This paper surveys the relevant theoretical and empirical literature on firm heterogeneity and external trade. By innovatively exploiting rich cross-country micro-aggregated data sourced from the ECB Competitiveness Research Network (CompNet), this study then investigates the main implications of firm heterogeneity for trade of EU countries, showing a set of stylised facts. On the one hand, exporting firms are larger, more productive and pay higher wages than non-exporting firms. Only these firms are able to bear export costs, related to various factors, such as tariff and non-tariff trade barriers, the quality of the legal system or access to finance. Hence, only few enterprises actually export, and the intensity of aggregate export concentration within few large firms varies across countries and sectors. On the other hand, opening to trade boosts individual firms’ productivity growth, via a number of channels, and also enhances allocative efficiency across firms, in turn increasing aggregate productivity growth. One of the main standard determinants of export growth, namely changes in the real effective exchange rate, impacts aggregate performance differently across countries and sectors, depending on sectoral composition and on firm characteristics within a given sector.
Labour Reallocation in Recession and Recovery: Evidence for Europe Eric Bartelsman, Paloma Lopez-Garcia, Giorgio Presidente, National Institute Economic Review, Volume: 247, Issue: 1, February 2019 –
Show/Hide Abstract This paper builds upon Bartelsman, Lopez-Garcia, and Presidente (2018) and provides empirical evidence on the cyclical features of labour reallocation in a sample of European Union (EU) countries over the Great Recession and the slow recovery. The analysis makes use of cross-country micro-aggregated data on firm dynamics and productivity from release 6 of the ECB CompNet database. While productivity-enhancing reallocation generally is counter-cyclical, with a stronger effect providing a silver lining in downturns, it was weaker during the Great Recession in the EU, but reverted back to more normal patters in the most recent years.
Revisiting the global decline of the (non-housing) labor share Germán Gutiérrez, Sophie Piton, Bank of England Staff Working Paper No. 811, July 2019 –
Show/Hide Abstract We show that cross-country comparisons of corporate labor shares are affected by differences in the delineation of corporate sectors. While the US excludes all self-employed and most dwellings from the corporate sector, other countries include large amounts of both — biasing labor shares downwards. We propose two methods to control for these differences and obtain ‘harmonized’ non-housing labor share series. Contrary to common wisdom, the harmonized series remain stable across all major economies except the US, where the labor share still declines, primarily due to manufacturing. These new facts cast doubts on most technological explanations for the labor share decline.
2018
Cyclical and structural variation in resource allocation: evidence for Europe Eric Bartelsman, Paloma Lopez-Garcia, Giorgio Presidente, ECB Working Paper Series No 2210, November 2018 –
Show/Hide Abstract This paper uses cross-country micro-aggregated data on firm dynamics and productivity from the ECB CompNet database to provide empirical evidence on factor reallocation in the European Union (EU). The analysis finds that reallocation is towards more productive firms although the magnitude varies across countries and over time. Variation in reallocation is related to structural differences in firm size distribution across countries as well as to variation in labor and product market institutions. Productivity-enhancing reallocation generally rises in downturns but, similar to findings for the US, it did not pick up in the Great Recession. The sharp drop in exports and tightness in credit markets are seen to provide a partial explanation for this lack of a silver lining.
Structural policies in the euro area Klaus Masuch, Robert Anderton, Ralph Setzer,Nicholai Benalal(editors), Occasional Paper Series No 210, June 2018 –
Show/Hide Abstract Structural policies in the euro area are of great interest for the Eurosystem, particularly as they can support the smooth functioning of the Economic and Monetary Union (EMU) and the effectiveness of monetary policy. This paper adopts a broad definition of structural policies, analysing not only the benefits of efficient labour, product and financial market regulations, but also emphasising the importance of good governance and efficient institutions that ensure high quality and impartial public services, the rule of law and the control of rent-seeking. The paper concludes that there are many opportunities for enhanced structural policies in EU and euro area countries which can yield substantial gains by boosting long-term income and employment growth and supporting social fairness, also via better and more equal opportunities. It provides empirical and model-based analyses on the impacts and the interactions of structural policies, highlighting synergies between growth and inclusiveness, while acknowledging that structural policy changes need to be country-specific to reflect national conditions and social preferences. Well-designed structural policies would also strengthen economic resilience and convergence of Member States, bringing the euro area closer to the requirements of an optimal currency area and improving the transmission of monetary policy. The paper also discusses the political economy causes of the sluggish implementation of socially beneficial structural policies and assesses ways to deal with possible short-term costs of reforms.
The post-crisis TFP growth slowdown in CEE countries: exploring the role of Global Value Chains Francesco Chiacchio, Katerina Gradeva,Paloma Lopez-Garcia, ECB Working Paper Series No 2243, April 2018 –
Show/Hide Abstract Using micro-aggregated firm information for nine Central and Eastern European (CEE) countries and data from input-output tables, we examine the role of Global Value Chains (GVCs) for technology diffusion across EU countries. Our empirical results provide support for a two-stage diffusion process of technology across countries. In the first stage, the most productive firms in the host economy benefit from their direct exposure to new technology created in parent firms as a result of their GVC participation. In the second stage, technology spills over to the rest of firms in the host economy via domestic production networks. In addition, we show that the import of intermediate inputs –i.e. backward linkages- is the main channel of technology diffusion within GVCs. We use these results to explain the pronounced post-crisis drop in Total Factor Productivity (TFP) growth in CEE countries. We show that due to their deep integration in GVCs, CEE countries have been exposed to two recent developments highly correlated with their TFP performance: (i) a slowdown in TFP growth of parent firms located in non-CEE EU countries; and (ii) a global slowdown in the growth rate of GVC participation, which is evident also for CEE countries from 2011 onwards. Moreover, we find that the capacity of host firms in CEE countries to absorb and understand new knowledge has decreased since the crisis. We argue that this is related to the drop in RD investment in the CEE region during the post-crisis period.
Exchange Rate Movements, Firm-Level Exports and Heterogeneity Antoine Berthou, Emmanuel Dhyne, Banque of France Working Paper No.660, January 2018 –
Show/Hide Abstract This paper provides an estimation of the reaction of firm-level exports consecutive to real exchange rate movements, the exchange rate elasticity of exports. Following recent theoretical works emphasizing the role played by firm heterogeneity, we test in particular how the exchange rate elasticity may be affected by firm-level productivity, and how the heterogeneous reaction of different firms may contribute to shape the aggregate reaction of countries' exports. The analysis relies on a unique cross-country micro-based dataset of exporters available for 11 European countries (2001-2011), which details in particular information about firms' productivity and export performance. Our results show that while the average exchange rate elasticity across firms is quite weak, it is also highly heterogeneous. The least productive firms within each country and sector tend to react more to real exchange rate movements than the most productive firms. This weak reaction of highly productive and large exporters tends to reduce the macroeconomic exchange rate elasticity in all countries. Cross-country differences in the shape of the productivity distribution among exporters have a strong influence on the macroeconomic exchange rate elasticity: countries populated with a higher density of low productive firms tend to respond more to exchange rate movements in terms of aggregate exports than countries populated with highly productive exporters.
Is corruption efficiency-enhancing? A case study of the Central and Eastern European Region Claire Giordano, Paloma Lopez-Garcia, The European Journal of Comparative Economics, Volume: 15 Issue:1, June 2018 –
Show/Hide Abstract We investigate the role of firm-level bribes in explaining the efficiency of within-sector production factor allocation across firms in nine Central and Eastern European (CEE) countries in 2003-2012. We find a positive association between corruption and both labour and capital misallocation dynamics, once country framework conditions are controlled for. The link is larger the smaller the country, the lower the degree of political stability and of civil liberties, and the weaker regulatory quality. Results hold when instrumenting corruption withfemale representation in Parliament and the freedom of the press. Targeted action against corruption in the CEE region would thus enhance within-sector allocative efficiency, in turn a determinant of sectorial, and aggregate, TFP growth.
Financial Markets and the Allocation of Capital: The Role of Productivity Filippo Di Mauro, Fadi Hassan and Gianmarco I.P. Ottaviano, CEP Discussion Paper No 1555, July 2018 –
Show/Hide Abstract The efficient allocation of credit is a key element for the success of an economy. Traditional measures of allocative efficiency focus on the Q-theory of investment and, in particular, on the elasticity of finance to investment opportunities proxied by firm real value added. This paper introduces a theory-based alternative measure that focuses instead on the elasticity of credit to firm productivity. In doing so, it develops a simple theoretical framework that delivers clear predictions for the elasticity of credit to current and future productivity depending on capital market frictions. When applied to the novel firm-level dataset of the Competitiveness Research Network (CompNet) set up by the EU System of Central Banks, the proposed measure leads to normative statements about the efficiency of credit allocation across the largest Eurozone economies, changing the conclusions that one would reach based on traditional empirical applications of Q-theory.
Non-tariff measures and competitiveness Giorgio Barba Navaretti, Giulia Felice, Emanuele Forlani, Paolo Garella,
Centro Studi Luca D'Agliano Development Studies Working Papers, No. 438, September 2018 –
Show/Hide Abstract In this paper, we explore how tariff and standard-like Non-Tariff Measures (NTMs) introducedby the EU are related with market conditions in domestic EU markets. While Tariffs work asa pure tax on import, standard-like NTMs potentially affect costs of both domestic firms andforeign exporters. NTMs may not necessarily work as protectionist measures and even inducepro-competitive effects in the domestic market in the longer term, especially if we allow for firmsmobility. The impact could be different for large and small firms. We extend the model by Melitzand Ottaviano (2008) to include Non-Tariff barriers. We derive some testable implications relatingNon-Tariff barriers to the number of firms selling in the domestic market and average efficiency.The link between NTMs and domestic market conditions depends on whether they involve newstandards and technical specifications imposed on both domestic and foreign firms, or, rather, theextension to foreign firms of standards and technical specifications already adopted by domesticfirms. In the first case, there is a decline in the number of firms and in average productivity; inthe second case, NTMs induce pro-competitive effects: an increase in the number of firms and ofaverage productivity. We then take the model to the data for a group of European countries andmanufacturing industries. We combine Compnet data for 15 EU countries in 2001-2012, providinginformation on firms performance at the industry level and by size class, with the STC WTO-I-TIPdatabase, with information on Specific Trade Concerns raised at the WTO on NTMs and with theTrains database with information on Tariffs. The NTMs that we consider have similar effects asin the second NTMs case in the theoretical model; the results for Tariff are in the same direction,albeit of a larger magnitude. These results are consistent with a theoretical framework allowing forfirms mobility in the longer term.
2017
The exchange rate, asymmetric shocks and asymmetric distributions Calin-Vlad Demian, Filippo Di Mauro, Journal of International Economics,ISSN 2110-7017, October 2017 –
Show/Hide Abstract The elasticity of exports to exchange rate fluctuations has been the subject of a large body of literature without a clear consensus emerging. Using a novel sector-level dataset based on firm level information, we show that exchange rate elasticities double in size when country and sector specific firm productivity distributions are considered in the empirical estimations. In addition, exports appear to be sensitive to appreciation episodes, but rather unaffected by depreciations. Finally, only rather large changes in the exchange rate appear to matter. The paper intends to contribute to the debate on the effectiveness and impacts of exchange rate movements, which features highly in the policy agenda.
Banks credit and productivity growth Show/Hide Abstract Financial institutions are key to allocate capital to its most productive uses.In order to examine the relationship between productivity and bank credit in the context of different financial market set-ups, we introduce a model of overlapping generations of entrepreneurs under complete and incomplete credit markets. Then, we exploit firm-level data for France, Germany and Italy to explore the relation between bank credit and productivity following the main derivations of the model. We estimate an extended set of elasticities of bank credit with respect to a series of productivity measures of firms.We focus not only on the elasticity between bank credit and productivity during the same year, but also on the elasticity between credit and future realised productivity. Our estimates show a clear Eurozone core-periphery divide, the elasticities between credit and productivity estimated in France and Germany are consistent with complete markets, whereas in Italy they are consistent with incomplete markets. The implication is that in Italy firms turn to be constrained in their long-term investments and bank creditis allocated less efficiently than in France and Germany. Hence capital misallocation by banks can be a key driver of the long-standing slow productivity growth that characterises Italy and other periphery countries.
Wage bargaining regimes and firms' adjustments to the Great Recession Show/Hide Abstract The paper aims at investigating to what extent wage negotiation set-ups have shaped upfirms’response to the Great Recession, taking a firm-level cross-country perspective. We contribute to the literature by building a new micro-distributed database which merges data related to wage bargaining institutions (Wage Dynamic Network, WDN) with data on firm productivity and other relevant firm characteristics (CompNet). We use the database to study how firms reacted to the Great Recession in terms of variation in profits, wages, and employment.The paper shows that, in line with the theoretical predictions, centralized bargaining systems –as opposed to decentralized/firm level based ones –were accompanied by stronger downward wage rigidity, as well as cuts in employment and profits.
Firm growth in Europe: an overview based on the CompNet module Cristina Fernández, Roberto García, Paloma Lopez-Garcia, Benedicta Marzinotto, Roberta Serafini, Juuso Vanhala and Ladislav Wintr, ECB Working Paper Series No 2048, April 2017 –
Show/Hide Abstract This paper illustrates the main features of the Labour Module of the CompNet dataset which
provides indicators of firm growth over the period 1995-2012 across 17 EU (13 euro area) countries and 9 macro-sectors. It also includes information on a large set of micro-aggregated characteristics of firms growing at different speed such as their financial position and labour and total factor productivity. The paper shows that during the Great Recession the share of shrinking firms sharply increased in countries under stress, while firm growth slowed down in non-stressed countries. In the former, the construction sector suffered the most, while in the latter manufacturing and services related to transportation and storage were mainly affected, possibly as a result of the trade collapse. While we find that, all else equal, more productive firms had a higher probability of growing, the process of productivity-enhancing reallocation was muted during the Great Recession.
The drivers of revenue productivity: a new decomposition analysis with firm-level data Show/Hide Abstract This paper aims to derive a methodology to decompose aggregate revenue TFP changes over time into four different components – namely physical TFP, mark-ups, quality and production scale. The new methodology is applied to a panel of EU countries and manufacturing industries over the period 2006-2012. In summary, patterns of measured revenue productivity have been broadly similar across EU countries, most notably when we group them into stressed (Italy, Spain and Slovenia) and non-stressed countries (Belgium, Finland, France and Germany). In particular, measured revenue productivity drops for both groups by about 6 percent during the recent crisis. More specifically, for both stressed and non-stressed countries the drop in revenue productivity was accompanied by a substantial dip in the proxy we use for TFP in quantity terms, as well as by a strong reduction in mark-ups. Demand also suffered a conspicuous decline. Our results suggest that non-stressed countries seem to enjoy a stronger recovery in terms of fundamentals like quantity TFP, demand and mark-ups than stressed countries. Yet, their overall performance in terms of revenue TFP recovery does not necessarily align with the above analysis which is due to some possible deterioration in the resource reallocation, signalled in our framework from the lower covariance between the two components we split revenue TFP.
How competitiveness shocks affect macroeconomic performance across euro area countries Karsten Staehr and Robert Vermeulen, ECB Working Paper Series No 1940, July 2016 –
Show/Hide Abstract This paper considers the short-term effects of competitiveness shocks on macroeconomic performance in the euro area. Vector autoregressive models are estimated on quarterly data from 1995 to 2013 for individual countries and the whole euro area. The results show that competitiveness shocks help to explain subsequent GDP developments in most countries but have little explanatory power for the current account balance and domestic credit. These results apply for all of the competitiveness measures considered, but a non-traditional competitiveness measure accounting for quality differences fares better in some cases. The effects of the competitiveness measures vary substantially across the countries in the euro area, which likely reflects their different economic structures and institutions. This heterogeneity suggests that policy measures seeking to improve competitiveness may have very different effects on economic performance and financial stability in different countries.
Capital and labour (mis)allocation in the euro area: some stylized facts and determinants Elisa Gamberoni, Claire Giordano and Paloma Lopez-Garcia, ECB Working Paper Series No 1981, November 2016 –
Show/Hide Abstract We analyse the evolution of capital and labour (mis)allocation across firms in five euro-area countries (Belgium, France, Germany, Italy and Spain) and eight main sectors of the economy during the period 2002-2012. Three key stylized facts emerge. First, in all countries with the exception of Germany, capital allocation has worsened over time whereas the efficiency of labour reallocation has not changed significantly. Second, the observed increase in capital misallocation has been particularly severe in services as opposed to industry. Third, misallocation of both labour and capital dropped in all countries in 2009 and again for some country-sectors in 2011-2012. We next take stock of the possible drivers of input misallocation dynamics in a standard panel regression framework. Controlling for demand conditions and for the initial level of misallocation, heightened uncertainty, restrictive bank credit standards and tight product and labour market regulation are found to have boosted input misallocation, whereas the Great Recession per seexerted a cleansing effect.
Is corruption efficiency-enhancing? A case study of nine Central and Eastern European countries Elisa Gamberoni, Christine Gartner, Claire Giordano and Paloma Lopez-Garcia, ECB Working Paper Series No 1950, August 2016 –
Show/Hide Abstract We investigate the role of corruption in the business environment in explaining the efficiency of within-sector production factor allocation across firms in nine Central and Eastern European countries in the period 2003-2012. Using a conditional convergence model, we find evidence of a positive relationshipbetween corruption growth and both labour and capital misallocation dynamics, once country framework conditions are controlled for: the link between corruption and input misallocation dynamics is larger the smaller the country, the lower the degree of political stability and of civil liberties, and the weaker the quality of its regulations. As input misallocation is one of the determinants of productivity growth, we further show that the relationship between changes in corruption and TFP growth is indeed negative. Our results hold when we tackle a possible omitted variable bias by instrumenting corruption with two instrumental variables (the percentage of women in Parliament and freedom of the press).
Export characteristics and output volatility: comparative firm-level evidence for CEE countries Urška Cede, Bogdan Chiriacescu, Péter Harasztosi, Tibor Lalinsky and Jaanika Meriküll, ECB Working Paper Series No 1902, May 2016 –
Show/Hide Abstract The literature shows that openness to trade improves long-term growth but also that it may increase exposure to high output volatility. In this vein, our paper investigates whether exporting and export diversification at the firm level have an effect on the output volatility of firms. We use large representative firm-level databases from Estonia, Hungary, Romania, Slovakia and Slovenia over the last boom-bust cycle in 2004-2012. The results confirm that exporting is related to higher volatility at the firm level. There is also evidence that this effect increased during the Great Recession due to the large negative shocks in export markets. In contrast to the literature and empirical findings for large or advanced countries we do not find a statistically significant and consistent mitigating effect from export diversification in the Central and Eastern European countries. In addition, exporting more products or serving more markets does not necessarily result in higher stability of firm sales.
2015
The Exchange rate, asymmetric shocks and asymmetric distributions Calin-Vlad Demian and Filippo di Mauro, ECB Working Paper Series No 1801, June 2015 –
Show/Hide Abstract The elasticity of exports to exchange rate fluctuations has been the subject of a large literature without a clear consensus emerging. Using a novel sector-level dataset based on firm level information, we show that exchange rate elasticities double in size when the country and sector specific firm productivity distribution is taken into account in empirical estimates. In addition, exports appear to be sensitive to appreciation episodes, but rather unaffected by depreciations. Finally, only rather large changes in the exchange rate appear to matter.
Assessing European firms’ exports and productivity distributions: the CompNet trade module Antoine Berthou, Emmanuel Dhyne, Matteo Bugamelli, Ana-Maria Cazacu, Calin-Vlad Demian, Peter Harasztosi, Tibor Lalinsky, Jaanika Meriküll, Filippo Oropallo and Ana Cristina Soares, ECB Working Paper Series No 1788, May 2015 –
Show/Hide Abstract This paper provides a new cross-country evaluation of competitiveness, focusing on the linkages between productivity and export performance among European economies. We use the information compiled in the Trade module of CompNet to establish new stylized facts regarding the joint distributions of the firm-level exports performance and productivity in a panel of 15 countries, 23 manufacturing sectors during the 2000’s. We confirm that exporters are more productive than non-exporters. However, this productivity premium is rising with the export experience of firms, with permanent exporters being much more productive than starters. At the intensive margin, we show that both the level and the growth of firm-level exports rise with firm productivity, and that the bulk of aggregate exports in each country are made by a small number of highly productive firms. Finally, we show that during the crisis, the growth of exports by high productive firms sustained the current account adjustment of European “stressed” economies. This last result confirms that the shape of the productivity distribution within each country can have important consequences from the point of view of the dynamics of aggregate trade patterns.
Assessing European competitiveness: the new CompNet microbased database P. Lopez-Garcia, F. di Mauro and the CompNet Task Force, ECB Working Paper Series No 1764, March 2015 –
Show/Hide Abstract Drawing from confidential firm-level balance sheets for 17 European countries (13 Euro-Area), the paper documents the newly expanded database of cross-country comparable competitiveness-related indicators built by the Competitiveness Research Network (CompNet). The new database provides information on the distribution of labour productivity, TFP, ULC or size of firms in detailed 2-digit industries but also within broad macro-sectors or considering the full economy. Most importantly, the expanded database includes detailed information on critical determinants of competitiveness such as the financial position of the firm, its exporting intensity, employment creation or price-cost margins. Both the distribution of all those variables, within each industry, but also their joint analysis with the productivity of the firm provides critical insights to both policy-makers and researchers regarding aggregate trends dynamics. The current database comprises 17 EU countries, with information for 56 industries, including both manufacturing and services, over the period 1995-2012. The paper aims at analysing the structure and characteristics of this novel database, pointing out a number of results that are relevant to study productivity developments and its drivers. For instance, by using covariances between productivity and employment the paper shows that the drop in employment which occurred during the recent crisis appears to have had “cleansing effects” on EU economies, as it seems to have accelerated resource reallocation towards the most productive firms, particularly in economies under stress. Lastly, this paper will be complemented by four forthcoming papers, each providing an in-depth description and methodological overview of each of the main groups of CompNet indicators (financial, trade-related, product and labour market).
Assessing the financial and financing conditions of firms in Europe: the financial module in CompNet Annalisa Ferrando, Matteo Iudice, Carlo Altomonte, Sven Blank, Marie-Hélène Felt, Philipp Meinen, Katja Neugebauer and Iulia Siedschlag, ECB Working Paper Series No 1836, August 2015 –
Show/Hide Abstract This paper provides an encompassing description of the various indicators compiled in the financial module of CompNet using balance sheet information of European firms. We investigate whether and to which extent the heterogeneous financial positions of firms have affected firms’ investment decisions, especially during the recent crisis. Our results confirm the relevance of leverage for investment, in addition to other common determinants, such as cash flow or sales growth. In particular, we find evidence that higher levels of indebtedness act as a drag on investment. We investigate cash holding policies and find significant differences across firm sizes and degrees of financial constraints. Furthermore, our data confirm the pro-cyclicality of firm profitability and its negative association with financial constraints. Finally, we exploit the richness of this new dataset to document the relationships between firms’ financial and financing conditions and their productivity.
2014
Euro area external imbalances and the burden of adjustment Filippo di Mauro and Francesco Pappadà, ECB Working Paper Series No 1681, May 2014 –
Show/Hide Abstract The objective of this paper is to explore the consequences of the correction of Euro area trade imbalances on real exchange rates. This analysis requires one additional dimension with respect to the standard Global Imbalances framework à la Obstfeld and Rogo(2005),since the adjustment takes place within and outside the Euro area.Both types of adjustments are analyzed in a three-country general equilibrium model with a tradable and a non-tradable sectors,and heterogeneous firms built upon Pappadà(2011).ECB(CompNet)data are used to measure the differences in firm size and productivity dispersion across Euro area countries.With respect to the surplus country(Germany),countries running a trade de cit(Spain,Italy)are characterised by a productivity distribution with a lower mean and a less fat right tail.This increases the relative price movement associated with the external adjustment because of the limited role played by the extensive margin.We show that the real exchange rate movements are underestimated when the cross-country differences in terms of productivity distributions are neglected.
Micro-based evidence of EU competitiveness: the CompNet database CompNet Task Force, ECB Working Paper Series No 1634, February 2014 –
Show/Hide Abstract Drawing from confidential firm-level balance sheets in 11 European countries, the paper presents a novel sectoral database of comparable productivity indicators built by members of the Competitiveness Research Network (CompNet) using a newly developed research infrastructure. Beyond aggregate information available from industry statistics of Eurostat or EU KLEMS, the paper provides information on the distribution of firms across several dimensions related to competitiveness, e.g. productivity and size. The database comprises so far 11 countries, with information for 58 sectors over the period 1995-2011. The paper documents the development of the new research infrastructure, describes the database, and shows some preliminary results. Among them, it shows that there is large heterogeneity in terms of firm productivity or size within narrowly defined industries in all countries. Productivity, and above all, size distribution are very skewed across countries, with a thick left-tail of low productive firms. Moreover, firms at both ends of the distribution show very different dynamics in terms of productivity and unit labour costs. Within-sector heterogeneity and productivity dispersion are positively correlated to aggregate productivity given the possibility of reallocating resources from less to more productive firms. To this extent, we show how allocative efficiency varies across countries, and more interestingly, over different periods of time. Finally, we apply the new database to illustrate the importance of productivity dispersion to explain aggregate trade results.
