Firm Dynamics And Their Impact On Productivity Growth In The Manufacturing Sector

This article examines firm dynamics, especially the entry and exit of firms and the reallocation of labour across continuing firms, and their impact on productivity growth in the manufacturing sector. In terms of firm dynamics, our key observations are as follows: (i) different manufacturing segments had different rates of firm churn (i.e., the sum of exit and entry rates), with firm churn being higher in segments with a higher proportion of small- and medium-sized enterprises; (ii) there was persistence in the productivity performance of continuing firms; and (iii) firms in the lower productivity quartiles were more likely to exit, although entry firms also tended to start in the lower productivity quartiles.

Next, we decompose labour productivity growth in the manufacturing sector into the contribution from(i) productivity improvements among continuing firms (i.e., within effect); (ii) the reallocation of labour across continuing firms of varying productivity levels and growth (i.e., reallocation effect); and (iii) the entry and exit of firms with different productivity levels (i.e., churn effect).

Our results show that the firm churn effect contributed positively to productivity growth in the manufacturing sector for all three periods under study (i.e., 1999-2004, 2004-2009 and 2009-2013). In other words, firms entering the sector were more productive than firms exiting the sector on average in all time periods. There was also a net reallocation of labour from less productive firms to more productive firms in the sector in the latest period of 2009-2013. Collectively, the role of firm churn and reallocation effects in improving productivity was found to be significant after the Global Financial Crisis, accounting for 48 per cent of the improvement in productivity in the sector between 2009 and 2013.

Our findings thus suggest that positive firm churn (where less productive firms exit and more productive firms enter) and the net reallocation of labour to more productive firms are important channels to achieve higher productivity growth in the Singapore economy.

The views expressed in this paper are solely those of the authors and do not necessarily reflect those of the Ministry of Trade and Industry or the Government of Singapore

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