The most productive (so-called frontier) firms in East Asia and Pacific are falling further behind global leaders, especially in the digital-intensive sectors that drive innovation. Synchronized reforms to improve competition, digital infrastructure, and skills can reignite productivity growth.
The productivity puzzle
In East Asia and Pacific (EAP), productivity growth has slowed over the past two decades. Why has this slowdown come at a time of rapid technological progress?
First, in EAP, aggregate productivity growth has been mostly due to increases within firms, with little contribution from reallocation of market share between firms or firm entry and exit.
Second, productivity growth has been slower within most-productive EAP firms – “the national frontier” - than less productive firms. This slows aggregate productivity, because the national frontier firms account for a large share of output and jobs. These findings are not unique to EAP, but are confirmed also in other developing countries.
In the EAP region, the productivity growth of frontier manufacturing and services firms has been slower than that of other firms:
The national frontier is falling behind
Despite the global productivity slowdown, the world’s most-productive firms - “the global frontier” - have continued their rapid productivity growth, especially in digital-intensive sectors like electronics, pharmaceuticals, research and development, and information technology services.
In contrast, national frontier firms in EAP are falling further behind the global frontier, especially in digital-intensive sectors. For example, in digital manufacturing sectors, the productivity of the global frontier increased by 76 percent between 2005 and 2015, whereas the national frontier firms in Indonesia, Malaysia, the Philippines, and Viet Nam increased their productivity by only 34 percent on average.
One reason for the divergent productivity trends is that the gap in technology use between EAP’s and the world’s most sophisticated firms has widened, much more so than the gap between the average EAP firms and their global counterparts.
Why are the leaders not leading?
Firms require the right incentives
Impediments to competition are inhibiting the incentive to innovate, especially among frontier firms. Although manufacturing tariffs are relatively low in EAP, nontariff measures in manufacturing and restrictions on services trade limit competition. Services trade restrictions are higher in most EAP countries than in countries of similar level of development.
Firms require the right capabilities
The adoption of sophisticated technologies and productivity growth require a broad range of skills and high-quality digital infrastructure. In EAP, frontier firms with a higher share of educated workers showed faster productivity growth than other frontier firms.
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How can policy boost technology adoption and productivity growth?
Eliminate impediments to entry and competition in goods and services markets. For example, tariff liberalization in Viet Nam around the time of its WTO accession raised the productivity of frontier and other firms.
Fix the foundation of basic skills on which more-advanced skills can be built (World Bank 2023). Equip workers with skills that complement new technologies, and enhance the abilities of managers.
Synchronize reforms to exploit the synergies between enhanced human capital, infrastructure, and competition. For example, both openness to foreign competition and access to fiber broadband for firms in the Philippines increased technology adoption, but their combined impact was more than double.
