The Trade and Competitiveness (T&C) agenda in DIME is structured to test and identify effective ways of increasing firms’ productivity through both efficiency gains and shifts in the production frontier. Efficiency gains are understood as changes in the production process to help firms move closer to the efficient production frontier. The two assumptions underlying suboptimal allocation of inputs are: (1) market imperfections and/or behavioral biases—such as misperception of returns associated with a given business practice, lack of motivation to adopt better production process (Gibbons and Henderson 2012; Nguyen and Nguyen 2016); and (2) organizational barriers that prevent firms from adopting new technologies (Atkin et al., forthcoming at QJE) and using inputs optimally. In this light, adoption of new technology is key to firms’ (and economic) growth.
In this context, technology change encompasses any shock in the production process that leads to higher output given the inputs available. That shock could be caused by, for instance, better trained employees, use of better managerial practices, use of cheap credit lines in credit-constrained firms, and business registration to access public services that are only made available to formal firms. Technology change and, thus, productivity growth go hand in hand with technology adoption.
Shifts in the production frontier occur only when factors of production are already used optimally, and could result from improvements in business regulations, innovation, and infrastructure. It is worth mentioning that interventions aimed at moving out the production frontier are more difficult to evaluate with randomized controlled trials for two main reasons. First, regulation policies usually involve changes in the current legislation and such decisions are usually taken at higher levels and are not necessarily theoretically grounded. Second, those policies are highly likely to have general equilibrium effects (spillovers).