Israel also has a more compressed distribution of firm productivity than any of the other countries shown – possibly because Israeli firms tend to be more advanced in terms of the technology they are using, but also because Israel is more competitive than the average transition country.4 The ratio of the 90th to the 10th percentiles of the log of labour productivity – a measure of variation in productivity across firms – ranges from 1.19 in Israel to 1.59 in Tajikistan. In most EBRD countries and regions this ratio tends to be higher for services than it is for manufacturing. Within manufacturing, the productivity spread tends to be lowest in high-tech sectors, which face strong competitive pressure to innovate and reduce costs. The spread is highest among providers of services, which (unlike producers of manufactured goods) do not face such strong competition from imports.

There is evidence that the performance of sectors which produce or are heavily reliant on information and communication technology (ICT) and their ability to innovate and adopt technology are important drivers of cross-country differences in aggregate productivity.5

ICT-intensive sectors are characterised by high levels of labour productivity, and this holds for the transition region as well. The largest productivity premiums for these sectors relative to other manufacturing industries can be found in central Europe and the Baltic states (CEB), south-eastern Europe (SEE), and eastern Europe and the Caucasus (EEC). Within the EEC region, this is particularly true of Armenia and Azerbaijan, two countries with a strong focus on ICT in their innovation policies.6 However, in most countries differences between the productivity levels of individual firms are also large within ICT-intensive sectors. Thus, even in these sectors, it seems that many firms have ample scope for improving their productivity.