TRANSITION REPORT 2014 Innovation in Transition

Labour productivity across firms and countries

All over the world, large and persistent differences in productivity continue to exist across both firms and countries.2 Transition countries are no exception in this regard. There are firms with low and high productivity in each of these countries: there are highly productive firms in Central Asia and poorly performing firms in the EU. What determines aggregate productivity is the percentage of firms with low productivity relative to the percentage of firms with high productivity. Compared with Israel, an advanced industrialised country with several innovation successes,3 transition countries have a higher percentage of firms with low productivity and a lower percentage of highly productive firms (see Chart 2.1). This, of course, results in lower average productivity at the country level.

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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.


Labour productivity varies considerably across both regions and firms

Source: BEEPS V, MENA ES and authors’ calculations.
Note: The red line is the fitted distribution for Israel. Firm-level labour productivity is measured in logs and defined as turnover per employee. Cross-country differences in sectoral composition are controlled for. Turnover in local currency is converted to US dollars using the average official exchange rate.7 Density is calculated by dividing the relative frequency (in other words, the number of values that fall into each class, divided by the number of observations in the set) by the width of the class.