The April 2017 Regional Economic Outlook: Asia and Pacific documented that productivity growth in a number of economies in Asia—just as in the rest of the world—slowed after the global financial crisis, and that this slowdown was most severe in the region’s advanced economies and in China (Figure 11). In addition, the slowdown was not a temporary phenomenon, but rather has persisted and even become the “new normal” in some economies. IMF (2018c), the third background paper to this Regional Economic Outlook, complements the earlier analysis, which was based on national accounts data, by examining firm-level data from the Orbis data set for six advanced and emerging market Asian economies for which sufficient data are available (China, Japan, Korea, Malaysia, the Philippines, and Thailand), during the period 2003–15.
Aggregate Total Factor Productivity Growth
Source: Penn World Tables.Note: GFC = global financial crisis; TFP = total factor productivity.Aggregate Total Factor Productivity Growth
Source: Penn World Tables.Note: GFC = global financial crisis; TFP = total factor productivity.Aggregate Total Factor Productivity Growth
Source: Penn World Tables.Note: GFC = global financial crisis; TFP = total factor productivity.The literature shows growing evidence that firm dynamism—the speed at which businesses are born, grow or decline, and exit—contributes to aggregate productivity growth through the continuous reallocation of resources toward more valued and productive activities (Decker and others 2016). And by the same token, the misallocation of resources across firms with differing productivity levels has been shown to be a major driver of the productivity growth slowdown in other regions. IMF (2018c) examines whether this is true in Asia as well, and whether a loss of firm dynamism has contributed significantly to lower productivity at the macro level.
Against this background, IMF (2018c) takes up three sets of questions:
Which firm characteristics are associated with higher firm productivity in Asia? How important are firm dynamism and related characteristics such as intangible capital deepening?
To what extent is the presence of firms that are under persistent financial stress (so-called “zombie” firms) an obstacle to achieving higher productivity in Asia?
To what extent is the region’s productivity growth slowdown explained by macro developments such as sectoral shifts (from agriculture to manufacturing, and then to services) or the global financial crisis?
Key Findings
The background paper shows first that firm dynamism has decreased in Asia: the share of young firms has fallen (Figure 12), while that of so-called “zombie” firms—that is, those that are financially distressed, often on account of excessive leverage6—has risen (though not yet to levels seen in Italy and Spain) (Figure 13)-7 Moreover, young firms tend to have higher productivity growth (Figure 14), while zombie firms not only have low productivity growth but also tend to reduce the productivity of other firms by absorbing financial, labor, and other resources that others could have used more effectively (Figure 15). Separately, IMF (2018c) establishes that higher productivity growth at the firm level is associated with investing more in intangible assets (for example, by conducting more R&D), belonging to exporting sectors, or being foreign-owned. In sum, these analyses suggest that forces at the firm level have been important determinants of Asia’s productivity growth slowdown.
Share of Young Firms
(Percent of all firms; a young firm is a firm with less than 10 years since incorporation)
Sources: Orbis for all series except Thailand census, which is taken from Thailand’s industrial census; and IMF staff calculations.Share of Young Firms
(Percent of all firms; a young firm is a firm with less than 10 years since incorporation)
Sources: Orbis for all series except Thailand census, which is taken from Thailand’s industrial census; and IMF staff calculations.Share of Young Firms
(Percent of all firms; a young firm is a firm with less than 10 years since incorporation)
Sources: Orbis for all series except Thailand census, which is taken from Thailand’s industrial census; and IMF staff calculations.
Zombie Shares
Sources: Orbis; and IMF staff calculations.Zombie Shares
Sources: Orbis; and IMF staff calculations.Zombie Shares
Sources: Orbis; and IMF staff calculations.
Average Difference in TFP Growth: Young versus Old Firms, 2014
(Threshold is above/below 10 years since date of incorporation)
Sources: Orbis; and IMF staff estimates. Note: TFP = total factor productivity.Average Difference in TFP Growth: Young versus Old Firms, 2014
(Threshold is above/below 10 years since date of incorporation)
Sources: Orbis; and IMF staff estimates. Note: TFP = total factor productivity.Average Difference in TFP Growth: Young versus Old Firms, 2014
(Threshold is above/below 10 years since date of incorporation)
Sources: Orbis; and IMF staff estimates. Note: TFP = total factor productivity.IMF (2018c) also examines the extent to which macroeconomic factors, such as the global financial crisis and sectoral shifts, have affected productivity. The econometric analysis shows that the global financial crisis led to a sharp drop in productivity at the firm level—one possible explanation is that firms were unable to shed labor and decommission capital as quickly as demand contracted, and thus their output fell more than their inputs did. If this explanation were the entire story, however, then the effect of the global financial crisis on productivity should have been temporary, as firms would eventually have adjusted. The background paper shows, however, that the global financial crisis had a lasting impact on productivity, and this is through a financial channel—more highly leveraged firms had persistently lower tangible and intangible investment, which in turn led to lower productivity growth (Figure 16).
Loss for a Typical Non-Zombie Firm due to Increase in Zombie Share from 2005-14
(Percentage points)
Sources: Orbis; and IMF staff calculations.Note: I = investment; TFP = total factor productivity.Loss for a Typical Non-Zombie Firm due to Increase in Zombie Share from 2005-14
(Percentage points)
Sources: Orbis; and IMF staff calculations.Note: I = investment; TFP = total factor productivity.Loss for a Typical Non-Zombie Firm due to Increase in Zombie Share from 2005-14
(Percentage points)
Sources: Orbis; and IMF staff calculations.Note: I = investment; TFP = total factor productivity.
Impact of Precrisis Leverage on Post-GFC TFP Growth
(Percentage points)
Source: IMF staff calculations.Note: GFC = global financial crisis; TFP = total factor productivity.Impact of Precrisis Leverage on Post-GFC TFP Growth
(Percentage points)
Source: IMF staff calculations.Note: GFC = global financial crisis; TFP = total factor productivity.Impact of Precrisis Leverage on Post-GFC TFP Growth
(Percentage points)
Source: IMF staff calculations.Note: GFC = global financial crisis; TFP = total factor productivity.As for sectoral shifts, IMF (2018c), the third background paper to this Regional Economic Outlook: Asia and Pacific, shows that these were important in explaining some of the productivity slowdown for China but do not seem to have played a significant role as drivers of firm productivity in the other countries examined, possibly because the structural transformation was already more advanced in those economies.
Policy Implications
The above findings suggest that the productivity growth slowdown was not, in most economies, an inevitable product of macroeconomic trends, but rather was driven significantly by declining firm dynamism and by financial constraints, especially excess leverage. These are factors that can be influenced by policy, and the paper suggests that policymakers should focus on three areas in particular:
Fostering firm dynamism. This would require supportive policies to foster an environment that is more conducive to innovation and to facilitate resource reallocation through the exit of nonviable firms. Entry and exit barriers should be eased, including by: (1) improving insolvency regimes and removing support schemes that keep distressed firms in operation; (2) lifting barriers to competition in goods markets; and (3) promoting increased labor market flexibility.
Addressing debt overhang and avoiding buildup of excessive leverage. This could be achieved by: (1) facilitating judicious debt resolution and corporate restructuring plans to address weak balance sheets; (2) adopting the proper institutional frameworks and implementing supportive tax measures; and (3) introducing appropriate micro- and macro-prudential regulations to contain leverage. Tax and other policies that reduce firm leverage could stimulate firm dynamism and thus growth. By shifting the capital structure from debt to equity, an allowance for corporate equity would reduce leverage and boost firm investment in both tangible and intangible capital.
Fostering innovation and trade openness. Fiscal incentives for R&D are already in place in some parts of Asia, and their scope could be broadened. Strengthening intellectual property rights regimes while avoiding undue limitations on competition could also incentivize R&D, as could competition for research grants. Separately, policymakers should continue to open their economies to international trade and foreign investment, as the stimulus from competition and knowledge transfer support higher TFP growth. In this respect, current trade tensions could dampen trends toward intangible capital deepening in Asia by increasing policy uncertainty for firms.
