A country’s ability to increase its living standards over time depends to a large extent on its ability to improve its output per worker, in other words its productivity level. Indeed, disparities in living standards are largely reflected in the different levels of productivity across countries. For example, Hall and Jones (1999), find that output per worker, the traditional measure of labour productivity, is 35 times greater in the United States than in Niger. Disparities in productivity growth were magnified by the Great Recession of 2008, with many countries experiencing a substantial contraction in their aggregate output (OECD, 2014). In the UK, labour productivity has remained weak following the recession, with firm-level evidence suggesting it is 17 percentage points below its pre-recession trend (ONS, 2017).

Advanced economies have experienced a trend decline in productivity growth in recent years, a phenomenon that predates the financial crisis (OECD, 2015; 2016). This ‘productivity puzzle’, so-called as it comes despite rapid technological advancement, is one of the factors behind the global low growth environment. Should productivity growth remain sluggish it will continue to act as a drag on real wage growth (and hence in living standards) in the years to come. The underlying reasons for the slowdown are complex and research aimed at understanding the global slowdown has shifted the focus towards firm-level dynamics, with a number of projects turning to this method as microdata become more freely available (Bartelsman et al. 2009; Andrews et al., 2015; Berlingieri et al., 2017).

The accepted channels for aggregate productivity growth include innovation and productivity growth amongst firms at the productivity frontier, a diffusion of technology from frontier firms to the rest of the economy, and a reallocation of resources (i.e. capital and labour) from the least productive to the most productive firms through competition (Andrews et al., 2016). Empirical evidence based on a number of OECD countries suggests there is no slowdown in innovation at the frontier – indeed, firm-level analysis has shown strong productivity growth amongst the firms at the global frontier throughout the 2000s (Berlingieri et al., 2017).

However, the same study showed that amongst laggard firms – firms in the lower productivity deciles – there has been limited productivity growth, and no evidence of catch-up. These findings suggest that it may be a breakdown in the diffusion mechanism causing the different productivity patterns across frontiers and laggards, as well as a possible misallocation of resources, driving the aggregate productivity slowdown. 

Using firm-level data and the OECD MultiProd Model, this paper therefore seeks to understand what is happening at the firm level in Ireland to see if the same trends are occurring across the productivity distribution, and how this may explain aggregate productivity growth. We assess the implications of Ireland’s particular industrial structure, driven by a high level of FDI, for its productivity patterns.

Ireland’s productivity gap, the distance between high productivity ‘frontier’ firms and low productivity ‘laggards’, has widened over time in both manufacturing and services, although for different reasons. In manufacturing, after an initial fall in productivity coinciding with the Great Recession, we see that frontier firms have recovered to their pre-crisis levels while laggard firms have failed to do so. In services, firms at both ends of the productivity distribution declined over the period, although laggard firms saw a larger fall. Comparing these trends to cross-country results, productivity in manufacturing declined much faster while the recovery was slower for Ireland, unsurprising given the relatively deeper recession experienced by the Irish economy during that period. In the case of services, the cross-country results showed that a recovery to pre-crisis levels occurred, unlike the Irish results.

We then compare the size of the productivity gap for Ireland to the cross-country results. This is close to the average across countries, suggesting that despite the possible distortionary influence of FDI on aggregate productivity, Ireland’s productivity gap is not an outlier.

Decomposing this productivity dispersion into variation within sectors and differences across sectors pinpoints the within-sector differences as the main driver of this overall variation, confirming that a large part of the productivity heterogeneity is firm- rather than sector-specific. The within-sector dispersion contribution for Ireland is amongst the largest across the group of comparators. This may in part be due to the large number of multinationals located in the country,  concentrated within certain sectors and who are much more productive than their domestic counterparts. This suggests there may be greater scope for future productivity gains through diffusion, as encouraging linkages between high and low productivity firms in the same sector should be more feasible than those in unrelated sectors.

We confirm the reliance of aggregate productivity on a small number of firms using a range of concentration measures. This suggests that any future trends in Irish aggregate productivity are highly dependent on these firms, and that any fluctuations to this over time are likely to be explained by micro (firm-level) shocks as opposed to economy-wide shocks. The efficiency of resource allocation is also

deceptively high for Ireland due to these few firms. When foreign-dominated sectors are removed we find that Ireland’s resources amongst domestic sectors and firms are much less efficiently allocated, and more in line with the OECD MultiProd comparison countries.

Although this paper makes clear the large contribution of large multinational enterprises to the Irish economy in terms of productivity, it also highlights that to ensure a more sustained aggregate productivity growth it is crucial to bridge the productivity gap between high productivity firms and those who are lagging behind. 

Although the size of this gap is not out of line with comparator countries, its growth should be of concern. However, the fact that the dispersion is mainly due to differences within sectors means that there is greater potential for policy to encourage linkages between the frontier and laggard firms, with benefits for long-term living standards via more efficient resource allocation among firms. 

Papa, J. et al (2021) “Patterns of Firm-Level Productivity in Ireland”, Economic and Social Review, Vol. 52, No. 3, Autumn 2021, pp. 241-268, September 2021, Dublin. https://www.esr.ie/article/view/1233