productivity and business dynamics through the lens of

PRODUCTIVITY AND BUSINESS DYNAMICS THROUGH THE LENS OF COVID-19: THE SHOCK, RISKS AND OPPORTUNITIES

Chiara Criscuolo, OECD

29 September 2021, ECB Forum on Central Banking

COVID-19 Crisis

Cross-Sectoral Reallocation

Creative Destruction and Within-Sector

Reallocation

EntryWithin-Sector Reallocation

Exit

Adoption of Digital

TechnologiesTelework

COVID-19, Productivity and business dynamics

Intangibles

COVID-19 Crisis


Creative Destruction and within-sector

reallocation

EntryWithin-sector reallocation

Exit

Adoption of digital technologies

Telework

Intangibles

Sectoral Productivity Pecking Order in the

strength of the shockChange in hours worked relative to previous (half)

year by major sectors of economic activity

Productivity enhancing reallocation:• Low productivity sectors

cut hours relatively more

• Very different from GFC

Challenges:• Increase in productivity

(+1.5%) but destruction in output (-6.3%)

• Long-term? cyclical vs structural (e.g. change in consumers’ behaviour)

• Short to medium term: high costs & frictions cross-sectoral reallocation

COVID-19 Crisis



Reallocation

Exit Entry Within-Sector Reallocation

Adoption of Digital


Productivity enhancing

Long-term vs cyclicalProductivity growth +output Destruction? High Costs of reallocation

Intangibles

Unexpected Decline in Bankruptcies

-80

-60

-40

-20

0

20

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

%Belgium

-60

-40

-20

0

20

40


%Finland

-80

-60

-40

-20

0


%France

-50

-40

-30

-20

-10

0


%Germany

-70

-60

-50

-40

-30

-20

-10

0

10


%Netherlands

-60

-40

-20

0

20


%United Kingdom

difference bankruptcies 2020 difference cumul. bankruptcies 2020 vs 2019

difference bankruptcies 2021

difference cumul. bankruptcies 2021 vs 2019

-80

-60

-40

-20

0

20


%Belgium

-60

-40

-20

0

20

40


%Finland

-80

-60

-40

-20

0


%France

-50

-40

-30

-20

-10

0


%Germany

-70

-60

-50

-40

-30

-20

-10

0

10


%Netherlands

-60

-40

-20

0

20


%United Kingdom

difference bankruptcies 2020 difference cumul. bankruptcies 2020 vs 2019

difference bankruptcies 2021

difference cumul. bankruptcies 2021 vs 2019

• Sizeable support measures in place• Regulatory measures that delayed

bankruptcies

-40

-20

0

20

40


%

Belgium

-10

-5

0

5

10

15

20


%

Finland

-60

-40

-20

0

20

40


%

France

-30

-20

-10

0

10

20


%

Germany

-40

-30

-20

-10

0


%

Italy

-20

-10

0

10

20


%

Netherlands

-80

-60

-40

-20

0


%

Portugal

-80

-60

-40

-20

0

20


%

Spain

-100

-50

0

50


%

United Kingdom

-50

0

50

100

150


%

United States

difference entry 2020 vs 2019 difference cumul. entry 2020 vs 2019


Heterogeneous Recovery in Entry

Entry rates across sectors:Telework potential:+veCustomer contact: -ve

Online retail: entry rates





-40

-20

0

20

40


%

Belgium

-10

-5

0

5

10

15

20


%

Finland

-60

-40

-20

0

20

40


%

France

-30

-20

-10

0

10

20


%

Germany

-40

-30

-20

-10

0


%

Italy

-20

-10

0

10

20


%

Netherlands

-80

-60

-40

-20

0


%

Portugal

-80

-60

-40

-20

0

20


%

Spain

-100

-50

0

50


%

United Kingdom

-50

0

50

100

150


%

United States



• Reallocation during the GFC has been less cleansing than in previous crises

• During COVID-19, reallocation slowed down:

– Regulation +support: job matches were preserved

• Two mechanisms may potentially weaken the cleansing effect of the subdued exit:

– Sectoral shock: weakened negative correlation between exit and productivity

– support measures stifling the reallocation process

• Until now: reallocation – although slower (delayed?) – has not been distortive

• Risk of zombification?

– Trade-offs when exiting or adapting support measures: protection vs distortion

Reallocation: Productivity-enhancing or sullying?

COVID-19 Crisis



Reallocation


Exit

Adoption of Digital


IntangiblesProductivity enhancing

Subdued but not distortive

Trade off: “protection vs Zombification”

Long-term vs cyclicalProductivity growth +output Destruction? High Costs of reallocation

• Virtue of crises: lower firms’ opportunity costs to reorganise and innovate

• COVID quasi-natural experiment:

– Firms forced to adjust the way they produce, are organized (telework), and engage with their customers (shift in demand: e.g. from offline to online)

• Use of “potential capital”:

– Source of resilience (estimated to contribute roughly 10 percent of GDP on average)

Adoption and Reorganisation during Crises

• Source of resilience

• Savings due to lower commuting costs

• Stigma of telework broken and expectations of hybrid mode of working

• Link with productivity a priori ambiguous: – Worker-level efficiency depends on telework intensity; Firm-level

efficiency additionally depends on coordination and in the long-term, impact on knowledge-sharing is crucial

• Potential risks: – In the long term, lower innovation both within firm and across firms

(loss of agglomeration externalities)

– Increased inequalities

– Changes in role of cities, real estate prices etc.

The Rise of Telework

• Shock pushed fast adoption of digital technologies:• After initial drop in output due to adjustments, increase firm productivity

– Increased catch-up of SMEs, lower prod. Dispersion and lower inequality

• Heterogeneous adoption patterns:

– Larger, more digital and more productive firms more likely to adopt (multiple and more advanced) technologies.

• Importance of complementary (intangible) assets

• Intangibles: scalability, sunkenness, synergies, non-rivalry, non-excludability

– Risks:

• Perpetuate (if not increase) dispersion in performance observed pre-crisis

• Increase in wage inequality

• Increase in mark-ups and concentration [“market power”?]

Digital Adoption:

Opportunities, Complementarities and Risks

Mark-ups have increased - especially for top

digital firms

Average mark-up trends: high- vs low-digital

High-digital

Low-digital

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

2002 2004 2006 2008 2010 2012 2014 2016 2018

Markup trends for firms at the top of the markup distribution: high vs low digital

Low-digital

High-digital

Mark-up trends for firms at the top of the distribution: high vs low-digital

Risks: Concentration and M&As

-0.1

-0.05

0

0.05

0.1

0.15

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Change since 2002

All High digital intensity Low digital intensity

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

2016 2017 2018 2019 2020

Share

High digital intensity

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

2016 2017 2018 2019 2020

Share

Low digital intensity

Acquirer TargetAcquirer

Trends in share of M&A activity (in values)Concentration (share of sales Top 8) has increased in the last decade

75%

growth

(1) (2) (3)

Log Value of M&A dealsLagged concentration 0.122*** 0.081** 0.081**

(0.043) (0.040) (0.040)

Top 8 1.949*** 1.740***

(0.102) (0.120)

Top8 x Digital 0.447***

(0.175)Observations 28145 28145 28145Pseudo R-Square 0.122 0.155 0.156Country and Sector and Year FE YES YES YESNum. Countries 12 12 12

Will Concentration increase? A look at M&A

Dynamics

COVID-19 Crisis



Reallocation


Exit

Adoption of Digital

Technologies

Telework

IntangiblesProductivity enhancing Subdued but not distortive

New opportunities

Trade off: protection vs zombificationLong-term vs cyclicalProductivity growth +output Destruction? High Costs of reallocation

Digital + intangibles: higher resilience higher productivity & higher performance at the bottom

Heterogeneous adoption: dispersion and (wage) inequalityRise in concentration

Telework and productivity ambiguous (at firm and local level)

1. Fostering digital diffusion and sectoral reallocation:

• Policies that facilitate labour mobility and provide workers with the necessary skills (e.g. digital)

• Digital infrastructure

• Support complementary investment in intangible assets

2. Enabling entry, exit and growth of innovative firms

• New opportunities: e.g. new business models, green and digital/remote

• Reduce red tape and regulatory uncertainty and level the playing field

• Support experimentation and growth, and improve the efficiency of liquidation procedures and of judicial systems

3. Maintaining a competitive environment

Structural Policy: a strategic Ally to Monetary and Fiscal

Policies for a Green, Digital and Inclusive Recovery

THANK YOU

[email protected]

Increased Productivity Dispersion

back

90

100

110

120

130

140

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

High digital intensity

EA(15) frontier (top 5%)

Global frontier (top 5%)

Firms below the EA(15) frontier

Index normalised to 100 in the initial year

90

100

110

120

130

140

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Low digital intensity

EA(15) frontier (top 5%)

Global frontier (top 5%)

Firms below the EA(15) frontier

Index normalised to 100 in the initial year

Investment in intangibles was more resilient

that investment in tangibles

90

95

100

105

110

115

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125

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135

140

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