Productivity growth in UK manufacturing is driven less by efficiency improvements within
individual plants than by ‘survival of the fittest’ – the Darwinian process of entry and exit, in
which less productive plants contract and close while new more productive ones open and
grow.
That is the central conclusion of new research by Richard Disney, Jonathan Haskel and
Ylva Heden, published in July 2003 issue of the Economic Journal. They also find that
productivity growth is highest in industries that face greater competition in product markets.
Increasing productivity growth, especially in the competitive (traded) sector of the economy, is
a central concern of economic policy. There is a general concern, for example, that UK
manufacturing is ‘less productive’ than manufacturing in other leading industrialised
economies, and that this accounts for the disappointing jobs performance of the UK
manufacturing sector.
But understanding productivity growth and, in particular, what forces drive productivity growth
is not straightforward: is it a lack of capital investment (reflected in low labour productivity) or is
it the poor utilisation of inputs such as capital (reflected in low total factor productivity)?
This research examines both labour productivity and total factor productivity for UK
manufacturing. It argues that productivity growth comes from two sources:
Innovation and better use of existing inputs within manufacturing plants – this is called
internal restructuring.
The process by which successful manufacturing plants grow, while less efficient plants
contract and exit – this is called external restructuring.
The study examines which of these sources – internal or external restructuring – is the most
important source of productivity growth.
This is novel research in the UK context because it uses panel data on manufacturing plants
that make it possible to track not only productivity growth but also the process of exit and entry.
Most existing research just looks at survivors, and therefore only permits researchers to
examine internal restructuring.
The results suggest that roughly half of labour productivity growth is accounted for by internal
restructuring and a similar amount by external restructuring. But looking at total factor
productivity (which allows for differences in capital investment across plants and over time),
over 80-90% of productivity growth comes from external restructuring, and over half of that
from exit and entry alone. It is the Darwinian process of ‘survival of the fittest’ that is the main
driver of productivity growth in manufacturing rather than internal improvements in techniques
and organisation within the plant.
Some of this external restructuring is done by companies that own several plants. The
evidence suggests that companies do reorganise production to increase productivity. But they
tend to do it by closing less productive plants and opening new plants rather than by increasing
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efficiency within plants. Among small single-plant companies, there is almost no internal
restructuring – almost all productivity growth comes through entry and closure.
What are the policy implications of all this?
First, there are huge flows of exits and entrants among manufacturing plants – 18-19% of the
‘stock’ exit each year and are replaced by a roughly similar proportion (although typically these
are smaller plants). These flows are a key driver of productivity growth. But with roughly
25,000 new plants each year entering UK manufacturing, selective policy, such as ‘picking
winners’ among new plants, is difficult.
Such policies, along with financial support for plants that are faced with closure, may be less
effective than general measures to encourage start-up of new, innovative plants and taking a
more relaxed view of failures (for example, in how bankruptcies are handled)
Second, competitive markets are a key element of productivity growth. Competition underpins
the process of exit and entry, and the growth in size of the most successful plants. But it also
underpins internal restructuring. This study confirms the findings of earlier published work by
Professor Stephen Nickell: that productivity growth is highest in industries that face greater
competition in product markets. As Nickell puts it, when discussing his own results:
‘Perhaps competition works not by forcing efficiency on individual firms but by
letting many flowers bloom and ensuring only the best survive.’
The results of this study show that more competition in product markets does both these
things: it forces plants to be internally efficient and it ensures that only the best survive.
ENDS
Notes for Editors: ‘Restructuring and Productivity Growth in UK Manufacturing’ by Richard
Disney, Jonathan Haskel and Ylva Heden is published in the July 2003 issue of the Economic
Journal.
Disney is at the University of Nottingham and the Institute for Fiscal Studies; Haskel is at
Queen Mary, University of London; and Heden is at the Bank of Sweden.
For Further Information: contact Richard Disney on 0115-951-5619 (email:
richard.disney@nottingham.ac.uk); or RES Media Consultant Romesh Vaitilingam on 0117-
983-9770 or 07768-661095 (email: romesh@compuserve.com).
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