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Key Takeaways
- East Asian economies are experiencing a slowdown in productivity growth, despite technological advancements.
- Frontier firms in the region are falling behind global leaders, particularly in digital-intensive sectors.
- This lag may be due to insufficient competition, skill gaps, and underdeveloped digital infrastructure.
- Coordinated reforms in competition, skills development, and digital infrastructure are crucial for boosting productivity.
The Productivity Paradox in East Asia
Advances in transport and communication technologies during the 1980s and 1990s fueled the rise of global value chains and the East Asian growth miracle. However, the subsequent wave of disruptive technologies like robotics, AI, and digital platforms has coincided with a deceleration in productivity growth across East Asia. While this slowdown is a global phenomenon, its impact and causes in emerging economies like those in East Asia are still being understood.
In developed OECD economies, the productivity slowdown is characterized by a widening gap between top-performing firms and the rest. The key question is how these dynamics are playing out in emerging markets.
East Asia’s Frontier Firms Are Lagging
The current period of rapid technological progress in East Asia has paradoxically coincided with slower productivity growth. Analysis using harmonized firm-level data from five major East Asian economies reveals several critical factors.
💡 A significant portion of aggregate productivity growth in East Asia comes from improvements within existing firms, rather than from market share reallocation or firm entry/exit. Notably, the market share of national frontier firms – the top 10% most productive firms in a sector – is actually declining. This suggests resources may be trapped in less productive firms that struggle to scale.
📍 Productivity growth within national frontier firms has been slower compared to less productive firms. Given that frontier firms represent a substantial share of output and employment, their stagnation significantly impacts overall productivity trends.
While slower growth among leading firms relative to laggards might indicate domestic convergence, the gap between East Asia’s national frontier firms and the global frontier is widening, especially in digital-intensive sectors like electronics, IT services, and pharmaceuticals. Between 2005 and 2015, global frontier firms in digital manufacturing saw productivity increase by 76%, while national frontier firms in countries like Indonesia, Malaysia, the Philippines, and Vietnam achieved only a 34% increase during the same period.
A primary reason for this underperformance is the uneven adoption of advanced technologies. The gap in technology adoption between East Asian and Pacific (EAP) firms and the world’s most sophisticated companies has widened considerably. While accessible technologies like mobile internet have near-universal adoption, significant disparities persist in the use of sophisticated technologies crucial for frontier firm growth.
Understanding the Underperformance and Policy Implications
The relative stagnation of East Asia’s leading firms can be attributed to a lack of adequate competition and insufficient capabilities, including high-quality skills and robust infrastructure.
Firms Need Stronger Competitive Incentives
Barriers to competition in both goods and services markets diminish the incentive for leading firms to innovate. Firms close to the productivity frontier typically innovate to stay ahead of rivals, while less productive firms may be discouraged from investing in innovation. For instance, import competition has been shown to boost innovation among leading firms but dampen it among others in several countries.
While tariffs on goods are relatively low in East Asia, non-tariff measures in manufacturing and restrictions in services markets create significant limitations on competition. This is particularly evident in sectors dominated by state-owned enterprises (SOEs), where frontier firm productivity growth is notably lower.
Policy reforms aimed at increasing competitive exposure can be powerful drivers of productivity growth. For example, the liberalization of services markets following Vietnam’s accession to the WTO in 2007 correlated with a 5% faster productivity growth for frontier firms in those services sectors, and over a 10% increase in downstream manufacturing firms that utilize these services.
Firms Require Enhanced Capabilities
Driving productivity growth and adopting sophisticated technologies necessitate a broad spectrum of skills and high-quality digital infrastructure. However, basic skills remain a challenge in several East Asian economies, with over half of 10-year-olds unable to read an age-appropriate passage. Management quality is also an area for improvement, as the best-managed firms in the region lag behind their global counterparts. Furthermore, access to high-speed fiber broadband, essential for cloud-based tools and AI, remains uneven.
📊 Improving skills is paramount. Reforms must focus on solidifying foundational skills to build upon. Equipping the workforce with skills that complement new technologies and enhancing managerial capabilities are critical for accelerating productivity.
⚡ Increased investment in new technologies is linked to higher firm productivity in Vietnam, but this correlation is strongest for firms with a sufficiently skilled workforce.
The Case for Coordinated Reforms
Boosting productivity at the frontier requires a comprehensive approach involving mutually reinforcing reforms. This includes enhancing competition through services liberalization and reducing non-tariff barriers, building a range of skills from foundational literacy to advanced technical and managerial capabilities, and expanding digital infrastructure to ensure access to high-speed internet and cloud services.
📍 Synchronizing these reforms can maximize synergies between human capital, infrastructure, and competition. For instance, openness to foreign competition and access to fiber broadband in the Philippines showed a combined impact on technology adoption more than double their individual effects.
Similarly, wider access to higher education in China boosted productivity, particularly for foreign-owned firms. Trade liberalization in Indonesia also led to productivity-enhancing foreign direct investment, especially benefiting firms with more skilled workforces.
Final Thoughts
The relative stagnation of East Asia’s leading firms poses a challenge to long-term economic growth. In an era of rapid technological advancement, maintaining competitiveness demands more than just broad digital infrastructure access. It requires ensuring that the most productive firms can innovate, expand, and adopt cutting-edge technologies.
The findings underscore the need for coordinated reforms in skills, infrastructure, and competition to unlock the potential of East Asian firms and enable them to match global leaders.
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