Firm Productivity, innovation and Financial Development

Abstract

Economists still struggle to explain the large differences in output per worker across countries. The view that these differences are mostly the result of variations in investment rates has now largely been abandoned, as cross-country evidence suggests that total factor productivity (TFP) rather than capital accumulation accounts for observed per capita income differences (Hall and Jones, 1999). The largely unexplained cross-country differences in TFP led to Prescott’s (1998) call for a ‘theory of TFP’. In response, barriers to innovation, imitation and adoption (e.g., Parente and Prescott, 2000) and institutions (e.g., Acemoglu and Johnson, 2005) have often been offered as explanations for low TFP in poorer countries. The current global crisis and the resulting uncertainty have reinforced concerns about growth prospects in many low-income countries. After a decade of almost-universally solid growth performance, the medium-term outlook for many low-income countries appears increasingly uncertain. At the same time, the growth potential in many countries with low TFP remains dim, even beyond the eventual conclusion of this crisis.