Study: Productivity dispersion, technological diffusion and productivity growth in Canada

Released: 2020-01-17

Labour productivity growth slowed in Canada and in a number of other developed countries after 2000. In many Organisation for Economic Co-operation and Development countries, this slowing was accompanied by a widening of the labour productivity gap between the most productive firms and all other firms. It has been hypothesized that this growing dispersion in labour productivity would be linked to a slowdown in the diffusion of increasingly complex digital technologies.

Two studies released today—"Frontier Firms, Productivity Dispersion and Aggregate Productivity Growth in Canada" and "Technological Frontiers and Post-2000 Productivity Growth in Canada"—present new Canadian evidence on the growing productivity dispersion between firms. These studies confirm that the slowing productivity growth in Canada is associated with a slower pace of innovation and technological progress and, to a certain extent, a slowdown in the diffusion of innovation and technology.

The first study shows that frontier firms (defined as the top 10% of the most productive firms in each industry) had higher labour productivity growth rates than non-frontier firms (all other firms) from both 1991 to 2000 (3.4% versus 2.4%) and from 2000 to 2015 (1.5% versus 0.5%). Over the study period, the labour productivity growth of frontier firms was also higher than that of non-frontier firms in all industries except in arts, entertainment and recreation; accommodation and food services; and other services.

A decomposition analysis shows that non-frontier firms contributed more than frontier firms to the slowdown in labour productivity growth. The decline in the labour productivity growth of non-frontier firms post-2000 accounted for about 90% of the aggregate decline of 3.21 percentage points. Frontier firms accounted for the remaining 10%.

Despite the finding that non-frontier firms were the largest contributor to the labour productivity slowdown, the studies cast doubt on whether the developments can be linked to a slowdown in the diffusion of increasingly complex digital technologies. First, the growing productivity dispersion is not a recent phenomenon in Canada. Therefore, digitalization is not the sole cause of this increasing dispersion. Other factors—such as economies of scale and intangible assets (intellectual property, organization capital and employee training)—may have contributed to this increasing dispersion as well. Second, while the results from the decomposition analysis are suggestive, they do not constitute direct evidence of the slowdown in diffusion, and the findings could vary depending on which methods are used.

In the second study, there is a more direct focus on the importance of technology diffusion in explaining productivity changes post-2000 using an advanced statistical method. In this method, changes in firm productivity depend on changes in the maximum potential productivity level that can be achieved, as well as on changes in the ability of firms to reach that potential, which is often associated with technological diffusion.

The study finds that the movements in productivity post-2000 were not associated with changes in diffusion, but were largely associated with changes in the potential level of productivity. Research and development expenditures and being under foreign control are correlated with movements in the potential level of productivity, while investments in information and communications technologies and intangible assets are correlated with the ability to reach that potential level.

Products

The studies "Frontier Firms, Productivity Dispersion and Aggregate Productivity Growth in Canada" and "Technological Frontiers and Post-2000 Productivity Growth in Canada," which are part of the Analytical Studies Branch Research Paper Series (Catalogue number11F0019M), are now available.

Contact information

For more information, contact us (toll-free 1-800-263-1136; 514-283-8300; STATCAN.infostats-infostats.STATCAN@canada.ca).

To enquire about the concepts, methods or data quality of this release, contact Wulong Gu (613-951-0754; wulong.gu@canada.ca), Economic Analysis Division.