The EU-US total factor productivity gap: An industry perspective

This paper uses the EU KLEMS industry growth accounting database to explore the determinants of the EU-US total factor productivity (TFP) growth gap which started to emerge in the mid-1990s. The bulk of this TFP gap is explained by a handful of market service industries (notably retail & wholesale; financial; and business services) and ICT manufacturing, whilst the EU exhibits a considerably stronger performance with respect to the network utilities. Our analysis of the determinants of TFP growth across countries and industries shows that, as found in previous analyses (e.g., Nicoletti and Scarpetta (2003), Griffith, Redding, and Van Reenen (2004), Inklaar, Timmer and Van Ark (2008)), TFP growth appears to be driven by catching-up phenomena associated with the gradual adoption of new-vintage technologies. Compared with previous analyses, it appears that TFP growth is also significantly driven by developments taking place at the “technological frontier”, and that these "frontier" effects are becoming stronger since the mid-1990's compared with the catching-up drivers of TFP. Industries with higher R&D expenditure and higher adoption rates for ICT-intensive technologies appear to exhibit higher TFP growth rates, other things being equal. R&D in particular is a crucial determinant of TFP growth in ICT-producing manufacturing. Anti-competitive financial market regulations hamper the ability of countries to share in the TFP developments taking place at the frontier. Product market regulations also appear to be related to reduced TFP growth but only in market services, notably in the network utilities. In the retail & wholesale trade industry, cyclical consumption dynamics which permit a better exploitation of scale economies are a highly significant determinant of TFP growth.