Renewal Through Industry Switching and Its Impacts on Productivity

Productivity growth in Finland has slowed down due to structural change. Firms are in a continuous process of renewal in a dynamic economy. In addition to firms’ entry and exit, the structure of business sector also renews internally. Some firms renew their product and service offerings to such an extent that they change industry. We find that industry switching by firms are surprisingly common in Finnish business sector. As many as a quarter of companies in the early 2000s that continue to operate in 2018 have switched industries. Similar to entry and exit, the renewal of products and service offerings is a part of structural change that can impact productivity growth of industries. Industry switching has both positive and negative contributions to aggregate productivity in different industries and periods. Gradual industry switching mainly has negative impact on productivity growth suggesting that the change of industry is a survival strategy. On the other hand, more radical industry changes generally have positive impacts on productivity. This result is particularly relevant to the Finnish innovation policy that aims to provide incentives for continuous renewal of companies. Much research has been done on barriers to startup establishment. However, industry switching is also a form of entry, and the barriers of product switching and how those could be lowered should be further explored.