Productivity differences among firms in Latin American and the Caribbean

While the accumulation of factors of production, both physical and human capital, has helped Latin America and the Caribbean (LAC) to narrow the income gap with developed economies, aggregate productivity is still relatively low. Although there are numerous determinants of aggregate productivity, it is largely based on the underlying productivity of all firms in the economy. Using firm-level data from several waves of the World Bank Enterprise Survey and Chile’s National Manufacturing Survey, we explore the ‘what’ question on productivity dispersion in LAC. We document three stylized facts: (i) there are significant differences in firm productivity within industries – the firm at the 90th percentile of the productivity distribution produces almost seven times as much output (using the same measured inputs) as the 10th percentile firm; (ii) productivity differences persist over time – regressing a firm’s current productivity on its one-year lagged productivity yields an autoregressive coefficient of around 0.9; and (iii) most of the growth in aggregate productivity comes from improvements in the productivity of existing firms. Next, we discuss the factors that explain these persistent productivity differences – the ‘why’ question. We argue that the large productivity differences within industries can be traced back to differences in firm strategy and organization (internal factors), and in the environment in which firms operate (external factors). Finally, we review the existing empirical evidence on the impacts of these factors on firm-level productivity (with a focus on developing countries) and identify knowledge gaps and opportunities for public, private and institutional investments.