Micro level dynamics of productivity growth

The study analyses the dynamics of productivity growth at the micro level in Finnish manufacturing industries. It is shown that productivity-enhancing restructuring (so-called “creative destruction”) has played a crucial role especially since the mid-1980s. Empirical evidence is provided that R&D efforts and exposure to global competition through imports and exports have affected positively with a few years’ lag. The results for R&D are in accordance with the views that innovations and technological progress entail experimentation, selection and reallocation of resources at the micro level that are important for economic development. An increase in productivity divergence seems to precede increases in creative destruction. However, at the same time creative destruction also compresses productivity dispersion by cleansing low productivity units. The positive effect of international trade, in turn, points to the importance of product market competition which is emphasised in the recent theoretical literature. Finally, the main part of productivity-enhancing restructuring can be attributed to newly established plants, which indicates the importance of entrants to creative destruction.