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In recent years, productivity growth across the East Asia and Pacific (EAP) region has shown worrying signs of deceleration. At the heart of this issue lies a critical productivity divide between the region’s most advanced firms and the world’s leading companies—particularly those in digital-intensive sectors.

The Innovation Divide: National vs Global Frontier

Firms that sit at the top of the productivity ladder in their respective EAP countries—referred to as the “national frontier”—are failing to keep pace with the “global frontier” of innovation. This global group consists of firms at the cutting edge of technological advancement, often located in North America, Western Europe, or parts of East Asia. Their comparative advantage in integrating digital technologies to boost productivity and fuel innovation is creating a widening gap.

This gap is not just a statistical concern—it is an economic red flag. National frontier firms are typically responsible for significant portions of output and employment. More importantly, they play a pivotal role in disseminating technological advancements to the broader economy. When these firms lag behind, the ripple effect is felt across the entire business ecosystem, stunting broader innovation diffusion and productivity improvement.

Barriers to Progress: Competition, Capital, and Capacity

A deep dive into firm-level dynamics reveals multiple barriers that hinder innovation. Chief among them is insufficient market competition. Lack of competitive pressure reduces firms’ incentives to innovate or adopt more efficient practices. Additionally, the free movement of resources—particularly skilled labor and financial capital—towards more productive firms is often blocked by regulatory rigidities or market inefficiencies.

Equally concerning is the inadequacy of digital infrastructure and skill development in many parts of the region. In an era where digital transformation is a prerequisite for economic dynamism, gaps in broadband penetration, data infrastructure, and tech-savvy workforce capabilities are major stumbling blocks.

Pathways to Productivity Renewal

The recently released World Bank book, Firm Foundations of Growth: Productivity and Technology in East Asia and Pacific, presents a multifaceted solution framework. The recommendations are clear:

Enhance Market Competition: By removing entry barriers and encouraging entrepreneurship, governments can incentivize firms to innovate and improve efficiency.

Invest in Digital Infrastructure: Reliable internet, cloud computing capabilities, and secure data systems are essential for firms to adopt modern technologies and scale.

Develop Relevant Skills: Workforce readiness in digital tools, analytics, and technical domains is crucial. Governments and businesses must collaborate to align education systems with market needs.

Facilitate Resource Reallocation: Policies should enable smoother transitions of labor and capital to more productive and innovative firms, ensuring a dynamic and responsive economy.


Why This Matters

The future of productivity in EAP depends not just on closing the gap between domestic leaders and global innovators but also on spreading gains more broadly. Without strategic intervention, the region risks falling further behind in the global innovation race.

Researchers, businesses, and policymakers have a shared stake in this endeavor. The challenge is systemic—but so are the opportunities. Strengthening the foundations of firm-level productivity can catalyze a new wave of inclusive, innovation-led growth.

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Source : https://openknowledge.worldbank.org/entities/publication/71f83514-6518-4816-9af6-6352376c0362