|Average TFP in t-1|-34.594|12.254|6.546**|4.408|0.810|0.076|
|---|---|---|---|---|---|---|
||(0.310)|(0.416)|(0.033)|(0.440)|(0.789)|(0.905)|
|Sector FE|Yes|Yes|Yes|Yes|Yes|Yes|
|Year FE|Yes|Yes|Yes|Yes|Yes|Yes|
|Observations|657|957|657|957|657|957|
|Average change FDI<br>(million USD)|39.8|21.3|-3.29|-1.47|4.93|-1.47|

Note: The top panel of the table shows the coefficients obtained by regression sector-level output tariffs (columns 1, 2 and 3) and input tariffs (columns 3, 4 and 5) on sector-level productivity in the preceding year. Sector-level productivity is calculated as the weighted average of listed firms TFP, weighted by sales shares. The bottom panel considers FDI (in logs) in own sector (column 1), FDI in upstream manufacturing sectors in column 3 and 4, and FDI in upstream service sectors in column 5 and 6. All regressions include sector and year fixed effects and are weighted by the number of firms in each sector for each given year. Standard errors are clustered at the sector level. Significant at *10%, **5%, ***1%.

# **5. Results**

## **5.1. Productivity differences and dynamics**

The results of the productivity estimates reported in Table 4 reveal two patterns. First, aggregate productivity growth at the firm level for the subset of firms under analysis is consistent with patterns observed at the macro level. Second, there are sizable differences in productivity within sectors, suggesting some distortions at play that prevent productivity convergence.

Estimated aggregate productivity grew at an average rate of 2.5 percent between 2013 and 2017, with maximum growth of 4.7 percent in 2015 and a minimum of 1.1 percent in 2017. We decompose the aggregate TFP growth into a within-firm component, which explains the extent to which aggregate productivity grew because individual firms increased their productivity given the firms’ market shares, and a between-firm component, explaining the extent to which aggregate productivity grew because of more productive firms absorbing resources from less productive ones (given firm’s productivity). Results are presented in Table 4.<sup>14</sup> Most aggregate productivity growth observed during the period has been driven by more productive firms becoming larger (the between-firm component). This is suggestive of a growth-enhancing ‘Darwinian’ market mechanism (or ‘creative destruction’), which allocates resources away from low-productivity firms towards high-productivity firms. Firms’ average productivity (the within-firm component) has not grown since 2015, which has put downward pressure on aggregate productivity.

Table 4 – Aggregate TFP growth has been driven by between-firm reallocations while within-firm productivity growth has been mostly low or negative

|Year|Overall TFP<br>growth|Within-firm<br>TFPgrowth|Between-firm<br>TFPgrowth|
|---|---|---|---|
|2013|0.026|0.005|0.021|
|2014|0.016|0.014|0.002|
|2015|0.047|-0.035|0.082|
|2016|0.024|-0.012|0.036|
|2017|0.011|-0.015|0.026|
|2013-2017|0.025|-0.009|0.033|

14 Two other terms in the decomposition – exit and entry of firms – are negligible in this case. Given the small number of companies “exiting”, their contribution to aggregated TFP has also been found to be extremely small, hence it is not reported in the table. The analysis, therefore, focuses on a balanced panel of 357 firms.

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