Productivity growth of the globally most productive firms remained robust, despite the slowing in aggregate productivity, which was evident even before the crisis. This rising productivity gap between the global frontier and other firms raises questions about why seemingly non-rival technologies and knowledge do not diffuse to all firms and suggests that future growth will depend on re-harnessing the forces of knowledge diffusion, which propelled productivity growth for much of the 20th century. Accordingly, this book identifies a number of structural impediments to future productivity growth, which span the decline in business start-ups, slowing knowledge based capital accumulation and inefficient resource allocation. The latter is reflected in barriers to up-scaling, which undermine entry into international markets and scope for knowledge diffusion from the global frontier, and relatively high rates of skill mismatch, which constrains the growth of innovative firms. Analysis based on micro and industry-level data highlights the importance of reallocation-friendly policies, including well-functioning product, labour and risk capital markets, efficient judicial systems, bankruptcy laws that do not excessively penalize failure and housing policies that do not unduly restrict labour mobility. Improvements in public funding and organisation of basic research will also become increasingly necessary, while other innovation policies – including R&D fiscal incentives, university-industry R&D collaboration and IPR protection – should be designed so that they do not excessively favour applied vs basic research and incumbents vs young firms.
