Empirical Link between Firm-Level Indicators and Target Variables of Competitiveness: Bayesian Model Averaging Approach

This paper investigates the empirical link between a set of firm-level indicators, developed in the ESCB Competitiveness Research Network, and target variables of competitiveness – real GDP per capita, TFP and export market shares. Our results are based on a Bayesian Model Averaging framework, which allows to investigate a large number of candidate drivers of competitiveness. While our results suggest a strong role for traditional cost and price factors, we also underline the relevance of firm-level information. On the one hand, the heterogeneity of firms affects the response of competitiveness variables to real exchange rate movements. On the other hand, we show that the skewness of the labour productivity distribution itself explains target variables of competitiveness: a fatter right tale of firms' productivity distribution substantially contributes to higher growth in GDP per capita and TFP. Thus, our results suggest that a country’s competitive position is substantially driven by the most productive firms. Economic policies that promote the removal of barriers for highly productive firms are expected to yield significant competitiveness gains.