Title page 1

Contents 7

Foreword 13

Acknowledgments 15

About the Authors 17

Overview 19

Abbreviations 39

1. The Productivity Puzzle 41

The importance of productivity 41

Sources of the productivity slowdown 43

Decomposition of productivity growth 46

The role of new technologies 53

Notes 54

References 55

2. The Importance of National Frontier Firms 58

Frontier firms drive aggregate productivity 58

Size matters: The large impact of frontier firms 59

Highest productivity but falling market share 64

Higher wages but slow employment growth 65

Notes 67

References 68

3. The Performance of Frontier Firms in Global Context 69

Rapid productivity growth of global frontier firms 69

Lagging productivity growth of EAP frontier firms 73

EAP frontier falling behind in advanced technology use 82

Multinational affiliates also lag behind in advanced technology use 92

Notes 101

References 102

4. Why Are the Leaders Not Leading? 106

Firms require incentives from competition 106

Firms must have the necessary capabilities 119

Notes 133

References 133

5. How Can Policy Boost Technology Adoption and Productivity Growth? 137

Reforms to spur competition 138

Reforms to enhance human capital 141

Infrastructure and the synergies between reforms 147

References 149

APPENDIX A. Measurement of Human Capital, Capital Stocks, and the Productivity Frontier 152

APPENDIX B. Supplementary Figures 157

Tables 12

TABLE 4.1. Classification of the mismatch between skills in Vietnamese firms and those in technology origin countries 131

TABLE 4.2. Relationship between skills in Vietnamese firms and those in technology origin countries 131

Figures 9

FIGURE O.1. TFP growth trends in EAP and other selected countries, 1995-2022 20

FIGURE O.2. Decomposition of aggregate productivity growth in selected EAP countries 21

FIGURE O.3. Productivity growth along the firm productivity distribution, EAP countries 22

FIGURE O.4. Productivity gaps between the global frontier and national frontier in EAP countries, by digital sector intensity, 2003-19 23

FIGURE O.5. Technology gap between firms in developing and advanced EAP countries 24

FIGURE O.6. Technology and labor productivity gaps between MNE affiliates in advanced and emerging economies, 2022 25

FIGURE O.7. Share of MNE subsidiaries using AI or cloud computing, by usage level, 2022 26

FIGURE O.8. Share of sector value added and employment of EAP firms, by productivity decile 27

FIGURE O.9. Severity of constraints to manufacturing business operations in developing EAP countries, by labor productivity quartile (versus bottom quartile) 28

FIGURE O.10. Correlation between productivity growth of EAP frontier firms and the presence of state-owned or foreign-owned firms 29

FIGURE O.11. Extent of nontariff barriers and services trade restrictions in EAP countries relative to developing countries elsewhere 30

FIGURE O.12. Management skill gaps between EAP firms and US firms 32

FIGURE O.13. Correlation between firm productivity and tariff reform in Viet Nam 33

FIGURE O.14. Correlation between firm productivity and services reform in Viet Nam 34

FIGURE O.15. Comparisons of productivity and investments in data and software in relation to foreign ownership or fiber broadband capability in the Philippines, 2013-21 36

FIGURE 1.1. Decomposition of labor productivity, by country and income group 42

FIGURE 1.2. TFP growth trends in EAP and other selected countries, 1995-2022 43

FIGURE 1.3. Sources of aggregate productivity growth 44

FIGURE 1.4. Decomposition of aggregate productivity growth, selected EAP countries 47

FIGURE 1.5. Decomposition of labor productivity growth, selected EAP countries 48

FIGURE 1.6. Diffusion of robots and broadband in EAP countries 53

FIGURE 1.7. Within-firm changes in TFP from increases in IT capital or in data and software capital per worker, by industry type, the Philippines, 2010-21 54

FIGURE 2.1. Contribution to aggregate within-firm productivity growth in EAP, by productivity decile 59

FIGURE 2.2. Share of sector value added and employment of EAP firms, by productivity decile 60

FIGURE 2.3. Growth of value-added market share, by productivity decile 64

FIGURE 2.4. Average wages across EAP firms, by productivity level 65

FIGURE 2.5. Average one-year employment growth in EAP firms, by productivity decile 66

FIGURE 2.6. Responsiveness of employment to TFP growth in EAP countries and the United States 67

FIGURE 3.1. TFP growth of firms in advanced economies, by frontier status and sector, 2003-19 71

FIGURE 3.2. Fixed-cost and data investment increases among frontier firms in advanced economies 72

FIGURE 3.3. Productivity growth along the firm productivity distribution, EAP countries 74

FIGURE 3.4. Manufacturing productivity growth along the firm distribution, by EAP country 75

FIGURE 3.5. Services productivity growth along the firm distribution, by EAP country 76

FIGURE 3.6. EAP labor productivity growth along the firm distribution 76

FIGURE 3.7. Productivity gaps between the global frontier and national frontier firms in EAP countries, by digital sector intensity, 2003-19 77

FIGURE 3.8. Productivity growth along the firm distribution in selected non-EAP countries 81

FIGURE 3.9. Technology gap between firms in developing and advanced EAP countries, by sophistication level 83

FIGURE 3.10. Technology gap between firms in select developing countries and the Republic of Korea, by sophistication level 84

FIGURE 3.11. Use of ERP data analytics software, by GDP per capita 85

FIGURE 3.12. Data investment by firms in developing EAP countries versus EU countries, as a share of GDP, 2011 and 2018 86

FIGURE 3.13. Firms' fixed costs, as a share of total costs, in developing EAP countries versus the United States, 2005-23 87

FIGURE 3.14. Share of medium and large firms in emerging markets and advanced economies using ERP software, MNEs versus non-MNEs, 2022 94

FIGURE 3.15. Share of medium and large firms in emerging markets and advanced economies using AI, MNEs versus non-MNEs, 2022 95

FIGURE 3.16. Technology and labor productivity gaps between MNE affiliates in advanced and emerging economies, 2022 96

FIGURE 3.17. Share of MNE subsidiaries using AI or cloud computing, by usage level, 2022 97

FIGURE 3.18. Factors determining AI diffusion within MNEs 99

FIGURE 4.1. Illustration of the relationship between competition and productivity growth of frontier and laggard firms 107

FIGURE 4.2. Changes in firm entry and market concentration from a doubling of state ownership in a sector 108

FIGURE 4.3. State-owned enterprise revenue as a share of GDP, 2019 112

FIGURE 4.4. Young firms' share of industry employment in selected EAP countries, by sector digital intensity 113

FIGURE 4.5. Correlation between productivity growth of EAP frontier firms and the presence of state-owned or foreign-owned firms 115

FIGURE 4.6. Correlation between foreign ownership and technology diffusion and productivity in EAP countries 116

FIGURE 4.7. FDI restrictiveness in EAP countries and GDP per capita, 2023 117

FIGURE 4.8. Services trade restrictiveness in EAP countries and correlation with GDP per capita, 2022 118

FIGURE 4.9. Most-severe constraints to business operations of EAP's most-productive firms, by labor productivity quartile (versus bottom quartile) 121

FIGURE 4.10. Least-severe constraints to business operations of EAP's most-productive firms, by labor productivity quartile (versus bottom quartile) 121

FIGURE 4.11. Correlation between data center availability and GDP per capita in EAP and other countries 123

FIGURE 4.12. Share of workers with selected digital skills in developing versus advanced EAP countries 124

FIGURE 4.13. Management skill gaps between EAP firms and US firms, by level of management sophistication 125

FIGURE 4.14. Investment by Vietnamese firms in technologies from China, Viet Nam, and HICs, 2010-18 129

FIGURE 4.15. Skill abundance of country technology sources for Vietnamese firms, by firm skill quintile 130

FIGURE 4.16. Increase in Vietnamese firms' TFP from a doubling of technology capital per worker, by firm skill quartile 132

FIGURE 5.1. Correlation between firm productivity and tariff reform in Viet Nam 139

FIGURE 5.2. Correlation between firm productivity and services reform in Viet Nam 140

FIGURE 5.3. Trends in diffusion of online platforms in the Philippines and correlation with TFP and wages, 2010-20 141

FIGURE 5.4. Correlation of productivity growth and higher shares of educated workers in frontier firms, by education level 142

FIGURE 5.5. Demand for analytical, interpersonal, or routine tasks in China and Viet Nam, by firm's innovation intensity (regression coefficient) 143

FIGURE 5.6. Change in Philippine firms' e-commerce use after 2012 arrival of internet backbone 148

FIGURE 5.7. Comparisons of productivity or data analytics use in relation to foreign ownership or fiber broadband capability in the Philippines 149

Boxes 8

Box 1.1. Availability of microdata in the East Asia and Pacific region 45

Box 1.2. The reallocation puzzle 48

Box 2.1. Frontier firms and technology diffusion: Examples from Viet Nam 61

Box 3.1. Who are the frontier firms? 70

Box 3.2. Classifying digital-intensive sectors 73

Box 3.3. Productivity of national frontier firms since the COVID-19 pandemic 78

Box 3.4. Investments in fixed-cost technologies 88

Box 3.5. AI and productivity 93

Box 4.1. Drivers of misallocation and productivity loss in the East Asia and Pacific region 109

Box 5.1. Targeted support to firms 145

Maps 12

MAP O.1. Fixed broadband speeds in EAP countries, 2023 31

MAP 4.1. Number of border NTMs, by country, relative to global averages, 2021 120

MAP 4.2. Fixed broadband speeds in EAP countries, 2023 122

Box Figures 9

FIGURE B1.2.1. Relationship between firm value added and productivity in EAP countries 49

FIGURE B1.2.2. Decomposition of productivity growth outside the EAP region 50

FIGURE B3.3.1. Productivity gap between national EAP and US frontier firms, 2015-23 79

FIGURE B3.3.2. Productivity gap between EAP national and US frontier firms, by sector digital intensity, 2015-23 80

FIGURE B3.4.1. Markup rates in EAP, emerging markets, the United States, and other advanced economies, 2005-16 88

FIGURE B3.4.2. Fixed costs (as a share of total costs) for various technologies in the Philippines 90

Out of the Boxes 8

Out of the Box 1. How the EMS Group exemplifies long-term relationships and innovation 62

Out of the Box 2. How one multinational, STEER World, achieves growth and technology diffusion 90

Out of the Box 3. How companies can automate complex production processes 99

Out of the Box 4. How skills and local regulations matter for innovation at one food and beverage multinational 126

Appendix Figures 12

FIGURE B.1. Decomposition of aggregate productivity growth, select EAP countries by decomposition method 157

FIGURE B.2. Labor productivity growth along the firm labor productivity distribution in Mongolia and Thailand 158

FIGURE B.3. Composition of data investment across EU and EAP countries, 2018 159

Appendix Boxes 8

Box A.1. Challenges in measuring human capital 152

Box A.2. Measurement of capital 154

Box A.3. Measuring the productivity frontier 155

Appendix Box Figures 12

FIGURE BA.1.1. Contribution of human capital to differences in cross-country labor productivity 153