Aggregate productivity growth in Europe has disappointed over the last two decades, fuelling concerns about competitiveness. This column argues that firm-level evidence points to a more optimistic picture. Productivity differences between firms have stopped widening, and initially low-productivity firms have started moving up the productivity ladder. To speed up productivity convergence within industries, policies should reduce regulatory and administrative barriers to entry and expansion, strengthen competition enforcement, and deepen the Single Market. Investing in a European harmonised framework for firm-level data is also key for understanding productivity developments and devising economic policy.
Europe’s productivity story may not be quite as gloomy as recent headlines suggest (Aghion et al. 2026). Aggregate productivity growth has undoubtedly disappointed over the past two decades, fuelling concerns about Europe’s competitiveness and its ability to keep pace with the US. Yet newly available firm-level evidence (IWH–CompNet 2026) reveals a more nuanced picture. Across much of Europe, productivity differences between firms have stopped widening after increasing for more than a decade, and a surprisingly large share of initially low-productivity firms are moving up the productivity ladder. Taken together, these findings suggest that the diffusion of technology, managerial know-how, and innovative business practices may finally improve.
The first result concerns the evolution of productivity dispersion across firms. Since the Global Crisis, differences in productivity across firms have widened substantially in most European economies. Such divergence raised concerns that frontier firms were pulling further away while most firms struggled to adopt new technologies and management practices. The latest evidence, however, points to a change in direction. Productivity dispersion has broadly stabilised and, for the representative EU sample of countries, has begun to narrow within each industry (Figure 1, panel A).
Figure 1 Relative change in firms’ productivity dispersion and productivity growth of different percentiles
This should not be interpreted as an objective in itself. An economy benefits from experimentation, innovation, and the emergence of highly productive firms. Some productivity dispersion is therefore both inevitable and desirable. The important question is why dispersion changes (Bighelli et al. 2023). Have productivity gaps moderated merely because the growth of the frontier has slowed, or has there instead been an acceleration of convergence among firms at the bottom end of the distribution? To investigate this further, we compare the relative growth of the bottom, middle, and top deciles of the productivity distribution over the same period. The lowest deciles have grown faster than the frontier in the last decade, while at the same time there has been no stagnation at the top (Figure 1, panel B). These findings are consistent with mechanisms such as stronger technology diffusion, reduced resource misallocation, and other forces that support average productivity growth. Further analysis comparing firms in the top and bottom productivity deciles shows that firms at the lower end of the distribution experienced larger increases in capital deepening and real wages. This pattern is consistent with the relative productivity gains among those firms being extended to their workers. Overall, these results are encouraging from both an efficiency and an equity perspective.
The second finding zooms in on the variation across European countries and focuses on providing implications for policy. In general, roughly one-third of firms that start in the lowest productivity quintile move into a higher quintile within three years (IWH–CompNet 2026). In several European economies, upward mobility is even stronger, including in Germany (Figure 2). Far from being permanently trapped, many lagging firms appear capable of catching up.
Furthermore, the CompNet report reveals that differences across countries and industries explain only a limited share of the variation in the speed of convergence. Their contributions are broadly comparable, while most of the variation arises within individual country–industry cells. This finding echoes van Ark (2026), which shows that Europe’s productivity performance depends primarily on developments within industries rather than on differences in countries’ sectoral composition. The main policy challenge is therefore not just to redirect activity towards particular countries or sectors, but to improve the conditions under which less productive firms can catch up within the markets in which they already operate.
Among the factors that have a strong negative association with the speed of convergence in a given industry and country are firms’ average markups and digital intensity (IWH-CompNet 2026). These findings suggest that policies supporting both competitive pressure and technology diffusion could accelerate productivity catch-up, ensuring that market structure does not impede entry, innovation, or the diffusion of productivity-enhancing technologies. Relevant measures include reducing regulatory and administrative barriers to entry and expansion, strengthening competition enforcement, and deepening the Single Market so that firms can enter and scale across national borders more easily.
Figure 2 Mobility of firms across productivity quintiles
These dynamics are economically important. Two countries may record identical average productivity growth while displaying completely different underlying processes. In one economy, productivity gains may be broadly shared as firms gradually absorb innovation and improve their performance. In another, aggregate growth may be driven by a small number of frontier firms while the majority remain disconnected from technological progress. Aggregate statistics cannot distinguish between these two worlds, yet they imply very different policy priorities.
How can these patterns now be observed? The answer lies in the emergence of harmonised firm-level datasets. For decades, productivity research relied primarily on sectoral averages because internationally comparable firm-level information was largely unavailable. Initiatives such as CompNet have fundamentally changed this landscape by constructing comparable distributions of firm performance across European countries (IWH–CompNet 2026). Rather than describing the representative firm, they allow researchers to observe the entire productivity distribution and, increasingly, how firms move within it over time.
This richer evidence base arrives at an important moment. The Draghi Report has placed productivity and competitiveness at the centre of the European policy agenda, while recent contributions by Bart van Ark and others have shown that most of the productivity gap with the US originates within industries rather than between them (Draghi 2024, van Ark 2026). The challenge is therefore not simply to develop more high-productivity firms but to understand how innovation spreads across the wider business population. Firm heterogeneity has become central to the competitiveness debate (Bighelli et al. 2023).
Europe’s competitiveness debate has understandably focused on weaknesses. But evidence-based policy should also recognise encouraging developments when they emerge. Firm-level based evidence suggests that Europe’s economy is more dynamic than aggregate statistics have led us to believe. Whether this trend continues — and which policies can strengthen it — cannot be answered using aggregate indicators alone. Building a European infrastructure for harmonised firm-level information is therefore not simply an investment in better statistics. It is an investment in a better economic policy.
Source : VOXeu
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