Creative Destruction and Policy Reforms : Changing Productivity Effects of Firm Turnover in Moroccan Manufacturing

How important is firm turnover to national productivity growth? The literature points to the contribution of creative destruction being strongest in more developed countries or where market institutions are strongest. This paper looks at the case of Morocco, spanning 16 years, during which reform initiatives aiming to strengthen market forces were introduced. The paper argues that it is important to take into account i) the timing of how decompositions are structured (capturing the effects of high growth among young firms as part of the benefit of increased entry) and ii) the additional indirect impacts of firm dynamics on agglomeration externalities and competition. The paper shows there are striking differences in the productivity paths of entering and exiting firms compared with incumbents, and that restricting the time horizon of productivity decompositions to the actual year of entry or exit underestimates the productivity effects of turnover. Although it has been hypothesized that conducting decompositions over longer horizons would increase the positive contribution of net turnover, this is not the case in Morocco as losses from exiting firms rise too. Nor has the net contribution of turnover increased with market reforms; if anything, the contribution has declined over time. But the allocation of resources has improved. Both technical and allocative efficiency have risen since the mid-1990s. The paper also shows that firm turnover affects productivity through additional channels. It is closely correlated with measures of agglomeration that are associated with higher rates of exit among unproductive firms, and turnover itself is positively associated with subsequent productivity growth of incumbents