Why do some firms produce vastly more than others, even within the same industry?
Productivity is not uniform. A massive gap exists between the most efficient firms and the rest, a divide that has widened significantly since the 2008 financial crisis. Understanding why large firms often outperform smaller ones—and how management, technology, and scale drive these differences—is essential to unlocking global economic growth.
Productivity differences between firms are profound. In the UK, workers at the 90th percentile of productivity produced 3.5 times more output than those at the median in 2023, a gap that has grown from 2.9 times before the 2008 financial crisis. This dispersion is not merely a statistical curiosity; it reflects a fundamental reality where a 'fat tail' of low-productivity firms coexists with highly efficient, internationally competitive giants. While large firms generally enjoy higher labour productivity due to economies of scale, easier access to finance, and a greater propensity to adopt new technologies, this is not a universal rule. In Luxembourg, for instance, very small firms with 1-9 employees actually surpass the largest firms in productivity.
The mechanisms driving these disparities are multifaceted. Beyond firm size, industry-specific factors and the quality of human capital—including both workforce and management skills—are critical determinants. In developing economies, productivity is often stifled by bureaucratic rules, weak promotion incentives, financial constraints, and limited managerial autonomy. Furthermore, the presence of multinational enterprises can be a double-edged sword: while they may foster knowledge spillovers that benefit local firms, they also engage in profit-shifting to low-tax jurisdictions, which can artificially inflate national productivity figures and complicate international comparisons.
Dynamic processes like scaling also play a role. Firms that grow through employment often see a temporary dip in productivity before catching up to their peers, whereas firms that scale through turnover may experience different growth trajectories. The health of the broader ecosystem matters too; the absence of new start-ups, which are vital for innovation and technology diffusion, can dampen long-term productivity. Ultimately, the concentration of labour in highly productive firms suggests that allocative efficiency remains a key driver of economic output, even as business dynamism—measured by job reallocation rates—has declined across industries since 2001.
Source: Productivity in Firms
