---
title: "Fact of the Week: From 1997-2001, 45% of Norway’s Manufacturing Growth Came From More-Productive Firms Gaining Market Share From Less-Productive Ones"
summary: |-
  From 1997 to 2001, about 45 percent of Norwegian non-oil manufacturing growth can be explained by reallocation effects--when more-productive firms progressively gain larger shares of the market at the expense of less-productive ones, writes John Wu in Innovation Files.
date: "2016-11-02"
issues: ["Manufacturing", "Productivity"]
authors: ["John Wu"]
content_type: "Blogs"
canonical_url: "https://itif.org/publications/2016/11/02/1997-2001-45-norways-manufacturing-growth-came-more-productive-firms/"
---

# Fact of the Week: From 1997-2001, 45% of Norway’s Manufacturing Growth Came From More-Productive Firms Gaining Market Share From Less-Productive Ones

An industry grows when so-called “reallocation effects” weed out less-productive firms and allow more-productive firms to flourish. When regulation encourages fair competition, more-productive firms progressively gain larger shares of the market at the expense of less-productive ones, because they use the same inputs more effectively. As less-productive firms leave the industry, they free up resources and market share for more-productive firms to compete over. This leads to a virtuous cycle of reallocation in which resources are put to better and better use.

[A working paper](http://www.norges-bank.no/en/Published/Papers/Working-Papers/2016/152016/) commissioned by the Norwegian central bank estimates that about 45 percent of Norwegian non-oil manufacturing growth between 1997 and 2001 can be explained by reallocation effects. In other words, about half of manufacturing growth during this 5-year period came from more-productive firms making better use of resources that were freed up as less-productive firms left the market.

As an extension to the paper, the authors included an R&D reallocation effect, whereby more profitable firms invest more heavily in R&D with the expectation of earning higher returns in the future. In this innovation race, firms that invest more heavily in R&D tend to increase their productivity by leveraging their successful innovations. When factoring in firm-level R&D investment, the authors attribute 72 percent of non-oil manufacturing growth between 1997 and 2001 to reallocation effects. This highlights the huge role firms’ innovation decisions make in increasing their productivity and driving economic growth.

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*Source: Information Technology & Innovation Foundation (ITIF)*
*URL: https://itif.org/publications/2016/11/02/1997-2001-45-norways-manufacturing-growth-came-more-productive-firms/*