## sipea2023012

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### Introduction and overview
- Labor productivity in Spain has been weak across several dimensions: levels significantly lower than some peer economies, low growth rate that has not favored convergence, and considerable differences in output per hour worked across Spanish regions.
- Weak productivity holds across sectors, suggesting cross-cutting drivers are more significant than productive structure.
- Post-GFC dynamics:
  - Rapid decline in working hours increased the capital-labor ratio.
  - Employment destruction was biased toward less productive occupations, raising average productivity among remaining employed.
  - Capital deepening contribution settled at a lower level (negative in 2014–19) reflecting lower capital accumulation since the GFC.
- Pandemic-era policies (strengthened furlough scheme, ERTE) produced better labor market dynamics than past crises, but labor productivity performed worse in Spain than in other countries.
- Total factor productivity (TFP) has been consistently low and lagging peers for decades. Contributing factors identified include structural labor market weaknesses, capital misallocation linked to financial frictions, product market regulation, size-related regulations and weak business innovation.
- Recent reforms and commitments include:
  - Changes in regulation of temporary contracts (December 2021) with early results showing a decline in the share of temporary workers.
  - Incentives for provision of training and revamping of the vocational and training system.
  - Spain’s Recovery, Transformation and Resilience Plan (RTRP) contemplates improvements to active labor market policies.

### Data and empirical strategy
- Firm-level data:
  - Covers over 1.2 million Spanish firms during 2003–2019.
  - Orbis Bureau Van Dijk (BvD) microdata compiled by IMF Research Department.
  - Unbalanced panel with about 8 million total observations.
  - Ten economic sectors selected covering about 80 percent of total value added and 70 percent of total employment.
- Firm investment empirical strategy:
  - Firm net investment (ΙΝV_it) = change in fixed assets normalized by one-year lagged fixed assets (interpretable as percent change of firm capital stock).
  - Regression controls: lagged investment, debt-to-asset ratio, debt service ratio, profits, sales growth, firm size, firm age, local product market concentration, and sector-region-year fixed effects.
  - Debt-to-asset ratio and debt service ratio used as proxies for balance sheet health.
- Misallocation and TFP measures:
  - Dispersion of marginal revenue product of capital (MRPK) and labor (MRPL) derived from growth-accounting and profit-maximization frameworks (Hsieh and Klenow, 2009; Hsieh and Song, 2015; Gopinath et al., 2017).
  - Firm-level TFP estimated using De Loecker and Warzynski (2012) and Ackerberg, Caves, and Frazer (2015); value-added on left-hand side.
- Common explanatory variables:
  - Local markets: NACE 2-digit × autonomous community, total of [209] local product markets; concentration measured by Herfindahl–Hirschman index (HHI).
  - Firm size: by employees (0–9, 10–49, 50–249, ≥250) and by fixed-asset quartiles (micro to large).
  - Firm age: years since establishment (firm considered one year old at establishment).

### Firm-level investment: findings
- Aggregate and size patterns:
  - Before the GFC, firm net investment rate averaged about 20 to 30 percent.
  - It dropped to negative territory after the crisis and has only recently started to increase again.
  - Firm investment rate typically positively correlated with firm size (by fixed assets):
    - Before the GFC, a 10-percent increase in firm asset value could raise investment rate by about 0.6 percentage points.
    - A coefficient of 0.05 implies a 10-percent increase in firm asset value could raise investment rate by about 0.5 percentage points.
  - By 2015, there was almost no difference between investment rates of large and small firms.
- Macro and financial drivers:
  - Change in size-dependency of investment over time mainly driven by real interest rate, total deposits growth, and economic policy uncertainty.
  - Large firms disproportionately lower investment when real interest rate increases, total deposit growth declines, or economic policy uncertainty rises.
  - Implication: supporting systemic firms during downturns could better sustain investment potential.
- Firm-level determinants:
  - Firms with healthier balance sheets (lower leverage ratios and debt service ratios) invest more regardless of business cycle.
  - Balance sheet stress relevance increases when financial conditions are tighter; tangible capital investment responds more strongly to changes in financial conditions.
  - Higher firm-level investment correlates with stronger future sales growth and return on assets.
- Macroeconomic indicators in the analysis include series for real interest rate, total deposits growth, and economic policy uncertainty (2003–2019; EPU index mean = 100).

### Resource misallocation and TFP: findings
- Misallocation concept:
  - Dispersion of MRPK and MRPL within sectors indicates allocative inefficiency; in frictionless markets marginal products would be equalized across producers.
- Empirical findings:
  - Significant positive correlations between MRPK and observed indicators of financial constraints: firms with higher MRPK pay higher effective interest rates and hold on average larger shares of intangible assets.
  - The chapter uses marginal revenue product of capital (labor) and marginal cost of capital (labor) interchangeably.
- Within-sector allocative efficiency:
  - Has stabilized in recent years, consistent with rising TFP.
  - Spain remains more inefficient relative to the early 2000s compared to more productive neighbors such as France and Germany.
  - Stabilization of capital misallocation could be partly associated with the “cleansing effect” of credit contractions and accommodative monetary policy improving allocative efficiency.
- Common drivers of misallocation: tax and labor regulations, discretionary governance or credit provision, and imperfect competition in capital, labor, and product markets.

### Firm size, age, and size-dependent distortions
- Capital-market distortions and size:
  - Relevant criterion is capital stock (total value of fixed assets). Micro, small, and medium firms (by fixed assets) pay higher cost of capital than large firms, both before the euro area crisis and in recent years.
  - Firm size measured by employment does not show a robust correlation with cost of external financing.
  - Robustness: firms with less capital stock on average pay higher effective interest rates (proxy for average borrowing cost).
- Firm age, startups, and survival:
  - Start-ups (age < 2 years) face significantly higher frictions in the capital market.
  - Spain has lower entry rates and lower post-entry survival rates compared to EU peers; gaps in entry and survival within first two years declined before 2015 but widened again in recent years.
  - Conditional on surviving after 2 years, probability of surviving within 3 to 5 years is larger in Spain than in a median EU country.
  - Only firms that are 1 or 2 years old face significantly higher cost of capital compared to firms with 10 or more years of experience.
  - Policy implication: focus support on startups to help them survive the first two years.
- The “small business trap”:
  - High prevalence of small and micro firms in Spain; SMEs have on average significantly lower TFP compared to large firms.
  - More than 100 size-related regulations across accounting, financial, insurance, labor, and tax areas can create disincentives to grow.
  - Exact regulatory thresholds cited:
    - >= 10 employees: employees have the right to elect representatives with 15 hours per month paid; not eligible for simplified accounting if the company has either 1) assets of more than EUR 1 mn or 2) sales of more than EUR 2 mn; monthly VAT and income tax retention settlement if company has sales over EUR 6mn.
    - >= 50 employees: employee representatives are elected as members of a works council (comité de empresa); not eligible for simplified balance sheets if the company has either 1) assets of more than EUR 4mn or 2) sales of more than EUR 8mn.
  - Growth accounting indicates firms with less than 10 employees and with 10–49 employees pay less for labor, which could imply size-related misallocations in the labor market.

### Product market competition, innovation, and human capital
- Product market competition:
  - Regional dispersion of regulatory frameworks affects competition. Market Unity Law (2013) aimed to align requirements but application remains slow after Constitutional Court rulings in 2017.
  - Fragmentation of the Spanish market has been increasing since the GFC; sub-national regulations are significant contributors.
  - Empirical finding: more competitive local product markets (lower local HHI) imply both higher investment and higher firm-level TFP.
- Innovation indicators:
  - Spain ranks relatively low in business innovation; business R&D spending as a share of GDP lags European and OECD peers and has not increased materially since 2008.
  - Take-up rate of R&D tax incentives limited; number of firms conducting R&D and number receiving R&D tax reliefs have been declining in recent years.
  - Spanish businesses lag in business-public collaborations, process innovations, and business non-R&D innovative expenditures.
  - Law on Science, Technology and Innovation sets a goal for public R&D funding of 1.25 percent of GDP by 2030 (3 percent including private investment).
- Human capital and training:
  - Despite a 13-percentage point decline over the last decade, the rate of early leavers from education and training (age 18–24) in Spain remains among the highest in Europe.
  - Enrollment in vocational education and training (VET) remains low compared to the region.
  - Recent reforms to vocational and training systems and incentives for provision of training align with raising skills; RTRP active labor market policy reforms aim at personalized itineraries for low employability groups and focus on in-demand skills.

### Policy implications and recommendations
- Support startups to improve survival through the first two years, including non-monetary measures such as promoting employee ownership and facilitating university spin-offs.
- Review and reduce size-dependent regulations that create disincentives to grow and contribute to the “small business trap.”
- Reduce fragmentation in product market regulation across sub-national authorities to enhance competition, investment, and TFP.
- Strengthen business R&D incentives and support to increase take-up of R&D tax incentives and reverse declines in firms conducting R&D.
- Promote higher educational attainment, VET enrollment, and lifelong learning/re-skilling to meet structural demands from digitalization and greening.
- Safeguard firm balance sheets and support large/systemic companies during downturns to limit negative impacts on investment.
- Reduce economic policy uncertainty; reform product market regulation to boost investment.
- Use public investment in large strategic projects (PERTEs) and effective structural reforms to crowd in private investment in tangible and intangible capital.
- Improve access to finance for disadvantaged firms (startups < 2 years or firms with limited physical collateral), review size-related rules, and expand non-monetary startup support (talent search, access to data, reduced regulatory costs).

### Key statistics and sample metrics (selected)
- Net Investment Rate: No. of Observations 6,542,441; Mean 0.32; Std. dev. 1.75; 1st Percentile -1.01; 99th Percentile 3.6
- Leverage Ratio: No. of Observations 5,177,887; Mean 0.30; Std. dev. 0.30; 1st Percentile 0.01; 99th Percentile 1.7
- Log(Fixed Assets): No. of Observations 7,719,755; Mean 11.5; Std. dev. 2.1; 1st Percentile 6.0; 99th Percentile 16.6
- Debt Service Ratio: No. of Observations 5,846,711; Mean 0.3; Std. dev. 1.1; 1st Percentile -4.8; 99th Percentile 6.6
- ROA: No. of Observations 8,055,687; Mean 0.0; Std. dev. 0.2; 1st Percentile -1.4; 99th Percentile 0.7
- Age: No. of Observations 8,062,505; Mean 13.5; Std. dev. 9.2; 1st Percentile 2; 99th Percentile 45
- EMPL: No. of Observations 6,694,141; Mean 9.6; Std. dev. 18.1; 1st Percentile 1; 99th Percentile 131
- Market Share (percent): No. of Observations 7,850,550; Mean 0.2; Std. dev. 2.2; 1st Percentile 0; 99th Percentile 100
- Effective Interest Rate (percent): No. of Observations 4,022,777; Mean 8.6; Std. dev. 12.4; 1st Percentile 0.0; 99th Percentile 100
- TFP Growth (percent): No. of Observations 4,066,854; Mean -0.3; Std. dev. 14.1; 1st Percentile -51.6; 99th Percentile 51.8
- Sales Growth (percent): No. of Observations 7,024,140; Mean 24.4; Std. dev. 125.3; 1st Percentile -90.7; 99th Percentile 935.5
- HHI (0-1): No. of Observations 8,065,049; Mean 0.05; Std. dev. 0.11; 1st Percentile 0; 99th Percentile 1

*Source: IMF staff compilation from chapter "LABOR PRODUCTIVITY DYNAMICS IN SPAIN: A FIRM-LEVEL PERSPECTIVE" (sipea2023012).*

### References ________________________________________________________________________________18

### sipea2023012 - References ________________________________________________________________________________18

### Introduction
- Labor productivity in Spain has been weak across several dimensions: levels significantly lower than some peer economies, low growth rate that has not favored convergence, and considerable differences in output per hour worked across Spanish regions (IMF, 2018).
- Weak productivity performance relative to peers holds across sectors, implying cross-cutting drivers are likely more significant than the productive structure.
- After the Global Financial Crisis (GFC), labor productivity in Spain exhibited a counter-cyclical pattern driven by large employment reductions:
  - Rapid decline in working hours increased the capital-labor ratio.
  - Employment destruction was biased toward less productive occupations, raising average productivity among those remaining employed.
  - Capital deepening contribution settled at a lower level (negative in 2014–19) reflecting lower capital accumulation since the GFC.
- Pandemic policies, particularly the strengthened furlough scheme (ERTE), resulted in better labor market dynamics than in past crises, but labor productivity performed worse in Spain than in other countries.
- Total factor productivity (TFP) has been consistently low and lagging peers for decades. Contributing factors identified include:
  - Structural labor market weaknesses (high share of temporary workers; wide use of sector-level collective bargaining agreements).
  - Capital misallocation linked to financial frictions from size-dependent borrowing constraints.
  - Product market regulation, size-related regulations and policies, and weak business innovation.
- Recent reforms that could positively impact TFP include:
  - Changes in regulation of temporary contracts (December 2021) with early results showing a decline in the share of temporary workers.
  - Incentives for provision of training and revamping of the vocational and training system.
  - Spain’s Recovery, Transformation and Resilience Plan (RTRP) contemplates improvements to active labor market policies.
- The chapter provides an updated assessment of drivers of labor productivity, focusing on both TFP and firm investment using firm-level financial statement data and reviewing reform commitments under the recovery plan.

### Data and Empirical Strategy
- Data:
  - Firm-level data covers over 1.2 million Spanish firms during 2003–2019.
  - Microdata from Orbis Bureau Van Dijk (BvD) database, compiled by IMF Research Department (Díez et al., 2018).
  - Sample is an unbalanced panel with about 8 million total observations.
  - Ten economic sectors selected where database matches sectoral employment and value-added growth from National Statistical Office since early 2000s; these sectors cover about 80 percent of total value added and 70 percent of total employment in the Spanish economy.
- Empirical strategy for firm investment:
  - Firm net investment (ΙΝV_it) defined as change in fixed assets normalized by one-year lagged fixed assets (interpretable as percent change of firm capital stock).
  - Regression specification includes lagged investment, debt-to-asset ratio, debt service ratio, profits, sales growth, firm size, firm age, local product market concentration, and sector-region-year fixed effects.
  - Debt-to-asset ratio and debt service ratio serve as proxies for firm balance sheet health; higher leverage/debt service imply more stressed balance sheets and more difficulty financing investment.
- Construction of misallocation and TFP measures:
  - Misallocation measured by dispersion of firm-level marginal revenue product of capital (MRPK) and marginal revenue product of labor (MRPL), derived from growth-accounting and firm profit-maximization framework (Hsieh and Klenow, 2009; Hsieh and Song, 2015; Gopinath et al., 2017).
  - Firm-level TFP estimated using methods of De Loecker and Warzynski (2012) and Ackerberg, Caves, and Frazer (2015), with value-added on left-hand side; estimation conducted by IMF Research Department.
- Common explanatory variables:
  - Local market concentration: local markets defined by NACE 2-digit sector × autonomous community; total of [209] local product markets; concentration measured by Herfindahl–Hirschman index (HHI).
  - Firm size: two approaches — by employees (0–9, 10–49, 50–249, ≥250 define micro, small, medium, large) and by book value of fixed assets (sample divided into 4 quartiles as micro to large).
  - Firm age: years since establishment (firm considered one year old at establishment).

### Results — Firm-Level Investment
- Aggregate and size-patterns:
  - Before the GFC, firm net investment rate averaged about 20 to 30 percent.
  - It dropped to negative territory after the crisis and has only recently started to increase again.
  - Firm investment rate is typically positively correlated with firm size (measured by total value of fixed assets):
    - Before the GFC, a 10-percent increase in firm asset value could raise investment rate by about 0.6 percentage points.
    - A coefficient of 0.05 implies that a 10-percent increase in firm asset value could raise investment rate by about 0.5 percentage points (note presented benchmark).
  - By 2015, there was almost no difference between investment rates of large and small firms.
- Macro and financial drivers:
  - Change in size-dependency of investment over time mainly driven by real interest rate, total deposits growth, and economic policy uncertainty.
  - Large firms tend to disproportionately lower investment when:
    - Real interest rate increases,
    - Total deposit growth declines,
    - Economic policy uncertainty rises.
  - This pattern aligns with literature finding large companies more sensitive to economic cycles and contributing most to economic fluctuations.
  - Implication: supporting systemic firms during downturns could better sustain investment potential of business sector.
- Firm-level determinants:
  - Firms with healthier balance sheets (lower leverage ratios and debt service ratios) invest more regardless of business cycle.
  - Relevance of balance sheet stress increases when financial conditions are tighter; tangible capital investment responds more strongly to changes in financial conditions.
  - Higher firm-level investment is positively correlated with stronger future sales growth and return on assets.
- Macroeconomic indicators and firm access:
  - Charts indicate real interest rate, total deposits growth, and economic policy uncertainty series (2003–2019; index mean = 100 for EPU).
  - European Commission survey data show percent of surveyed firms citing financial access as factor limiting manufacturing production for DE, UE, ESP, FRA, ITA, EA (time series displayed in source).

### Results — Resource Misallocation and TFP
- Misallocation focus:
  - Analysis concentrates on distortions in allocation of capital and labor across heterogeneous producers.
  - In frictionless markets, marginal products of labor and capital would be equalized across producers with same costs; dispersion of MRPK and MRPL indicates misallocation within sectors.
- Empirical findings:
  - Significant and positive correlations between model-based MRPK and observed indicators of financial constraints:
    - Firms with higher MRPK pay higher effective interest rates and hold on average a larger share of intangible assets.
  - The chapter uses marginal revenue product of capital (labor) and marginal cost of capital (labor) interchangeably for the remainder of the analysis.
- Conceptual framework:
  - Firm optimization problem specifies production y_fst = A_fst k_fst^α ℓ_fst^{1−α}, first-order conditions equate marginal revenue products to factor costs adjusted by reduced-form wedge parameters τ^K_fst and τ^L_fst representing capital and labor market frictions.
  - A higher τ implies firm faces higher cost for factor and more frictions in factor market.
  - The analysis assumes sector-specific factor prices and thus examines misallocation within sectors, not across sectors.

*Source: IMF staff compilation from chapter "LABOR PRODUCTIVITY DYNAMICS IN SPAIN: A FIRM-LEVEL PERSPECTIVE" (selected excerpts).*

### 12.      The within-sector a llocative efficiency in Spain’s capital market has stabilized in recent

### 12.      The within-sector a llocative efficiency in Spain’s capital market has stabilized in recent

### Key findings on allocative efficiency and misallocation
- The within-sector allocative efficiency in Spain’s capital market has stabilized in recent years, consistent with rising TFP.
- Spain remains more inefficient relative to the early 2000s compared to more productive countries in the region such as France and Germany.
- The stabilization of capital misallocation in recent years could partly be associated with the “cleansing effect” of credit contractions and with accommodative monetary policy improving allocative efficiency.
- Common drivers of misallocation discussed in the literature include tax and labor regulations, discretionary governance or credit provision, and imperfect competition in capital, labor, and product markets.

### Evidence on dispersion of marginal revenue product of capital (MRPK)
- The exercise fixes sectoral share of gross value added at its initial level and normalizes MRPK dispersion in 2005 as 1 for all countries.
- Charted comparisons start in 2005 to avoid big jumps in sample coverage.
- Elevated level of misallocation implies a large variation in firms’ marginal productivity of capital.
- Firms with higher marginal product of capital are facing larger financing cost and are thus more financially constrained.

### Firm size and capital market distortions
- The relevant criterion for capital market distortions is the level of capital stock, measured as the total value of fixed assets.
- Micro, small, and medium-sized firms defined based on fixed asset value pay a higher cost of capital compared to large firms, both before the euro area crisis and in recent years.
- Firm size measured by employment does not show a robust correlation with the cost of external financing.
- Robustness check: firms with less capital stock on average pay higher effective interest rates (proxy for average borrowing cost).
- Chart indicators (exact labels preserved):
  - Firm Marginal Cost of Capital Across Different Sizes (in log differences) — differences relative to group of large firms, controlling for firm-specific characteristics and region-industry-year fixed effects.
  - Firm Effective Interest Rate Across Different Sizes (in percentage points) — differences relative to group of large firms, controlling for firm-specific characteristics.

### Firm age, startups, and survival
- Start-ups with an age of less than two years face significantly higher frictions in the capital market.
- Spain’s business sector tends to have lower entry rates and lower post-entry survival rates compared to EU peers.
- Gaps in entry rates and survival rates within the first two years declined before 2015 but became larger again in recent years.
- Conditional on surviving after 2 years, the probability of surviving within 3 to 5 years is larger in Spain than in a median EU country.
- Only firms that are 1 or 2 years old face significantly higher cost of capital compared to firms with 10 or more years of experience.
- Policy implication: focus on supporting startups to help them survive through the first two years.
- Chart indicators preserved:
  - Survival Rates Within the First Two Years (in percent of total entrants within the past 2 years) — shows EU 25th–75th percentile, EU median, and Spain (2012–2019 series).
  - New Entrants (in percent of active enterprises) — shows EU 25th–75th percentile, EU median, and Spain (2010–2019 series).
  - Firm Marginal Cost of Capital and Age (in log differences) — differences relative to group of firms with 10 or more years of experience.

### Size-dependent regulations and the “small business trap”
- Spain has a high prevalence of small and micro firms compared to other European countries; SMEs have on average significantly lower TFP compared to large firms.
- More than 100 size related regulations exist in Spain, across accounting, financial, insurance, labor, and tax areas.
- Size-related regulations can create advantages for small businesses but may reduce incentives to grow and create inefficiencies.
- Example regulatory thresholds preserved exactly as shown:
  - >= 10 employees: employees have the right to elect representatives with 15 hours per month paid; not eligible for simplified accounting if the company has either 1) assets of more than EUR 1 mn or 2) sales of more than EUR 2 mn; monthly VAT and income tax retention settlement if company has sales over EUR 6mn.
  - >= 50 employees: the employee representatives are elected as members of a works council (comité de empresa); not eligible for simplified balance sheets if the company has either 1) assets of more than EUR 4mn or 2) sales of more than EUR 8mn.
- Growth accounting results: firms with less than 10 employees and with 10–49 employees pay less for labor, which could imply size-related misallocations in the labor market.
- Chart indicators preserved:
  - Share of Firms with 1-9 Employees (in percent of total enterprises, 2019) — Spain compared with listed countries and Euro Area.
  - Total Factor Productivity (TFP) and Firm Size (in log differences) — differences relative to group of large firms with 250 or more employees.
  - Firm Marginal Cost of Labor Across Different Sizes (in log differences) — differences relative to group of firms with 250 or more employees.

### Labor market frictions affecting young firms
- Young firms use a larger share of temporary contracts, implying higher employment instability and precautionary use of flexible contracts.
- Young firms face higher labor search costs than established firms.
- Labor market rigidity can prevent young firms from expanding to desirable scale.
- Growth accounting verifies startups (age < 2 years) and young firms (age 3–5 years) have a higher labor wedge, indicating more labor market distortions.
- Recent policy changes:
  - Spain modified labor regulation to promote the use of permanent contracts rather than temporary ones; since implementation there has been a significant increase in the share of permanent contracts, but it is too early to make a full assessment.
  - The new legal framework strengthened short-time work schemes to provide flexibility to firms facing shocks.
- Policy implication: supports to startups could include non-monetary measures such as promoting employee ownership and facilitating startup spin-offs from science and universities.

### Product market competition, innovation, and other drivers of TFP
- Regional dispersion of regulatory frameworks has affected product market competition.
- Market Unity Law (2013) aimed to align regulatory requirements across central, regional, and local authorities, but application remains slow after Constitutional Court rulings in 2017.
- Fragmentation of the Spanish market has been increasing since the GFC; sub-national regulations are significant contributors.
- Empirical finding: more competitive local product markets (lower local HHI) imply both higher investment and higher TFP at the firm level.
- Evidence and indicators for innovation and human capital:
  - Spain ranks relatively low in business innovation; business R&D spending as a share of GDP lags European and OECD peers and has not increased materially since 2008.
  - The take-up rate of R&D tax incentives has been limited; the number of firms conducting R&D activities and the number receiving R&D tax reliefs have both been declining in recent years.
  - Spanish businesses lag in business-public collaborations, process innovations, and business non-R&D innovative expenditures.
- Innovation indicators preserved:
  - R&D and Other Innovations, 2021: relative positions for Public sector R&D, Venture capital expenditure, Government R&D support, Business R&D, Non-R&D innovative expenditures, Innovation expenditure per person employed, SME product innovations, SME business process innovations, Innovative SME collaboration, Public-private co-publications, Patent applications, Trademark applications (Spain vs Median and 90th percentile).
  - OECD: R&D Intensity (in percent of GDP) — 2008 vs 2020 positions with Spain included.
- Human capital and training:
  - Despite a 13-percentage point decline over the last decade, the rate of early leavers from education and training (age 18–24) in Spain remains among the highest in Europe.
  - Enrollment in vocational education and training (VET) remains low compared to the region.
  - Recent reforms to vocational and training systems and incentives for provision of training align with raising skills; RTRP active labor market policy reforms aim at personalized itineraries for low employability groups and focus on in-demand skills.

### Policy implications and areas for reform (implied by findings)
- Target support to startups to improve survival through the first two years (including non-monetary measures such as employee ownership and facilitating university spin-offs).
- Address size-dependent regulations that create disincentives to grow and contribute to the “small business trap.”
- Reduce fragmentation in product market regulation across sub-national authorities to enhance competition, investment, and TFP.
- Strengthen business R&D incentives and support to increase take-up of R&D tax incentives and reverse declines in firms conducting R&D.
- Promote higher educational attainment, VET enrollment, and lifelong learning/re-skilling to meet structural demands from digitalization and greening.

*Source: Orbis BvD database and IMF staff calculations; selected figures and charts as presented in the chapter.*

### 20.      Spain has committed to

### sipea2023012 - 20.      Spain has committed to

### Human Capital
- Labor reform enacted in 2022 aimed to combat the high prevalence of temporary employment to support accumulation of workers’ human capital.
- Initial data suggests the proportion of permanent hires has increased significantly (too early for full assessment).
- Recovery plan education reforms include:
  - investments in digital skills,
  - expansion of vocational training,
  - modernization of the education system,
  - revamp active labor market policies (to limit loss of human capital during unemployment).
- Recommendation: Evaluate the effectiveness of new programs once they have been in place for some time.

### Innovation and R&D
- Law on Science, Technology and Innovation sets a goal for R&D public funding of 1.25 percent of GDP by 2030 (3 percent including private investment).
- The plan increases budgetary support for R&D and innovation but should be complemented with a review of the existing incentives framework.
- Further efforts needed to:
  - strengthen collaborations between the public and private sectors,
  - identify impediments to business innovation.
- Adoption of large strategic projects (PERTEs) offers opportunity to foster synergies between public and private investment and promote innovation.
- A tabulated note references a target "2 percent of GDP in R&D investment" under AreaKey Initiatives.

### Business Demographics, Dynamics, and Competition
- Recent measures and laws:
  - Law on Business Growth to eliminate financial and administrative barriers to firm growth and reduce delinquency rates.
  - New Start-up Law under legislation to provide incentives and facilitate creation of innovative companies.
  - Sectoral conference for Regulatory Improvement and the Business Climate (established in 2021) to enhance cooperation across levels of government.
- Identified frictions and recommendations:
  - Review size-dependent regulatory thresholds in labor and tax spheres that may discourage business growth.
  - Better align regulatory framework across regional and local authorities to promote market integration and business competition.
  - Continued work on aligning regional regulatory framework and improving product market competition is warranted.
- Startups with less than 2 years of experience:
  - Identified as the most vulnerable age group,
  - Show much lower survival rate compared to other European countries,
  - Face significant disadvantages in both the capital and the labor market compared to older firms.
- High market concentration is associated with both weak investment and weak TFP growth.

### Investment, Allocative Efficiency, and TFP Findings
- Low labor productivity growth in recent years was mostly driven by a lack of capital deepening because of weak firm investment amid a continued deleveraging process since the GFC.
- Large firms lowered investment disproportionately more in response to the unfavorable macroeconomic shock.
- Firm balance sheet health and growth potential are significant factors affecting investment decisions.
- Allocative inefficiency remains relatively high in Spain compared to neighboring countries.
- Misallocation across firms’ size and age groups is identified in both the capital market and the labor market.
- Size-dependent financial constraints and size-dependent labor regulations (and possibly other regulations, including in tax and accounting) are significant determinants of TFP.

### Policy Measures to Support Investment and Firms
- Safeguarding firm balance sheets and supporting large and systemic companies during downturns could limit the impact of negative macroeconomic shocks on investment.
- Pandemic-era firm support measures (state-backed guarantee program and solvency support to strategic companies and other businesses affected by COVID) have preserved the environment for resuming corporate investment.
- Policy recommendations:
  - Reduce economic policy uncertainty.
  - Reform product market regulation to boost investment.
  - Use public investment in large strategic projects (PERTEs) and effective structural reforms to crowd in private investment in tangible and intangible capital.
  - Alleviate distortions faced by startups and SMEs by:
    - improving access to finance for disadvantaged firms (e.g., startups with less than two years of experience or firms with limited physical capital as collateral),
    - reviewing the large number of size-related rules and regulations,
    - expanding non-monetary support to startups (facilitating search for talent, providing easier access to data, reducing regulatory costs).

### Key Statistics and Sample Metrics (Annexes)
- Annex I: Sectoral comparisons (ratios of 2019 over 2003) from Eurostat and Orbis BvD for selected sectors (examples):
  - Manufacturing: Eurostat 1.12; Orbis BvD 1.01; 0.94; 0.93 (table formatting in source).
  - Construction: Eurostat 0.81; Orbis BvD 0.74; 0.58; 0.72 (table formatting in source).
  - Wholesale and retail trade; repair of motor vehicles and motorcycles: Eurostat 1.56; Orbis BvD 1.49; 1.11; 1.18 (table formatting in source).
  - Transporting and storage: Eurostat 1.44; Orbis BvD 1.49; 1.60; 1.40 (table formatting in source).
  - Accommodation and food service activities: Eurostat 1.37; Orbis BvD 1.65; 1.53; 1.51 (table formatting in source).
  - Information and communication: Eurostat 1.22; Orbis BvD 1.53; 1.09; 1.30 (table formatting in source).
  - Professional, scientific and technical activities: Eurostat 1.94; Orbis BvD 2.22; 1.47; 1.47 (table formatting in source).
  - Education: Eurostat 1.51; Orbis BvD 1.56; 1.90; 1.91 (table formatting in source).
  - Human health and social work activities: Eurostat 1.86; Orbis BvD 1.93; 2.01; 1.96 (table formatting in source).
  - Arts, entertainment and recreation: Eurostat 1.82; Orbis BvD 1.66; 1.78; 1.97 (table formatting in source).
  - Other services activities: Eurostat 2.06; Orbis BvD 1.87; 1.77; 1.49 (table formatting in source).
- Annex II: Descriptive statistics, full sample (all variables winsorized to eliminate bottom and top 1 percent; observations with effective interest rate higher than 100 percent excluded):
  - Net Investment Rate: No. of Observations 6,542,441; Mean 0.32; Std. dev. 1.75; 1st Percentile -1.01; 99th Percentile 3.6
  - Leverage Ratio: No. of Observations 5,177,887; Mean 0.30; Std. dev. 0.30; 1st Percentile 0.01; 99th Percentile 1.7
  - Log(Fixed Assets): No. of Observations 7,719,755; Mean 11.5; Std. dev. 2.1; 1st Percentile 6.0; 99th Percentile 16.6
  - Debt Service Ratio: No. of Observations 5,846,711; Mean 0.3; Std. dev. 1.1; 1st Percentile -4.8; 99th Percentile 6.6
  - ROA: No. of Observations 8,055,687; Mean 0.0; Std. dev. 0.2; 1st Percentile -1.4; 99th Percentile 0.7
  - Age: No. of Observations 8,062,505; Mean 13.5; Std. dev. 9.2; 1st Percentile 2; 99th Percentile 45
  - EMPL: No. of Observations 6,694,141; Mean 9.6; Std. dev. 18.1; 1st Percentile 1; 99th Percentile 131
  - Market Share (percent): No. of Observations 7,850,550; Mean 0.2; Std. dev. 2.2; 1st Percentile 0; 99th Percentile 100
  - Effective Interest Rate (percent): No. of Observations 4,022,777; Mean 8.6; Std. dev. 12.4; 1st Percentile 0.0; 99th Percentile 100
  - TFP Growth (percent): No. of Observations 4,066,854; Mean -0.3; Std. dev. 14.1; 1st Percentile -51.6; 99th Percentile 51.8
  - Sales Growth (percent): No. of Observations 7,024,140; Mean 24.4; Std. dev. 125.3; 1st Percentile -90.7; 99th Percentile 935.5
  - HHI (0-1): No. of Observations 8,065,049; Mean 0.05; Std. dev. 0.11; 1st Percentile 0; 99th Percentile 1

*Source: sipea2023012 - 20.      Spain has committed to (IMF).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023012.pdf_