## Firm Dynamics and Firm-Level Total Factor Productivity in Belgium

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---

### A. Context: Declining Productivity Growth, and Subdued Firm Dynamics
- Belgium’s TFP growth slowdown since the late 1990s has been worse than peers’, despite significant spending on innovation.
- R&D spending (in percent of GDP) reached 3.4 percent of GDP in 2022 following policy measures introduced in 2017.
- TFP growth fell from 1 percent on average over 1990–94 to -0.1 percent in 2015–19.
- Belgium’s TFP growth was lower on average over 1999–2022 than the euro area’s (EA).
- Sector composition:
  - Accommodation and food service activities — employment: 4.9 percent for Belgium and 7 percent for the EU; value added: 1.7 percent for Belgium and 2.7 percent for the EU.
- Firm dynamics:
  - Firm entry rate: 9 percent in Belgium versus 10.5 percent EU and EA averages; entry rate is stagnant.
  - Exit rate: 5.2 percent in Belgium versus 8.7 percent EU average.
  - Recent bankruptcies increased to pre-pandemic levels (Text Chart referenced).

### B. Firm Characteristics
- Firm size and composition:
  - 96 percent of Belgian firms employ fewer than ten employees compared to 94 percent in the EU.
  - Micro firms (ten employees or fewer) make up 32 percent of total employment in Belgium versus 30 percent on average in Europe.
  - Firms with fewer than 50 employees employ 45 percent of Belgian employees versus 49 percent in the EU.
- Young, high-growth firms:
  - Young high-growth firms employ 0.25 percent of those employed in firms with 10+ employees in Belgium versus a euro average of 0.8 percent.
  - Average size of young high-growth firms: 48 employees in Belgium, which is 10 employees fewer than the EU average.
- Scaling and firm age:
  - Average mature firm (above 25 years old) typically has about 12 employees in Belgium.
  - Typical firm below the age of three has about four employees (implied by “thrice as many workers” comment).
  - Employment growth rate of Belgian startups is on par with the EU average, but growth is much lower for above-average TFP startups in Belgium.
- Start-up quality trends:
  - Share of one- to four-year-old firms in the highest productivity decile declined from 14 percent in 2002 to 10 percent in 2021.
  - Share of startups in the lowest TFP decile increased from 27 percent in 2002 to 33 percent in 2021.
  - Possible contributing factor: increase in federal and regional government-funded loan guarantees and additional angel investor and seed funding to startups during the pandemic.
- Spillovers and political connections:
  - Relationships with multinationals or “superstar firms” can boost a firm’s TFP by 8 percent in three years (NBB, 2023).
  - Firms with lower profitability and productivity that purchase inputs from state-owned suppliers have higher leverage and employment, especially if politicians are on their boards (NBB, 2024), which may discourage efficiency and innovation.

### C. Firm Dynamics’ Contributions to Sectoral Productivity Growth (2002–21)
- Decomposition findings:
  - Within-firm TFP growth contributes the most to aggregate sectoral productivity growth; strongest in investment-intensive sectors such as pharmaceuticals.
  - Within-industry market-share reallocation contributions vary by sector; for telecom the contribution is strongly negative.
  - Entry contributes positively in some sectors (e.g., motor vehicle manufacturing).
  - Negative contributions from exits suggest exits are not predominantly from the lowest-productivity firms.

### D. Firm Access to Finance
- Perceptions and overall access:
  - Firms report financing needs that exceed available funding, particularly for bank loans and credit lines.
  - Early-stage startups access a more diverse range of funding options (private venture and angel investor capital), but later-stage funding remains scarce.
- Debt financing:
  - Belgian startups are particularly under-leveraged relative to peers.
  - Leverage defined as the sum of loans and long-term debt as percent of total assets (outliers excluded).
  - Startups face higher interest rates than mature firms; higher borrowing costs are more acute for startups with higher intangible investments.
  - Belgium’s bank-based financial system is ill-fitted for startup funding: risk models, debt-service and loan-maturity requirements, regulatory and supervisory guidelines, and lengthy loan approval processes limit bank financing for high-growth initially unprofitable firms.
- Private equity and venture capital:
  - VC investment in Belgium was 0.04 percent of GDP in 2023.
  - VC in Belgium was twice as low as in the Netherlands and ten times lower than in the United Kingdom (as a share of GDP) in 2023.
  - Deal staging: 57 percent of funding went to seed or early-stage deals in 2023, up from 45 percent in 2013 but down from a peak of 71 percent in 2018.
  - On average over 2007–23, 40 percent of VC investment in Belgium were at late stage compared to 45 percent in Germany and 60 percent in France.
  - Access to VC supports faster growth, job creation, and contributions to aggregate TFP; limited VC constrains firm growth and productivity.
- Tax and policy instruments:
  - The notional interest deduction (NID), introduced in 2006 and abolished in 2023, reduced corporate debt finance bias while it was in force.
  - NID increased equity ratios of Belgian firms by approximately three percentage points above the pre-NID mean equity-to-asset ratio of 39 percent (Meki, 2023).
  - NID was abolished due to fiscal cost and concerns about profit shifting; similar allowances in Austria, Croatia, and Italy were also eliminated.

### E. Labor and Capital Misallocation
- Trends:
  - Labor and capital allocation have deteriorated over recent years.
  - Misallocation has been exacerbated by a growing share of lower-quality startups receiving abundant government support, including loan guarantees for higher-risk borrowers, which may crowd out more productive firms.
- Capital misallocation:
  - Measured by the standard deviations of the marginal revenue product of capital, misallocation has increased in Belgium over the past two decades and remains more pronounced among younger firms.
- Labor misallocation:
  - Misallocation of labor also increased over the past two decades and is typically more pronounced in larger firms, suggesting labor hoarding.
- Wage-setting mechanism:
  - Belgium’s wage-setting process is governed by automatic indexation and a 1996 wage law that restricts salary increases for the coming two years within an upper limit based on hourly wage growth in France, Germany, and the Netherlands with no reference to productivity differentials.
  - Wages are indexed to actual inflation excluding alcohol, tobacco, and petrol prices; indexation applies nearly universally, ensuring a quick pass-through of inflation (including volatile components).
  - The “wage corridor” prevents productivity-based real wage differentiation across industries and firms or adjustment of wages to local labor market conditions and likely contributes to labor misallocation.
  - (Reference: 2023 SIP: “Wage Indexation and International Competitiveness in Belgium: An Uneasy Coexistence”.)

### F. Product Markets and Insolvency Frameworks
- Product market regulation:
  - Belgium’s product market regulation is more restrictive than those of other European advanced economies, constraining TFP growth.
  - Economy-wide product-market regulations are only marginally less restrictive than the three most-constraining regulations in European advanced economies, except on administrative burdens on firms.
  - Restrictions are highest in professional services and retail (except for civil engineers).
  - Closing half the gap with the top three European advanced economies could potentially boost TFP by about 3½ percent in the long run, offsetting losses since the global financial crisis.
- Specific regulatory issues:
  - Price controls are more widespread in Belgium than in the average European advanced economy: nearly half of services prices are either regulated by the government or indexed to inflation.
  - Interactions between public officials and interest groups are not sufficiently regulated: registration of lobbyists is voluntary; public officials are not required to disclose interest groups consulted during regulatory processes; no mandatory cooling-off period after leaving positions.
- Insolvency regime:
  - Belgium’s insolvency regime improved since 2010: personal costs to owners of failed companies are lower; prevention and streamlining of insolvency have improved (notably with revamped early warning, pre-insolvency, and SME-specific procedures).
  - Barriers to a more efficient system remain.

### G. Barriers to Restructuring and Intra-EU Trade Barriers
- Barriers to restructuring:
  - Creditors still cannot initiate restructuring (only liquidation).
  - Delays in restructuring remain lengthy.
  - Courts are still too often involved.
- Intra-EU trade barriers and firm productivity:
  - Despite strides toward the single market, significant barriers to intra-EU trade remain.
  - Non-tariff barriers noted include different treatment of foreign suppliers, and licensing, registration, classification, labeling, and packaging import requirements.
  - Barriers to foreign direct investment are also still significant.
  - Remaining barriers are as high as a tariff equivalent of about 44 percent on average for goods trade—three times higher than trade barriers between US states.
  - For services, barriers are equivalent to a 110 percent tariff (Adilbish and others, 2024).
  - Belgium’s trade integration within the single market is among the highest in the EU.
  - Belgium’s strategic location (with the port of Antwerp as key entry point of goods in the EU), high-quality infrastructure and well-developed logistics network, and strong ties with neighboring countries like the Netherlands and Germany position the country to benefit from further integration, particularly of service trade.
  - The professional services sector, where national competition is limited, entry requirements are rigid, and conduct rules strict, stands to benefit more from EU level harmonization and expanded firm reach than the trade of goods.
- Recommended actions to reduce intra-EU barriers (from source):
  - Invest in cross-border infrastructure to improve connectivity.
  - Liberalize protected sectors to foster increased competition and innovation.
  - Pursue meaningful intra-EU trade liberalization.
  - Harmonize regulations across member states to allow firms to exploit economies of scale and network effects to improve efficiency and productivity (Adilbish, and others., 2024).

### H. Conclusions and Options for Reform (policy implications)
- Key constraints to raising Belgian TFP:
  - Subdued business dynamics (low entry and exit rates).
  - Insufficient firm access to financing, particularly at later growth stages.
  - Labor and capital misallocation, exacerbated by policy distortions and support to lower-quality startups.
  - Predominance of small firms and insufficient scaling of young high-productivity firms.
  - Restrictive product-market regulations and remaining inefficiencies in the insolvency framework.
- Policy options highlighted:
  - Product-market reforms to reduce barriers to entry and lower exit costs to raise TFP.
  - Reform the wage-setting mechanism to better align wage and productivity developments to improve labor allocation.
  - Deepen the European single market and advance the capital market union to support higher firm productivity and facilitate firm scale-up.
  - Improve access to later-stage private equity and reduce distortive supports that favor lower-productivity startups.
  - Increase the availability of long-term risk capital and develop venture capital within an EU-wide push toward capital market union.
  - Explore new policies to reduce the tax debt-bias; authorities could consider reinstating the NID or introducing a similar measure to foster more equity financing, while limiting interest deductions on debt.
  - Wage-setting mechanism reforms could include:
    - Excluding items with volatile prices from the basis for indexation.
    - Widening the group of country comparators.
    - Using unit-labor costs instead of wage growth as basis for comparison.
    - Leaving room for firms at risk to index wages only partially.
  - Remove remaining barriers to trade within the EU and harmonize regulations and bankruptcy frameworks to give Belgian firms access to a much larger customer base, improve competition, and vitalize firm dynamics.

*Prepared by Karen Coulibaly; IMF Selected Issues Paper SIP/2025/022 (completed March 3, 2025).*

### Section 1

### Firm Dynamics and Firm-Level Total Factor Productivity in Belgium

### A. Context: Declining Productivity Growth, and Subdued Firm Dynamics
- Belgium’s TFP growth slowdown since the late 1990s has been worse than peers’, despite significant spending on innovation.
- R&D spending (in percent of GDP) reached 3.4 percent of GDP in 2022 following policy measures introduced in 2017.
- TFP growth fell from 1 percent on average over 1990–94 to -0.1 percent in 2015–19.
- Belgium’s TFP growth was lower on average over 1999–2022 than the euro area’s (EA).
- Sector composition: shares of accommodation and food service activities — employment: 4.9 percent for Belgium and 7 percent for the EU; value added: 1.7 percent for Belgium and 2.7 percent for the EU.
- Firm dynamics:
  - Firm entry rate: 9 percent in Belgium versus 10.5 percent EU and EA averages; entry rate is stagnant.
  - Exit rate: 5.2 percent in Belgium versus 8.7 percent EU average.
  - Recent bankruptcies increased to pre-pandemic levels (Text Chart referenced).

### B. Firm Characteristics
- Firm size and composition:
  - 96 percent of Belgian firms employ fewer than ten employees compared to 94 percent in the EU.
  - Micro firms (ten employees or fewer) make up 32 percent of total employment in Belgium versus 30 percent on average in Europe.
  - Firms with fewer than 50 employees employ 45 percent of Belgian employees versus 49 percent in the EU.
- Young, high-growth firms:
  - Young high-growth firms employ 0.25 percent of those employed in firms with 10+ employees in Belgium versus a euro average of 0.8 percent.
  - Average size of young high-growth firms: 48 employees in Belgium, which is 10 employees fewer than the EU average.
- Scaling and firm age:
  - Average mature firm (above 25 years old) typically has about 12 employees in Belgium.
  - Typical firm below the age of three has about four employees (implied by “thrice as many workers” comment).
  - Employment growth rate of Belgian startups is on par with the EU average, but growth is much lower for above-average TFP startups in Belgium.
- Start-up quality trends:
  - Share of one- to four-year-old firms in the highest productivity decile declined from 14 percent in 2002 to 10 percent in 2021.
  - Share of startups in the lowest TFP decile increased from 27 percent in 2002 to 33 percent in 2021.
  - Possible contributing factor: increase in federal and regional government-funded loan guarantees and additional angel investor and seed funding to startups during the pandemic.
- Spillovers and political connections:
  - Relationships with multinationals or “superstar firms” can boost a firm’s TFP by 8 percent in three years (NBB, 2023).
  - Firms with lower profitability and productivity that purchase inputs from state-owned suppliers have higher leverage and employment, especially if politicians are on their boards (NBB, 2024), which may discourage efficiency and innovation.

### C. Firm Dynamics’ Contributions to Sectoral Productivity Growth
- Decomposition of sectoral productivity growth (2002–21) shows:
  - Within-firm TFP growth contributes the most to aggregate sectoral productivity growth; strongest in investment-intensive sectors such as pharmaceuticals.
  - Within-industry market-share reallocation contributions vary by sector; for telecom the contribution is strongly negative.
  - Entry contributes positively in some sectors (e.g., motor vehicle manufacturing).
  - Negative contributions from exits suggest exits are not predominantly from the lowest-productivity firms.

### D. Firm Access to Finance
- Perceptions and overall access:
  - Firms report financing needs that exceed available funding, particularly for bank loans and credit lines.
  - Early-stage startups access a more diverse range of funding options (private venture and angel investor capital), but later-stage funding remains scarce.
- Debt financing:
  - Belgian startups are particularly under-leveraged relative to peers.
  - Leverage defined as the sum of loans and long-term debt as percent of total assets (outliers excluded).
  - Startups face higher interest rates than mature firms; higher borrowing costs are more acute for startups with higher intangible investments.
  - Belgium’s bank-based financial system is ill-fitted for startup funding: risk models, debt-service and loan-maturity requirements, regulatory and supervisory guidelines, and lengthy loan approval processes limit bank financing for high-growth initially unprofitable firms.
- Private equity and venture capital:
  - VC investment in Belgium was 0.04 percent of GDP in 2023.
  - VC in Belgium was twice as low as in the Netherlands and ten times lower than in the United Kingdom (as a share of GDP) in 2023.
  - Deal staging: 57 percent of funding went to seed or early-stage deals in 2023, up from 45 percent in 2013 but down from a peak of 71 percent in 2018.
  - On average over 2007–23, 40 percent of VC investment in Belgium were at late stage compared to 45 percent in Germany and 60 percent in France.
  - Access to VC supports faster growth, job creation, and contributions to aggregate TFP; limited VC constrains firm growth and productivity.
- Tax and policy instruments:
  - The notional interest deduction (NID), introduced in 2006 and abolished in 2023, reduced corporate debt finance bias while it was in force.
  - NID increased equity ratios of Belgian firms by approximately three percentage points above the pre-NID mean equity-to-asset ratio of 39 percent (Meki, 2023).
  - NID was abolished due to fiscal cost and concerns about profit shifting; similar allowances in Austria, Croatia, and Italy were also eliminated.

### E. Labor and Capital Misallocation
- Trends:
  - Labor and capital allocation have deteriorated over recent years.
  - Misallocation has been exacerbated by a growing share of lower-quality startups receiving abundant government support, including loan guarantees for higher-risk borrowers, which may crowd out more productive firms.
- Capital misallocation:
  - Measured by the standard deviations of the marginal revenue product of capital, misallocation has increased in Belgium over the past two decades and remains more pronounced among younger firms.
- Labor misallocation:
  - Misallocation of labor also increased over the past two decades and is typically more pronounced in larger firms, suggesting labor hoarding.
- Wage-setting mechanism:
  - Belgium’s wage-setting process is governed by automatic indexation and a 1996 wage law that restricts salary increases for the coming two years within an upper limit based on hourly wage growth in France, Germany, and the Netherlands with no reference to productivity differentials.
  - Wages are indexed to actual inflation excluding alcohol, tobacco, and petrol prices; indexation applies nearly universally, ensuring a quick pass-through of inflation (including volatile components).
  - The “wage corridor” prevents productivity-based real wage differentiation across industries and firms or adjustment of wages to local labor market conditions and likely contributes to labor misallocation.
  - (Reference: 2023 SIP: “Wage Indexation and International Competitiveness in Belgium: An Uneasy Coexistence”.)

### F. Product Markets and Insolvency Frameworks
- Product market regulation:
  - Belgium’s product market regulation is more restrictive than those of other European advanced economies, constraining TFP growth.
  - Economy-wide product-market regulations are only marginally less restrictive than the three most-constraining regulations in European advanced economies, except on administrative burdens on firms.
  - Restrictions are highest in professional services and retail (except for civil engineers).
  - Closing half the gap with the top three European advanced economies could potentially boost TFP by about 3½ percent in the long run, offsetting losses since the global financial crisis.
- Specific regulatory issues:
  - Price controls are more widespread in Belgium than in the average European advanced economy: nearly half of services prices are either regulated by the government or indexed to inflation.
  - Interactions between public officials and interest groups are not sufficiently regulated: registration of lobbyists is voluntary; public officials are not required to disclose interest groups consulted during regulatory processes; no mandatory cooling-off period after leaving positions.
- Insolvency regime:
  - Belgium’s insolvency regime improved since 2010: personal costs to owners of failed companies are lower; prevention and streamlining of insolvency have improved (notably with revamped early warning, pre-insolvency, and SME-specific procedures).
  - Barriers to a more efficient system remain.

### G. Conclusions and Options for Reform (summarized policy implications)
- Key constraints to raising Belgian TFP:
  - Subdued business dynamics (low entry and exit rates).
  - Insufficient firm access to financing, particularly at later growth stages.
  - Labor and capital misallocation, exacerbated by policy distortions and support to lower-quality startups.
  - Predominance of small firms and insufficient scaling of young high-productivity firms.
  - Restrictive product-market regulations and remaining inefficiencies in the insolvency framework.
- Policy options highlighted:
  - Product-market reforms to reduce barriers to entry and lower exit costs to raise TFP.
  - Reform the wage-setting mechanism to better align wage and productivity developments to improve labor allocation.
  - Deepen the European single market and advance the capital market union to support higher firm productivity and facilitate firm scale-up.
  - Improve access to later-stage private equity and reduce distortive supports that favor lower-productivity startups.

*Prepared by Karen Coulibaly; IMF Selected Issues Paper SIP/2025/022 (completed March 3, 2025).*

### Section 2

### sipea2025022 - Section 2

### Barriers to restructuring
- Creditors still cannot initiate restructuring (only liquidation).
- Delays in restructuring remain lengthy.
- Courts are still too often involved.

### Intra-EU trade barriers and firm productivity
- Despite strides toward the single market, significant barriers to intra-EU trade remain.
- Non-tariff barriers noted include different treatment of foreign suppliers, and licensing, registration, classification, labeling, and packaging import requirements.
- Barriers to foreign direct investment are also still significant.
- Remaining barriers are as high as a tariff equivalent of about 44 percent on average for goods trade—three times higher than trade barriers between US states.
- For services, barriers are equivalent to a 110 percent tariff (Adilbish and others, 2024).
- Belgium’s trade integration within the single market is among the highest in the EU.
- Belgium’s strategic location (with the port of Antwerp as key entry point of goods in the EU), high-quality infrastructure and well-developed logistics network, and strong ties with neighboring countries like the Netherlands and Germany position the country to benefit from further integration, particularly of service trade.
- The professional services sector, where national competition is limited, entry requirements are rigid, and conduct rules strict, stands to benefit more from EU level harmonization and expanded firm reach than the trade of goods.

### Recommended actions to reduce intra-EU barriers (from source)
- Invest in cross-border infrastructure to improve connectivity.
- Liberalize protected sectors to foster increased competition and innovation.
- Pursue meaningful intra-EU trade liberalization.
- Harmonize regulations across member states to allow firms to exploit economies of scale and network effects to improve efficiency and productivity (Adilbish, and others., 2024).

### Conclusions and options for reform
- Further product market reforms are needed to reduce regulatory and administrative barriers to entry and improve the insolvency regime to lower exit costs in order to raise TFP.
- Specific areas offering opportunities for improvement include:
  - State-imposed price controls.
  - The complexity of regulatory procedures and regulatory capture.
  - Strict occupational restrictions.
- Deepening the European single market and advancing the capital market union would contribute to fostering higher productivity of Belgian firms by allowing firms to scale up and attract financing at a larger scale.
- Removing remaining barriers to trade within the EU and harmonizing regulations and bankruptcy frameworks would:
  - Give Belgian firms access to a much larger customer base.
  - Improve competition.
  - Vitalize firm dynamics.
- Increasing the availability of long-term risk capital and developing venture capital within an EU-wide push toward capital market union could help capital markets play a more prominent role in firm financing.
- New policies to reduce the tax debt-bias should be explored; the authorities could consider reinstating the NID or introducing a similar measure to foster more equity financing, while limiting interest deductions on debt.
- Wage-setting mechanism reforms should aim to better align wage growth with productivity and improve labor allocation. As a first step, reforms could include:
  - Excluding items with volatile prices from the basis for indexation.
  - Widening the group of country comparators.
  - Using unit-labor costs instead of wage growth as basis for comparison.
  - Leaving room for firms at risk to index wages only partially.

*Source: sipea2025022 - Section 2*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025022.pdf_