Small and Vulnerable: Small Firm Productivity in the Great Productivity Slowdown

IMF Working Papers, December 18, 2020

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Broad-based evidence of a firm size premium of total factor productivity (TFP) growth in Europe after the Global Financial Crisis.
TFP growth of smaller firms was more adversely affected and diverged from their larger counterparts after the crisis.
The impact was progressively larger for medium, small, and micro firms relative to large firms.
Impact was disproportionally larger for firms with limited credit market access.
Smaller firms were less likely to have access to safer banks: those that were better capitalized and with a presence in the credit default swap market.
Horseraces suggest that firm size may be a more important and robust vulnerability indicator than balance sheet characteristics.
The results imply that the tightening of credit market conditions during the crisis, coupled with limited credit market access especially among micro, small, and medium firms, may have contributed to the large and persistent drop in aggregate TFP.

Firm size premium: smaller firms experienced weaker TFP growth relative to large firms in the post-crisis period.
Size gradient: the adverse impact increased progressively from medium to small to micro firms when compared to large firms.
Credit access link: firms with limited credit market access suffered disproportionately larger TFP setbacks.
Banking channel: smaller firms had less access to safer banks (better capitalized banks and banks with a presence in the credit default swap market).
Vulnerability indicator: firm size emerged as a potentially more important and robust indicator of vulnerability than balance sheet characteristics in horserace comparisons.

Tightening credit market conditions during the Global Financial Crisis likely contributed to a large and persistent drop in aggregate TFP through disproportionate effects on micro, small, and medium firms.
Limited credit market access and differential access to safer banks appear central to understanding post-crisis productivity dynamics across firm sizes.