Dynamics: The Bottom-Up Approach

An industry is usually an ensemble of individual firms (decision making units) which may or may not interact with each other. Similarly, an economy is an ensemble of industries. It is natural to expect that there is a relation between (aggregate) industry or economy productivity and the (disaggregate) firm- or industry-specific productivities. This chapter considers the relation between (total factor or labour) productivity measures for lower-level production units and aggregates thereof such as industries, sectors, or entire economies. In particular, this chapter contains a review of the so-called bottom-up approach, which takes an ensemble of individual production units, be it industries or enterprises, as the fundamental frame of reference. At the level of industries the various forms of shift-share analysis are reviewed. At the level of enterprises the additional features that must be taken into account are entry (birth) and exit (death) of production units.