Total factor productivity and spillover effects: Frontier and Laggard firms dynamics

Abstract

In this paper, I explore the spillover effects of frontier firms on other firms in Türkiye, using a detailed administrative dataset with firm-level data on balance sheets, inter-firm transactions, and employment. I review key production function estimators, evaluate their assumptions and performance using a large dataset of Turkish firms, and use productivity estimates to identify frontier firms and assess their influence on laggard firms' performance. Additionally, I contribute to the empirical literature by exploring the spillover and network effects of frontier firms on laggard firms, as well as examining the productivity convergence of laggard firms to frontier firms. The analysis reveals three key findings: (i) Frontier firms generate positive spillover effects within sectors, which enhance sales, employment, exports, and asset growth among laggard firms; (ii) detailed firm-to-firm invoice data reveals that a higher share of frontier firms in a firm's network significantly boosts investment, net sales, and productivity growth; and (iii) laggard firms show faster productivity growth, with substantial variation across firm types and industries.