Sources of Productivity Growth by Firm Size and Causes of the Negative Exit Effect

Kyoji Fukao, YoungGak Kim and Hyeog Ug Kwon

No E-2025-03, TDB-CAREE Discussion Paper Series from Teikoku Databank Center for Advanced Empirical Research on Enterprise and Economy, Graduate School of Economics, Hitotsubashi University

Abstract: This study examines the dynamics of total factor productivity (TFP) by firm size to clarify the recent drivers of productivity growth in the Japanese economy, utilizing firm-level financial data from Teikoku Databank (TDB) spanning the years 1999 to 2020. In particular, we examine Japan’s distinctive “negative exit effect” by differentiating among various types of firm exit, including bankruptcy, closure, dissolution, and mergers. Our analysis shows that while within-firm productivity improvements at large firms played a dominant role in driving productivity growth through the 2000s, reallocation effects have become increasingly important since the 2010s. Notably, a substantial share of high-productivity firms exited the market through mergers, accounting for nearly half of the overall negative exit effect. Furthermore, while TFP among acquiring firms tends to stagnate in the short term after mergers, their labor productivity shows a significant and sustained increase, likely driven by capital deepening. These findings provide new insights into the shifting drivers of productivity growth in Japan—from within-firm productivity growth to market-driven resource reallocation—as well as into firm-size heterogeneity and the role of mergers in shaping productivity dynamics.

Keywords: productivity dynamics; firm size heterogeneity; negative exit effect; mergers and acquisitions; resource reallocation; total factor productivity; SMEs; Japan (search for similar items in EconPapers)
JEL-codes: D24 G34 L25 O47 O53 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2026-01
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https://hit-u.repo.nii.ac.jp/record/2061613/files/070careeDP-E-2503.pdf

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Working Paper: Sources of Productivity Growth by Firm Size and Causes of the Negative Exit Effect (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:hit:tdbcdp:e-2025-03

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