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Eastern Germany on the brink of closing the productivity gap? Firm level evidence from manufacturing

Bernd Görzig, Martin Gornig, Ramona Voshage and Axel Werwatz

Post-Communist Economies, 2010, vol. 22, issue 4, 499-511

Abstract: After 20 years of transition, productivity in Eastern Germany is still considerably below the Western level. We study the development of the East-West productivity gap at the firm level and link it to firms' product policy. Redesigning their product range was a major challenge for Eastern enterprises as they sought their place in the international division of labour. Based on data from manufacturing we apply a non-parametric extension of the widely used Oaxaca-Blinder method to decompose the average East-West productivity difference. By running separate decompositions for modifiers and non-modifiers of the product range we study the impact of product policy on the productivity gap. We find that the time span 1995-2004 has two component periods: a period of adaptation from 1995 to 2001 and a period of branding from 2002 to 2004. The initial period is characterised by a smaller share of Eastern firms that modify their product range and by a large productivity gap between Eastern and Western non-modifiers of comparable size and sector. The evidence for the second period, however, points to a more active and established role of Eastern German manufacturers: more of them alter their product range and step up their productivity performance.

Date: 2010
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DOI: 10.1080/14631377.2010.518459

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