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

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.