Periodic Reporting for period 2 - MICROPROD (Raising EU Productivity: Lessons from Improved Micro Data) Reporting period: 2020-01-01 to 2022-06-30 Summary of the context and overall objectives of the project Productivity has slowed down atypically in the developed world. At the same time, the benefits of the small productivity improvements are accruing disproportionately to capital over labour. The distribution of wealth is therefore becoming increasingly and very visibly unequal, a fact that causes societal anxiety and unrest. MICROPROD explored the roots of the productivity slowdown by generating and applying micro data at the level of individual firms.The objectives of MICROPROD are fourfold: i) improve data and methodologies to measure productivity, ii) better understand the within-firm drivers of productivity growth as well as the impact of imperfections at labour and capital markets on the speed of reallocation of production factors, iii) assess the combined effects of globalisation and technological change in terms of their distributional impacts, iv) synthesise the results of the micro evidence to inform macroeconomic models in order to assess what policy environment will be supportive to productivity growth.We conclude that i) building a data infrastructure combining cross-country firm-level data sets is feasible and promising, ii) international trade can improve productivity and that the connections formed through global value chains lead to knowledge flows and promote innovation, iii) societies need to pay particular attention to how input factors are allocated across the economy, as such allocation might limit or foster growth potential, and iv) that technological change and automation tend to increase inequality. Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far WP1 demonstrates how combining already existing data sources in new ways can be used to uncover patterns of firm performance and productivity and their variation across countries and industries and time. Granular firm-level data enhances our understanding of the drivers of aggregate productivity, as it informs about the degree and persistence of productivity dispersion and about reallocation of economic activity between firms. One central aspect is to understand how the institutional environment shapes the distribution of firm productivity, making the case for cross-country comparable data. In the course of the project, we developed a blueprint for a data infrastructure hosted at each national statistical institute that allows researchers to conduct cross-country research using the same research design, even if the details of the underlying data vary. Productivity boards of several EU member states asked the European Commission to support the further development of the infrastructure, which will take place under the lead of the Halle Institute for Economic Research.WP2 aimed at describing how globalisation and global value chains (GVCs) interact with knowledge flows, intangible assets and productivity. Findings show that both import competition and export demand shocks have a sizeable impact on firms’ productivity. For multi-product firms both changes in product-level efficiencies and within-firm product reallocation contribute to aggregate patterns. There are sizeable indirect effects of foreign demand shocks transmitted through trade networks within and across countries and industries, amplified by ownership connections between firms. Intangibles assets play an important role in the structure of business groups and GVCs. Tasks that are more complex tend to be carried out close to the headquarters, while better intangibles at the headquarters allow building more complex hierarchies. GVC-connected firms tend to have more intangibles. Based on the research findings in the work package, we can conclude that the connections formed through GVCs lead to knowledge flows and promote innovation, in this way becoming an important driver for productivity and economic growth. Research and development (as studied in WP3) is seen as a key contributor to growth because it generates knowledge, leading to new or improved products through product innovation, and makes firms more efficient at producing goods through process innovation. Digital systems could be an important driver of productivity growth, particularly in combination with investments in R&D, but there has been little hard evidence. Researchers from the MICROPROD project have assessed the effect of technology investment on productivity and performance. Combining recent unique firm-level data and state-of-the-art research methodologies, MICROPROD research provides a better overview of which firms are most likely to adopt digital technologies and to innovate, and to turn these investments into productivity growth.WP4 studied the deep roots of weak business dynamism in Europe and had a particular focus on (obstacles to) factor relocation. The analysis focused on three aspects. First, we examined the effects of financial market imperfections on factor allocation, firm growth, and productivity. We found that credit frictions are a severe issue harming SME growth and that regulatory forbearance in handling distressed banks generates long-run losses in economic performance. Second, the impact of skill shortage and labour market institutions on firm dynamism was analysed in country specific settings and across countries. We quantified the impact of labour shortage in Hungary on productivity and dynamism and showed in a cross-country perspective how wage-setting institutions impact on economic recovery. Finally, we highlight that import competition improved allocative efficiency in Germany.WP5 allows us to understand whether and to what extent different shocks (trade, automation) might have different aggregate effects in terms of income inequality and wages and through which micro-driven channels any such effects accrue. The latter allows to refine the design of policies aimed at reconciling growth and cohesion at the macro level. Results show that the impact of the trade and automation shock on inequalities stems through two different channels: trade shocks tend to increase inequalities by depressing wages of less skilled workers, while automation shocks increase inequality via their increase in the skill premium. Policy responses aiming at fighting inequalities should thus take into account these different results.WP6 deliverables represents the conclusion of different analyses performed by the MICROPROD researchers ranging from governance models to R&I funding schemes. Covid-19 played a crucial role within the various discussions – especially as regards the effect of this shock on labour, firms and banks.All the research performed and the corresponding policy recommendations can be used by national and European policymakers as they show the elements and variables to consider when develop and/or adjust policies.Results of WP3 – WP6 are exploited and disseminated via research papers, academic conference, policy conferences, and media channels. Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far) Generating a cross-country harmonised database is a big step toward improving on the state of the art and will open up a multitude of new avenues for research and policy advice. MICROPROD’s output comprises several academic papers each containing new scientific contributions, including new evidence as well as methodological innovations, thereby shifting the knowledge frontier. Our micro-evidence can be used as building blocks for macroeconomic evidence that will yield suggestions on how to support an EU policy environment being conducive to productivity growth while taking into account distributional implications.