Capital and labour misallocated in less productive firms
Capital and labour are still too often tied up in less productive companies, hindering overall economic dynamism. This misallocation has increased since the COVID-19 pandemic, despite no significant rise in market dominance.
Misallocation hinders productivity gains
The Dutch economy faces a persistent challenge with capital and labour often tied up in less productive companies, hindering overall business dynamism.
This misallocation stifles innovation and impedes economic growth by limiting new market entry and reducing efficiency incentives.
Despite this, De Nederlandsche Bank's analysis shows no significant increase in market dominance.
Market concentration has risen only slightly over fifteen years and remains moderate internationally, while mark-ups show no clear upward trend.
The study notes that smaller Dutch businesses often have higher mark-ups but lower productivity than larger firms.
Competition is shifting market share towards larger, more efficient companies leveraging economies of scale, particularly in internationally competitive sectors.
Preventing excessive market dominance is crucial to protect future competition and innovation.
Policy levers for dynamism
Governments can foster productivity by creating better conditions, with European integration crucial for the Dutch services sector where dynamism lags.
Deeper single market integration and a capital markets union could offer greater economies of scale and competition by addressing varied national regulations.
Investigating Dutch insolvency law's role in company cessation is also suggested.
However, untargeted government intervention requires caution.
While innovation schemes can address market failures, many existing measures, like tax benefits for self-employed and small businesses, lead to inefficient resource allocation.
Untargeted financial support, though sometimes justified, risks sustaining low-productivity businesses, a dilemma highlighted by increased labour and capital misallocation post-COVID-19.
A persistent drag on potential
The DNB's analysis highlights a critical, often overlooked, impediment to economic vitality.
Persistent misallocation of capital and labour, exacerbated by untargeted policies, represents a significant drag on long-term growth potential.
Addressing this requires a nuanced policy approach, balancing market integration with targeted interventions, to unlock dormant productivity.