This paper provides new evidence on the main characteristics of laggard firms - firms in the bottom 40% of the productivity distribution - and their potential for productivity growth. It finds that laggards are on average younger and smaller than more productive firms, and matter for aggregate resource reallocation. Moreover, younger laggards converge faster toward the productivity frontier, suggesting that the composition of the laggard group matters for future productivity. Yet this report finds that laggards converge at a slower rate in highly digital- and skill-intensive industries, suggesting that there are barriers to technology and knowledge diffusion. This could help explain the much-debated productivity slowdown and the increased productivity dispersion. This report also finds that policies aimed at improving workers’ skills, alleviating financial constraints to investments and increasing firms' absorptive capacity through direct R&D support can accelerate the diffusion of knowledge and technology, and help laggard firms to catch up.
