Research Insights: How Does Firm-Embedded Productivity Affect Cross-Country Income Differences?

The gap in productivity among countries is a fundamental factor contributing to income disparities across countries. Firm-embedded productivity, encompassing knowledge, expertise, patents, brands, and business models, contributes to approximately one-third of the variation in output per worker across countries. Country-specific factors, such as institutions and natural resources, account for the remaining variation. Policies that enhance firm- embedded productivity, such as tax incentives for R&D and research grants, can help reduce global income inequality.