Allocative Efficiency, Firm Dynamics, and Productivity in Latvia

Latvia's economy has faced challenges in competitiveness, with labor productivity growth slowing over the past two decades. This paper analyzes labor productivity growth in Latvia and the Baltic region, focusing on allocative efficiency and firm dynamics. Resource misallocation has significantly hindered productivity growth. The findings also indicate a decline in allocative efficiency and limited impact from net firm entry. The contribution of firm entry to productivity growth is negative, while that of firm exit is positive. The paper emphasizes the importance of government policies to support high-quality firm entry, facilitate efficient exit, and improve allocative efficiency to boost productivity growth in Latvia.