Chasing the Dream: Industry‐Level Productivity Developments in Europe

ABSTRACT European countries continue to lag in productivity growth, with significant disparities across industries. This study utilises harmonised industry‐level data to examine the patterns and drivers of total factor productivity (TFP) growth across 28 European countries from 1995 to 2020. The empirical analysis yields four key insights. First, TFP growth is strongly influenced by the extent to which countries engage in scientific and technological innovation, either as pioneers or as recipients of knowledge spillovers. Second, closing the technological gap is critical: Countries that converge towards the technological frontier by adopting new innovations tend to achieve greater productivity gains. Third, increased investment in information and communications technology (ICT) capital and research and development (R&D) significantly contributes to higher TFP growth. Finally, the role of human capital becomes more pronounced in countries closer to the technological frontier. These findings underscore the importance of policy interventions and structural reforms that promote innovation and facilitate the diffusion of both emerging and established technologies.