Productivity Growth and the Speed of Convergence of Domestic Firms

We investigate productivity convergence of domestic firms in a transition economy, Ro- mania. In estimating total factor productivity we allow for varying returns to scale and control for both the endogeneity of the productivity shock and the omitted price variable bias linked to heterogeneous firms' market power. Consistently with our priors, we find that without controlling for the omitted price variable bias absolute convergence estimates are biased upwards. In terms of conditional convergence, we find that the speed of convergence across firms depends mainly on technology transfers from the frontier and, less markedly, by a number of regional and industrial characteristics such as the distance to the capital region, the minimum efficient scale and the absorptive capacity.