Internal vs. External Firm Productivity Drivers. A Study of the Italian Counties

We analyse productivity growth differentials across 68.000 Italian manufacturing firms over 2001-2010, in order to disentangle internal and external productivity drivers. A two-stage procedure is implemented for extracting fixed effects for 103 home counties of the firms (stage one), and regressing them upon a number of external factors that could affect productivity dynamics (stage two). We find that the local environment matters for firm performance with external drivers, such as financial conditions, social capital and market potential, explaining about two-thirds of the cross-county productivity dispersion.