Heterogeneous Firms and the North–South Divide in Italy

In this paper, we document how the productivity gap between firms in the North and in the South of Italy is essentially due to a difference in local competitive pressures, lower in the South. In fact, we find that lower average productivity in the South is driven by the presence of relatively more inefficient firms on the left tail of the distributions, while no significant difference is found among the most productive firms across the country, after controlling for industrial specialization patterns, time-invariant geographic characteristics and different institutional environments at the province-level. In addition, firms’ entry and exit dynamics are more frequent in the provinces of the North, where the average productivity is already higher, pointing to a stronger market selection process than in the South. Eventually, after entry, new firms register productivity levels not different from local incumbent firms, i.e. higher where the average productivity is already higher. Finally, we argue that policies that do not consider the emergence of firm-level heterogeneity at the local level fail in tackling regional disparities.