The performance of foreign-owned firms captures some of the wider benefits of cross-border flows (foreign capital, ideas and people). The productivity differences with domestically-owned firms are even more 30  striking. Productivity is around twice as high in foreign-owned firms. These stylised facts suggest external openness is an important driver of productivity. Whether it can explain the UK’s productivity gaps is, however, more questionable. The UK in fact scores highly on all the external openness metrics. Given that degree of openness, its productivity under-performs other countries; it sits beneath the regression line of best-fit (Charts 8-11). Openness cannot, on the face of it, easily explain the UK’s productivity gap with other countries. Nor can it explain the UK’s productivity slump since the crisis. Over recent years, most measures of the UK’s external openness have been increasing, not decreasing. Cross-border flows of people, direct investment and trade into the UK have risen to their highest levels in a generation in the past few years, while flows of information have risen to their highest-ever levels, at the same time productivity has flat-lined. 26  For example, Feyrer (2009a) and Feyrer (2009b). Baddeley (2006). 28 The indices of openness come courtesy of the McKinsey’s Global Institute as shown in Manyika et al (2016). 29 For example, Frankel and Romer (1999), Feyrer (2009a) and Feyrer (2009b). 30 Batten and Jacobs (2017). 27  8  All speeches are available online at www.bankofengland.co.uk/speeches  8  A similar openness puzzle is operating at a global level.
Chart 11: Overall openness and productivity GDP per hour worked 100 90 80 70 60 50 40 R² = 0.4635  30 20 10 0  400  300  200  100  0  Total MGI Connectedness Ranking Sources: McKinsey Global Institute, OECD and Bank calculations. Notes: Data for 2014. GDP per hour worked in $ at constant prices, in 2010 PPPs. UK marked in red. 34  All speeches are available online at www.bankofengland.co.uk/speeches  34  Chart 12: Productivity for exporting and non-exporting firms Density 0.018 Non exporter  0.016  Exporter  0.014 0.012 0.01 0.008 0.006 0.004 0.002 0 -0.002  -50  0  50  100  150  200  250  300  GVA per worker, £ Sources: ONS Research Databases and Bank calculations. Notes: Kernel density estimate; real GVA per worker for 2013 and 2014. Chart 13: Productivity for foreign-owned and domestically-owned firms Density 0.016 Domestic  0.014  Foreign 0.012 0.01 0.008 0.006 0.004 0.002 0 -0.002 -50  0  50  100  150  200  250  300  350  400  GVA per worker, £ Sources: ONS Research Databases and Bank calculations. Notes: Kernel density estimate; real GVA per worker for 2013 and 2014.