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Don't blame weak productivity growth on dynamism drop -Fed study

(In Jan 9 item, corrects pronoun in sixth and seventh paragraphs to reflect researcher's gender.)

SAN FRANCISCO (Reuters) - The slowdown in productivity gains that has curbed the potential pace of U.S. economic growth cannot be chalked up to a long-term decline in the rate of new business startups, according to a study published Monday by the San Francisco Federal Reserve Bank.

New business starts now account for about 10 percent of existing U.S. businesses, down from 15 percent in the late 1970s. Meanwhile productivity growth has dropped to about half a percent a year from about 1.5 percent, and is a main reason that the economy is now expected to be able to grow sustainably at about 2 percent rather than the 3 percent of 4 percent that was more usual in decades past.

Startups are often assumed to be more innovative than older firms, and influential Fed policymakers including Fed Chair Janet Yellen and Vice Chair Stanley Fischer have cited the decline in so-called business dynamism as one likely reason for weak productivity gains that are keeping U.S. GDP from growing as fast as in the past.

But it turns out that well-established businesses are probably just as good at innovating as new firms are, according to San Francisco Fed economist Huiyu Li, whose study is published in the bank's latest Economic Letter.

In fact, data on market share and employment growth suggest that existing firms actually contribute more to productivity growth than newly established businesses, she showed.

"New firms may not be as critical to productivity growth as is commonly believed," Li wrote. "Focusing on the detrimental effects from fewer new businesses on aggregate productivity growth may undervalue the strong innovation that existing firms contribute to the economy," she wrote.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)