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Ms. Era Dabla-Norris, Mr. Tidiane Kinda, Kaustubh Chahande, Hua Chai, Yadian Chen, Alessia De Stefani, Yosuke Kido, Fan Qi, and Alexandre Sollaci

COVID-19 hit on the back of weakening productivity growth in many advanced and emerging Asian countries, a trend that could be exacerbated by the pandemic. Interestingly, productivity growth in the region was slowing even amid increased innovation effort, as proxied by spending on research and development (R&D) and number of patents. A key element underpinning this disconnect is the growing dispersion in productivity growth, innovation effort, and digitalization across and within sectors. Asia has risen to become an innovation powerhouse, contributing to more than half of world patents. The rise of Asia as an innovation hub has been driven by a few frontier countries that have experienced a sharp increase in digital and computer-related patents, supported by solid R&D spending and a large share of researchers in the labor force. Within countries, R&D has become more concentrated in a smaller share of firms in frontier Asia. Empirical evidence using firm-level data highlight that the high concentration in R&D is associated with large dispersion in productivity. External exposure to competition and innovation, including through trade, supports innovation and help close productivity gaps for firms closer to the frontier. Non-frontier Asian developing countries have benefited from technology diffusion through a higher share of imported high-technology goods and by granting more patents to non-residents, supported by improvements in human capital and digital infrastructure. For these countries, further integration to the international economy, including global value chains, greater entrepreneurship, and expanding innovative labour supply could support productivity by encouraging innovation, including process innovation which is associated with larger productivity at the firm-level. Policies to foster innovation, reduce productivity gaps, and ultimately boost aggregate productivity can be grouped into two buckets. For countries close to the technological frontier, R&D tax credits and grants, business-university R&D collaboration, and lower trade barriers would support broader-based innovation and help close productivity gaps. For countries farther from the frontier, further improvements in digital infrastructure, skilled labor force, openness to trade and FDI, and patent protection, could promote resource reallocation to the most productive firms and enhance incentives for technological adoption, supporting diffusion and higher productivity.