Asia's Productivity Boom

Sustainable economic growth comes from building institutions and developing economies that allow companies to generate greater gains from capital and labor. On the capital side of the equation, Asia's deepening financial markets and growing adoption of capital-light business models enable businesses to use assets more efficiently. On the labor side of the equation, Asia's workforce benefits from rising education levels and growing entrepreneurial spirit, helping to make the most of its existing human talent. The marriage of the productivity gains between capital and labor has resulted in regional growth rates that are likely to continue to outpace the U.S., Europe and Latin America.

Economists use Total Factor Productivity (TFP) to measure increases in economic growth not attributed to higher inputs in the volume of capital and labor. Accordingly, higher TFP reflects better use of capital and labor, as opposed to simply more capital and labor. The Asian Productivity Organization, which tracks economic data globally, reports that the U.S. generated average annual TFP growth of 0.8% over a recent 46-year period from 1970 to 2016

1. In comparison, roughly half of all Asian economies generated higher TFP growth than the U.S. during the same period, according to the group's research. Turning to Asia's largest economy, China generated average annual TFP growth of roughly 3% over the same period, meaning that China has consistently generated higher economic output with existing resources.

Notably, TFP comes from the private sector and represents the collective efficiency of individual companies (and their human capital) within a broader economy. From a bottom-up research perspective, we find that companies driving Asia's productivity boom include software makers, online platforms and cloud storage providers for small and medium-sized enterprises. As active portfolio managers, we also see opportunities in companies that invest heavily in R&D and compete on intellectual property and brand differentiation and awareness.

Small Companies Signal a Healthy Ecosystem

Small companies serve a vital function in entrepreneurial economies by feeding creativity, new ideas and innovative services into domestic and regional markets. The entrepreneurs running small companies in Asia today are very different than earlier generations of business owners, both in terms of human capital and financial capital. Asia's productivity boom allows small companies to do more with less, as labor and capital come together in interesting new ways.