Total Factor Productivity growth, Technological Progress, and Efficiency Changes: Empirical Evidence from Canadian Manufacturing Industries
AbstractAs productivity (growth) appears to be the single most important determinant of a nation’s living standard or its level of real income over long periods of time, it is important to better understand the sources of productivity growth. In Canada, total factor productivity (TFP) growth is the major contributing factor (relative to changes in capital intensity) to labour productivity growth, particularly in manufacturing sector. However, the TFP gap is also the main source of labour productivity gap between Canada and other industrialized (OECD) countries in recent years. In this paper, a stochastic frontier production model is applied to Canadian manufacturing industries to investigate the sources of TFP growth. Using a comprehensive panel data set of eighteen industries over the period 1990-2005 and the approach proposed by Kumbhakar et al. (1991) and Kumbhakar and Lovell (2000), we decompose TFP growth into technological progress, changes in technical efficiency, changes in allocative efficiency and scale effects. The decomposition reveals that during the period under study, technological progress has been the main driving force of productivity growth, while negative efficiency changes observed in certain industries have contributed to reduce average productivity growth. In addition, our empirical results show that research and development (R&D) expenditure and information and communications technology (ICT) investment, as well as trade openness exert a positive impact on productivity growth through the channel of efficiency gains. We argue that the decomposition carried out in this study may be very helpful to elicit the correct diagnosis of Canada’s productivity problem and develop effective policies to reverse the situation, and thereby reduce Canada’s lagging productivity gap.
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Bibliographic InfoPaper provided by University of Ottawa, Department of Economics in its series Working Papers with number 0905E.
Length: 24 pages
Date of creation: 2009
Date of revision:
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Canadian manufacturing; Stochastic frontier; TFP growth; Efficiency changes.;
Find related papers by JEL classification:
- L6 - Industrial Organization - - Industry Studies: Manufacturing
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-19 (All new papers)
- NEP-EFF-2009-12-19 (Efficiency & Productivity)
- NEP-FDG-2009-12-19 (Financial Development & Growth)
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