Productivity Analysis in Global Manufacturing Production

Despite the widely recognised importance of the manufacturing industry for successful development relatively few studies empirically investigate this sector in cross-country analysis. In this paper we attempt to fill this gap in the literature by investigating manufacturing production across a large number of developing and developed countries using an unbalanced panel of UNIDO data (1970-2002). Our empirical framework allows us not only a great deal of flexibility with regard to the production technology, but also enables us to model the complex network of endogeneities, the web of interdependencies not merely within but also across economies, which previously has been largely ignored in cross-country empirics. We apply a novel two-stage estimator which can account for these matters and check the robustness of our results against a range of alternative methods from the recent panel time series literature. Our results imply that differences in production technology, not just differences in TFP, are of crucial importance for understanding cross-country differences in labour productivity and their underlying causes. They furthermore imply that conventional interpretation of regression intercepts as TFP level estimates is no longer valid and we therefore provide an alternative methodology.