Capital utilization, economies of scale and technical change in the growth of total factor productivity: An Explanation of South Korean manufacturing Growth

Abstract

This paper presents a method of interpreting the growth of total factor productivity, directly linking the productivity growth to key parameters of a specific cost function. It shows that the productivity index can be decomposed into effects due to (a) technical change, (b) non-constant returns to scale, and (c) change in capital utilization. The decomposition framework was applied to data on South Korean manufacturing. During the 1961–1980 period in South Korean manufacturing, the total factor productivity was found to have grown at 3% per annum, scale economies contributed about 38% of the growth of TFP, the technical change 45%, and the change in the capital utilization rate 17%. The results of this study support of the view that for growing, less-developed economies, the growth in capital utilization rate is a source of growth in total productivity that is too significant to be ignored.