Decomposing total factor productivity growth in small and medium enterprises, SMEs

Abstract

Small and Medium Enterprises (SMEs) are one of the principal driving forces in economic development and are the backbones of most economies, developing as well as developed. The purpose of this paper is to model and investigate the total factor productivity growth of SMEs with reference to technological and technical efficiency change which are synonym to adoption and adaptation of technology. To do this, we utilize the linear programming based operations research technique known as Data Envelopment Analysis methodology of Malmquist Total Factor Productivity, TFP index. TFP measures the overall efficiency with which products are produced due to non-physical change. Improvement in TFP will enable the economy to generate a larger output from the same available resources, and hence shifting it to a higher frontier. The technological change component of productivity growth provides a measure of innovation or adoption of new technology and captures shifts in the frontier technology. Technical inefficiency, on the other hand, is measured by the difference between the frontier output and the realized output. Thus decomposition of TFP growth into technical efficiency improvement ( adaptation or catching up ) and technological change is therefore useful in distinguishing innovation or adoption of new technology by ' best practice ' firms from the diffusion of technology. The study utilizes data on SMEs from 42 selected economies (29 European Union and 13 APEC countries) for the period 2004-2008. Results obtained are analyzed and discussed, and some policy implications are suggested.