TFP growth, technical efficiency and catch-up dynamics: Evidence from Indian manufacturing

Abstract

Recent studies have shown that technical efficiency can be both persistent (long-term) and transient (short-term). However, their dynamics are under-examined compared to conventional technical efficiency. This study investigates the dynamics of both persistent and transient technical efficiencies and TFP growth in the Indian manufacturing sector. Using data on 10667 firms in 17 industries over 1999–2018, we employ a four-component stochastic frontier model to separate the persistent technical efficiency from the firm heterogeneity and the transient technical efficiency from the random noise. Results support the existence of both conditional and unconditional beta convergence in transient technical efficiency, indicating a catching-up by transiently inefficient firms. Convergence speed remains unaffected by firm characteristics; however, it slowed after the 2008-financial crisis. Results also show that with time persistently inefficient firms exit the market. Finally, the study investigates the drivers of TFP growth. We show that technical change and efficiency improvement drive the TFP growth.