TFP growth, technological progress and efficiencies change

Abstract

PurposeThe purpose of this paper is to apply a stochastic Frontier production model to Canadian manufacturing industries, to investigate the sources of total factor productivity (TFP) growth. As 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, 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 (Organization for Economic Co‐operation and Development) countries in recent years.Design/methodology/approachIn 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 18 industries over the period 1990‐2005 and the approach proposed by Kumbhakar et al. and Kumbhakar and Lovell, TFP growth is decomposed into technological progress (TP), changes in technical efficiency, changes in allocative efficiency and scale effects.FindingsThe decomposition reveals that during the period under study, TP 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, the empirical results show that research and development expenditure, information and communications technology investment, as well as trade openness exert a positive impact on productivity growth through the channel of efficiency gains.Originality/valueThe author argues 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, thereby reducing Canada's lagging productivity gap.