Firm-level Production Functions Research Articles

A structural estimation of the return to infrastructure investment in China

The productivity effect of infrastructure investment is controversial in the traditional literature using aggregate production function estimation due to reverse causality. This paper develops a new approach, using a structural model of firm-level production function, and matching Chinese firm-level production data with province-level infrastructure data. The estimated rates of return are about 6 percent averaged from 1999 to 2007. The returns triple if national-level spillover effects are taken into account. Controlling for the demand effect of public expenditure leads to smaller but still positive returns. The effect of infrastructure investment on firm-level productivity is heterogenous. With an increase in infrastructure investment, lower productivity firms are more likely to exit and higher productivity firms gain more market share.

Firm-Level Shocks and Labour Flows

AbstractWe analyse how labour flows respond to permanent idiosyncratic shifts in firm-level production functions and demand curves using very detailed Swedish micro data. Shocks to firms’ physical productivity have only modest effects on firm-level employment decisions. In contrast, we document rapid and substantial employment adjustments through hires and separations in response to firm-level demand shocks. The choice of adjustment margin depends on the sign of the shock: firms adjust through increased hires if these shocks are positive and through increased separations if the shocks are negative.

Is heterogeneous capital depreciation important for estimating firm-level productivity? Evidence from Chinese manufacturing firms

This paper contributes to the existing literature on estimating firm-level production functions. Using Chinese manufacturing survey data, we employ the firm-level heterogeneous capital depreciation rate to measure firms’ investment and assess its role using Olley and Pakes (1996) (OP) production function estimation technique. Although there is some ongoing debate on the econometric soundness of the OP technique, we argue quantitatively that the heterogeneous depreciation rate muffles the measurement error associated with the key input demand investment. In our sample, it significantly narrows the gap of total factor productivity (TFP) estimates between the OP technique and a state-of-the-art estimation method that works without investment. We further reveal that the improved performance primarily originates from the dynamic evolution in the distribution of the capital depreciation rate.

PRODUCTIVITY DYNAMICS OF CHINESE MANUFACTURING FIRMS

China has experienced high-speed catch-up growth with an average annual rate of over 8% in per capita GDP in the past four decades. Using growth accounting, Zhu (Understanding China’s growth: Past, present, and future. Journal of Economics Perspectives, 26(4), 103–124) finds that the growth of total factor productivity (TFP) accounts for 77% of China’s per capita GDP growth during 1978–2007, and argues that China’s TFP growth is mainly driven by resource reallocation due to market liberalization and institutional reforms. This paper aims to estimate China’s aggregate productivity growth by applying three leading methods of estimating firm-level production function on Chinese manufacturing firms during 1998–2007, and quantify the contribution of resource reallocation to productivity growth. In addition, we also empirically compare the three estimation methods in this large data set.

Aggregate productivity and the allocation of resources over the business cycle

This paper proposes a novel decomposition of aggregate productivity to evaluate the role of allocative efficiency for the cyclical dynamics of aggregate productivity. The decomposition, which is derived from the aggregation of heterogeneous firm-level production functions, accounts for changes in allocative efficiency, as well as for changes in entry and exit. This approach thereby extends Solow's (1957) growth accounting exercise to a framework with firm heterogeneity and frictions in the allocation of resources across firms. I apply the decomposition to a comprehensive dataset of French manufacturing and service firms, and I find that entry and exit contribute little to the year-on-year variability of sectoral productivity, between-sector allocative efficiency plays a limited role for the volatility of aggregate productivity, whereas within-sector allocative efficiency is countercyclical and tends to reduce the volatility of sectoral productivity.

Bank Technology: Productivity and Employment

The impact of technology investment on bank production and employment is examined. Using a new bank-level technology spending dataset from 2000-2017, we estimate the parameters of a firm-level production function correcting for endogenous input choices. We document that technology input on average contributes about 12.85% to the increase in value-added output. We then show that the bank employment and tasks are positively correlated with their lagged technology spending in the cross-section, supporting the task-based framework of Acemoglu and Restrepo (2018). These results indicate that technology capital is highly productive and technology adoption generally lead to more employment at the firm-level.

Micro-evidence on product and labor market regime differences between Chile and France

Purpose – Institutions, social norms and the nature of industrial relations vary greatly between Latin American and Western European countries. Such institutional and organizational differences might shape firms’ operational environment in general and the type of competition in product and labor markets in particular. The purpose of this paper is to identify and quantify industry differences in product and labor market imperfections in Chile and France. Design/methodology/approach – The authors rely on two extensions of Hall’s econometric framework for estimating price-cost margins by nesting three labor market settings (LMS) (perfect competition (PC) or right-to-manage bargaining, efficient bargaining (EB) and monopsony). Using an unbalanced panel of 1,737 firms over the period 1996-2003 in Chile and 14,270 firms over the period 1994-2001 in France, the authors first classify 20 comparable manufacturing industries in six distinct regimes that differ in the type of competition prevailing in product and labor markets. The authors then investigate industry differences in the estimated product and labor market imperfection parameters. Findings – Consistent with differences in institutions and in the industrial relations system in the two countries, the authors find regime differences across the two countries and cross-country differences in the levels of product and labor market imperfection parameters within regimes. Originality/value – This study is the first to compare the type and the degree of industry-level product and labor market imperfections inferred from consistent estimation of firm-level production functions in a Latin American and a Western European country. Using firm-level output price indices, the microeconomic production function estimates for Chile are not subject to the omitted output price bias, as is often a major drawback in microeconometric studies of firm behavior.

The Export-productivity Link for Brazilian Manufacturing Firms

Abstract This paper explores the link between exports and total factor productivity (TFP) in Brazilian manufacturing firms over the period 2000–2008. The Brazilian experience is instructive as it is a case of an economy that expanded aggregate exports significantly, but with stagnant aggregate TFP growth. The authors first estimate firm-level TFP under alternative assumptions (exogenous and endogenous law of motion for productivity) following Wooldridge’s (On estimating firm-level production functions using proxy variables to control for unobservables, 2009) GMM procedure. In turn, they use stochastic dominance techniques to assess whether the ex-ante most productive firms are those that start exporting (selfselection hypothesis). Finally, they test whether exporting boosts firms TFP growth (learningby- exporting hypothesis) using matching techniques, to control for the possibility that selection into exports may not be a random process. Their results confirm the self-selection hypothesis and show that starting to export yields an extra TFP growth that emerges since a firm’s first year of exporting but lasts only one year. Further, this extra TFP growth is much higher under the assumption of an endogenous law of motion for productivity, which reinforces the importance of accounting for firm export status to study the evolution of productivity.

Agglomeration and Firm-Level Efficiency in South Africa

Where firms cluster together, there are efficiency gains from outsourcing, labour pooling and knowledge spillovers. Earlier research into agglomeration in South Africa focussed on sub-national regions and found that capital stock, human capital, access to markets and exports are significant determinants of output growth. This paper examines whether location explains differences in efficiency at firm level. Data from the 2003 and 2007 World Bank Enterprise Surveys allow one to examine firms in the four major South African cities. This paper reports estimates of a firm-level production function that incorporates location-specific explanatory variables to examine the scope of agglomeration economies. The place-specific size of the home market, level of education and share of exports are found to be positively related to output per worker at firm level. A description of the survey data identifies possible indicators of the sources of agglomeration economies. The size and significance of the inland Gauteng Province’s economy is reflected in its firms’ use of intermediate inputs and skilled labour.

The Impact of Capital Measurement Error Correction on Firm-Level Production Function Estimation

Based on a large panel of Czech manufacturing firms, we estimate firm-level production functions in 2003-2007 using the Levinsohn and Petrin (2003) and Wooldridge (2009) approaches, correcting for the measurement error in capital. We show that measurement error plays a significant role in the size of the estimated capital coefficient. The capital coefficient estimate approximately doubles (depending on the particular industry) when we control for capital measurement error. Consequently, while the majority of industries exhibit constant or (in)significantly decreasing returns to scale when the standard methods are used, increasing returns cannot be rejected in some industries when the estimation is corrected for capital measurement error.

Economic transition, higher education and worker productivity in China

We investigate the role of education on worker productivity and firms' total factor productivity using a panel of firm-level data from China. We estimate the returns to education by calculating the marginal productivity of workers of different education levels based on estimates of the firm-level production function. We also estimate how the education level of workers and CEO contributes to firms' total factor productivity. Estimated marginal products are much higher than wages, and the gap is larger for highly educated workers. Our estimate shows that an additional year of schooling raises marginal product by 30.1%, and that CEO's education increases TFP for foreign-invested firms. Estimates vary substantially across ownership classes, the effect of schooling on productivity being highest in foreign-invested firms. We infer that market mechanisms contribute to a more efficient use of human capital within firms.

Information and communication technologies, human capital, workplace organization and labour productivity: A comparative study based on firm-level data for Greece and Switzerland

This paper describes a comparative empirical study of the effect of information and communication technology (ICT) capital, human capital and new organizational practices on labour productivity in Greek and Swiss firms. We use firm-level data collected in 2005 through a common questionnaire administered to samples of similar composition (e.g. similar firm sizes, similar sectors), from which we construct econometric models with similar specifications for Greece and Switzerland. The analytical framework is based on a firm-level production function. We find statistically significant positive effects for physical capital, ICT capital, human capital and “employee voice”-oriented organizational practices for both samples. We also identify considerable differences: Swiss firms are more mature and more efficient than Greek firms at creating, using and combining these ‘new’ production factors.

Production functions and distributions of unit factor productivities: Uncovering the link

We derive a reversible “endogenous technology choice transform,” according to which firm-level production functions and distributions of unit factor productivities are two sides of the same coin. The Cobb–Douglas function relates to Pareto distributions, and the CES to Weibull distributions.