nep-eff New Economics Papers
on Efficiency and Productivity
Issue of 2007‒03‒31
thirteen papers chosen by
Angelo Zago
University of Verona

  1. A Richer Understanding of Australia’s Productivity Performance in the 1990s: Improved estimates based upon firm-level panel data By Robert Breunig; Marn-Heong Wong
  2. Bank Distress and Productivity of Borrowing Firms: Evidence from Japan By AKIYOSHI Fumio; KOBAYASHI Keiichiro
  3. A retrospective look at the U.S. productivity growth resurgence By Dale W. Jorgenson; Mun S. Ho; Kevin J. Stiroh
  4. Entry, Exit and Productivity: Empirical Results for German Manufacturing Industries By Joachim Wagner
  5. Productivity, Capital-Intensity and Labour Quality at Sector Level in New Zealand and the UK By Geoff Mason; Matthew Osborne
  6. Productivity and Size of the Export Market: Evidence for West and East German Plants, 2004 By Joachim Wagner
  7. Indian IT industry: a performance analysis and a model for possible adoption By Mathur, Somesh Kumar
  8. Does Secondary School Tracking Affect Performance? Evidence from IALS By Kenn Ariga; Giorgio Brunello
  9. Behind the Gap Between Productivity and Wage Growth By Dean Baker
  10. Random walk to innovation: why productivity follows a power law By Christian Ghiglino
  11. Shifts in Economic Geography and their Causes By Anthony J. Venables
  12. The future of small banks By Alton Gilbert
  13. Wage Structure and Firm Productivity in Belgium By Thierry Lallemand; Robert Plasman; Francois Rycx

  1. By: Robert Breunig; Marn-Heong Wong
    Abstract: Australia’s productivity performance is characterized by important differences across continuing firms, frequent entry of new firms, and substantial exit of firms which, for one reason or another, decide to cease production. These basic facts call into question the appropriateness of measuring productivity using an aggregate production function that is based upon a representative firm. This study relaxes the standard assumptions that industries are comprised of a set of homogeneous firms, the set of which are constant over time. Instead, we apply a semi-parametric production to continue production. The model controls for the relationship between productivity shocks and input choices and the inter-relationship between these and the decision to continue production. Using the Business Longitudinal Survey we estimate an improved set of production functions for twenty-five two-digit industries in Australia. We use these results to examine aggregate industry-level productivity performance. We use a new aggregation method in calculating these changes which allows us to separate productivity changes and output composition changes which sheds new light on industry-level productivity performance in Australia.
    Keywords: Firm-level production function estimation, multi-factor productivity, semiparametric estimation, Australian economic performance
    JEL: D21 D24 L20 C14
    Date: 2007–03
  2. By: AKIYOSHI Fumio; KOBAYASHI Keiichiro
    Abstract: We investigate the effects of bank distress on productivity of borrowing firms using micro data on listed companies in Japanese manufacturing industry during the 1990s. We find some evidence suggesting that deterioration in financial health of banks, like a decline in capital-asset-ratio, decreased productivity of their borrowers during the period of FY1994-1996. Although huge nonperforming loans had been a serious problem in Japanese economy since the collapse of asset prices bubble in 1991, resolution of the problem was postponed during the early 1990s. The Japanese economy plunged into serious banking crisis from 1997 to 1999. Our finding is consistent with the hypothesis that forbearance lending by banks that was prevalent during the early 1990s lowered the aggregate productivity of the economy.
    Date: 2007–03
  3. By: Dale W. Jorgenson; Mun S. Ho; Kevin J. Stiroh
    Abstract: It is now widely recognized that information technology (IT) was critical to the dramatic acceleration of U.S. labor productivity growth in the mid-1990s. This paper traces the evolution of productivity estimates to document how and when this perception emerged. Early studies concluded that IT was relatively unimportant. It was only after the massive IT investment boom of the late 1990s that this investment and underlying productivity increases in the IT-producing sectors were identified as important sources of growth. Although IT has diminished in significance since the dot-com crash of 2000, we project that private sector productivity growth will average around 2.5 percent per year for the next decade, a pace that is only moderately below the average for the 1995-2005 period.
    Keywords: Information technology ; Labor productivity
    Date: 2007
  4. By: Joachim Wagner (University of Lueneburg and IZA)
    Abstract: Using panel data from Spain Farinas and Ruano (IJIO 2005) test three hypotheses from a model by Hopenhayn (Econometrica 1992): (H1) Firms that exit in year t were in t-1 less productive than firms that continue to produce in t. (H2) Firms that enter in year t are less productive than incumbent firms in year t. (H3) Surviving firms from an entry cohort were more productive than non-surviving firms from this cohort in the start year. Results for Spain support all three hypotheses. This paper replicates the study using unique newly available panel data sets for all manufacturing plants from Germany (1995-2002). Again, all three hypotheses are supported empirically.
    Keywords: entry, exit, productivity
    JEL: L11 L60
    Date: 2007–03
  5. By: Geoff Mason; Matthew Osborne (National Institute of Economic and Social Research)
    Abstract: Understanding productivity performance is important to informing policy advice on how to improve productivity and therefore New Zealand's overall economic performance. Given data limitations inherent in international productivity comparisons, this paper is not intended to inform policy in isolation but forms an important element of a wide and expanding body of evidence on the performance of the New Zealand economy. Previous international productivity comparisons involving New Zealand have been confined to the aggregate economy or to broadly-defined sectors such as manufacturing. This paper reports on a New Zealand-UK comparison which distinguishes 21 different ‘market sectors’ (ie, excluding public administration, education, health, property services and some personal, social and community services). It confirms the prevailing consensus that, in aggregate, New Zealand market sectors compare unfavourably with the UK on average labour productivity (ALP) - and by implication compare even more unfavourably with other countries such as the US. However, beneath this overall story there is considerable sectoral variation. While some NZ sectors out-perform the UK on ALP and/or multi-factor productivity (MFP), there is a large group of sectors which fall short of the UK on both productivity measures. Most of these low-productivity sectors are relatively low in physical capital-intensity compared to the UK. Overall, roughly a quarter of the New Zealand-UK gap in ALP for aggregate market sectors in 2002 was attributable to differences in employment structure such as the relatively high shares of New Zealand employment in comparatively low value added sectors such as agriculture. The remaining three quarters of the ALP gap were accounted for by within-sector productivity differences.
    Keywords: productivity, capital-deepening, human capital
    JEL: J24 O47 P52
    Date: 2007–03
  6. By: Joachim Wagner (University of Lueneburg, Max Planck Institute of Economics, Jena and IZA)
    Abstract: Using unique recently released nationally representative high-quality data at the plant level, this paper presents the first comprehensive evidence on the relationship between productivity and size of the export market for Germany, a leading actor on the world market for manufactured goods. It documents that firms that export to countries inside the euro-zone are more productive than firms that sell their products in Germany only, but less productive than firms that export to countries outside the euro-zone, too. This is in line with the hypothesis that export markets outside the euro-zone have higher entry costs that can only by paid by more productive firms.
    Keywords: exports, productivity, micro data, Germany
    JEL: F14 D21
    Date: 2007–03
  7. By: Mathur, Somesh Kumar
    Abstract: India's software and services exports have been rising rapidly. The annual growth rate ranges between 20 -22% in IT services and nearly 55 % in IT-enabled services (ITES), such as call centres, Business Process Outsourcing ( BPO) and other administrative support operations. Together they are predicted to grow at 25% pa till 2010.The IT industry is highly export oriented and the exporters are predominantly Indian. The Indian BPOs (ITES) are moving up the value chain, handling high end data for airline information, insurance, banking sector and mortgage companies, enterprise resource planning, among others. Some of the companies have already moved into significantly higher value added segments such as mission- critical applications, development and support, product design, HR Management, knowledge process outsourcing for pharmaceutical companies and large complex projects. Software exports make up 20 % of India's total export revenue in 2003-04, up from 4.9 % in 1997.This figure is expected to go up to 44% of annual exports by 2010. Though India accounts for just about 3 % of the world market for information technology services, this sector has been growing at a scorching pace, helped by a large pool of English-speaking workers, nearly 4 million engineers and the increasing tribe of tech-savvy entrepreneurs in the country. The Information Technology industry currently accounts for almost 4.8 % of India's GDP. It will account for 7 % of India's GDP by 2010. Software and IT enabled services have emerged as a niche sector for India. This was one of the fastest growing sectors in the last decade with a compound annual growth rate exceeding 50 per cent. Software service exports increased from US $ 0.50 million in 1990 to $5.9 billion in 2000-01 to 23.6 billion dollars in 2005-06 recording a 34% growth. A compound annual growth of over 25% per annum is expected over the next 5 years even on the expanding base. The impact on the economy of projected software and IT enabled service exports of $ 60 billion by 2010 is likely to be profound. One manifestation is that India notched up a current account surplus in 2001-02, for the first time in 24 years. India further needs an open environment under GATS to promote exports of services through outsourcing and off-shoring . The present study examines the growth performance of India’s IT industries, with particular attention paid to the role of policy in this process. The study recognizes that emergence of a strong Indian IT industry happened due to concerted efforts on the part of the Government, particularly since 1980s, and host of other factors like Government-Diaspora relationships, private initiatives, emergence of software technology parks, clustering and public private partnerships. In this study we further look at the major parameters of the Indian IT and ICT industry in global context and give justification for including the main factors responsible for the IT boom in India. The study has looked into the past and present trends of the Indian IT industry and has considered further needs of IT sector to act as a catalyst of growth and development. The study has examined whether the Indian IT growth does have enough lessons for other countries to model their IT policy which may help them to shape their IT industry as driver of growth and development. IT firms were actually required to export software in the early days of the industry. This arose in the context of a shortage of foreign exchange in India in the 1970s and early 1980s.Software firms that needed imported inputs were required to earn foreign exchange themselves through export of software. This enabled them to get an idea of global markets very early. Besides formulating the national vision to promote software industry in India in the early 1980s by the government, there were deliberate attempt by the companies to promote software production like compilers, device drivers and operating system to cater to the domestic hardware sector. The high tariffs for the hardware sector had meant that the production of domestic hardware segment (including PCs which were introduced in the same period) had to be sustained requiring necessary software’s like operating system and drivers. Subsequently by mid 1980s, software started coming up unbundled with the hardware. This further gave fillip to the software industry and exports. The 1990s and early 2000 saw the rise of Software Technology Parks and formation of the Ministry of Information Technology, respectively. Despite liberalization of the 1991, the software industry flourished signifying the inherent strength that it developed due to benign and enabling environment provided over a period of time and also the fact that the 1990s saw the dramatic decline in telecommunication costs (government explicit intervention) and the commercialization of the internet along with the Y2K “problem”. The Data Envelopment Analysis (DEA) model is used to work out technical efficiency of Information and Communication Technology ( ICT) Industry in host of countries which are front runners as far as ICT is concerned. India lags behind the most as far as ICT (not IT) is concerned. However, information and Communication technology industry has brought revolution in India because it has reduced intermediation in business and society, provided solutions across sectors and is increasingly becoming an important tool for national development. DEA is also applied to benchmark the performance of the 92 Indian Software Companies for 2005- 2006. The impact of various determinants on technical efficiency of the Indian Software companies is worked out using tobit regression. The impact of the explanatory factors on net exports of 92 software firms in 2005-06 is also worked out using simple regression exercise. The study also works out technical efficiency of 36 telecommunication firms in India and examines the determinants for new technology adoption by such industries. The study uses a Malmquist index to estimate total factor productivity changes decomposed into efficiency change( catching up to the frontier technology) and technical change( movement of the frontier) for the common software firms existing between 1996 and 2006 E-government is the application of Information and Communication Technologies (ICT) by government agencies. Its use promises to enhance the effectiveness and efficiency of government and alter its relationship with the public. The study outlines E-Governance models for effective governance and for higher agricultural growth and development. E-Commerce primarily refers to buying, selling, marketing and servicing of products or services over internet and other computer networks. E-Commerce in India is just taking off with the advent of Railway and Online Air bookings and Net banking. The business is likely to grow to Rs 2300 crore by 2007 .Electronic commerce allows efficient interactions among customer, suppliers and development partners cutting down on transaction time and reducing the costs of doing business. The role of government is to facilitate the development of E-Commerce. For promoting South-South Cooperation and making it meaningful, the governments of the member countries need to pool resources and capabilities in R&D and human resource development for harnessing the fruits of Information and Communicating technologies. The study spells out in detail a number of examples where ICT has been used by rural communities for their benefit and for policy and development goals of the government in general. Web based software development and software product development (like device drivers) is necessary for providing complete business and consumer oriented solutions. These are also areas of interest for the Indian IT entrepreneurs to work upon in times to come. India’s relatively unsafe e-security environment is costing the BPO/ITES industry. The new IT Act (2000) needs to crucially define cyber harassment, phishing and cyber stalking to take care of cyber crimes in India. With the Indian IT/BPO exports to reach $60 billion by 2010, such companies need to invest in upgrading security measures for sustaining competitiveness. Organizations are not obliged under the IT Act to implement data security measures to protect consumers and clients. All this makes it obvious that qualitative progress cannot be made without enacting comprehensive data protection legislation. The Information and communication technologies (ICT) indicators of India are 13 million PCs, 40 million internet users- country with the fifth-largest number of Internet users,143 million mobile phones and 60 million subscribers for fixed lines in 2006. These are modest figures in comparison with the ICT penetration indicators achieved by the front runners like Taiwan, South Korea, Japan, UK, US, Nordic countries in Europe, among others (see the text for our strength and weaknesses in the ICT infrastructure in comparison with some other front runner countries). India’s Strengths lies in its availability of pool of scientists and engineers and quality of maths and science education along with quality of business schools. We are also ranked quite high in terms of cluster development, foreign technology licensing and Government prioritization of ICT. The weaknesses are the telecommunication infrastructure and speed of new business registration. However, Information and communication technologies(ICT) has brought about revolution in India particularly since 1990s .This is because it has reduced intermediation in business and society, reduced mobile and fixed telephony rates(because of concerted policy interventions by the government), provided solutions across sectors, provided both CDMA and GSM mobile technologies (and now Wi-Max technologies for internet access at different public places using PC), re-organizing firm level behavior, empowering individuals by providing them with more information and is increasingly becoming an important tool for national and rural development through E-governance, E-Banking and E- Commerce programmes. In addition, the success of the Information Technology industry in India is intertwined with information and communication technologies as most of the Information technology enabled services use such technologies for providing their services. The quantitative results of the paper answers the following- what orientations in inputs should be done by inefficient software and telecommunication firms and ICT Industry in general to reach the ‘ best practice frontier’( and have operational excellence), examines the relationship between technical efficiency and net exports of software firms along with the impact of host of explanatory factors like size of firms in terms of sales and total cost, among others on technical efficiency and net exports for cross section of software firms using tobit analysis, gives some reasons for relatively low ICT penetration in India and what can be done to transform India’s relatively good ICT readiness and ICT environment into higher ICT usage, answers why telecommunication firms are adopting new technologies and estimates total factor productivity changes in software firms which can be further used to model wage and price estimation of products and services offered by software firms over time. The paper confirms the improvements in productivity, efficiency change and technical change of the Indian Software industry from 1996 to 2006. Synopsis Chapter Wise Chapter one describes the major parameters of the Indian Information Technology (IT) Industry in India today and in the immediate past. The chapter further analyzes the reason for the ‘boom’ in the Indian IT sector. We also outline an electronic governance Model which can become a tool for effective governance. DEA is applied to benchmark the performance of the 92 Indian Software Companies for 2005- 2006. The impact of various determinants on technical efficiency of the Indian Software companies is worked out using tobit regression. The impact of the explanatory factors on net exports of 92 software firms in 2005-06 is also worked out using simple regression exercise. . Further this chapter uses a Malmquist index to estimate total factor productivity changes decomposed into efficiency change and technical change for the common software firms existing between 1996 and 2006. Chapter two gives an account of the position of the Indian Information Technology (IT) Industry and the Indian Information and Communication Technology (ICT) Industry in the global context and analyzes the strengths and weaknesses of ICT Infrastructure across some countries. Technical Efficiency of the Indian ICT sector is worked out using the mathematical model of Data Envelopment Analysis. The study also works out technical efficiency of 36 telecommunication firms in India and examines the determinants for new technology adoption by such industries. Chapter Three describes why and how the Indian IT industry can act as a catalyst of growth and development. An account of an effective electronic governance model for Agriculture Sector is also given. Chapter Four looks at the past of IT industry since 1960s keeping policy in mind. This chapter also outlines an export success model . Such models can be emulated by other countries. Chapter five describes the hurdles and constraints faced by the India IT industry and give an account of the policies and strategies which can be adopted to address the hurdles and concerns of the ICT sector. The last Chapter gives the conclusions, suggestions and policy advice for making IT as a tool for addressing some core inadequacies in the system like poverty, inequality, healthcare and education, among others.
    JEL: L86
    Date: 2007–01–01
  8. By: Kenn Ariga (Kyoto University); Giorgio Brunello (University of Padova, CESifo and IZA)
    Abstract: There is substantial cross-country variation in secondary school design, with some countries tracking students into different ability schools very early, and other countries with little or no tracking at all. Does tracking length affects school performance, as measured by standardized test scores? We use the international data from the International Adult Literacy Survey to estimate the relationship between the experienced tracking length and the performance in standardized cognitive test scores of young adults, aged between 16 and the mid-twenties. Our IV estimates suggest that the contribution of tracking to performance is positive and statistically significant: conditional on total years of schooling, one additional year spent in a track raises average performance by 3.3 to 3.4 percentage points, depending on the estimates.
    Keywords: tracking, secondary schools, efficiency
    JEL: I21 I28
    Date: 2007–02
  9. By: Dean Baker
    Abstract: Much has been written in this business cycle regarding the rapid increases in productivity and the stagnant growth in wages. From the peak of the last business cycle in the first quarter of 2001 to the second quarter of 2006, productivity increased by 17.9 percent, an average growth rate of 3.2 percent per year. But real wages have barely moved, with the average hourly wage for production and nonsupervisory workers increasing by just 1.2 percent, an average annual growth rate of just over 0.2 percent. This report explores the forces behind this difference. It looks at cyclical trends in labor and capital income, and the difference between gross and net productivity.
    JEL: E32 E24
    Date: 2007–02
  10. By: Christian Ghiglino
    Abstract: In this paper we propose a mechanism generating innovations with productivity distributed according to a power law. We assume that knowledge creation occurs as new ideas are produced from combinations of existing ideas. The productivity of an innovation is determined by an unobservable intrinsic component as well as by the productivity of the parent ideas and their parents, thus generating a network of spillovers. The second important feature is that the innovator has no global information on the network of parenthood links across ideas but has acces to local knowledge, as for example the list of cited references in a patent. The optimal behaviour of the innovator is to "walk randomly" through the network of "citations" as this algorithm leads to selecting highly connected parent nodes. We show that the distribution of productivity resulting from this optimal behaviour follows a power law. The intuition behind the result is that the innovator focuses his efforts on strengthening local spillovers because he has no command on the other sources of productivity. When this process of innovation is imbedded in a model a la Kortum (1997) balanced growth of output is generated.
    Date: 2007–03–27
  11. By: Anthony J. Venables
    Abstract: This paper analyses some of the forces that are changing the spatial distribution of activity inthe world economy. It draws on the 'new economic geography' literature to argue theimportance of increasing returns to scale and cumulative causation processes in shaping theproductivity and comparative advantage of different regions. In the presence of suchincreasing returns there may be persistent spatial disparities in productivity. Economicdevelopment will tend to be 'lumpy', with some regions (countries, or smaller areas such ascities) experiencing rapid growth and others being left behind.
    Keywords: economic geography, urbanisation, world economy, productivity
    JEL: F1 R1
    Date: 2006–12
  12. By: Alton Gilbert
    Keywords: Banks and banking ; Bank size
    Date: 2007
  13. By: Thierry Lallemand; Robert Plasman; Francois Rycx
    Abstract: The objective of this paper is twofold. First, we analyse the structure of wages within and between Belgian firms. Next, we examine how the productivity of these firms is influenced by their internal wage dispersion. To do so, we use a large matched employer-employee data set (i.e., a combination of the 1995 'Structure of Earnings' and 'Structure of Business' Surveys). On the basis of the methodology developed by Winter-Ebmer and Zweimuller (1999), we find that within-firm wage dispersion has a positive and significant effect on firm productivity. This result is robust to controls for individual and firm characteristics as well as to instrumenting the wage inequality variable. Findings also suggest that the intensity of this effect is stronger within firms with: i) a majority of blue-collar workers, and ii) a high degree of monitoring. These results are more in line with the 'tournament' models than with the 'fairness, morale and cohesiveness' models.
    JEL: J24 J31 J41
    Date: 2007–03

This nep-eff issue is ©2007 by Angelo Zago. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.