Determining Multifactor Productivity: How Robust the Relationship Between Sources of Knowledge and Competing Theories of Productivity

Yavuz Yildirim

Advisor: .

Carow Hall, Conf. Rm
April 27, 2008, 08:00 PM to 07:00 PM


The sources and effects of knowledge on multifactor productivity (MFP) have been the main object of the R&D studies. However, if MFP levels of countries seem to be sensitive to the factors other than knowledge stocks, these omitted variables could be significant in explaining cross-country MFP differences, their growth rates and the fundamentals that drive them. Competing theories to R&D propose a range of other factors that may affect productivity, such as, human capital, public infrastructure, access to export markets (learning-by-doing), imports, foreign direct investments (FDI). These theories hypothesized how these variables influenced the multifactor productivity, however, none of them has analyzed the robustness of the sources that generate scientific knowledge and other determinants of productivity that emerge from economic theory. This omission of relevant variables may cause misspecified models. As a result, estimated coefficients will be biased and the policy implications would be unreliable. Estimate the determinants of domestic multifactor productivity that in addition to four forms domestic business and government sector, university as an institution, and foreign of stocks of knowledge, includes the measures of human capital, life expectancy, inward and outward FDI, access to export and import markets, physical infrastructure, and rate of unemployment growth to capture the effects of business cycles. Therefore, we would be able to examine the robustness of the sources of knowledge and identify the main drivers of domestic productivity for a sample of 13 OECD countries for the period 1985-2005. Since OECD countries differ noticeably in their business, government and university knowledge stocks, human capital bases and infrastructure, the scales of inward and outward FDI, magnitudes of exports and imports, the assumption of homogenous productivity relationship across OECD nations appears quite strong and it is unlikely to hold. On contrary, productivity relationships across OECD countries may show country-specific partial elasticities in relation to their determinants. Country specific parameters were estimated by Seemingly Unrelated Regression estimator. Results confirm that significance of estimated parameters do differ across OECD countries. Finally, previous studies that estimate private or social returns to R&D capital stock for cross-country analysis typically assume an arbitrary depreciation rate of 10% to15% to construct the stock of R&D capital using the perpetual inventory method. In this study we estimated the depreciation ratio within the model and found than estimated depreciation ratio depending on the types of knowledge stock ranges between 10% to 0.