By Arup Mitra
Developing countries are often confronted with the scarcity of natural and financial resources. As a result, efforts to accelerate the economic growth may end up exhausting the resource endowment of the economy. In other words, there can be serious trade-offs between growth and development in the present and the future. Productivity growth, or the non-input driven growth, is thus the key to the long-run sustainability of growth.
Understanding total factor productivity growth (TFPG)
[su_pullquote align=”right”]The realisation of productivity gains can occur at the macroeconomic level through a structural transformation.[/su_pullquote]
Non-input driven growth, widely known as total factor productivity growth (TPFG) has a variety of determinants including improved infrastructure, policy reforms and resource availability. Moreover, changes in resource allocation from less to more productive firms and/or sectors can help achieve the same.
This productivity gain, therefore, spreads across the industries and boosts the productive capacity of a state. For example, improving TFPG in the manufacturing sector is an effective way of enhancing the overall performance of the economy. It can also assist in catching up with other better performers. This is popularly called as convergence hypothesis. The reason behind this is the fact that manufacturing is capable of experiencing rapid productivity gains largely through technical progress, innovation, external economies of scale and knowledge spill-over. The realisation of productivity gains can also occur at the macroeconomic level through a structural transformation.
The role of information technology
[su_pullquote]Access to financial capital, electric power from the grid, and skilled workers are integral to the decision of investing in IT capital.[/su_pullquote]
There is a widespread recognition of the role of infrastructure plays in boosting productivity. For example, public infrastructure is a crucial support structure. Also, enhancing productivity and technical efficiency through a complementary relationship with other factors of production and external economies of scale is equally essential. There has also been an examination of the role of information technology (IT) as a contributor to manufacturing productivity. Higher productivity is a characteristic of plants with higher levels of IT capital stock. Access to financial capital, electric power from the grid, and skilled workers are integral to the decision of investing in IT capital. An increase in total and ICT infrastructure can raise the competitiveness of the manufacturing sector. It can also enhance the capability to resist international competition, reinforcing the exporting capacity of industrial goods.
Import/export accelerating growth
The role of import and export in enhancing long-term growth has been a matter of great interest. Technology transmission and adoption have found a key source in international trade. This channel is particularly important for developing economies.
Here, new technology is relatively scarce, resources are limited, and firms are dependent on high quality imported inputs.
[su_pullquote align=”right”]It is international trade, and exporting in particular, which improves the productivity of firms, finally leading to economic growth.[/su_pullquote]
However, imports generally increase the competition for domestic firms. This incentivizes them to invest and be more productive. Additionally, imports of intermediate and capital goods stimulate productivity through technology transfer from advanced countries and providing better quality inputs. The learning spill-over between foreign and domestic goods is another channel in this process. It is international trade, and exporting in particular, which improves the productivity of firms, finally leading to economic growth. For exporting firms, international competition is a factor that encourages investment in more productive technology, organisation, and innovation. Empirically, trade intensity is found to be positive and significant in metal and metal products, non-metallic mineral products and transport equipment. These enjoy a relatively larger exposure to foreign competition. The impact is at 5-10% in these industries. The effect on the overall manufacturing is around 2%. This happens to be lower than expected (Mitra, Sharma and Veganzones-Varoudakis, 2011; 2014).
How do R&D, size, and skilled manpower factor in?
Firms spend on innovation to obtain new technology which have significant additional implications for the overall economy | Photo Courtesy: GenironR&D expenditures contribute to productivity through their industry-wide spill-over effect.
Firms spend on innovation to obtain new technology that augments their productivity growth. This has significant additional implications for the overall economy. The private know-how of individual firms easily spills over horizontally to other firms of the same industry and, later, vertically to firms of other industries. This acts as an external effect, enhancing the productivity of all firms. On spatial concentration, it has also been observed that states which are more urbanised or cities which are larger in size offer higher returns to investment, in terms of higher total factor productivity growth. The agglomeration economies, in turn, contribute to TFPG.
With respect to size, the impact is noticeable in food, beverage, and non-metallic mineral products. Small firms with low productivity is a characteristic of these sectors. Therefore, a policy of pro-concentration would generate productivity gains in these sectors, adding to competitiveness. In fact, rapid productivity growth can occur only when a firm has acquired a minimum threshold limit in terms of size.
Finally, skilled manpower is a significant determinant of productivity growth. Imported technology is not only capital-intensive but also skill intensive. Social infrastructural investment, inclusive of education and health, can make the labour force more employable, helping them in contributing to productivity.