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01-06-2014

Intrasectoral structural change and aggregate productivity development: robust stochastic nonparametric frontier function estimates

Author: Jens J. Krüger

Published in: Empirical Economics | Issue 4/2014

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Abstract

This paper investigates the sources of total factor productivity growth in the German manufacturing sector during 1981–1998. Decompositions of aggregate productivity growth are used to identify the effects of structural change and entry–exit on aggregate productivity growth. We find a substantial rise in productivity growth after the German reunification. The bulk of this rise can be attributed to structural change and entry–exit. Two methodological refinements are implemented. The first refinement is the application of robust stochastic nonparametric approaches to frontier function analysis, and the second is the calculation of bootstrap confidence intervals for the components of the productivity decompositions.

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Input orientation is favored here over output orientation because our DMUs are firms which are more likely to be able to decide about their input usage while being more constrained on the output side.

The influence function of an estimator, introduced by Hampel (1974), shows the effect of a small (tending to zero) fraction of outlying observations. If the influence function is unbounded, a small fraction of outlying observations is sufficient to let the estimator diverge. Estimators with an unbounded influence function are thus not robust. In contrast, estimators with a bounded influence function are considered to be robust.

These firms are the DMUs referred to in the methodological description.

Thus, entry as appearance in the data set may be de novo entry or may be due to firms growing to a size so that they become recognized by Hoppenstedt and the annual accounts will be recorded in the data set. Exit as disappearance from the data set may be real exit, or it may be the exit due to mergers or acquisitions by other firms. This should also be kept in mind when interpreting the entry and exit components of the productivity decomposition below. So, the effects of entry and exit on aggregate productivity growth are actually caused by a mixture of de novo entry, entry into the data set, real exit and exit due to mergers or acquisitions, respectively.

For a firm-level analysis with large multiproduct firms in the sample, there is no choice anyway. Physical output measures are only an alternative for physically homogeneous outputs at the plant level if such data are available as in the cases selected by Foster et al. (2008).

Since our sample mostly consists of large quoted firms, the meaning of aggregate productivity may be problematic. Large firms, however, naturally have large shares and are thus dominating the share-weighted aggregate productivity measure. Therefore, we stick to the standard terminology speaking of aggregate productivity also in this case. In addition, it is reassuring that the main findings are similar to those found in studies for other countries working on the level of individual establishments.

It is worth stressing at this point that the differences found in the subperiods before and after the German reunification cannot entirely be attributed to that event but are also influenced to a considerable extent by the differences in the macroeconomic conditions before and after the year 1990.

Recall that according to replicator dynamics, firms with above (below)-average productivity levels tend to have increasing (decreasing) employment shares.

In the words of Brown and Earle (2008, p. 109): “Unlike under central planning, job reallocation during the transition has contributed significantly to aggregate productivity growth. Jobs have been reallocated from less to more productive incumbent firms, and the exiting firms have been predominantly less productive ones. Though entering firms have not initially been more productive than incumbents, the surviving ones have caught or surpassed incumbents within 3 years.”

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See also the survey articles by Bartelsman and Doms (2000) and Haltiwanger (2000). Krüger (2008) contains a review of the literature mostly concerned with intersectoral structural change.

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Title: Intrasectoral structural change and aggregate productivity development: robust stochastic nonparametric frontier function estimates
Author: Jens J. Krüger
Publication date: 01-06-2014
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 4/2014
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-013-0727-0

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