Firm-Level Productivity in Bangladesh Manufacturing Industries Ana M. Fernandes The World Bank (DECRG) Bangladesh: A Strategy for Growth and Employment Workshop Dhaka, December th 2005

Motivation In 1990s GDP growth in Bangladesh strong and sustained In 1990s GDP growth in Bangladesh strong and sustained But productivity growth low and Bangladeshs good performance has fallen below potential But productivity growth low and Bangladeshs good performance has fallen below potential Our study focuses on performance of manufacturing sector (increasingly important for domestic value-added and for exports) Our study focuses on performance of manufacturing sector (increasingly important for domestic value-added and for exports) We examine trends and determinants of productivity based on new firm-level survey data We examine trends and determinants of productivity based on new firm-level survey data

Why Does Productivity Matter? Productivity isn't everything, but in the long run it is almost everything. P. Krugman Productivity isn't everything, but in the long run it is almost everything. P. Krugman Differences in GDP growth across countries are largely due to differences in productivity growth Differences in GDP growth across countries are largely due to differences in productivity growth Improvements in productivity are crucial to raise living standards and wealth of nations Improvements in productivity are crucial to raise living standards and wealth of nations

Concept of Total Factor Productivity TFP: TFP: –Is amount of output produced per unit of all inputs –Reflects overall efficiency with which inputs are transformed into output –Linked to technology but also to general knowledge, management techniques, government policies, reallocation of resources to more productive uses, etc

Data New firm-level survey conducted by world Bank in New firm-level survey conducted by world Bank in Eliminating data problems and outliers, final sample includes: Eliminating data problems and outliers, final sample includes: –51 firms in pharmaceuticals industry –88 firms in food industry –276 firms in garments industry –24 firms in leather/footwear industry –136 firms in textiles industry Survey includes production (output/inputs) data for firm characteristics Survey includes production (output/inputs) data for firm characteristics

Sample Characteristics – Firm Size

Sample Characteristics – Firm Age

Sample Characteristics – Location

Measurement of Productivity Firm-level TFP not observed but can be estimated as residual from a production function Firm-level TFP not observed but can be estimated as residual from a production function Estimate production function coefficients using Olley and Pakes (1996) methodology that corrects for endogeneity of inputs Estimate production function coefficients using Olley and Pakes (1996) methodology that corrects for endogeneity of inputs Use firm-level price indexes to deflate sales (output measure) and materials (materials input measure) Use firm-level price indexes to deflate sales (output measure) and materials (materials input measure) Capital constructed by perpetual inventory method Capital constructed by perpetual inventory method

Production Function Coefficients Using unbiased production function coefficients, derive firm-level time-varying TFP estimates Using unbiased production function coefficients, derive firm-level time-varying TFP estimates

Trends in TFP across Industries Two Approaches: Industry-level TFP: weighted average of firm- level TFP (weights=sales shares) Industry-level TFP: weighted average of firm- level TFP (weights=sales shares) –Look at evolution over time –Problem: emphasizes movements in TFP for larger firms Median firm-level TFP in each industry Median firm-level TFP in each industry –Look at evolution over time –Gives same weight to each firm

Industry-Level TFP

Industry-Level TFP (contd) In pharmac., food, leather/footwear TFP increases, then declines and recovers in 2003 In pharmac., food, leather/footwear TFP increases, then declines and recovers in 2003 TFP declines then stagnates in garments TFP declines then stagnates in garments TFP increases until 2002 then sharply declines in textiles TFP increases until 2002 then sharply declines in textiles

Median Firm-Level TFP

Median Firm-Level TFP (contd) Median TFP growth is negative until 2001 in pharmac. and garments Median TFP growth is negative until 2001 in pharmac. and garments Median TFP growth positive in food, leather/ footwear and textiles Median TFP growth positive in food, leather/ footwear and textiles Until 2002 median sales growth is negative in all but pharmac. industry Until 2002 median sales growth is negative in all but pharmac. industry Empl. growth positive but capital growth negative Empl. growth positive but capital growth negative

Efficient Allocation of Resources? TFP in industry may increase because : TFP in industry may increase because : –All firms become more productive - Output reallocated towards more productive firms Decompose industry-level TFP into: Decompose industry-level TFP into: –Unweighted average TFP –Covariance between TFP and sales share Inefficient allocation in pharmac., leather/ footwear and textiles in Inefficient allocation in pharmac., leather/ footwear and textiles in

Determinants of TFP What explains higher firm TFP and higher firm TFP growth ? What explains higher firm TFP and higher firm TFP growth ? Five sets of policy-relevant factors: Five sets of policy-relevant factors: –Human capital –Integration into world markets –Technology –Finance –Business environment

Framework and Potential Problems Regressions of TFP levels or TFP growth on variables covering 5 factors Regressions of TFP levels or TFP growth on variables covering 5 factors Estimation problems Estimation problems –Endogeneity of factors/reverse causality Solutions: - include year, industry and location Solutions: - include year, industry and location dummy variables + size and age dummy variables + size and age - include industry-location averages of - include industry-location averages of business environment variables business environment variables –Multicollinearity given many variables included Solution: regressions with 1 determinant at a time Solution: regressions with 1 determinant at a time –Most determinants of TFP available for 2003 only

Summary Statistics on TFP Determinants

Summary Statistics on TFP Determinants (contd)

Main Obstacles to Operations/Growth

Smaller firms are more productive: inefficiencies, weak corporate management Smaller firms are more productive: inefficiencies, weak corporate management Middle-aged firms are more productive Middle-aged firms are more productive Main Determinants of TFP Levels 1

Firms with better human capital have higher TFP Firms with better human capital have higher TFP Internationally-integrated firms have higher TFP Internationally-integrated firms have higher TFP Main Determinants of TFP Levels 2

Main Determinants of TFP Levels 3 Firms with R&D staff or quality certif. are more productive but firms with newer machinery are not Firms with R&D staff or quality certif. are more productive but firms with newer machinery are not Firms with overdraft have higher TFP but firms with loan have lower TFP Firms with overdraft have higher TFP but firms with loan have lower TFP

Main Determinants of TFP Levels 4 Weak power infrastructure and crime lead to lower firm TFP Weak power infrastructure and crime lead to lower firm TFP Bureaucracy and corruption are associated with higher TFP: reverse causality? Bureaucracy and corruption are associated with higher TFP: reverse causality?

Main Determinants of TFP Growth 1 Very large/rel. large firms have faster TFP growth Very large/rel. large firms have faster TFP growth Young firms have faster TFP growth Young firms have faster TFP growth Some convergence in TFP Some convergence in TFP

Main Determinants of TFP Growth 2 Firms with better human capital exhibit faster TFP growth Firms with better human capital exhibit faster TFP growth Internationally-integrated firms show higher TFP growth Internationally-integrated firms show higher TFP growth

Main Determinants of TFP Growth 3 Firms with quality certif. exhibit faster TFP growth but those with R&D or newer machin. exhibit lower TFP growth Firms with quality certif. exhibit faster TFP growth but those with R&D or newer machin. exhibit lower TFP growth Firms with access to overdraft facility have slower TFP growth Firms with access to overdraft facility have slower TFP growth

Main Determinants of TFP Growth 4 More frequent power outages, more red tape and more crime are associated with lower TFP growth More frequent power outages, more red tape and more crime are associated with lower TFP growth

TFP Growth Panel firms observed in 1992 World Bank survey and in current survey 82 firms observed in 1992 World Bank survey and in current survey Obtain growth accounting firm-level TFP growth measures between 1992 and 2003 Obtain growth accounting firm-level TFP growth measures between 1992 and 2003

Determinants of TFP Growth Extrem. large firms, younger firms and exporters have higher TFP growth in Extrem. large firms, younger firms and exporters have higher TFP growth in

Policy Implications Improvements in infrastructure are likely to bring large improvements in firm TFP Improvements in infrastructure are likely to bring large improvements in firm TFP Policies promoting Policies promoting –human capital formation of both workers and managers – integration of firms into global markets – either by attracting foreign capital or by facilitating access to export markets can benefit firm TFP Efforts of firm-level data collection can pay off by allowing government to make informed decisions on policies towards private sector Efforts of firm-level data collection can pay off by allowing government to make informed decisions on policies towards private sector