Openness in trade and total factor productivity growth in East Asia

Abstract

This paper attempts to analyze the factors that influence the total factor productivity (TFP) growth rate for six East Asian countries over 1980-2007. Data envelop analysis (DEA) approach is used to estimate the changes in the production frontier in first stage. The Malmquist productivity index has decomposed total factor productivity into technological change (TECHCH) and technical efficiency change (EFFCH). Empirical results suggest that TFP growth for the entire sample periods have not been encouraging due to unsatisfactory contribution from technological changes. The results reveal that the economies were able to cause shifts in their own frontier due to innovation. In the second stage the paper analyzes the factors responsible for the surge in total factor productivity experienced by the sample countries. Based on a panel regression with random effects of the six countries over the time period 1980-2007, the number of technical and journal articles was the only variable that had a positive impact on TFP growth and efficiency growth. On the contrary, trade openness and foreign direct investment were seen to be inconsequent as determinants of TFP growth and its components. This highlights the fact that internal technological improvements as opposed to foreign capital and technologies were the main determinants of TFP growth and improvements in efficiency.