What affects MFP in the long-run? What affects MFP in the long-run? Evidence from Canadian Evidence from Canadian

industriesindustriesDanny Leung and Yi ZhengDanny Leung and Yi Zheng

Bank of Canada, Research DepartmentBank of Canada, Research DepartmentStructural StudiesStructural Studies

May 2008May 2008

The views expressed in this presentation are those of the authors. The views expressed in this presentation are those of the authors. No responsibility should be attributed to the Bank of Canada.No responsibility should be attributed to the Bank of Canada.

March 2008 2

MotivationMotivation

Changes in labour productivity growth driven by changes in MFPChanges in labour productivity growth driven by changes in MFP Recent interest in ICT as a determinant of MFP, results mixedRecent interest in ICT as a determinant of MFP, results mixed

Sensitive to assumptions on timingSensitive to assumptions on timing Difficulty in accounting for other variablesDifficulty in accounting for other variables Two above issues are not exclusive to ICTTwo above issues are not exclusive to ICT

1981-1986 less 1997-2005 less1961-1980 1981-1996_________________________________________________________________

Swing in Labour Productivity Growth -1.56 0.62

Swing in MFP Growth -0.84 0.64_________________________________________________________________

March 2008 3

ContributionContribution

Evaluate possible determinants of MFP Evaluate possible determinants of MFP using Canadian industry-level datausing Canadian industry-level data

Adopt an econometric methodology that Adopt an econometric methodology that allows the estimation of the long-run allows the estimation of the long-run effects of the determinants of MFPeffects of the determinants of MFP

Examine the main determinants of MFP in Examine the main determinants of MFP in the same frameworkthe same framework

March 2008 4

Preview of ResultsPreview of Results

In the long-run, ICT capital services seem In the long-run, ICT capital services seem to have a small positive effect on MFPto have a small positive effect on MFP

In recent years, the impact of ICT has In recent years, the impact of ICT has been stronger, but not instantaneousbeen stronger, but not instantaneous

Outsourcing and trade openness also Outsourcing and trade openness also influence MFP positivelyinfluence MFP positively

The impact of competition is unexpectedly The impact of competition is unexpectedly negativenegative

March 2008 5

Variables ConsideredVariables Considered ICT – general purpose technology, facilitates

organizational change that raises MFP R&D – innovation, imitation, spillover; generally not fully – innovation, imitation, spillover; generally not fully

accounted for in measured MFPaccounted for in measured MFP FDIFDI – efficient conduit of technological transfer – efficient conduit of technological transfer TradeTrade – tech. transfer, competition, economies of scale – tech. transfer, competition, economies of scale

through expanded marketsthrough expanded markets OutsourcingOutsourcing & offshoring – & offshoring – specialization, economies of specialization, economies of

scale, firm turnover, restructuringscale, firm turnover, restructuring Competition Competition –– its relation with innovation is ambiguousits relation with innovation is ambiguous Public infrastructure Public infrastructure – “omitted” capital– “omitted” capital

March 2008 6

The Model (1)The Model (1)

ARDLARDL

Reparameterized to ECMReparameterized to ECM

iti

p

j

q

jjtiijjtiijit yy

1 0,, x

itijti

p

j

q

jijjtiijittiiit yyy

,

1

1

1

0,1, xx

March 2008 7

The Model (2)The Model (2)

The Pooled Mean Group EstimatorThe Pooled Mean Group Estimator Pesaran et al (1999)Pesaran et al (1999) Constrains long-run parameters to be Constrains long-run parameters to be

identical, but allows short-run coefficients and identical, but allows short-run coefficients and error variances to differ across groupserror variances to differ across groups

Traditional dynamic fixed effect model Traditional dynamic fixed effect model restricts all coefficients to be the samerestricts all coefficients to be the same

Estimating each equation separately may not Estimating each equation separately may not be feasible given sample sizebe feasible given sample size

March 2008 8

The Data (1)The Data (1)

Twelve 2-digit NAICS industries (covering all of Twelve 2-digit NAICS industries (covering all of business sector), 1976-2003business sector), 1976-2003

MFP – from Canadian productivity accounts MFP – from Canadian productivity accounts (CPA)(CPA)

ICT capital services, CPAICT capital services, CPA R&D measures (1987-2003), various sourcesR&D measures (1987-2003), various sources

Own-industry R&D stock (Own-industry R&D stock (RDRD)) R&D spill-over; weighted R&D stock of suppliers R&D spill-over; weighted R&D stock of suppliers

((SRDSRD)) R&D intensity (R&D intensity (RDIRDI))

March 2008 9

The Data (2)The Data (2) Public infrastructure (Public infrastructure (infra_ginfra_g) or mass infrastructure ) or mass infrastructure

((infra_minfra_m) - Stock of engineering capital owned by gov’t ) - Stock of engineering capital owned by gov’t or or infra_ginfra_g plus engineering capital of transportation and plus engineering capital of transportation and utilities sectors, CANSIMutilities sectors, CANSIM

Outsourcing – intermediate inputs costs over nominal Outsourcing – intermediate inputs costs over nominal gross output, CPAgross output, CPA

Global trade openness – nominal world imports and Global trade openness – nominal world imports and exports over world GDP, IMFexports over world GDP, IMF

MarkupMarkup price over average variable cost –nominal output over labour, price over average variable cost –nominal output over labour,

energy and materials costs, CPAenergy and materials costs, CPA price over average cost – from production function estimation price over average cost – from production function estimation

with unobserved component, Leung (2008)with unobserved component, Leung (2008)

March 2008 10

ICTICT

84

86

88

90

92

94

96

98

100

102

0

20

40

60

80

100

120

MFP

ICT

March 2008 11

Own R&D capitalOwn R&D capital

84

86

88

90

92

94

96

98

100

102

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

MFP

RD

March 2008 12

Spill-over R&D capitalSpill-over R&D capital

84

86

88

90

92

94

96

98

100

102

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

MFP

SRD

March 2008 13

Public infrastructurePublic infrastructure

84

86

88

90

92

94

96

98

100

102

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

MFP

infra_g

March 2008 14

Mass infrastructureMass infrastructure

84

86

88

90

92

94

96

98

100

102

0.0

50.0

100.0

150.0

200.0

250.0

MFP

infra_m

March 2008 15

OutsourcingOutsourcing

84

86

88

90

92

94

96

98

100

102

0.450

0.460

0.470

0.480

0.490

0.500

0.510

0.520

0.530

0.540

MFP

Outsource

March 2008 16

Trade opennessTrade openness

84

86

88

90

92

94

96

98

100

102

0.000

0.100

0.200

0.300

0.400

0.500

0.600

MFP

Trade

March 2008 17

Markup (P/AVC)Markup (P/AVC)

84

86

88

90

92

94

96

98

100

102

1.200

1.210

1.220

1.230

1.240

1.250

1.260

1.270

MFP

Markup

March 2008 18

Unit Root Test (1)Unit Root Test (1)

Im, Pesaran and Shin (2003), ADFIm, Pesaran and Shin (2003), ADF H0: series from each industry contain unit rootH0: series from each industry contain unit root Ha: fraction of series are stationary with Ha: fraction of series are stationary with

heterogenous coefficientsheterogenous coefficients Hadri (2000)Hadri (2000)

H0: series are stationaryH0: series are stationary Pesaran (2003), CADFPesaran (2003), CADF

IPS test that relaxes assumption of cross-IPS test that relaxes assumption of cross-sectional independence between industriessectional independence between industries

March 2008 19

Unit Root Test (2)Unit Root Test (2)

Variable IPS Hadri CADF

ln(MFP ) 0.206 0.000 0.760ln(ICT ) 0.848 0.000 0.436outsource 0.208 0.000 0.161markup1 0.113 0.000 0.107markup2 0.192 0.000 0.986RDI 0.066 0.000 0.998RD 0.875 0.000 0.450SRD 0.817 0.000 0.889p-values

March 2008 20

Unit Root Test (3)Unit Root Test (3)

Variable ADF PP

ln(infra_g ) 0.961 0.974ln(infra_m ) 0.614 0.241trade openness 0.951 0.913p-values

March 2008 21

Cointegration (1)Cointegration (1)

Pedroni (1999, 2004), residual-based tests with Pedroni (1999, 2004), residual-based tests with null of no cointegrationnull of no cointegration four “panel” tests with alternative that residuals have four “panel” tests with alternative that residuals have

homogeneous autoregressive coefficienthomogeneous autoregressive coefficient three “group” tests with alternative without three “group” tests with alternative without

homogeneity assumptionhomogeneity assumption General-to-specific approachGeneral-to-specific approach

Variables dropped one at a time from relationship to Variables dropped one at a time from relationship to see if null is still rejectedsee if null is still rejected

Most parsimonious specification includes MFP, ICT Most parsimonious specification includes MFP, ICT capital, outsourcing, trade openness, and markupcapital, outsourcing, trade openness, and markup

March 2008 22

Cointegration (2)Cointegration (2)

No Trend

Panel v -statistic 0.505Panel rho -statistic 0.614Panel PP -statistic -1.735**Panel ADF-statistic -2.466***

Group rho -statistic 1.862Group PP -statistic -1.354*Group ADF-statistic -2.217***, **, *** denote significance at 10, 5, and 1% levels

-1.772**

-1.849**-2.262**

2.461-1.794**

Industryspecific trend

0.0161.412

March 2008 23

PMG Results – Long Run (1)PMG Results – Long Run (1)

Long-run coefficients

ln(ICT )

outsource

markup1

trade openness

*, **, *** denote significance at 10, 5, and 1% levels(0.050)

(0.127)

0.674***(0.074)

0.213***

0.002*(0.002)

0.810***

March 2008 24

PMG Results – Long Run (2)PMG Results – Long Run (2)

Impact of ICT is smallImpact of ICT is small Effect of outsourcing is positiveEffect of outsourcing is positive Effect of trade openness is positiveEffect of trade openness is positive Higher competition (lower markup) has a Higher competition (lower markup) has a

negative effect on MFPnegative effect on MFP Inverted U-shaped relation between Inverted U-shaped relation between

competition and innovationcompetition and innovation

March 2008 25

PMG Results – Long Run (3)PMG Results – Long Run (3)

Resonable fitResonable fit No evidence of non-normal errors, Jarque-No evidence of non-normal errors, Jarque-

Bera testBera test Two of twelve industries exhibit Two of twelve industries exhibit

heteroskedasticity, Breush-Pagan testheteroskedasticity, Breush-Pagan test Breush-Godfrey test of serial correlation Breush-Godfrey test of serial correlation

and RESET test indicate a possibility of and RESET test indicate a possibility of missing variables for certain industriesmissing variables for certain industries

March 2008 26

PMG Results – Short Run PMG Results – Short Run

Speed of adjustment is -0.4 on averageSpeed of adjustment is -0.4 on average 95% of a deviation from long-run equilibrium 95% of a deviation from long-run equilibrium

corrected in 5 yearscorrected in 5 years Average coefficients on current and Average coefficients on current and

lagged growth rates of ICT are negative, lagged growth rates of ICT are negative, but statistically insignificantbut statistically insignificant Sum of short-run ICT coefficients is negative Sum of short-run ICT coefficients is negative

and significant in retail trade and and significant in retail trade and manufacturingmanufacturing

March 2008 27

Dynamic Decomposition (1)Dynamic Decomposition (1)

It is possible to decompose MFP growth into It is possible to decompose MFP growth into contributions by factorcontributions by factor assuming speed adjustment is the same for all assuming speed adjustment is the same for all

factors and assuming equilibrium in the initial factors and assuming equilibrium in the initial periodperiod

1101 lnˆlnˆlnˆlnˆln tICTtt

ICTt

ICTt

ICTt ICTICTICTMFPMFP

March 2008 28

Dynamic Decomposition (2)Dynamic Decomposition (2)1980-2003 1980-1994 1995-1999 2000-2003

Manufacturing MFP 0.376 0.343 0.556 0.278 ICT 0.107 0.153 -0.293 0.438

Retail MFP 0.621 0.146 1.492 1.313 ICT 0.110 0.066 0.520 -0.241

Transportation and warehousing MFP 0.102 0.289 -0.600 0.278 ICT 0.034 0.008 -0.269 0.514

Information and culture MFP 0.489 0.431 0.125 1.164 ICT -0.091 -0.153 -0.166 0.232Annual average MFP growth (%) and contribution of ICT

March 2008 29

Concluding RemarksConcluding Remarks

The long-run impact of ICT is small, but its The long-run impact of ICT is small, but its contribution to recent MFP growth in some contribution to recent MFP growth in some industries is largeindustries is large

Outsourcing and global trade openness Outsourcing and global trade openness have a positive effect on MFP in the long-have a positive effect on MFP in the long-runrun

The effect of competition in MFP is The effect of competition in MFP is negativenegative