Electrification and productivity growth in Korean manufacturing plants

- A model that incorporates technology knowledge by electrification is presented.
- The model predicts the relationship between electrification and firm productivity.
- Electrification has a negative level effect in the short term on firm productivity.
- Electrification has a positive rate effect in the long term on firm productivity.
- We have tested two predictions empirically using Korean manufacturing plants.

This paper presents a theoretical model of firm-specific productivity growth that incorporates technological knowledge by electrification and tests the model empirically. Our theoretical explanations suggest that the energy-transformation from fossil fuel to electricity by electrification could cause a decrease in the short-term level of productivity but an increase in the long-term rate of productivity growth in firms. Our empirical evidence from a large panel of Korean manufacturing plants is generally consistent with the theoretical predictions on the relatedness of technological knowledge by the electrification to the level and rate effects of the firm's productivity. The electrification measured by the share of electricity results in lowering the short-term productivity level but in raising the long-term rate of productivity growth of firms.