On modeling the determinants of TFP growth

We investigate the determinants of TFP growth of Italian manufacturing firms. Using stochastic frontier techniques, we consider three approaches for taking into account the influence of external factors, i.e., the determinants or drivers of growth. First, in our novel approach external factors may influence the technological progress, that is the shift of the frontier. To model this possible unexplored effect, we extend the standard time trend model to make it a function of the external factors. Then, following more standard approaches, we model external factors as either influencing the distance from the frontier, i.e., inefficiency, or the shape of the technology. Using a sample of manufacturing firms in 1998–2003, we find that technological investments and spillovers, human capital and regional banking inefficiency all have a significant effect on TFP growth.

► We investigate the determinants of TFP growth of Italian manufacturing firms.
► External factors usually are modelled to influence either firms’ technology or their efficiency.
► We suggest an approach in which they can influence technological change as well.
► We test the different models and find that external factors affect firms’ efficiency.
► Technology spillovers, human capital and bank inefficiency have important effects.