Total factor productivity of Korean manufacturing industries: Comparison of competing models with firm-level data

•We developed econometric methodologies to measure productivity growth and its decomposition.•Technical change is the main contributor to TFP growth in the Korean manufacturing industry.•We explored the determinants of TFP growth and their policy implications by using second regression technique.

This paper presents the parametric estimation of the rates of technical change and total factor productivity (TFP) growth of 7462 Korean manufacturing firms over the period 1987-2007. Two alternative formulations of technical change measured by the time trend and the general index approaches are estimated with panel data models assuming flexible functional forms. Several extensions of each approach are also considered and their benefits and limitations are discussed. In addition to making estimates of the TFP growth and its decomposition, the paper compares the parametric TFP growth measure with the non-parametric Solow residual serving as a benchmark. Several hypotheses related to technology level, firm sizes, industrial sectors, skill biased technological change and macroeconomic and industrial policies are tested to explain the growth patterns and heterogeneity in technical change, input biases and TFP growth rates. Using second regression analysis, the paper explores the determinants of TFP growth and their policy implications.