How different are the production functions of the European manufacturing sectors? New empirical evidence

Abstract

The neo-classical model of international trade assumes that the Total Factor Productivity (TFP) of a sector is common across countries, that returns to scale are constant and that the sectoral production of the countries differs by virtue of the factor endowments. In this article, we consider whether the differences in production can also be explained by the economies of scale in the national industries and by the technological differences across countries. To test this hypothesis, we estimate three models proposed in Harrigan (1999) with data for eight European Union (EU) Member States covering the period 1978 to 1992 and analyse how the TFP changes from country to country.

Acknowledgements

This study has been financed by the CICYT (project SEC 96-0524) and by the University of Zaragoza and the Government of Aragon (project 269–67).

Notes

¹ See Dollar et al. (1988), Trefler 1993, 1995, Dollar and Wolff (1993), Harrigan (1999) and Scarpetta et al. (2000).

² Harrigan (1999) does not include France, Denmark or Spain. His results are obtained with information for Germany, Italy, the United Kingdom, Finland, the Netherlands (a country for which we do not have the necessary data), Norway (which does not belong to the EU), as well as for four non-European countries, namely, Australia, Canada, Japan and the United States.

³ Among the numerous empirical research papers that use the aggregate production function, we can mention Bairam (1996), Tzanidakis and Kirizidis (1996), Casler (1997), Kaskaleris (1997), Felipe (1998), Segoura (1998), Duffy and Papageorgiou (2000), Moss (2000), Felipe and McCombie (2001), Graham (2001) and Kumbhakar (2003).

⁴ The potential GVA has been estimated by way of the Hodrick–Prescott filter applied to the GVA data for manufacturing corresponding to each country for the period 1978 to 1997, as this appears in the STAN database.

⁵ If, in the face of a productivity shock, there is an increase in the use of factors, this may be an indication of a strong positive correlation between employment and the error term.

⁶ In Model 1 the decreasing economies of scale appear with negative coefficients so that, when excluding them from Model 2, they explain the lower value of the TFP in all the countries.

⁷ For details of their development and a discussion, see Leamer (1983, pp. 157–9).