Determinants of Combined Factor Productivity of Ethiopian Manufacturing Firms

Abstract

Due to lack of reliable data, combined factor productivity has not yet been computed in developing countries on non-erroneous bases. This would mislead to the identification of the determinants of Combined Factor Productivity (CFP). The aim of this section is to identify some of the possible determinants of CFP in Ethiopian manufacturing firms. The dynamic panel data estimation, using a system of GMM, has been a selected approach. It has been hypothesized that, among others, insufficiency of finance (working capital) would significantly affect the productivity of firms. Results from the analysis show that all factor intensities, at 1% significance and energy following with 5% significance level, both were having negative influence on combined factor productivity both in extended growth accounting model that includes Capital, Labor, Energy and Material (KLEM) and prime growth accounting model where only capital and labor (KL) are considered in the models. Shortage of foreign currency and working capital both as proxy of financial insufficiency, wielded significant effect on productivity in KLEM and KL models respectively at 10% level of significance. Export and training in their dummies have also shown positive and significant influence on combined factor productivity. This suggested that labour quantification results in loss of combined factor productivity gain unless accompanied by quality enhancement instruments such as training.