Professional Documents
Culture Documents
MPhil
2008
School of Materials
2
Table of Contents
Abstract 10
Declaration 11
Copyright 11
Chapter One
Introduction 14-38
Chapter Two
Efficiency, Effectiveness 57
Chapter Three
Chapter Four
Chapter Five
References 249
List of Tables
(2004-5)
Pakistan
4.4 TFP of PKGI (at aggregate and disaggregate level) and Major 184
Industries of Pakistan
4.7 One Sample t test Group Statistics (at Aggregated Level) 191
4.8 One Sample t test Significance Values (at Aggregated Level) 191
4.9 One Sample t test Group Statistics (Horizontal and Vertical Firms) 193
4.10 One Sample t test Significance Values (Horizontal and Vertical 194
Firms)
(Horizontal Firms)
Firms)
List of Figures
Figure No Description
4.1 Distribution of TFP (Horizontal Firms) 185
4.2 Distribution of TFP (Vertical Firms) 185
4.3 Distribution of TFP (At Aggregated Level) 186
4.4 Distribution of TFP (Manufacturing Sector Pakistan) 186
4.5 TFP and Share % of Labour Expenses in Total Cost (Horizontal 202
Firms)
4.6 TFP and Share (%) of Financial Expenses in Total Cost 202
(Horizontal Firms)
4.7 TFP and Share (%) of Fashion Goods in Total Production 202
(Horizontal Firms)
4.8 TFP and USA Market Share in Total Exports (Horizontal Firms) 204
4.9 TFP and Average FOB Price in US $ (Horizontal Firms) 204
4.10 TFP and Number of Stitching Machines (Horizontal Firms) 205
4.11 TFP and Sale Value in Million US $ (Horizontal Firms) 205
4.12 TFP and Share % of Labour Expenses in Total Cost (Vertical 207
Firms)
4.13 TFP and Share (%) of Financial Expenses in Total Cost (Vertical 207
Firms)
4.14 TFP and Share (%) of Fashion Goods in Total Production (Vertical 208
Firms)
4.15 TFP and USA Market Share in Total Exports (Vertical Firms) 208
4.16 TFP and Average FOB Price in US $ (Vertical Firms) 209
4.17 TFP and Number of Stitching Machines (Vertical Firms) 209
4.18 TFP and Sale Value in Million US $ (Vertical Firms) 210
Total Word Count: 61174
10
ABSTRACT
This study measures the Total Factor Productivity level of Pakistan‘s Knitted Garment
Industry, which is one of the most significant segments of the Pakistan Textile Industry. Data
covering financial and production variables were collected from government offices and through
an exploratory survey. The data were analysed with the help of SPSS software. This analysis
confirmed that the Total Factor Productivity of Pakistan‘s Knitted Garment Industry is
comparatively low. The current study attempts to assess the impact of seven different factors on
Total Factor Productivity. The significance of these factors was assessed with the help of
regression models. The analysis showed that some of selected variables have a direct relationship
with Total Factor Productivity. However, it is presumed that there are certain factors, particularly
factors covering qualitative areas of the industry, which might have a significant relationship but
are missing. Nevertheless, this study accomplishes one of its main objectives of providing a
theoretical framework through which to make the industry highly competitive. It is proposed,
however, that there is a need of another in-depth study to diagnose the relationship between Total
Factor Productivity and any factors missing from the current analysis.
11
DECLARATION
I declare that no portion of the work referred to in this report has been submitted in
support of an application for another degree or qualification at this or any other university or
institution of learning.
COPYRIGHT STATEMENT
i. The author of this thesis (including any appendices and/or schedules to this thesis)
owns any copyright in it (the ―Copyright‖) and s/he has given The University of
Manchester the right to use such Copyright for any administrative, promotional,
ii. Copies of this thesis, either in full or in extracts, may be made only in accordance
Details of these regulations may be obtained from the Librarian. This page must
iii. The ownership of any patents, designs, trademarks and any and all other
intellectual property rights except for the Copyright (the ―Intellectual Property
Rights‖) and any reproductions of copyright works, for example graphs and tables
the author and may be owned by third parties. Such Intellectual Property Rights
and Reproductions cannot and must not be made available for use without the
iv. Further information on the conditions under which disclosure, publication and
exploitation of this thesis, the Copyright and any Intellectual Property Rights
12
and/or Reproductions described in it may take place is available from the Head of
School of (insert name of school) (or the Vice-President) and the Dean of the
ACKNOWLEDGEMENTS
Particular and everlasting regards are owed to Professors Mr. Mike Bailey
Dr. Rukhsana Kaleem, Mr. Sajjad Tahir, Mr. Rehmatulla, Mr. M. Rashid and
Mr. Shahzad Ahmed, Mr. Ahmed Sidiqui, Mr. Ejaz Ahmed, Mr. Farooq Gillani, who instructed,
zealously encouraged, and helped in writing this investigative report. Many thanks go to the
Institute of Research Promotion, which offered its literature and helped to collect the required
data. In addition, many thanks to my mother, wife, and kids, who are a symbol of life and hope
and who stood side by side to furnish their consistent support throughout this period.
The author of this report earned a degree in textile engineering in 1981 from the
University of Engineering and Technology (UET) in Lahore, Pakistan. He received his Masters
has worked in the textile industry for 27 years, spending most of his time on the manufacturing
and marketing of textile products, particularly apparels and textile auxiliaries. Lately, he has
been performing his duties as an assistant professor at the University of Management and
director of the Textile Productivity Centre, which plays an outstanding role in adding
Globalization, a new phenomenon in today's world, is one of the main factors that
pollution, transitions in production processes, and time factors in business games have led
productivity has taken place not only in production houses of manufacturing systems but
in social enterprises, behaviour science, and daily life. In this context, academic scholars
have introduced abundant concepts, new ideas, novel approaches, and new applications
based on socioeconomic factors (Kamimura, Bodeutsch, and Gayton, 1999; Sink, 1985;
Sumanth, 1998).
Productivity received attention even in olden days, when most human beings used
fire for their work. Stones were an essential element for a cave man on the hunt.
Similarly, if one looks at developments in car manufacturing, he or she will come across
the same idea. Presently, every car-manufacturing firm is adopting modern technology to
engineer more miles from the fewest units of fuel. It seems that productivity is a universal
concept and a ubiquitous term, as concluded by Sink (1985). This is proved by the
earliest known records, which recorded year-to-year crop levels. What's more, regions,
nations, and states with higher productivity were more powerful and capable of
leadership. Such states, regions, villages, and cities were rich economically (Brinkerhoff
and Dressler, 1990; Sink, 1985). Competition always finds its place among rivals to
Chapter One: Introduction 15
increase productivity. History bears out several interesting stories of wars and the
movement of tribes from one region to other, all in the name of better productivity. The
run through has become more vital in the modern era where different firms, companies,
brands go all-out to enclose higher productivity growth. These companies transfer their
manufacturing units from one country to other. A good example of this is the migration
of Western companies to developing countries, where they ensure better and less costly
production facilities. The particular purpose of all this is to increase productivity and
compete in global markets. Chen, Liaw and Yeong (2001) write about the economic
growth in China and in Far East Asian countries, concluding that the remarkable growth
is a result of many factors, the most significant of which is productivity growth. Chen et
al further indicated that foreign investment has a major role in the development of China
and that the attraction of foreign investment in China is mainly because of better returns
on investment, which is the result of high labour and capital productivity in China.
different viewpoints on it. In the beginning, the literature was inclined towards labour
practices and in environment. Now green productivity emerging from green movements
and the efforts of the Asian Productivity Organization and United Nations is an example
output to input. This may be partial, multifactor, or total factor productivity (OECD,
2005; Sink, 1985; Sumanth, 1998). Like many terms in business management literature,
Nevertheless, it seems there is disparity in words but there is a consistent theme when it
explains how the inputs are converted into output. Economists have taken keen interest in
production function since the industrial era. Many authors have put forward theories of
(1997), at least 18 economists hailing from seven countries either presented or reported
production function over a span of 160 years. All this was done before the famous
production function that was presented by Cobb-Douglas in 1927. Even after Cobb-
Douglas, several economists have presented production function models. These models
are used to measure productivity and TFP. On the other hand, economic literature
partial, multifactor, and TFP (see Section 2.1 for more details).
Ali (1978) wrote that productivity implications continue to change with the
passage of time, but in the modern era, productivity‘s importance is somewhat high in
comparison with the past. Ali writes, "The recognition of productivity came later, as late
as the 40s when Rostas published his famous study about productivity in British and
American industries" (p. 9). Mahoney (1998) linked the existing industrial period and
productivity, writing, ―Every age has its slogans and energizing concepts. Among other
concepts, concern for productivity has characterised much of the current decade‖ ( p.
13).
Chapter One: Introduction 17
The values of resources used for any output classify the behaviour of individuals
towards its utilization. Productivity becomes a crucial issue when there is a lack of
meaningful resources. The most relevant example in this regard is the invention of new
this technology helps to lower unaffordable prices of oil. It supports the statement given
by Mahoney, who said that the current era focuses on better utilizations of resources than
in the past. ―In Japan, productivity (seisansei) marched into public awareness in 1955,
since then, physical productivity of direct labour made out in manufacturing and its
auxiliary industries‖ (Taira, 1998, p. 40). After World War II, Japan embarked on its
activities in the industrial field and set up productivity centres. It is common knowledge
that Japan could not have made such an impressive performance without the concept of
high productivity.
Murugesh et al., after the 1980s, a wide-ranging upsurge occurred in the production of
different concepts and philosophies related to productivity. Indeed, the industrial world
increased competition. For the most part, this trend has gone unmatched over the last 20
years.
radically improves productivity, and this is a vital factor in the surge in productivity
awareness. Savery (1998) pointed out the significance of productivity in the current
business environment. Savery explains that the battle cry of the 1980s and 1990s was a
Chapter One: Introduction 18
endured in the early 21st century. It becomes a key point when resources are limited,
especially with a deeper concern about environmental impact, high competition in the
use of information technology, and other factors such as cost of labour associated with
business practices.
analysis, and gauging of the productivity of any firm, organisation, and industry, or the
ratio of output and input, but there are several definitions of productivity. According to
the Oxford Dictionary, ―measurement means to find the size, quantity, or degree of
something.‖ The word measurement is used here in the same sense. ―Productivity
measurement is defined as a set of management tools that are associated with the
of productivity is only possible when there is a solid knowledge available on the existing
productivity level. The impact of productivity measurement depends upon the business
environment. It becomes more decisive when there is always a want for resources, tough
and strict competition, rapid changes in business environment, and thin profit margins.
Chapter One: Introduction 19
According to Lord Kelvin (as cited in Ali, 1978), if one cannot measure and put
means expressing any judgement numerically. If one cannot get across productivity
findings numerically, the knowledge is not sufficient. Drucker expressed his personal
Morris and Sink wrote that, ―Measurement fosters organizational learning when
knowledge‖ (Parsons, 2000, p. 13). It all favours the observation that productivity
apparent that measurement is a process that converts ideas, observations, and assessments
into some understandable numbers, so that one can make an informed judgement about
the observations. Russell said (as cited in Ali, 1978), that measurement is, in the most
established between all or some of the magnitudes of kind and all or some of the numbers
— integral, rational, or real, as the case may be. If you cannot measure it, you cannot
1999, p. 5).
Chapter One: Introduction 20
how to produce output of desired goods and services within the minimum quantity of
human and physical resources. The measurement of output is the first major element in
necessity for the applicable analysis of productivity. No one can make useful comments
on the utilization of resources without analysing productivity (see Section 2.7 for more
details).
productivity and its implications in current era. In the following lines, there is a brief
discussion about productivity and its link with Pakistan‘s Textile Industry. This
Pakistan came into being in 1947 and at that crucial time, the Pakistani economy
industries were located in the geographic areas that became India after Partition.
However, considerable structural changes in the economy took place over the later part of
In 1950, agriculture production was 60% of the total GDP and 82% people were
living in rural areas and share of manufacturers merchandise in exports was zero,
while in 1996, agriculture had 26 % share in total GDP and manufactured goods
had 84% share in total exports from Pakistan. Pakistan was agrarian and large
One can glimpse the active re-configuration of Pakistani economy during that period.
In fact, the textile industry is one of the oldest industries on the subcontinent, but
unfortunately, a huge range of textile mills were in the Indian part of the subcontinent as
reported by All Pakistan Textile Mills Association (APTMA, 2006). APTMA further
illustrated the situation of the textile industry in Pakistan in 1947, writing that at the time
of Partition (in 1947), there were only 78,000 spindles and 3,000 power looms in the area
that became part of Pakistan, while in 2005-2006, there were 10,437,000 spindles,
155,000 rotors and 4,000 shuttle less looms installed in Pakistan. Besides, in 1947, cotton
production was only 6.876 Million Kg, and there was no manmade fibre production in the
area.
During [the] 1950s there was a strong need to develop local industrial capacity for
capital goods, and credit at low interest rates. (Husain, 2002, p. 12)
During the last 60 years, the Pakistani government made specific and focused policies to
particularly the share of textile goods instead of non-manufactured goods exports. This
industrial development was all designed to meet the growing requirements of foreign
growth of 9.6% manufacturing growth, and 2.8% agricultural growth during 1947 to
1958 (Husain, 2002). As per the APTMA report , in 1959-60, there were 1,582,000
Chapter One: Introduction 22
spindles working in Pakistan, whereas there were only 78,000 spindles in 1947. It shows
basic reasons for this tremendous growth was the availability of cotton at affordable
prices, which was the main raw material for spinning industry during the 1960s.
industry was only 6.876 Million Kg, while it was 201.18 Million Kg in 1959-60, a
Pakistan spinning industry in 2002-03 was 1.943 Billion Kg, which was 281 fold more
than the domestic consumption of cotton in 1947. This clearly gives a picture of the
government's major focus to develop the textile industry rather than relying on
agriculture. There is also evidence that comes from annual growth rate of agriculture and
manufacturing sectors. According to Husain (2002), these growth rates were 2.8% and
exports, while raw cotton was 33.9% of total exports. Nevertheless, in 2004-05, cotton-
manufacturing share had jumped to 60.1%, and raw cotton share had come to 0.76% of
the total exports. This trend clearly shows that policies framed by government of Pakistan
worked well, and ultimately succeeded in developing local industry. The dependence on
agriculture exports decreased, and the share of manufacturing goods increased from nil in
1947 to 84% in 1996 (Husain, 2002). It can be assumed that this all happened in
European countries imposed quota restriction on the imports of textile goods, particularly
Chapter One: Introduction 23
on apparels. This became one of the main obstacles for exporting countries, mostly for
Pakistan, which heavily relied on textile exports. The institution of the General
non-tariff barriers. The Agreement on Textiles and Clothing (ATC) established the
2000), during the quota regime, every country officially allowed exporting a certain
quantity of textile products to U.S.A, Canada, and European countries. The GATT
abolished quota-based import restrictions by U.S.A, EU, and Canada on Jan 01, 2005.
This agreement granted permission and liberty to exporters from any country to export
approaching years.
SMEDA states that during 1980s and 1990s, the government of Pakistan
competitive in international markets. Currently, the government has taken back most of
its financial assistance to the textile and clothing industry. It is presumed that having no
financial boost by the government of Pakistan, only better productivity can gradually
assist exporters to become competitive in the international and local market. The
expected competition requires improved productivity in the textile sector, which is the
core industry of Pakistan. In the textile industry, the clothing sector is more crucial due to
its value addition and high employment potential. Pakistan‘s Knitted Garment Industry
(PKGI) is one of the major clothing sectors. The economy largely depends upon the
Chapter One: Introduction 24
performance of textile industry since it has a two-thirds share in total exports and one-
third share in total employment (see Table 1.1 for more details).
Table 1.1
Contribution of Pakistani textile industry to the economy (2004-2005)
Under the World Trade Organization (WTO), when every country is needed to
phase out tariffs completely, the Pakistan textile industry (PTI) faces brutal competition.
This is most likely due to poor performance of this sector. A survey conducted by the
Japan International Cooperation Agency (JICA), (as cited in SMEDA, 2000) supports
this observation. According to this detailed study, PTI is impeded by outdated production
facilities, low productivity, and high production costs because of the small scale of
operations. JICA made recommendations for all textile sub sectors (ginning, spinning,
weaving, wet processing, and clothing). Furthermore, JICA identified many problems
associated with Pakistan Textile Industry (PTI). As per the JICA report, there is a
industry. Poor presentation is further supported by Sheikh, who said, ―There were many
Chapter One: Introduction 25
drawbacks on the part of the industry, such as internal weaknesses, structural imbalances,
Pakistan‖ (Sheikh, 2001, p. 41). In addition, PTI is facing a severe shortfall of skilled
workers as well as trained and educated managers. JICA also pointed out ample lack of
research and development activities, in mills as well as at the government level. Despite
all the problems cited above, growth of PTI is high, but not satisfactory when put in
comparison to the growth rate of other regional countries (see Table 1.2).
It is clear from the data provided in Table 1.2 that several regional countries
performed better than Pakistan in 2005. In 1980, Bangladesh was not included in the list
of top 70 states ranked based on textile and clothing export values. Nevertheless, in 2005,
this country rose to the 10th position. This suggests that in an international scenario, the
performance of the Pakistani clothing industry had a declining trend when compared with
other major exporters in the region. On the other hand, if one views the performance of
the PTI in Pakistan, it looks quite outstanding. The gap between performance both at the
local and international level shows that there is a considerable room for improvement.
Table 1.3 shows growth of the Pakistan textile industry from 1971 to 2005.
Chapter One: Introduction 26
Table 1.2
Share Percentage in World Clothing Exports and Ranking in Top Clothing Exporting
Countries
1980 2005
Ranking Ranking
Among Among
Export Share in Clothing Export Share in Clothing
Value (U.S. World Exports Exporting Value (U.S. World Exports Exporting
Countries $ Millions) (%) Countries $ Millions) (%) Countries
Source: WTO.org
Chapter One: Introduction 27
Table 1.3
Growth Rate of Textile Related Commodities in Total Export from Pakistan (Million
U.S.$)
Total Share in Total Share in Average
Exports Total Exports Total Growth
From Exports From Exports Rate In 33
Pakistan in in1971-72 Pakistan in 2004- Years (%)
1971-72 (%) in 2004- 2005
2005 (%)
Total Exports 590.70 14,391.00 10.16
The data provided in Table 1.3 supports several conclusions regarding exports of
1. The textile industry had a 72.8% share in total exports in 1971-72, which declined
to 61.39% in 2004-05. It shows the textile industry has failed to hold its
2. Raw cotton was a major export during 1971-72. It had a share of 33.98% of total
exports while its contribution came down to only 0.76% in 2004-05. This shows
Chapter One: Introduction 28
that the government policies promoted the establishment of a local industry that
3. Share of cotton, yarn, and grey cotton cloth is trending downward in total exports.
Share of these items in total exports was higher in 1971-72 as in comparison with
2004-05. The raw material of the textile industry that was of less value added in
4. Yarn had 21.61% share in total exports in 1971-72, but these shares decreased to
10.08% in 2004-05, despite addition in spinning mills capacity. This indicates that
local industry converted yarn into fabric instead of exporting as bulk yarn.
5. There is no big change in the share of fabric in total exports. In 1971-72, the share
was 13.81%, while in 2004-05, it was 12.95%. During this period yarn export
decreased, which means that yarn consumption in Pakistan increased and more
6. Share of made-ups, bed wears and clothing (woven and knitted both) was 2.46%
in 1971-72, and it increased to 33.12% in 2004-05. This shows that total export of
7. In 1971-72, textile raw material (raw cotton) export was 33.98% and share of
8. Growth rate of made-ups and clothing is much higher than yarn and fabric. Table
1.3 depicts that in 33 years Pakistan succeeded in converting its textile raw
is higher than less value-added products; particularly the share of apparel is higher
As per JICA (2006), in a scenario where there are no quota restrictions after 2004,
government of Pakistan might not be able to protect its industry by putting tariff barriers
on textile and clothing imports. The only competitive strategy that could assist the textile
challenge in the current business era and only a collaborative effort from government
In light of the above discussion, it is apparent that the economy of Pakistan has
strong ties with the performance of textile sector. The textile sector mainly consists of
manufacturing. One can observe a high growth rate during the last three decades, in the
sector of apparel manufacturing and made-ups (see Table 1.3). These sectors are
relatively higher benefit commodities and generate a high degree of foreign exchange.
Besides, the most important factor associated with these sectors is high employment
potential. At this time, massive unemployment is one of the main problems of Pakistan
because of high population growth and less industrial activities. The present
purpose, the government is developing textile and garment cities throughout the country.
The government will generously provide all sorts of facilities on a priority basis to firms
manufacturers that these cities will attract more foreign investment to appear in Pakistan.
Chapter One: Introduction 30
Hopefully, many big international companies will establish their garment production
units in these cities so that garment industry positively affects the economy of Pakistan.
In previous pages, discussion is mainly about the role of textile in the economy of
Pakistan. It shows that textile industry is playing a significant role in the economy of
Pakistan. This study is to assess TFP of Pakistan‘s Knitted Garment Industry (PKGI) and
the impact of different factors on its growth. Based on the objective, it is imperative to
discuss in detail the structure of PKGI so that one could have an idea about the working
In 2004-05, PKGI had a 11.36% share in total exports of Pakistan, while in 1971-
72 it was 0.54%. Furthermore, PKGI has an 18.51% share in total textile exports. In
addition to that, it belongs to the group of products that have the highest growth rate (see
Table 1.3). As described by SMEDA (2000), this sector provides enormous employment
this industry is export-oriented. This is due to the clothing customs of Pakistani society.
The main dress of Pakistani people is shalwar and qameez, while this industry produces
polo shorts, T-shirts, trousers, etc., which are not popular in Pakistan. Nevertheless,
young people living in cities are showing interest in knitted shirts and trousers. This
requirement is fulfilled by the left over goods after exporting the better quality products.
However, a few firms are producing for the local market. Their main products are vests
and undergarments. Such firms belong to cottage and unorganised sectors. The emphasis
information about this sector, which is under discussed in the current study. The
following information has been derived from the unpublished reports provided by the
1. Over 900 export companies sent knitted goods abroad in the year 2003. The range
of export figures (value in U.S.$) is very extensive, as low as a few hundred U.S.$
2. More than 90% of knitted garment export is manufactured by only 24% of the
3. Three major cities of Pakistan: Lahore, Karachi, and Faisalabad account for more
than 98% share in total export of knitted garments. Their share percentage is 45%,
4. More than 255,000 individuals are working in this sector and there is a 10%
5. Several other industries are working for this sector, too such as stitching thread
6. More than 80% of knitted garments are exported to U.S., Canada, and other
European countries.
7. Many worldwide firms are establishing their plants in Pakistan due to the
accessibility of cheap labour, abundant raw material and soft environmental and
labour laws.
Chapter One: Introduction 32
As mentioned earlier, PKGI plays a key role in Pakistan's economy but the author
of this report could not find any such study that weighed its TFP and determinants. It is
an assumption that a minor change in this sector can significantly affect the exports of
Pakistan, since it has nearly 12% share of exports. To improve productivity, it is requisite
identify significant factors that underpin productivity. Based on this observation, this
study plans to calculate the TFP level of the industry and identify major determinants that
A many ways rally round improving the function of the industry. Government
subsidies or the relaxation of import duties from the importing countries has profound
effects on improving export capacity. According to the JICA (2006) report, government
support for raw material cannot solve the problem entirely. Rather, industry must
improve its own productivity. Furthermore, as per SMEDA (2000), until 2000,
government provided strong duty drawbacks (rebate on exports). In addition to that, there
were many tax exemptions available to the industry. All these efforts supported the
in form of research and development funds, but even this support will take some time to
A pilot survey revealed that people dislike competition in the global market
without the help of government. However, the government is not ready to give additional
concessions to the industry. On the other hand, productivity of the industry is quite low,
as discussed by Majid (2000). Majid made a list of 110 states based on their
Chapter One: Introduction 33
competitiveness; Pakistan in 91st place. This shows how poor capacity has affected the
industry‘s ability to compete in the international market. Majid has not discussed PKGI
separately, but it can be presumed that the PKGI position is not significantly different
from other sectors. Majid also suggested improving the competitiveness and productivity
of the industry to acquire a better market share in the international market. These studies
indicate that better productivity in the textile industry will likely improve the economic
and social wellbeing of the Pakistan (See section 2.1 for more details)
critical determinants.
2. PKGI is coping with tough competition in global and local markets. It also has
result, the competition has become more ruthless; in such circumstances, only
3. This sector plays a noteworthy role in value addition of the textile products. At
this time, the PKGI has 11.36% share in the total export of Pakistan. This share
Fortunately, there is a huge gap in supply and demand, which PKGI can partially
1. To examine the TFP level achieved by PKGI (at aggregate level), vertical firms
Ho Ha
µ TFP of horizontal firms is less than or equal µTFP of horizontal firms is greater than
to 1 1
µTFP of vertical firms is less than or equal to µTFP of vertical firms is greater than 1
1
µTFP of PKGI at aggregate level is less than µ TFP of PKGI at aggregate level is
or equal to 1 greater than 1
variable)?
(b) Which variable in a set of variables has highest contribution in the variance of
dependent variable?
Chapter One: Introduction 35
This report is an attempt to estimate the TFP level of PKGI and mark out such
determinants as affects its performance. For this purpose, primary and secondary data
have been collected from different sources. The source of primary data is a census of the
manufacturing industry in Pakistan, whereas secondary data was found through a survey
theoretical understanding about basic internal and external processes linked with the
PKGI. This is not an applied research project focused on answering practical questions,
which would provide relatively immediate solutions. Basic and applied research can be
viewed as two endpoints on a research continuum, with the centre representing the
research applicable to both ends. Furthermore, it is also to be noted that for this research,
the deductive method has been used. As expressed by Johnson and Christensen (2006),
As described by Johnson and Christensen (2006), there are currently three major
research paradigms in education and the social and behavioural sciences. They are
quantitative research, qualitative research, and mixed research. This study relies largely
Chapter One: Introduction 36
on the collection and analysis of quantitative data (see Section 3.1 for more details). In
order to assess the TFP of any firm or any industry, it is necessary to identify and collect
data on critical determinants. Data can be classified broadly in to two classes; time-series
and cross-sectional data. The PKGI is only 15 to 20 years old, which is quite short for
time-series data, and furthermore no authenticated data is available over this entire
period. Hence, cross-sectional data has been utilised. According to the unpublished data
association of PKGI, 900 firms exported knitted goods in 2003, and 218 out of 900 firms
represented 90% of knitted garment exports; 682 firms exported the remaining 10%. Due
to the insignificant share of the 682 firms, only the 218 firms with the majority share
The knitted garment manufacturing process consists of three major processes: (a)
knitting, (b) wet processing, and (c) stitching. There are two models of garment
manufacturing firms, (a) vertical and (b) horizontal (non-vertical), existing in the
Pakistani market. Vertical firms have knitting, wet processing, and stitching facilities
under one roof, and horizontal firms have only stitching facilities. There are many
differences between vertical and horizontal firms in their production capacity, business
practices, capital invested, etc. All these firms are located in three major cities of Pakistan
— Karachi, Lahore and Faisalabad. Primary and secondary data were used for analysis.
Productivity Center, Craig, and Harris has been selected to assess TFP of the PKGI after
a thorough discussion. This model takes all inputs and outputs into account and gives a
true picture of the firms and industries where it is applied. The selection criterion is
Chapter One: Introduction 37
discussed in detail in chapter two (see Section 3.5 for more details). Analysis has been
carried out with the help of Statistical Product and Service Solutions (SPSS) software.
For the first time in Pakistan, the TFP of the PKGI has been estimated
quantitatively, and the related contribution of some determinants has been measured, too,
with the help of quantitative research methods. The decisive conclusion from this
research is that a well-timed analysis of PKGI has been made. This study may convince
the industry as well as the Pakistani government to take serious steps to increasing the
TFP of PKGI. Furthermore, results of this study can be useful for benchmarking of
related sectors and accurate assessment of TFP of PKGI in future. Finally, this report
determinants.
This thesis has been separated into five chapters. Chapter two reviews appropriate
Chapter three examines the research and data collection methods. Chapter four contains a
critical analysis of data information on the testing of the hypotheses. Chapter five
discusses the major findings and develops some policy guidelines for the PKGI.
Chapter Two: An Overview of Total Factor Productivity 38
industry of Pakistan, and the objectives of this report were discussed. As a conclusion,
one can get a condensed idea about productivity and its importance in the economy of
In the first half of the chapter, a debate embraces to elaborate the TFP concept,
the theoretical significance of TFP estimation issues that correlate with TFP
measurement, and an argument on the diverse approaches and methods to measure TFP.
It begins from the historical aspect of production functions and TFP, followed by an
argument on how this TFP caught the attention of macroeconomists, ending with the
journey of TFP from the macro to micro levels. This chapter discussed how TFP is
the second part of the chapter, selection of the most apposite and appropriate TFP
output in a production function, and it is the reason why it has remained on humans‘
minds throughout history. Sink (1985) also discussed it in the same way. Probably, better
productivity has been the first step in the development of economies, and it positively
contributed in the undeniable success of the world's leading states. The roots of
Chapter Two: An Overview of Total Factor Productivity 39
productivity are found in ancient records, where people were recording the crops‘ yields
on an annual basis. This was a way to measure and compare productivity of different
fields on seasonal basis (Brinkerhoff and Dressler, 1990; Monga, 2000; Sink, 1985;
Sumanth, 1998).
Struggle for better resources has been the basic quest of human beings, and they
have used several ways to fulfil this need, which led to the different revolutionary
movements. In the last three centuries, many ideologies were formed to improve the
living standard of people, including, for example, capital theory by Adam Smith and
Socialist theory by Karl Marx. In both cases, productivity remained the fundamental
stone to build whole theory. Nevertheless, there are drastic dissimilarities between the
two theories. Even today's open market economy also focuses on better economic
productivity as one of the burning issues in the business world. This is obvious from the
Performance and Innovation Unit (PIU) UK, which acts directly under the supervision of
the Premiership of UK. This unit has been established for the same cause — namely
promoting the concept of resource productivity (PIU, 2001). Resource productivity, like
other concepts of productivity, means creating more output while utilising fewer
resources. Shortage of natural resources forces the businesses and academic and political
leaders to take serious steps in order to have a minimum input for a higher output. A
relevant example is the use of recycled material. In the current era recycling has become
a winning tool in the marketing of the consumer products. Based on this observation, it
seems that a strong movement is emerging to improve the current productivity level of
natural resources. The resource productivity concept may be best illustrated in case of oil,
Chapter Two: An Overview of Total Factor Productivity 40
where people strive to bring innovative methods of increasing oil productivity and are
Nevertheless, productivity concepts have their origin centuries in the past and
have been promoted and redefined over the different periods in history. However, it looks
that after industrial revolution; the primary productivity concept developed in advanced
countries and less developed countries was gradually adopted to follow the proven and
the ―faculty to produce,‖ which is the ultimately desire to produce. In the mid-20th
productivity as the quotient obtained by dividing input by one of the factors of production
Sumanth has elaborated the role of OECD in productivity growth in the developed
world. Sumanth says that the OECD definition of productivity carries the strong impact
into productivity of capital, investment, and raw material. During the 1950s, OECD made
In the same period, many other Asian and European countries set up productivity
(1999). The United States is one of the countries that took many initiatives to promote
Chapter Two: An Overview of Total Factor Productivity 41
productivity concepts. The U.S. Department of Labor and Bureau of Labor Statistics have
gradually assisted many Asian and European countries to adopt practices of productivity.
The U.S. and UK played an important role in ongoing growth of productivity concepts,
Dewitt has also noted that productivity movement has a strong link with U.S.
industry. Dewitt wrote that the ―productivity concept was first recognized in the late
1800s and early 1900's when widespread efforts were made to improve the efficiency of
awareness grew with sharp development of industrial activities. Ali wrote, ―The
recognition of productivity came later, as late as the 1940s when Rostas published his
famous study about productivity in British and American industries‖ (1978, p. 9). This
study was carried out during World War II. It reveals that both Nazi Germany and the
U.S. were the strongest productive industries at that time, capable of producing anything
more than thrice annually what British industry could produce. The higher productivity of
Nazi Germany provided them a cutting edge in wars over their competitors. Outcome of
this detailed study gave a warning call to the European countries and led to the
The AAPC effectively implemented the Marshall Plan given by Marshall in 1948.
It was to raise markedly the productivity of European countries. The Marshall Plan called
Chapter Two: An Overview of Total Factor Productivity 42
for the foundation of productivity councils and centres in the all aid recipient countries
after the World War II 1(EANPC, 2008). Marshall‘s efforts show a high concern by U.S.
authorities towards productivity and their approach to it as a remedy for the adversity of
European countries. This discussion clearly indicates that higher productivity is believed
Campbell and Campbell (1998) have given in detail the journey of productivity
from its narrow concept to a wider acceptable approach. They argue that when the
attention on it and were captivated by it. Many authors embarked on research and
Campbell and Campbell further state that the concept of productivity ultimately
approaches the matter of urgency because a sense of urgency in human beings pushes
them to higher efficiency. They concluded that productivity has a direct impact on real
with daily life, at both macro and micro level and their effective role in improving living
improved a distribution system to meet the latent demand of products in the early period
of the 1950s after WWII; this field of productivity converted into a new dimension when
1
European Union National Productivity Centers
Chapter Two: An Overview of Total Factor Productivity 43
managers shifted their focus from more selling to marketing in the early part of the
oil crisis of 1973, when people began to talk about energy saving and using less to
produce more (Sumanth, 1998). Sumanth further stated that productivity became the
buzzword in corporate America and elsewhere in the world. All this is evidence for a
shift from production to productivity and a change in favourites among the corporate
sector within a span of few decades. Not only the corporate sector turned its face;
and organized conferences to make people aware of productivity. One can say that before
the 1950s, the business world‘s focus was on getting more production because there was
a huge demand in the market and less competition. However, after the 1960s, the focus
was less to produce maximum with minimum input to compete in international markets,
where there is severe competition, lower tariffs, and non-tariff barriers in international
transactions. Furthermore, there is a regular reduction in import duties under the umbrella
starting from the U.S. after WWII and its emergence in Europe and then in other parts of
the world, including underdeveloped countries. Prokopenko states that the productivity
concept was known for a long time, but it was formally taken as part of activities in the
1950s. The U.S. government took the first step by establishing a War Production Board
during WW II. The particular aim was to improve functioning of U.S. industries. After a
successful experience in the U.S., many European countries took initiative and started
their activities. This was all held under the Marshall Plan. However, the U.S. shared its
Chapter Two: An Overview of Total Factor Productivity 44
experiences and technology with many other countries. Prokopenko further tells that the
U.S. focus was efficiency-oriented productivity, which later synthesized with the
1950s all over Europe with the prime responsibility of ensuring that capitalism was the
only way of survival. In 1948, British Productivity Council was established and its main
Prokopenko further expresses that during 1948 to 1952; nearly 66,000 high rank
UK executives visited the U.S. to learn the methods and techniques to improve
different NPOs, in 1953, European countries launched a centre in Paris. The objective of
this centre was to carry out goals of technology innovation, human respect, and
achievement of a better quality of life. Because of these efforts, many new organisations
emerged at the National Productivity Centre in Greece, which is largest in its nature in
Prokopenko concluded that during this period many new slogans were promoted,
continuous improvement of what exists and can do better today than yesterday,‖ and
started in the U.S. and later on, Europe became a vital part of this movement, showing
that the core objective of NPOs was to create awareness and sort out dissimilar activities.
Chapter Two: An Overview of Total Factor Productivity 45
training of managers to acquire better tools of management were the main activities of
these organizations. These organisations did not establish different technology centres.
Rather, they assisted different industries to adopt the latest technologies (Prokopenko,
1999). In general, there was a general awareness about productivity, as it is clear from the
statement that productivity is a mindset that one can have better tomorrow than today,
Japan joined this race and established a Productivity Centre in 1955. In 1994, after a
merger of two sister organizations it converted into the Japan Productivity Centre for
development of Japan, particularly in the industrial sector. This centre arranged the first
visit of high executives in September 1955 to the U.S. to study productivity methods and
techniques. The objective behind this tour was to learn from U.S. experiences in the field
of production. In 1995, this centre organized its 50th anniversary with the declaration of
―Productivity Movement towards a Society Based on Mutual Trust and Vitality‖. This is
vital to note that the slogan is different from the original concept that this centre adopted
in 1955. At that time, the main objective of the centre was to facilitate Japan's industry to
have higher productivity and fill the gap between the performance of developed countries
and Japan.
Productivity Center. Prokopenko asserted that after JPC‘s successful experience, Japan
became the base of Asian Productivity Organisation (APO) in 1961, based in Tokyo. To
begin with, few Asian countries were members of this organisation, but now there are 20
economy of Japan. Taira (1998) also supports this observation. Taira conveyed the
massage that after 1950s, there was a strong movement in Japan to increase productivity
Japan entered the race of productivity with a full commitment and did good
efforts to minimize the gap of productivity with U.S. The U.S. felt that Japan was making
a dent in its economy based on productivity. In response, the U.S. established a National
Commission on Productivity that later added ―Work Quality‖ to its title to attract trade
home based manufacturing and service providers firms through better productivity. One
of the relevant examples is auto market. In 1980s, Japanese cars were becoming popular
in U.S. markets. This all compelled the U.S. government and industrialists to join hands
Having assessed the strength of productivity in 1983, the White House organized
a conference with the title ―White House Conference on Productivity: An Opportunity for
Change.‖ First, four preparatory conferences were organized in different parts of the
country and the closing convention held in Washington. The focus of this conference was
to discuss growing concerns like government regulation, tax reform, capital investment,
human resources, private sector initiatives, and public sector management. The
conference concluded that productivity is vital to the United States economy and that the
productivity challenge can be met with good management, ongoing public awareness,
Chapter Two: An Overview of Total Factor Productivity 47
and a cooperative effort between government and industry (Aronson and Skancke, 1983).
It proved that productivity was a catch cry of the 1980s and was a point of focus at a
Countries in Latin America and the Caribbean region also felt the significance of
productivity, though much later than other developed countries. No outstanding activities
were observed in African countries in the field of productivity until 1990s. In this
context, the most active institution is National Productivity Institute (NPI) in South
because of the presence of European people in government who had strong links with
After the fall of Soviet Union, productivity awareness in the Eastern Europe and
in central Asia lost its way. Nevertheless, after 1990, a movement emerged focusing on
productivity. Before the collapse of Soviet Union, ILO started cooperation with the
Soviet Labour Ministry. As a result, the All Union Productivity Centre and eight other
productivity centres were set up in former Soviet Republics (Prokopenko, 1999). The
productivity movement gave many benefits to U.S. and then to Europe, Japan. The rest of
the world was observing and filling a gap between them and developed nations.
Consequently, other countries and regions started their campaigns in this field and
assumed that today there is neither developed nor underdeveloped countries that have no
Chapter Two: An Overview of Total Factor Productivity 48
associations, and APO is one of the examples, having 20 member states alone, mainly
The survival of NPOs shows that there is a general conviction that for better
established in 1966 as a successor body to the European Productivity Agency. The main
this organization are in Brussels and its membership is open to all national productivity
centres and institutions. All the members are equal as being the member states of the
Europe, but currently many new countries have sought its membership, including Poland,
Russia, and the Ukraine. In late 1980s, Japan, which was in the list of developed
countries also contributed for the development and promotion of productivity movements
and assisted Hungary, Poland and Ukraine to establish National Productivity Centres.
There are many associations that are not fully capable of giving desired results, but there
is a serious concern about productivity, and it is growing every day. Currently there are
about 100 productivity institutions located all over the world (Prokopenko, 1999).
Prokopenko published this study in 1999. Therefore, it is this researcher‘s strong belief
there are many more centres and associations working today in this field.
Chapter Two: An Overview of Total Factor Productivity 49
With the start of 21st century, there is momentous growth in the productivity
movement. It is hard to find any country not focusing on productivity. Different awards
are being conferred upon the best performers. There are analysts of productivity gaps
who work online for public consumption and publish articles to promote productivity
which was established in 1998 after the merger of three different organizations. The main
objective of this merger was to enhance and strengthen the cohesive effort in the field of
productivity. The U.S. Senate offers productivity awards on an annual basis to best
performers, e.g., the Maryland-U.S. Senate Productivity Award and Award for
conducted by The London School of Economics in 2004. The School did an effort to find
out gaps in UK Productivity. This report is quite informative and gives a true depiction of
The summary of the above discussion is that the movement, which started in the
early 1900s, gained momentum with the passage of time. Having travelled from firms
and offices to government offices, it has attracted everyone to have healthier productivity
Table 2.1
Highlights of productivity awareness in chronological order
1766
Quesnay used the word productivity (Sumanth)
1883
Littre used the faculty to produce to describe productivity (Sumanth)
1880-1920
Spread of productivity concept in U.S.A (Dewitt)
Post WWII
Anglo-American Productivity Council was established to implement Marshal Plan
(Prokopenko)
1948
British Productivity Council formed (Prokopenko)
1950
OEEC defined productivity (Sumanth)
1953
Productivity Centre for Coordination established in Paris (Prokopenko)
1955
Japan Productivity Center was established
1961
Asian Production Organization was formed
1965
National Productivity Institute established in South Africa (Prokopenko)
1966
The European Association of National Productivity Centres was made (EANPC)
1969
World Confederation of Productivity Science (WCPS) in London
1980-1990
More than eight All Union Productivity Centres were erected in U.S.S.R.
1983
White House Conference on Productivity: An Opportunity for Change was organized
1992
Pan African Productivity Association in November 1992 by six African countries
1994
Merger of Japan Productivity Center and Socio Economic Congress of Japan
1998
Productivity Commission Australia was established under Productivity Commission Act
2005
50th Anniversary of JPC-SED with the declaration ―Productivity Movement towards a
Society Based on Mutual Trust and Vitality‖
Chapter Two: An Overview of Total Factor Productivity 51
Section 2.1 gave a glimpse of productivity awareness in the last three centuries. It
is obvious from the discussion that productivity is catching more and more attention
among all occupations. In addition, it is assumed that the future will witness serious,
focused, and results-oriented efforts in this field. This section is dedicated to discuss the
As discussed in section 2.1, the term productivity was first used in 1766 by
Quesnay and in 1950. It was formally defined by OECD, as said by Sumanth (1990).
Literature is full of several definitions of productivity. People view in different ways and
Tangen (2005) wrote that productivity is like other terms in the field of economics
and business still needs more efforts for a comprehensive definition. Tangen further
states that it is a fact that productivity is one of the most significant factors affecting a
they agree that productivity is a ratio of output to input. This concept has been explained
in different words and phrases. The complex concept of productivity covers changed
meanings and contexts. Such diverse views are mainly because of industry contexts in
with less input, whereas environmental engineers consider productivity as less pollution
with more recycling of materials. Unwritten definitions create a common and shared view
strategic objectives of the firms and reveals the plans of the firms. Adding to this idea,
Tangen spelled out that for the purpose of developing methods of improvement there is a
need for mathematical formulas. These formulas serve to design a framework to make
certain changes to increase productivity. For better results, there is an essential demand
visibly make a note between a concept and a particular mathematical definition attached
definition.
volume measure of input use. It tells how efficiently and wisely resources are used to
enclose a certain output. The commonly understood meaning of the word productivity is
too general for use in specialized fields. Even within business, the definition of
productivity varies according to the aspect being studied (Thomas and Baron, 1994). It is
obvious from the Table 2.2 that there is a difference of words — otherwise the concept of
productivity is nearly identical in all contexts. The main emphasis is on the professional
of the nation. Productivity could have a single factor, multiple factors, or total factors
universal and generic. Productivity does not only cover production but also covers
services.
Chapter Two: An Overview of Total Factor Productivity 53
system during or over a given period in time and inputs to that system during that same
period, should be generic and universal. The simplest meaning of productivity is the
relationship between goods produced or service provided and the resources consumed.
Productivity is also an indicator of the utilization of the resources. A right product at the
manner without wasting resources, it means the amount of undesired valuable products is
very low. Productivity has its functional meanings in a production function. It depicts the
whole process at an aggregate level. One can have a view of performance starting from a
Generally, it seems that different scholars and authors are agreeing that
productivity indicates how well resources are used to accomplish certain goals of the
firm.
Thomas and Baron (1994) have discussed the relationship between output and
input. They have studied the flaws present in the relationship and have concluded that
develops a relationship and interdependency among various factors. They further argue
that the above definition of productivity relies on the acceptance of the stimulus-response
model of causality, which explains that input causes output. This concept creates a
prejudice towards the production function. This assumption leaves out other economic
and non-economic performance of output such as market goodwill, market share, new
Chapter Two: An Overview of Total Factor Productivity 54
production introduction, social services, etc. Such output is an intangible gain. It is a fact
that for all such achievements, there is a consumption of tangible inputs and such inputs
are fully taken into account while calculating the ratio. It shows that the relationship
between tangible output and tangible input does not give a true picture.
Thomas and Baron point out another lack in this relationship. They write that in
case partial productivity is discussed, one factor is only considered whereas input factors
from other factors, just as labour productivity improvement because of latest technology
productivity.
Stainer (1995) pointed out that the term productivity is often confused with the
term production, although both have a close relationship to each other. Production is
goods or services. Broman pointed out (as cited by Tangen, 2005), that what appear to be
dissimilar definitions of productivity are actually quite similar in nature. The reason for
this similarity is the contents associated with productivity. Ghobadian and Husband (as
cited by Tangen, 2005) have suggested that similar productivity concepts can be
After having examined Table 2.2, one can find that there are different authors
who have explained productivity concepts and defined productivity, but there are subtle
differences that are based on the perception attached with the productivity. It shows that
context has a strong influence on productivity‘s meaning. It might be different for top
management and front line management. It may have dissimilar meaning when one is
discussing productivity in the context of a single machine, assembly line, unit level,
department level, or even at an individual level (Tangen, 2005). It may have different
meaning for employees, employers, government, and society. For employees, it may be
considered as more salary and wages; for employers more as profit; for government an
increase in taxes; and for society better employment chances (Baig, 2002).
Chapter Two: An Overview of Total Factor Productivity 56
Table 2.2
Chronological order of productivity definitions
1766: Productivity appeared first time in literature (Quesnay).
(OECD)
1965: Functional definition for partial, total factor and total productivity (Kendrick and Creamer)
1967: Ratio between the wealth produced and input resources used in the process of production (ILO)
1973: Productivity is the optimization of all available resources, investigation into the best-known
resources and generation of new resources through creative thinking, research and developing and
by using all possible improvement techniques and methods (M. R. Ramsay)
1980: Productivity refers to the effectiveness of the work not its intensity (Sir John Hedley)
1984: Delivering the right product or service of the right quality at the right time with least expenditure of
resources (Scarf)
1985: At its simplest, productivity is the relationship between goods produced and sold or services
provided- the output, and the resources consumed in doing it –the input (Alan Power)
Productivity is simply the relationship between the outputs generated from a system and inputs
provided to create those outputs (D. Scott Sink)
1990: Briefly, productivity reflects results as a function of effort (Brinkerhoff and Dressler).
1992: Productivity is the ratio of outputs produced to the input resources utilized in their production (Rick
L. Wilson)
1996: Productivity is about making the most efficient use of all resources and gaining the maximum
1997: Productivity is a measure of the capacity of individuals, firms, industries or entire economies to
transform inputs to outputs (Industry Commission)
Productivity relates to the efficient utilization of inputs in producing prescribed outputs of goods or
services (Alan Stainer).
1998: Productivity is an efficiency concept generally cast as ratio of output to input into some productive
process (Thomas A Mahoney)
Productivity is the ratio of output to input. Unfortunately, there is no place for management output
on an income statement (Richard Cardinali)
1999: Traditionally productivity is considered as ratio between input and output (Joseph Prokopenko)
2001: Technically productivity is the rate of output per unit of input (Social Policy Research Unit
Canada)
Sources: (Bheda, 2002; Brinkerhoff and Dressler, 1990; Cardinali, 1998; Gharneh, 1997;
Mahoney, 1998; Sink, 1985; Stainer, 1997; Sumanth, 1990)
profitability are synonymous in nature. Apparently, these terms are indicators of a firm's
level of achievement in a certain period and in a certain field, however in-depth analysis
shows that there is a subtle difference among the meanings and concepts of these terms.
develop a better understanding about these terms. This would serve in avoiding any
profitability is a ratio of cost of production and total revenue collected by a firm. Stainer
(1995) has pointed out that a fundamental problem in using profitability ratios is that
often outdoor conditions affect them, which may bear no relationship to the efficient use
of resources. Furthermore, profit is an economic activity. One firm can have larger profits
in certain circumstances. For example, firms working in a monopoly situation can have
better profits than a firm operating in a highly competitive market. Stainer further states
that it is the case that some firms do not earn profits because of their use of resources but
due to some external causes, for example, being unable to navigate government
Nevertheless, profitability has a strong link with productivity. Firms are of two
types: for profit (business concerns) and non-profits, such as welfare organisations,
rigorously for profit; they benefit from the same productivity considerations in some
function of productivity. However, it is true that incidents outside the firm's control can
substantially increase profit or loss. Such incidents are outside the scope of this study. In
The terms productivity and performance are commonly used within academic and
commercial circles, but they are rarely adequately defined or explained. Indeed, they are
often confused and considered to be interchangeable, along with terms such as efficiency,
Chapter Two: An Overview of Total Factor Productivity 59
efficiency, effectiveness, and profitability are interdependent, but they always move in
short term but the effect of increased productivity is more likely to be realised in terms of
long-term profitability‖ (Tangen, 2005, p. 39). It seems that productivity does not
guarantee profitability, but it is more likely that it will not reduce the profitability, and it
is expected that in the end, better productivity would contribute to high profits.
Miller (as cited by Tangen, 2005) is one of the scholars who tried to build up a
clear line between profitability and productivity. Miller defines profitability as the sum of
productivity and the price recovery. Price recovery is the ratio of unit price related to unit
cost. Bernolak (1980) makes it clearer by saying that an organization should combine
performance. This will let them know the true reason for accumulated earnings. By doing
so, firms can make decisions to enhance productivity and profitability separately. All the
same, profitability is the dominant objective of the firms, and success and growth of any
business depends upon profitability. To get high rate of profits, from the shareholders'
point of view the inputs are converted into the productions to add value, which ultimately
contributes to achievement of high profits (Kolay and Sahu, 1995). It seems that
profitability cannot be ignored in pursuing better productivity, whereas the main agenda
of the firms is profit. Because of this, some time productivity is ignored and other means
discussing productivity are actually looking at the more general issue of performance.
attributes‖ (Thomas and Baron, 1994). There is a general confusion between productivity
performance. It shows that some time people are not able to find a difference between
that are not easily quantified, such as quality, customer satisfaction, and worker morale‖
(Thomas and Baron 1994). Measurement of productivity by dividing output with input is
quite easy but the measurement of performance is quite difficult. It covers many areas
that have qualitative and quantitative data such as customer satisfaction, etc. It envelops
many economical and non-economical areas like objectives of the firm. It may involve
obligation. In addition to that, performance can be described as an umbrella term for all
concepts that are the main determinants of success or failure of the firm.
There is a common confusion regarding the term efficiency. It creates more doubts
commonly defined as the utilisation of resources for a certain output. It denotes how well
resources have used, and it affects the denominator (input) of a productivity ratio.
required for a certain operation or output versus actual consumption of the resources. It is
easy to calculate because in most of the cases it is related to time, capital, or other
Chapter Two: An Overview of Total Factor Productivity 61
specified inputs (Tangen, 2004). Sumanth (1998) has discussed it in detail. ―Efficiency is
the ratio of actual output generated to the expected (or standard) output prescribed and
efficiency does not necessarily imply productivity‖ (p. 13). In fact, efficiency is the actual
output versus standard output. There is a strong need to have a distinct view about
efficiency. Confusion between two terms can lead to unwanted decisions that can regress
certain situations. Actually, it is biased towards the qualitative. It is associated with the
value for a customer and usually affects the numerator (output). It can be explained as the
doing the things right. As said earlier, productivity, profitability, performance, efficiency,
effectiveness are indicators of the function of the organization. They move in one
direction but are not interdependent. However, they are strong associates with each other.
productivity. In addition, it is worth noting that better productivity does not give the
assurance of high profitability. All these terms move side-by-side, but by putting hands
together as concluded by Tangen. It is obvious from all above discussion that there is an
ongoing debate about different terms and phrases. In addition to that, it looks that it is
quite difficult to reach on a conclusion. Below, however, definitions and concepts that are
quantitative)
right things
The whole discussion could be concluded on the point that ―productivity is not
everything but in the long run, it is nearly everything‖, as said by Paul Krugman, an
American economist.
Section 2.3 discussed the concepts and definitions of productivity and highlighted
various misconceptions surrounding it. The section offered debate aimed at clarifying the
productivity concepts, describing the different definitions, and associating similar and
dissimilar meanings, urging for strong consideration of context when discussing the
implications of productivity. In this part of the chapter, the subject matter is production
function and TFP. The debate covered below will encompass the significance and
emergence of production function and TFP. This discussion explains how aggregate
production function approach originated and the way economists and industrial engineers
have developed their research frameworks based on production function and TFP. The
function and TFP, which is greatly linked with economies from the nation to firm levels.
Chapter Two: An Overview of Total Factor Productivity 63
This discussion will also throw a light on the emergence of TFP in the circle of industrial
What does a man do in this world? This question has an implicit answer: work.
Man cannot live without desires and needs. This is the instinct of all human beings. The
level and intensity of desires and needs depends upon many factors, which include
environment, culture, society, level of awareness, norms, and values. This list is not
meticulous in nature. There are numerous factors that force human being to perform a job
force that keeps society together. Based on this observation, it is understandable that
human beings started working since their beginning and this activity has gradually
and employer, seller and purchaser, taxpayer and tax collector, etc. Ancient caves, where
the people lived in the Stone Age, tell us the story of human beings about working and
products, which they produced and consumed. Primeval cities, tombs, temples, and
churches are understandable indicators that man is deeply involved in production. It may
be production of agriculture to satisfy the hunger, clothing to save from the weather
severity or to improve the aesthetic sense, houses to live, swords to fight, tools to have
Production is a result of an effort in which inputs are processed and converted into
another product. Output is obviously different from inputs and has higher value and high
usability. There is a need for a number of production factors such as technology, labour,
organisation, etc., and a system to covert inputs into an output. Nevertheless, in the case
of service, which is also a production function, more labour and less physical capital is
Chapter Two: An Overview of Total Factor Productivity 64
needed, whereas in some industries there is more need for physical stock and less labour.
organisational set up etc). It is apparent that there is a clear and strong relationship
between inputs and outputs, and production function details the type of relationship
Production function tells how one can have maximum output from a set of inputs.
said earlier, production is an outcome of certain inputs, so based on this statement every
function with few assumptions. They assume firms have a maximum level of efficiency
to keep themselves away from errors and wastage. In other words, economists presume
engineering and managerial problems of technical efficiency have worked out. It is the
functions. It is a non-monetary liaison since prices are not under the control of firms.
Many more factors control the prices of goods and services. In the case of a monopoly,
function does not explain the whole production process. It keeps itself away from the
essential and inherent aspects of physical production processes, which include errors and
waste. It also ignores the crucial role of management of sunk cost investments and the
relation of fixed overhead to variable costs. The primary objective of the production
function is to discuss efficiency in the best possible role of factor inputs in production
different factors. Production functions proposed by different authors used a term ―output‖
in their models to express the production of all factors. In the Cobb-Douglas production
function model, Y is the output or outcome of the capital and labour. In Cobb-Douglas
Generally, it is believed that human beings have always tried to get better output
from fewer resources. For this purpose, human beings invented a number of products that
Humphrey (1997) describes the whole phenomenon of production function and its
significance and concludes that a systematic and academic process to discover the
correlation between influencing factors of production came under discussion with the
beginning of industrial age. Production has a strong link with economics of the firm,
industry, and nations. Based on this observation, economists consider production function
is obvious from the efforts of people since 1767 until the early 1900s. Even in the current
era, it is one of the topics that is highly debated and has caught attention from economic
scholars, government officials, political leaders, and those in the business world.
Humphrey further pointed out the landmarks in the development of the production
function concept. Humphrey said that there is a great deal of academic work that defines
function, which has attracted the attention of scholars and researchers. The history of
Chapter Two: An Overview of Total Factor Productivity 66
production function can be traced in the work of A.R.J. Turgot in 1767. Until the early
1900s, there were many people who proposed different concepts and models of
production function, e.g. Malthus's iron law of wages, Ricardo's rent theory, the trend of
relative income shares in a growing economy, the first-order conditions of optimal factor
hire, Euler's theory of adding-up. Humphrey further explains that all these efforts
revealed their secrets through the production function, and it is important to note that von
Thune and Wicksell had proposed the Cobb-Douglas production function prior to Cobb
and Douglas. Humphrey divides the emergence of production function into seven stages
even before the presentation of the Cobb-Douglas model in 1928. Humphrey writes:
Each stage saw production functions applied with increasing sophistication. First
shares. Thirdly, there appeared the path of breaking initial statement of the
the marginal conditions of optimal factor hire. Sixth was the demonstration that
exhibit constant returns to scale at the point of competitive equilibrium. Last was
the proof that functions of the type later made famous by Cobb-Douglas satisfy
this very requirement. In short, macro and micro production functions and their
were well advanced when Cobb and Douglas arrived. (1997, p. 54)
The above statement depicts the level of concern of economists in modelling the
production function. Since the start of industrial era, people involved in production and
particularly economists have shown an excessive concern with production and factors
affecting production. There was continuous research in the past three centuries to have a
At least 18 economists from seven countries over a span of 160 years either
culmination of a long tradition rather than the beginning of a new one. (Humphrey
1997, p. 78)
Humphrey has critically examined various production functions and their applications.
He found that in different parts of the world, people were deeply involved in the
academic study of production function. It shows a path along which production function
concept travelled in last three centuries from a single factor to multi factors and finally
aggregated production function. Efforts in the field of production function are one
necessary output of industrial revolution, which has aged almost 300 years.
Mishra (2007) divides the history of production functions into three main parts. It
starts from Adam Smith (or even before), an economist of a particular mind set proposing
economy, competition, gathering of capital, etc., is most practicable and steady. In the
Chapter Two: An Overview of Total Factor Productivity 68
second phase, Karl Marx questioned the efficacy of the capitalistic system and put
forward his theory of socialism. In third phase, neoclassical scholars attempted to defend
product exhaustion theorem, and ultimately Harrod's, Solow's and von Neumann's
paths to expansion are only some major lemmas to prove they said grand
After surveying the economics literature, two landmarks hit upon the history of
production functions: first, the Cobb-Douglas production function, and second, the Solow
model in 1928 and 1957, respectively. Douglas computed the index numbers of total
numbers of manual workers (L) employed in American manufacturing between 1899 and
1922. Douglas also compiled fixed capital (C) for the same period and expressed in
logarithmic terms on a chart. Douglas added the index of physical production. After
developing a curve he found that there was around one quarter of distance between the
curve for labour, which increased the least (to162), and the curve of capital which had
increased to the most (to 431). He took 1899 as the base year and allotted 100 to this
year. Charles W Cobb, a mathematician assisted Douglas to give all indices a shape of
following equation:
Y = ALaKß,
Where:
L = labour input
K = capital input
returns to scale, meaning that if labour and capital input increases by 10%, output (Y)
will increase with the same percentage. This model also tells that if:
and capital's share of output. Furthermore, the exponents a and ß are output elasticity
with respect to labour and capital, respectively. This model explains the responsiveness
of output to a change in levels of either labour or capital used in production. This model,
influenced by statistical evidence, assumes that share of labour and capital over a period
remains constant. Critic of this model believe that it is doubtful. However, Douglas once
again wrote about the significance of the production function, which they proposed in
1928. Douglas (1976) has quoted some further studies, which also supported their
assumption that labour and capital had approximately same share as it calculated first
time. ―The results of this study lend further corroboration to the accuracy of the
the distribution of the product—which is a separate but allied subject‖ (Douglas, 1976, p.
913). This study once again proved the usability of the Cobb-Douglas model. There is a
Chapter Two: An Overview of Total Factor Productivity 70
great deal of criticism on this model and probably Robinson (1953) is the strongest critic
of this model. Nonetheless, still many scholars feel that this production function is useful.
Sharpe (2002) tells the story of economic theory of productivity and the
production function. Sharpe says economic theory went forward a stage beginning from
simple framework, which based on certain assumptions and was quite inflexible and
sometimes unworkable. With the passage of time, certain assumptions removed and
many more factors incorporated. This is evident from the development in production
function, which eventually took place from 1950 to 1990. For example, the addition of
technology as a main factor along with capital and labour were important. The main
contributors are Robert Solow, Moses Abramovitz and Dale Jorgenson (Sharpe, 2002).
labour and capital had been calculated. Solow characterized this residual as a
In reality, this was an abstraction to make it simple and allow facilitation to production
model users, which focus on long-term growth. Solow described the unexplained growth
due to technology as TFP. Literature survey shows that Solow is probably one of the
earliest scholars who used TFP phrase in a particular context and did venture to measure
TFP with the help of mathematics, putting forward a systematic way to measure TFP.
Chapter Two: An Overview of Total Factor Productivity 71
Landau, Taylor, and Wright (as cited by Sharpe, 2002) have divided these changes in
3. The neoclassical model assumes that the secrets of technical progress are
available to all
4. The neoclassical model assumes that all industries are equally important
5. Recent research suggests that higher rates of accumulation and investment can
increase productivity growth, that there is no steady-state rate of growth and that
The above debate is an attempt to give a brief idea about the history of production
production era. Every day, manufacturers offer new products to satisfy the essential needs
and demands of people. Nevertheless, it is obvious from the above discussion that a
systematic study of factors affecting production or output has a history of nearly 300
years. The conclusion of the discussion can be that change in the production function
economics growth and development‖ (Chen, 1997, p. 20). Chen further expressed that
Tinbergen, a German economist, introduced this concept in 1942 and in 1957 Solow put
forward TFP concept through his empirical work and proposed a production model.
never-ending debate in the economic literature about the origination of the TFP concept.
Many others measured, discussed, and promoted the TFP concept before Solow. Chen
has given a list of different authors who have worked and published their works on TFP
before Solow. Chen‘s statement supports the theme that TFP is one of the topics that has
been under discussion for a long time. ―Solow's 1957 paper was not so original, ‗not the
question, nor the data, nor the conclusion‘… The ‗new wrinkle‘ was the explicit
integration of economic theory into such a calculation and the use of calculus‖ (Chen,
1997, p. 20). This expression also supports the view that people were aware about the
TFP concept and its significance in the world of economics even before the presentation
Uri (1984) defines the ―TFP as the residual of output growth not explained by the
weighted sum of growth in factor inputs (i.e. labour and capital)‖ (p. 555). This is the
productivity growth due to technology from capital and labour. Besides the fact that
much studies about TFP halted after 1970s. In 1980s, supplementary stress was laid upon
labour and capital productivity. After 1990s, there is extra attention on this ―obsolete‖
topic, which has gained the full momentum everywhere. Today there is a tough
Chapter Two: An Overview of Total Factor Productivity 73
competition among nations to earn better TFP capacity and to rank well in the global
This discussion elaborates that TFP is an old concept and many people have
discussed this topic for many decades. Nevertheless, in the third quarter of the 20th
century TFP lost its importance, and other areas like quality of labour and capital were
moved ahead, as stated by Chen. During this period, however, the productivity concept
and its significance regressed, and more talks were made about the quality, which was the
most discussed topic in the fourth quarter of 20th century. However, it gained a
momentum once again in the late 1990s, and today, there is great attention to this topic. It
has becomes one of the most discussed topics in literature as well as in business world,
according to Chen.
(Lipsey and Carlaw, 2004, p. 1118). For example, Parente and Prescott (1994) and Hall
and Jones (1999) have put forward that TFP indicates people‘s living standard. It tells
about the prosperity of a country and shows performance of firms and industries.
countries. Different authors have discussed two common reasons of variation — one
related to technology, capital, skill, etc., and the other belongs to government policies,
force, modern technology, and useable knowledge are main contributors to TFP. On the
other hand, no one can ignore the role of government because it provides a platform to
Chapter Two: An Overview of Total Factor Productivity 74
attain skill, technology, and knowledge. Availability of technology depends upon the
government policies because the government is to facilitate firms in order to have better
technology, high skill, capital accumulation, and creation of knowledge. It looks that TFP
to encompass a better TFP without a critical support from all three main partners.
Hulten (2000) explains the role of technology and capital in empirical growth
analysis. Hulten says that there are two main areas or tasks before the growth economist.
First, he must take into account the historical data of input and output, and, second, he
framework‖ of TFP residual. It gives the whole concept of the TFP survey. This shows
that TFP is the area that remained the core subject matter of economists and their efforts
to analyse the reasons of growth has the points of diversity. It seems that with the passage
of time, the point of difference in measuring TFP and the reasons of growth is becoming
dichotomy, but no clear assessment has emerged. Many of early studies favoured
productivity as the main explanation of output growth, and this view continue in
―Output per unit input, or TFP, is not deeply theoretical concept rather it is an
implicit part of a circular income flow model‖ (Hulten, 2000, p. 4). In this model, product
market establishes the price of the product (Pt) and the quantity (Qt) sold to the
Chapter Two: An Overview of Total Factor Productivity 75
consumers. The total value, which is Pt Qt, is equal to the expenditures of the consumer
and revenue of the producer. On the other hand, the factor market establishes the quantity
and price of input (labour and capital). Producers forfeit these factors and this amount is
equal to the gross income of the consumer. In this way, two markets are interconnected
with each other based on equality of revenue and cost; revenue for producer and cost for
consumer. This leads to the GDP index (Hulten, 2000). Hulten further argued that
economic well-being originating from the quality and quantity of consumed goods and
services is not the total used up because prices change from time to time, and ultimately
there will also be a change in the value of cost and revenue. The argument leads towards
school of thought that takes TFP into account in a different way. Those in this school of
thought include Sumanth, Sink, and the American Production Centre. They take TFP as a
ratio of total tangible input and total tangible output. They convert the entire inputs and
outputs in monetary terms and weigh up the ratio. This approach is also much criticised,
and the main objection is the conversion of volume of input and output in dollar value, so
it is reasonable that the cost of inputs and price of output depend upon many factors that
are mostly not in the control of producers. Hulten tries to answer this problem and gives
suggestions that there should be an accounting model based on the volume keeping prices
constant and using any base year prices for valuing current input and output. It is a hope
that this model would hold a finer image of the TFP of the economy at macro level and of
a firm at micro level. The following items summarize the Hulten‘s observation of TFP:
Chapter Two: An Overview of Total Factor Productivity 76
1. The residual captures changes for output that can produce by a given quantity of
input.
2. Many factors may cause shift in TFP: technical innovation, organisational and
3. To the extent that the innovation affects, is the costless part of technical change
that it captures.
4. Various factors comprising the TFP do not measure directly, but lump together as
5. When different assumptions meet, the residual is a valid measure for shift in the
the function generally induces further movement along the function as capital
increases.
The discussion renders TFP as a concept, which has been the talk of economists
for a long time. Two main schools of thoughts take TFP in a different way. One takes it
of tangible output to tangible inputs. The coming pages discuss the variation in the TFP
concept.
from Robinson: ―Moreover, the production function has become a powerful instrument of
miseducation‖ (1953, p. 81). Mishra (2007) concludes that Karl Max questioned the
Chapter Two: An Overview of Total Factor Productivity 77
classical thoughts, and eventually neoclassical thoughts came forward to defend classical
approaches. Finally, the neoclassical era ended in the 1970s with capital controversies
that opened several new avenues of production function. Prescott (1998) supports this
observation by putting a question in order to build up a new theory of TFP. Title of the
The previous paragraphs show that TFP has been a well-recognised concept by
the economists for a long time and its significance is a well known, accepted fact.
However, at the same time a lot of controversy came with TFP. One of the major
while an environmental critique points to the unmeasured cost of growth. TFP is one of
the topics that has been a concern among economists. Its importance was quite high in the
past and today it is one of topics that have attained the attention of almost all and sundry
economists, and there are number of studies to measure TFP of different economies.
Nevertheless, the main difference, which was clearly observed, is the methods and
1953).
Recently a conference criticising the Aggregate Theory with the title ―Economic
Growth and Distribution: on the Nature and Causes of the Wealth of Nations‖ was held.
In this conference, Felipe and McCombie (2007) criticised the thoughts of Prescott, who
put forward that there was a strong need to develop a theory of TFP. However, they
Chapter Two: An Overview of Total Factor Productivity 78
raised another question about the difference between rich and poor country in the
following words:
With the revival of the interest in growth theory since the 1980s, and, in
particular, the interest in applied work in this area, economists have returned to
the important question of why some countries are richer than others (p.196).
Is there a need for a theory that may identify the reason why some countries are
rich and others poor? To answer this question Prescott says that there is a need of another
theory of TFP, while Felipe and McCombie are of the view that the neoclassical growth
model is sufficient to answer this question. However, there is a problem with the
We conclude that the tautological nature of the estimates of TFP lies at the heart
been dealing with during recent years. Hence, our arguments cast doubt on the
After 1980, there is a great concern about the growth in economics and disparity
between rich and poor. People are trying to find out the answer of this question, and one
view is that this is due to the difference in TFP. This shows how TFP is associated with
productivity. Burkett said that there is a growing ecological appraisal of the TFP concept.
In addition, TFP has a theoretical base, which connect it with aggregate production
function and which expresses in mathematical form showing output of different factors
employed in production function. It also tells the share of dissimilar factors, mainly
labour and capital in the output. While TFP growth is the amount of output growth,
which factors of input (also called residual) is not explained. Most commonly, TFP
the disembodied technological change. These factors are quite independent, they do not
influence other factors, and as a result, other factors also do not influence them.
―Generally speaking, there are two approaches to measuring TFP: the explicit use
growth accounting approach which used discrete data and assume an aggregate
level. However, there are many difficulties attached with this measurement. Many
underlying assumptions are there that need satisfaction. There are several methods to
measure TFP, which should be acceptable to all (Soriano, Rao and Coelli 2003). This is
one of the questions when TFP is measured at firm level, division, or plant level.
Fare and Zelenyuk (2003) did efforts to solve this issue, and established a new
conditions, which are necessary to estimate aggregate efficiency by using firm level
efficiency. Fare and Zelenyuk (2003, p. 616) write, ―To define the industry revenue
function and obtain an aggregation theorem, it is crucial that all firms face the same
output price vector.‖ It is not possible that in real business firms, which are producing
the same product, would have the same prices. Obviously, there is a difference in prices
There are two assumptions that are used to get aggregate efficiency of different
firms. The first assumption states that all firms are equal in fixing on one price system
that is similar, whereas the second assumption says that, there is no reallocation of
efficiencies (Soriano et al., 2003). This all discussion shows that TFP concept, which
originally was used for economies at nation level, can be used at the firm level, too. It
supports the concept that TFP, which originated to assess the performance of any
But the aggregate production function is only a little less legitimate a concept that,
say, the aggregate consumption function, and some kinds of long-run macro
models, it is almost as indispensable as the alter for short run. As long as we insist
1957, p. 312)
In previous pages, a discussion was made about factors responsible for better
productivity. Solow is the first author who put forward a simple way to measure the
effect of technological changes by using U.S. manufacturing data from 1909 to 1949. The
Chapter Two: An Overview of Total Factor Productivity 81
proposed production function by Solow is well recognised and much cited. This all shows
the significance of TFP (aggregate function) at macro level. Nevertheless, Nadiri (1970)
has put serious questions on the models of production function, questioning how changes
could measure due to technical alterations. Nevertheless, there are serious flaws taken
together in aggregate production function and doubts are quite high about its existence
and use for empirical studies. Even now, there is not an appropriate method to evaluate
the enormity and stability of its parameters. According to Nadiri (1970), there is evidence
which suggests that the specification of the form of the aggregate production function is
residual. This statement supports the idea of Robinson (1953), who said that aggregate
Though debate sheds light on the aggregate production function, which is the base
for all the models of production function, it is not acceptable to everyone because there
are many shortcomings in this model. Regardless, many authors and researchers are using
it continuously. Not all of the above discussion clarifies the differences among
economist who are discussing TFP and aggregate function. The purpose of the discussion
is to have an idea about the kind and level of difference among economists.
A positive and sustainable growth is the ultimate target for economies at macro
level and for firms at micro level. Particularly, its significance has increased in the
current scenario where globalisation has removed the economic borders and firms are
working in a global environment. Felipe (1997) elaborates the sources of growth and
Chapter Two: An Overview of Total Factor Productivity 82
concludes that primarily, growth stems from two sources: factor accumulation and
productivity growth. The importance of these two components is highly debated by both
neoclassical concept that attempts to measure productivity, taking into account all factors
of production; thus, the underlying assumption is that labour is not the only input
(classical Ricardian labour theory of value). Second, TFP is a notion linked to the
concept that refers to a ratio of output to input, in other words a measure of efficiency.
When referring to a single input (i.e. partial productivity), typically labour (Q/L), the
notion of productivity does not pose any problem. However, when more than one input is
to be taken into account (e.g., labour and capital), the problem that arises is how to weigh
each factor in the quotient. The arguments put forward by Felipe back up the viewpoint
of Hulten, who has been talked about in previous sections. Both are of the view that there
is a debate about the contribution factors in TFP. Both have the same opinion of the value
Cororaton (2002) wrote that the World Bank Economic Review has shown up the
significance of TFP. It has also published a series of its publications on the topic that
economies. The research seeks out the decisive role of factor accumulation in economic
growth while identifying some additional factors, which contribute significantly to the
economic growth of different countries. TFP is one of these factors. TFP, as a residual,
could be due to many factors. These may be the role of technology, better skill of
raw material into finished goods. Many authors have tried to incorporate these factors in
the growth of economies. Arguments by Cororaton support the debate about the role of
different factors in the uplift of TFP. In addition, Cororaton does not ignore the role of
factor accumulation and, at the same time, gives credit to technology and skill of the
workers.
The TFP gap among the developed countries, which was quite large around 1870,
variation existed around 1870 and thereafter that technological congruence lessened the
gaps over the course of the twentieth century‖. Solow supported this argument, saying
that growth model, which predicts the gap between developed and underdeveloped
This paradigm highlights the erosion of British and most especially of U.S.
particularly those countries with institutions and policy regimes which fostered
Felipe (1997) did a survey of the empirical literature on TFP and sources of
growth in East Asia. Felipe concludes that these studies build up awareness of
productivity in these countries. However, at the same time the theoretical concept of TFP
is rather weak and it generates many problems. Based on this, it seems as if the whole
studies were less reliable since different authors concluded different results from the
same data. Ultimately, there was a big variation in results from the same countries and
same periods. This variation may be due to the assumptions, data sources, methods, and
Chapter Two: An Overview of Total Factor Productivity 84
techniques to process data. The discussion in foregoing lines points out another problem
with the TFP concept. The conclusion can be that there is a dire need for another theory
How can people have a better TFP? A question arises. From time to time, many
economists have tried to respond to this, but it is all in vain. The economists divide on the
question of what is the source of TFP growth. Keeping this in mind, a sum up of views of
Hulten (2000) examines the economic growth of the U.S. and concludes that there
is a remarkable growth in TFP of U.S. in the last two centuries. However, this growth rate
is not smooth; rather it has an average growth of 1.7%. Having made much effort to
identify the reasons for the growth, people finally came up with different theories and
models. Some attached this growth with the growth of technology and organisational set
ups. Hulten further highlights that Marxian and neoclassical theories are of the view that
this growth is due to better productivity, which is the result of technology and
capital, knowledge, and in fixed capital as the reasons for growth. One thing is obvious
from all above discussion: There is a possible resemblance between the theories. The first
group that relates to the growth in TFP with the technology and organisational
development is the result of investment used to develop human capital and fixed capital.
Baier, Dwyer, and Tamura (2002) summed up the result of a vast survey and put
forward the results. Results of survey show that out of 145 countries, 24 had 8% average
output growth per worker associated with TFP growth. They divide TFP growth into nine
different regions, and out of these regions, TFP growth accounted for about 20% of
average output growth in three regions and between 10% and 14% in three other regions.
In rest of three other regions, TFP growth is negative on average. It shows that it is not
necessary all factors contribute positively. In fact, there is a big variation in contribution
growth associated with TFP shows that the rest of the growth is a result of other factors.
These may be due to technology, knowledge, accumulation factors, etc. This is a very
common question that how much growth in TFP is due to growth in workers‘
productivity and due to change in technology, institutional changes, and other factors.
Baier et al. (2002) further explained that there was much dissimilarity in the contribution
percentage. It starts from 34% and goes to negative input in some countries. However,
the role of different factors has not underlined. Accordingly, divergent factors in TFP
have glimpsed.
Giandrea (2006) has elaborated that a merger is another source of TFP growth.
Giandrea states that during last decades of the 20th century, firms began to undertake
horizontal mergers in order to perk up TFP. Nearly 28,816 mergers took place only in the
U.S. during 1996-2005. The idea was that merger is a most suitable method to improve
TFP. Giandrea concludes that many studies show that these mergers have contributed in
achieving objectives and the main target was to achieve high TFP. However, at the same
time it reduced the competition among firms, while competition is a basic motive for
Chapter Two: An Overview of Total Factor Productivity 86
enhancing TFP. Since competition stirs up firms to adopt policies of cost cutting and
investment to get over the value of goods, it has shown that there is a positive correlation
between merger and TFP. Nevertheless, its impact varies from industry to industry
depending upon size, area, types of products etc. Merger is one of the sources of TFP that
boost up capital, both human and physical. It also furnishes superior access to technology
There is a continuous debate among researchers about the role of capital in TFP.
understanding by saying that many researches show when in U.S., productivity was low,
and capital investment was quite high and in some cases role of capital in productivity
overrated. Stainer further squeezes out that in the case of the U.S. and UK; decline in
there is an improvement in productivity hardly it is 10% due to capital. In this report, TFP
appears to yield a complete view of the industry since it takes all quantitative factors of
inputs and outputs. In addition, an effort to quantify the correlation between TFP and
several other factors has also made out. Determination of factors affecting TFP of the
have better productivity. It seems that share of labour and capital for a better productivity
cannot be substitutes of each other; rather, they complement each other and at the same
time, other factors like government policies and organisational structure cannot be
overlooked.
during 1996-2005. Prescott also points out a huge gap between labour productivity of a
Chapter Two: An Overview of Total Factor Productivity 87
rich and poor country, e.g. a worker of U.S. is 20 to 30 times more productive than a poor
country like Nigeria. There is even a big gap between the labour productivity within a
country among different firms. Many people argue the difference is due to capital and
technology but this is not imperative, the most important reason is the difference in TFP.
Prescott‘s argument based on this observation gave a new dimension to the significance
of TFP in the economics of the world. Prescott urges to develop a new thinking about
TFP to find out the actual reasons of the variation in productivity across the different
countries and firms. There are many ways to determine labour productivity not directly
but also indirectly by determining capital per worker (Prescott, 1998). Prescott
emphasizes to develop a new theory of TFP and for this purpose; he presents facts from
the industrial data. According to him, there is a huge difference in TFP across the
countries other than physical stock and technology differences. Prescott introduced a new
area for research in which reasons of discrimination are recognizable between poor and
rich countries. Prescott does not agree with the notion that capital per worker is one of the
reasons, rather he says, that large differences in output per worker that cannot be
accounted for by difference in capital per worker is the difference in TFP. Prescott further
states there is a direct link between capital per worker and TFP and it is obvious from the
Erosa and Hidalgo (2007) have also talked about the issue of a gap between poor
and rich countries. According to them, three main factors cause the gap: low down
aggregate in TFP, big differences in output per worker across industries, and high
employment shares in sectors with the lowest labour productivity. Besides having
Chapter Two: An Overview of Total Factor Productivity 88
discussed more grounds for the factors, they gave evidence by using capital market as an
indicator.
This discussion leads to the addition of many other causes of disparity between
poor and rich. Every proposed factor has a contribution, and it is not easy to make one or
few factors responsible for the gap. However, it looks that every factor (TFP, human
capital technology, capital per worker, worker productivity, skill, knowledge, physical
capital, government policies) has its own sharing. Nevertheless, share percentage varies
from country to country and firm to firm. It is evident, from the findings of Prescott
(1998), Erosa and Cabrillana (2007), Felipe and McCombie (2007), Greasley and Madsen
Sharpe (2002, p. 39) has identified following seven areas of productivity growth:
3. Quality of workforce
6. Macroeconomic environment
Oguchi (2004) identifies and evaluates the role of TFP in economic prosperity of
the countries and verifies that TFP growth played a vital role in economic growth of most
growth. In addition to that, accumulation of capital also was another factor that chipped
Chapter Two: An Overview of Total Factor Productivity 89
in to the economic growth. Finally, impact of capital became more significant when it
A big discussion is also there about the role of technology in the change of TFP
values. Change in TFP is a result of change in returns that is much higher than the
opportunity cost of all activities, not technology alone. There is no chance that
technological change can precede without change in TFP. Both are interdependent and
difficult to separate (Lipsey and Carlaw, 2004). Economic literature points out three main
sources of TFP growth: physical capital, human capital, and technology. In traditional
growth model, investment in physical stocks is considered the most robust source of TFP
growth. After 1960, human capital captured the focus of people as being one of the most
effective growth sources. The literature also illustrates that after 1960, human capital was
a major source. Far East financial crises also proved it, showing that growth based on
factor accumulation was not as strong as based on human capital (Grosskopf and Self,
2006). Research by Grosskopf and Self also supports the argument of Stainer (1997),
who says that the bases of TFP growth are turning human capital reliance into other
factors. The physical capital does not provide the required support in all cases and all the
times.
The above discussion converges on one point that TFP growth is the reason for
economic growth. For a higher TFP, physical capital, human capital, and technology are
the primary contributors. Adding on to that, the author of this report asserts that although
there is a no denial of above stated factors, some important factors are missing. These
factors are qualitative in nature and are not of less value though measurement in
1. Government policies
3. Political stability
5. Level of education
The factors given above are not conclusive in nature. There might be a number of
other factors, but one thing is sure; high TFP is a result of cohesive and comprehensive
effort.
The above discussion depicts the history of TFP, which starts as a production
function and ends with neoclassical models. Economists whose emphasis was to identify
the factors mainly worked on TFP. There is a continuous development in the models of
the production function starting from a simple mathematical equation. It is evident from
the Cobb-Douglas model, which says that capital and labour are main contributors. Solow
modified it and added technology as a factor, which he called residual, or the growth
unexplained by capital and labour growth. In the last, Prescott demanded to consider TFP
Chapter Two: An Overview of Total Factor Productivity 91
theory to explain the current era growth and finally Landau, R., T. Taylor, and G. Wright
(as cited by Sharpe, 2002) introduced five more areas in production model. On the other
hand, a group of people defines TFP in a different approach. In this part of the chapter, a
discussion will cover the TFP concept, described by different authors who view TFP
different from the concept proposed by economists since the start of the industrial era. It
is a ratio of total tangible output and total tangible input as defined by Sumanth; Sink,
Craig, and Harris; Kendrick; Office of National Statistics; and American Productivity
Center. This definition is quite different from the most common definition mainly put
of the growth which other factors are not able to explain. It is the growth that embodies
Mahadevan (2002) explains the meanings of partial, multi and total factors
single factor of production, like labour hours employed to produce a certain number of
shirts in a clothing mill. The multi factor productivity considers the joint use of the all
production inputs. Dissimilarity between TFP and multifactor productivity is that the
latter includes the joint productivity of labour, capital, and intermediate inputs, and the
former considers the joint productivity of labour and capital only (Mahadevan 2002).
Chapter Two: An Overview of Total Factor Productivity 92
Though people commonly use the terms multi and total factor productivity in
literature in order to interchange with each other, there is a great need to have a clear
The official publication of the Office for National Statistics (ONS) which is the
agency of UK government has explicated the diversity between multi factor productivity
(MFP) and TFP. The ONS is responsible for compiling, analysing, and disseminating
economic, social, and demographic statistics about the UK. The agency takes ―multi
economy after calculating the contribution from all of its factor inputs. It is also
sometimes called Total Factor Productivity‖ (Camus, 2007, p. 182). Camus further
explains:
MFP can also be viewed as the unexplained difference between the growth in cost
growth in output to growth in the factor inputs, capital and labour, and growth in a
It seems that there is a big difference in the meaning of MFP and TFP among the
two well-known and established organizations, the Asian Productivity Organization and
Office of National Statistics. This confusion has led some to differentiate between MFP
and TFP. Sink (1985) has also increased the level of difference. He introduced new
terminology to express the MFP and TFP and proposed Multi Factor Productivity
Chapter Two: An Overview of Total Factor Productivity 93
Measuring Model (MFPMM), which according to him takes all input as denominator and
used to asses the ratio between total output and total input. This is similar to the model
(1999) has also explained that TFP measures the synergy and efficiency of the utilisation
of both capital and human resources. It is also regarded as a measure of the degree of
necessary for the production of goods and services. Sumanth (1990) and the American
Productivity Center both have developed their TFP model on this definition. According
to Felipe (1997), TFP is an attempt to measure productivity taking into account all factors
of production. Thus, the underlying assumption is that labour is not the only input
(classical Ricardian labour theory of value). Second, TFP is a notion linked to the
concept that refers to a ratio of output to input; in other words, a measure of efficiency.
When referring to a single input (i.e. partial productivity), typically labour (Q/L), the
notion of productivity does not pose any problem. However, when more than one input is
to be taken into account (e.g., labour and capital), the problem that arises is how to
One group holds that changes in TFP measure the rate of technical change (Law,
Statscan, Krugman, and Young). We refer to this as the ―conventional view‖. The
second group holds that TFP measures only the free lunches of technical change,
Chapter Two: An Overview of Total Factor Productivity 94
which are mainly associated with externalities and scale effects (Jorgenson and
Griliches). The third group is sceptical that TFP measures anything useful
Sargent and Rodriguez (2000) have compared labour productivity and TFP.
According to them, both academics and policy makers commonly use the two competing
measures of productivity, which are labour productivity, an output per hour; and TFP,
which measures net productivity of the contribution of capital. They further state that
both measures have their own place, and that neither tells the whole story. TFP is more
useful over the long run, assuming that one is confident about the underlying growth
process and the quality of capital stock data. Labour productivity is more reliable in the
short run, when there is doubt about the underlying growth process, or when capital stock
data are unreliable. This statement reinforces the observation that there is no absolute
between output and input assuming that firm is operating with highest efficiency
and after assuming that engineering problems have resolved. Nevertheless, in real
world, there is no chance that all engineering problems are solved and firm is not
ideas, commenting on old adages, discovering new ways, presenting new models,
Mishra, 2007).
Chapter Two: An Overview of Total Factor Productivity 95
3. Going back to the olden times, one can find that nearly 18 economists from seven
countries over a span of 160 years before Cobb Douglas discussed production
4. Mishra (2007) divides history of production function into three main periods (1)
Adam Smith era or even before, (2) Carl Max time and (3) Neoclassical period to
defend capitalistic theory. Paul Douglas used data to create index that became the
base of Cobb-Douglas function model. Robert Solow Model (1957) explains the
6. Five more areas added to production models proposed by Landau, R., T. Taylor,
7. TFP has two broad definitions; one it is a ―residual‖ or the growth embodied due
to factors, mainly technology other than capital and labour (Solow 1957) and next
describes the ratio of all inputs to all outputs (proposed by Sink, Sumanth, Hines,
Kendrick and Creamer, Craig and Harris, Office of National Statistics with minor
8. TFP proposed by economists mainly used for long-term data analyst. Whereas,
TFP proposed by industrial engineers can be used for cross sectional data, as
9. There is a little attention of the researcher to identify the role of attitude of the
people. Parente and Prescott (1994) and Hall and Jones (1999) have mentioned
Chapter Two: An Overview of Total Factor Productivity 96
role of institution, corruption level, transparency in the growth of TFP but they
have ignored other qualitative factors that could hamper TFP growth.
10. It is proposed that there should be studies to assess the correlation between TFP
growth and the attitude, behaviours, preferences, culture, norms, values and even
The concept of production function was discussed in the previous part of this
chapter, which explained the meaning and definition of TFP. This part also discussed
Summarizing it the two broader definitions of TFP found, as per Solow, it is residual of
productivity growth unexplained by capital and labour input growth and as a ratio of total
tangible input and total tangible output as taken by Sink, Craig and Harris, and Sumanth.
Both schools of thoughts have shown their own concern about the TFP measurement
complexities. This part of the chapter has been dedicated to thrash out different
different ways and techniques to measure productivity at firm, industry and national
level. Additionally, criticism of different authors will put forward different productivity
measurement techniques. Moreover, this part will also cover classification of productivity
measuring methods.
development. A very common and unanswered question in this regard is the availability
essential to be answered in the present scenario due to rapid and unexpected changes in
the world, particularly in the world of business. The volatile nature of the business world
has impeded the productivity measurement process to some extent. Based on its
significance for economic development, it now has become a challenge for the researcher
to build up a new and a comprehensive model. The literature survey bears out that it is an
unending story because the prime contribution in the business world is uncertainty, which
In addition to that, factors affecting productivity level are increasing day by day,
and they create a big hurdle to cover all factors while measuring productivity. ―It is a
popular game among the researchers to find a suitable measure for denoting the
the changes‖ (Stark and Bottoms, 1980, p. 100). Many authors have recommended a
number of ways to measure productivity that are accessible in the literature. Selection of
technique and method to measure productivity is the most critical step. ―The range of
productivity tools, the choice of an appropriate tool depends on the nature, scale, level
and phase of the investigation. There are even ‗political‘ considerations‖ (McKee, 2003,
p. 138). As expressed by McKee, selection of tools depends upon many factors. Based on
the observation it can assume that wrong selection of tools may cause some wrong
effects.
productivity is not an exact science. There is a range of important, but not fatal, technical
inappropriate, especially at the national level‖. Industry Commission also discusses that
―productivity measures cover the market sector rather than the whole economy‖. The
above discussion establishes a view that one should never expect a high level of precision
while measuring productivity, as it is just estimation. No one can deem entire results as
incorrect; rather, one can say that results may be biased and based on some extraneous
data. This might be because there are several factors that can alter the situation and
generally intricate to identify the exact cause of change. For example, modern technology
can increase labour productivity and with passage of time, skill of workers will also be
increasing. At the end of the day, it would be highly difficult to estimate exactly the share
percentage of technology and learned skill of workers in high productivity. There are
several other questions like that which have been put forward by different authors. On the
other hand, various scholars and even institutions are trying to resolve and solve this
Maital and Vaninsky (2000) have pointed out a serious flaw in the productivity
measuring techniques. Maital and Vaninsky further acknowledge that commonly used
hence generating paradoxes. Moreover, they argue that there is a well-known paradox in
the literature of economics related to structural changes. The structural changes can
an average price. The work of Maital and Vaninsky tells that there is major confusion
Chapter Two: An Overview of Total Factor Productivity 99
changes. This entire debate advocates that prior to studying and applying productivity
measurement process, it is mandatory to be ready to accept the outcome that the results
estimated are not fully correct. A hope survives that if the productivity of any firm or
industry is better, one can apply any method or technique to measure it and the results
will not be different. This can be explained with the help of an example of a natural scene
in which the viewer might see it as beautiful from his one angle he is using. ―All
measures of productivity considered are credible in the sense that highly productive
plants, regardless of measure, are clearly more profitable, less likely to close, and grow
faster‖ (Dwyer, 1996, p. 13). Dwyer‘s thoughts support the theme that a beautiful picture
classes and types in a diverse way. Difference in views might be due to many reasons but
the most appropriate reason could be the complexities associated with a productivity
techniques gives a blurred picture that is sometimes confusing. According to Maital and
et al. (1997) classified a productivity approaches into two main aspects, which is based
1. The effort on productivity in the initial days was biased towards its improvement
essential to improvement but now it has become as one of the central functions of
management. It shows the shift of the productivity concept and benefits. It also supports
the fact that initially productivity was considered as the province of economists, but now
industrial engineers and business managers also take part in productivity measurement
and in its implication from business outlook. This is evident from the activities of many
Organizations are very clear indicators of this context. A major part of the publications of
the aforementioned two prominent organizations covers engineering and managerial part
supports the theme proposed by Murugesh et al. that now productivity has become one of
methods/approaches:-
1. Control Panels
4. Productivity Accounting
5. Throughput Costing
Parsons has discussed above-cited methods in finer detail and concludes that no
performance measuring system is static whereas, measures are dependent on strategy and
action. Parsons further states that the choice of method mainly depends upon what is
most suitable to achieve the target or objectives of the whole process. Parsons has cited
the following quotation of John Kenneth Galbraith, which paints the true picture of the
productivity measurement phenomenon, ―To many it will always seem better to have
measurable progress towards the wrong goals than immeasurable progress towards the
right ones‖ (2001, p. 39). The discussion is based on the observation, which Parsons
views as part of the management. The focus of all approaches mentioned by Parsons
provides a clear picture to management and expects that it would be helpful for
following categories:
determined.
Chapter Two: An Overview of Total Factor Productivity 102
3. Endogenous models which consider a range of structural and policy variables that
These approaches are based upon the change associated capital, technology,
efficiency, and accumulation of knowledge and are suitable and appropriate in such
studies where time series data is available along with the data of technological,
these approaches are particularly helpful in calculating the benefits of new technology
and investment.
4. Econometric approach
The growth accounting approach, The growth accounting approach is based upon
4. Markets are perfectly competitive with all participants being price-takers who can
use the index number approach. For example, the Australian Bureau of Statistics
calculates market sector multifactor productivity using the index number approach based
achieve a productivity index. Mawson et al. (2003, p. 20) has further stated that:
There are two main approaches to choose an index number formula: the economic
and axiomatic approaches. The former approach bases the choice of index
choice of index formula on desirable properties that indexes should exhibit. Once
This approach is under utilized as mentioned by Mawson et al. (2003), who propose that
function separates TFP into two components using an output distance function. More
generally, the distance function (which is the dual of the cost function) has discussed in
the consumer and production literature where duality concepts are used. In principle, this
Chapter Two: An Overview of Total Factor Productivity 104
movement towards the production frontier and shifts in the frontier. The output distance
function measures how close a particular level of output is to the maximum attainable
level of output that could be obtained from the same level of inputs if production is
theoretically 100% efficient. In other words, it represents how close a particular output
involves the estimation of parameters of a specified production function (or cost, revenue,
or profit function, etc). Often the production function is expressed in growth rate and of
determinants are critical. One major advantage of the econometric approach is ability to
The above four approaches are useful and appropriate for a time series data
determinants, such as change due to the change in technology, capital, etc. These
approaches also help to assess the level of productivity of any firm, and the potential of a
firm with the same level of inputs. In other words, one can assess the potential
productivity but this approach requires time series data and furthermore, these are based
on stringent assumptions.
Chapter Two: An Overview of Total Factor Productivity 105
Gharneh (1997) classifies productivity measurement into two main categories: (a)
economists. Many models are available to assess the productivity of any production
function and accountants are more concerned about different financial ratios. These
approaches. In fact, the two categories are widely used by the researchers as mentioned
by Gharneh. Both have their advantages and disadvantages. One must keep in mind the
consuming certain amounts of raw material are assessed. It ignores the impact of
These models assume that two firms can have same parameters at a time therefore any
minor change in these parameters can change labour productivity. This kind of
measurement is most useful for short-term productivity measurement process and for
Another approach based on financial values of input and output has been objected
to that several outer factors of normal business control examples, such as the price of raw
minor change in the price of raw material can alter the productivity, e.g. cost of furnace
oil to run boiler to get steam for dyeing. Nevertheless, various organizations use this
approach often and bring up results keeping all factors in view. Gharneh‘s classification
Chapter Two: An Overview of Total Factor Productivity 106
is too broad to ignore other methods as described by the Parsons. However, this
classification serves the purpose of the scholars who are interested in measuring
productivity. Mahadevan (2002) has classified measuring of TFP into two main
categories, the Frontier approach and the Non-Frontier approach. This classification
stands on econometrics.
appropriately, a set of best obtainable positions. Thus, a production frontier traces the set
of maximum outputs easily to get to a given set of inputs and technology, and a cost
frontier traces the minimum achievable cost given input prices and output. The
production frontier is an unobservable function that is said to represent the 'best practice'
since the frontier approach identifies the role of technical efficiency in overall firm‘s
performance, whereas the non-frontier approach assumes that firms are technically
efficient. Sink (1985) has put forward three approaches to measure productivity: (a)
at all levels. In fact, this approach acts for a spotlight to improve productivity with the
production makes use of this approach, which are also called ―TFP‖ models, the APC
model named for the American Productivity Centre, developed the approach in 1977. As
ΔTR
Measure of Profitability = ─────
ΔTC
Sink (1985) discusses this model in detail and gives an explanation that how to
measured against this criteria set. The main advantage of this method is that setting of
criteria and measuring of performance are performed with the same methodology and
assumptions. This may be physical number of input and output or value of the input and
output.
Chapter Two: An Overview of Total Factor Productivity 108
system with the help of the National Productivity Institute. According to this approach,
profitability of different firms is compared and finally the firms that are more profitable
are identified. In this case, productivity equates with profitability. Some scholars use the
into three categories, (a) index measurement, (b) linear programming, and (c)
econometric models.
Singh et al. (2000) surveyed the studies of different productivity measurement and
showed that 11 authors used the index measurement approach and eight researchers used
an econometric approach, while only four used a linear programming approach. Having
The theoretical and empirical section of this paper clearly points out that there is
The financial ratio approach is one of the most common, simple, and easy ways to
assess the performance of any organisation. Every organisation prepares its annual
account statements and its performance is measured in the light of these statements.
These ratios are the basic criteria for its share value in stock exchange. One should be
clear that such ratios are not indicators of performance and productivity. However, this
Chapter Two: An Overview of Total Factor Productivity 109
approach is widely used in the industry and is easier to identify with. In the APC model,
input and output values are put in the models and profitability of the firms is calculated.
In the case of financial ratios, the value of different inputs and outputs is used to measure
productivity. This may be called partial productivity, and is useful to focus on specific
determinants such as labour productivity, which is calculated with the total labour cost
productivity considered are credible in the sense that highly productive plants, regardless
of measure, are clearly more profitable, less likely to close, and grow faster‖ (1996, p.
13). In this way, Dwyer proposes that if plants were highly productive, no matter in
which way productivity is measured, the results would be parallel. Every measure will
prove that the plant is making profit, which is the ultimate goal of the plant owners.
each case and this all depends upon the objectives, capability, and data/resources
The Centre for Inter-Firm Comparison UK (CIFC) has developed 103 different
ratios to assess performance. All these ratios are based on financial reports. CIFC also
publishes an Inter-Firm Comparison (IFC) of its members. CIFC helps the individual
The following factors are used to weigh up the performance of the firms:
The main theme of these ratios is to build a relation between diverse outcomes
and inputs of the firms. This is a valid way to verify the performance of any firm. In
accounts, these ratios are used to assess the present health of the firm and provide a
comparison with the past. It is evident from a deep look from the working of CIFC that
centre relies more on finance related matters whereas, economist always rely on the
volume not the value. Economists view profitability as an economic activity, which is
based on many factors and some of the factors, are not under the control of firm e.g.
government policies of taxes which may be different in different parts of the country. The
author of the report views that high productivity is required to get through high profits, if
not, then, high productivity will be of no value, not as a purpose of the firm. This
observation has its basis on the market economy theory of Adam Smith, which says that
the core objective of the firm is to gain profit. It is guided by self-interest and
maximization of profit.
Chen, Liaw and Yeong (2001) have proposed 15 different financial ratios to
assess the productivity of any firm. These 15 ratios cover most financial activities. By
using these ratios, one can assess the productivity of any firm. However, such approaches
do not illustrate the real picture about resource employment; rather these ratios portray
the financial health of the firms. Chen et al also supports the approaches proposed by
CIFC.
Sumanth (1990) has developed the Total Productivity Model, which is defined as
follows:
Chapter Two: An Overview of Total Factor Productivity 111
Sumanth takes this model similar to model presented by Craig and Harris. The
only major difference is that it offers greater clarity about the input and output.
5. Other income
2. Material
3. Capital
4. Energy
5. Other expense
Chapter Two: An Overview of Total Factor Productivity 112
It appears to be more applicable. Apparently, the APC and Sumanth models are based
Bernolak (1980) used financial ratios to assess the performance of the firms and
finally concluded, ―There is no single measure or best measure of productivity, but rather
a whole family of measures‖. Boucher (1980) also used the Inter-Firm comparison
method to discuss productivity in Ireland. The Irish Productivity Centre regularly uses
Buttgereit (1980, p. 41) has urged the application of inter-firm comparison based on the
following rationale: ―Inter-firm comparison meets both the wish to have information and
data concerning competitors, the market and its changing nature and the need for a
one of the most useful approaches to measuring productivity. Parsons believes that
traditional financial ratio analysis and value added measures will probably remain a part
of future National Productivity Institute (NPI) surveys, although they will assume a less
prominent position.
Harrington (1980) has also talked about the Inter-Firm comparison as a useful tool
UK and Iran. Brinkerhoff and Dressler (1990) have also used the ratio of output and input
to measure TFP. However, they have documented many problems associated with this
process.
Chapter Two: An Overview of Total Factor Productivity 113
found that there are great numbers of possible solutions to the problem of
model selection problem in this type of study. Furthermore, they said that simulation
studies might improve our understanding of the properties of the different models, and
There has been a drastic change in productivity measuring models since 1980. It
has spread out from the standard calculation of TFP towards more refined methods of
decomposition. Traditionally, TFP framework based on the technical efficiency, but now
there are several restrictions while using this framework such as constant rate to scale,
techniques to overcome this issue (Brummer, Glauben, and Thijssen, 2002). Brummer et
al have extended the TFP framework and added technical change, technical efficiency,
allocating efficiency, regarding inputs and outputs and scale components. Based on this
outline, they measured the TFP of four European countries by using panel data from the
using different techniques. Nevertheless, Brummer et al concluded that there is a still call
for a more refined decomposition of productivity growth, which is essential for policy
Chapter Two: An Overview of Total Factor Productivity 114
makers. It tells the significance of the ignored components and supports the fact that
technology efficiency is not the only way to estimate TFP, as Solow did.
OECD (2005) lays down different ways of measuring productivity. It has also
published an inclusive manual that provides a great deal of knowledge for managers who
There are many different productivity measures. The choice between them
OECD further divides productivity measurement into two main categories at firm
and industry level. It has proposed four types of productivity measurement based on
input, labour (labour productivity), capital (capital productivity), labour and capital
productivity.
when economists measure productivity, they mostly rely on capacity of inputs and
outputs. They avoid assuming a relationship between production elasticity and income
share. This leads to possibilities with econometric techniques. There is a discussion about
the subsidy in order to adjust prices of inputs and outputs. It is quite possible that cost of
Chapter Two: An Overview of Total Factor Productivity 115
inputs increases more than the prices of output. Furthermore, there is a possibility that
technical changes may be different other than assumptions. Fully-fledged models raise
complex econometric issues and sometimes challenge the utility and strength of results.
OECD observation has put a serious question on the efficacy of the econometrics
approach in measuring productivity. It all shows that OECD prefers the accountant
approach over econometrics approach. Why OECD relies more on the accountant
approaches. Hulten (2000), who points out that there is no valid reason to judge the
econometric and the index number approach as competitors, gives examples of synergism
that proved particularly productive. Hulten further says that one can have better results
when econometric methods are used further explain the productivity residual, hereby
reducing the ignorance about the ―measure of our ignorance‖. OECD especially views
Overall, econometric approaches are a tool that is best suited for academically
number methods that are the recommended tool for periodic productivity
All this discussion argues that productivity measurement is not a trouble-free process.
There is a great deal of complexities attached with it and final OECD argues that multiple
approaches give better results. Nevertheless, one should not forget that productivity
Chapter Two: An Overview of Total Factor Productivity 116
Commission.
―Creating and implementing models incorporating the many key pieces of the
productivity puzzle that are becoming increasingly prominent in our ‗new era‘ of
such as those in the food system, is not straightforward‖ (Paul, 2003, p. 173). The above
argument seems to be a big deal of debate among scholars about the complexities of
productivity measurement. However, it is also a fact that people are still striving to reach
a point where maximum consensus can develop. The main cause of complexities is the
vibrant nature of new business era. Paul also sustains the argument and says that:
distinguishing between measured and effective input and output prices and
quantities, valuing non-marketed good and bad, identifying spill over effects, and
There are a number of efforts that have been tried by different authors to develop more
comprehensive model. However, on the other side, swift changes in the business world
are hampering all such efforts. It seems that both ends will move side by side. Change is
an inevitable phenomenon and curiosity to know the depth is the instinct of human
nature.
A number of methods are used to measure productivity. Each has its strengths and
weaknesses. Notably, there are five widely used techniques, two non-parametric and
three parametric: in order, (a) index numbers, (b) data envelopment analysis (DEA), (c)
Chapter Two: An Overview of Total Factor Productivity 117
stochastic frontiers, (d) instrumental variables (GMM), and (e) semi parametric
estimation (Biesebroeck, 2007). Biesebroeck used simulated samples of firms and then
analyzed the sensitivity of alternative methods to the way randomness is introduced in the
When measurement error is small, index numbers are excellent for estimating
productivity growth and are among the best for estimating productivity levels.
DEA excels when technology is heterogeneous and returns to scale are not
differentials between firms (in decreasing order), one should prefer the stochastic
It looks from above discussion that there is a continuous anxiety about productivity
measurement. Biesebroeck focused on five major methods and finally concluded that
every model needed a specific environment for its suitability. It supports the theme of
OECD that selection of the methods depends upon the objective, data nature and the
Ark (1996) addresses the issue of productivity and economic prosperity. Ark
argues explain that the significance of the productivity is quite high enough for economic
growth. However, there are certain assumptions for a better output. Unfortunately, these
assumptions are very rare particularly; following three assumptions are quite difficult to
meet:
1. Value added is a function of capital input, labour input and the level of
technology.
Chapter Two: An Overview of Total Factor Productivity 118
situation in which aggregate results lift up at the industry level. Ark puts forward this
approach and gives his support to the concept of productivity measurement at firm level.
Additionally, Ark argues that for the economy as a whole, value added is the preferred
output concept because it does eliminate ―double counting of intermediate inputs, such as
raw materials, energy inputs and business services, and is comparable to the domestic or
national product as shown in national accounts‖ (p.25). Ark further states that ―from a
theoretical point of view, the bottom-up approach in combination with gross output is
levels‖( p.24). Ark debates other issues like labour and capital productivity. From all the
discussion, it seems that it is hard to fulfil all assumptions before applying and measuring
techniques. If one looks at the history of productivity measuring models in two centuries,
it is obvious that from Cobb-Douglas to Solow, all are relying on top down approach,
literature, the author of this report supports the theme of Ark and finds it the most
suitable for measurement. The strong argument in the favour of this approach is that
consistent and sustainable growth starts from the bottom and gives better results that are
phenomenon. Nadiri concludes after a thorough survey of economic literature that in the
last few years there was a tremendous growth in the publications covering issues of
Chapter Two: An Overview of Total Factor Productivity 119
categorised in three main areas: First, there are theories‘ endogenous technical changes
and attempts to explain the production and transmission of new knowledge. Second, there
is the formulation of general forms of production functions that are based on cost
function. It serves many purposes. Third, there is a serious attempt to segregate the pure
residual by attributing the growth of productivity due to change in the quality of inputs.
Nadiri further discusses the contribution of modern economics in this filed and draws a
result that there are still conceptual flaws which need further investigation. Nadiri
provides a complete list of such issues like substitution of factors, true assumptions of
production function models, etc. It all shows that the search for a comprehensive solution
is in progress but the main challenge is the instability in business and every day new
The selection of the most suitable method to measure productivity is one of the
measuring methods give a picture that is not authentic because it is affected by other
factors. For example, firms can have better technology by putting more capital and this
could change the labour productivity. A solution to the problem is provided by measuring
productivity, incorporating the totality of all outputs and all inputs (Saha, 1994). Saha
further writes that, ―Craig and Harris first suggested a model with this end in view. Their
Saha divides total productivity models into two leading categories: a model,
which takes into account ratio of tangible output to tangible inputs, and an alternative
Chapter Two: An Overview of Total Factor Productivity 120
model that takes into account the value added in the system. The value-added model does
not consider raw materials, parts and services purchased from outside the organization on
the premise that these represent tile fruits of someone else‘s labour and as such are ―an
Saha preferred TFP on partial productivity. Based on this assumption that TFP is
a better indicator than partial, it is obvious from Saha‘s discussion that partial
not in control of a firm. However, managers can have a better idea from TFP
measurement.
productivity. It writes,
The ―non-market‖ sector covers a number of activities in the services sector for
of the value of their labour inputs. Many financial services are similarly valued.
activities, productivity growth estimates make little sense or are assumed by the
Sumanth (1990) also takes into account this factor. Sumanth calls it intangible
input and intangible output. Correctly, there are certain factors that are also output of the
firm, but in aggregate function, these are not considered, e.g. market share, brand value,
position in the market, etc. All discussion shows that in productivity measurement by
economists or by industrial engineers the exact reflection of the performance of the firm
Chapter Two: An Overview of Total Factor Productivity 121
is not apparent. It is obvious that to enhance share in the market and to get a high position
among the competitors, there is a need for some tangible input whose output is intangible.
Such intangible output consumes the tangible inputs. While calculating productivity, all
inputs are taken as denominator, whereas not all outputs are taken as numerator. Results
based on such equation cannot represent a true picture since certain outputs are intangible
and are not accounted for. This argument facilitates the observation of Industry
Commission, which says that productivity measurement is not a science. It gives only
function provides assurance to survive in the competitive world. From the last ten years,
there was a growing concern about the productivity measurement schemes had devised to
measure productivity (Miller and Rao, 1989). Miller and Rao further state that one of the
productivity. This method has some advantages over traditional methods in which
productivity is calculated with different angles. The main difference is found in the
methods in which results are expressed in dollars and cents, in other words in ‗financial
responsible to run the firm. This method guides management in a focused way and lends
a hand to managers so that they may understand the whole situation and develop
Miller and Rao have further stated that there are many models, which premise
profit-linked approach. Two of the most common and popular are the (a) profit-oriented
Chapter Two: An Overview of Total Factor Productivity 122
model by the Ethyl Corporation (PPP) and (b) the American Productivity Centre Model
(APC model).
The basic approach of these models is that the firm engenders profit through
productivity and price recovery. Whereas productivity is a measure of factual growth and
it brings a change in physical input and output quantities, while price recovery is the
extent to which firm passes the increase in cost of production to its customer. In this way,
firms keep their profit intact. This approach is more liked by the industrial engineers and
business executives since its results are in term of money and do not need any further
explanation. There are number of models which are based on this approach, like the total
is well-documented phenomenon. All the same, there are many complexities attached
with the whole process. There is a lack of useful tools to measure productivity and always
a doubt on the effectiveness of available data. In most of the cases, available data is
misunderstood and ultimately wrong measuring of productivity comes out there (Wilson,
1994). Wilson proposed a new model to solve this issue and developed an improved
(WMFPI) approach represented. Wilson used Analytic Hierarchy Process (AHP) and the
main objective of this process is to determine the relative importance of a set of activities
It is quite obvious from the above discussion that TFP is a concept of which many
concept. The majority of scholars who put forward their theories have an economic
perspective and focus on measuring TFP at the national and international levels. In some
cases, scholars have made a serious effort to measure at international level, such as
Brummer et al., who measured the TFP of the dairy sector in different European
countries. Nevertheless, in the late 20th century people applied the TFP concept at the
firm level. In the following pages, there is a description of different empirical studies,
mostly conducted in the late 20th and early 21st century. This discussion will support the
significance of the study, which has been conducted to assess TFP at the firm level as
As discussed in previous pages, the TFP model is preferred for this study. There is
a discussion about the selection of the most suitable TFP measuring model. The
conclusion was that TFP, as proposed by Sumanth in a model similar to that proposed by
Sink, Craig, and Harris, and APC would be used to measure TFP of PKGI with only
the literature that have been conducted at the firm level and used on the same or similar
models. The following discussion will offer a detailed literature survey, which covers the
different empirical studies conducted at the firm level. This whole discussion will provide
logical support for the notion that TFP is not a matter solely for macroeconomists, but
also for those studying firms. Nevertheless, literature provides points of view of different
scholars who prefer measurement of TFP at the firm level (the micro level) over the
Chapter Two: An Overview of Total Factor Productivity 124
macro level. The reason behind their preference is that micro level studies provide a basis
for action, and they are also helpful for making strategic decisions. An increasingly
voluminous literature assessing the TFP at firm level reveals the significance of TFP at
influence). Thus, the weighted multi-factor [It is also called Total Factor
Wilson developed a new approach, and by using ―An Improved Method for Measuring
Productivity,‖ measured productivity of different firms. This shows that TFP is not a
concept that is only useful at macro level. It has been used on firms, too.
Zeed and Hagén studied the impact of ICT on TFP of the firms by using Swedish
Enterprises and finally concluded that ―if a larger part of the staff uses computers the firm
labour productivity is higher if controlled for capital intensity, education, industry and
size and a more advanced ICT use increases the firm TFP‖ (2008, p.22 ).
This study provides appropriate evidence that TFP is not only a concept useful at
Antonelli and Scellato (2007) conducted a study by using data from 7,020 Italian
manufacturing companies observed during 1996-2005. This study was to see the impact
of localised social interactions on TFP of the firms. The paper presents an empirical
Chapter Two: An Overview of Total Factor Productivity 125
analysis of firm level total factor productivity (TFP) for a sample of 7,020 Italian
We show that changes in firm level TFP are significantly affected by localised
firm level TFP with an additive effect with respect to localised social interactions
The above study was conducted in 2007, which supports the idea that TFP is becoming
popular among the people who are interested in applying this concept at the firm level.
Oyeranti (2000) has discussed in depth the concept of TFP. Oyeranti gave
productivity measures revolve around the value of aggregate output per man hour
of labour input despite the problems associated with measuring labour input. At
the moment, productivity research has focused more on total factor productivity
Oyeranti‘s emphasis is on developing a link between TFP and the firms. Oyeranti further
Arising from these three factors behind productivity changes are three possible
depending on the specific assumptions that are made with respect to the
It is obvious from above statements that all three factors are associated with firm. The
statements show that to attain a better TFP, there is a strong need for change at the firm
level.
Bheda (2002) studied the productivity of the Indian apparel industry and applied
collected data by interviewing people from selected firms throughout the country.
Thirteen different factors of production were taken into account. The data was analysed
with the help of ANOVA. Major findings from this study are:
1. Factories based in South India are more productive than in the North.
4. Companies that export to the U.S.A perform better than those that export
to other countries.
more productive.
In this study, the author did not take into account the firms‘ financial strength and
workers have better productivity and that workers‘ satisfaction mainly depends upon the
working environment, wage levels, and timely payment of wages. This has a strong link
Chapter Two: An Overview of Total Factor Productivity 127
with financial strategy and strength of firms. Firms with more fixed assets and less
working capital always face a shortage of funds to clear their outstanding expenses.
Moreover, management style also plays an important role in productivity. Bheda ignored
these factors.
UK and Iran. The focus of the Gharneh study was to estimate the labour productivity gap
between the UK and Iran. Gharneh found a significant gap between labour productivity in
the two countries. UK labour productivity was quite high as compared to Iran. Gharneh
cited numerous reasons for this gap. One of the main reasons was the closure of the big
rather than large mills, and labour in small units was more productive than in big units. In
Iran, the government gave incentives to establish industry and provided numerous
protections to industry by putting heavy duties on imports. This gave employees in the
Iranian textile industry a feeling of security, which ultimately became one reason for low
labour productivity. At the same time, the UK textile industry was squeezed due to many
problems, and employees had to perform well to save the industry as a whole as well as
TFP. They compared TFP across different sectors of G7 countries. They collected sector
wise data for the use of intermediate inputs and calculated gross output measures of TFP
growth and TFP levels. An accurate view of underlying TFP growth across the G7
economies was provided by the Malley et al. analysis. The conclusion was in the form of
the existing value added, and cyclically unadjusted measures that tended to overestimate
Chapter Two: An Overview of Total Factor Productivity 128
TFP growth were influencing the underlying technical progress. Keeping the importance
measures of TFP. According to them, a key conclusion from the UK‘s perspective is that,
especially the U.S. and Germany, is still significant. This supports the findings of recent
studies based on value-added measures, but of course, the measure of the gap differs
depending on comparisons between individual countries. Generally, the data shows that
the UK was closing the gap in the mid-1990s but that a considerable amount of ground
useful link between productivity and the living standard of the people. This study
analyzed direct data of GDP, working hours, and number of workers without applying
any econometrics. Their findings are very simple. Industry Commission concludes,
Productivity matters for growth. Productivity growth has accounted for about half
of the increase in Australia‘s output over the past three decades. Since a firm‘s
management using financial factors is proposed as the key element for upgrading
Chen et al. stated that that they have developed their results by applying fuzzy
clustering approaches for the purpose of categorization, with distinct characteristics for
Chapter Two: An Overview of Total Factor Productivity 129
financial factors and with the application of characteristics of productivity and financial
factors for each pattern. Chen et al. used data from the Taiwanese manufacturing
industry, and their data suggests they have used a financial ratio to determine the
productivity of the industry. Salinger (2001) conducted a survey of African industry and
used financial parameters to measure competitiveness and productivity. His views are
that financial matters are insufficient to develop an analysis and that there is a strong
―However, it should be noted that the growth of a country results from the growth
of industries, which comes from the growth of firms. Ultimately, the productivity growth
Kiyota, 2005, p.1). Nishimura et al. have discussed in depth the role of the firm for
firm level. For this purpose, they used the index computing TFP method. Nishimura et al.
compared productivity across firms and time-series. They employ the multilateral index
extended by Good, Nadiri, Roeller and Sickles (as cited in Nishimura et al.). The
outcome of their research is that there is a strong need to measure TFP at the firm level.
According to the authors, ―this paper has examined the growth of productivity at the firm
among firms exists not only in manufacturing but also in non-manufacturing industries‖
(Nishimura et al., p.17). The above discussion supports the general observation that TFP
is not a subject of economists only at the macro level but also at the personal and firm
levels.
Chapter Two: An Overview of Total Factor Productivity 130
Harris and Li (2007) conducted a study to measure the TFP of different exporting
firms in the UK. All this measure is at the micro level. They have identified firms having
that generally exporters and foreign-owned firms have on average higher levels of
TFP, but foreign-owned firms are not always better than UK-owned exporters and
exporting (as opposed to not selling abroad) by foreign-owned firms only seems
to confer a TFP advantage in half of the industries considered‖ (Harris and Li, p.
35).
This study was conducted in the start of the 21st century, which shows that people are
now adding firms to study TFP. One possible explanation of this study is that TFP is a
to TFP growth at the firm level. Duguet held the view that ―radical innovators would be
the only significant direct contributors to TFP growth‖ (p. 20). For this study, Duguet
used data provided by the French Innovation Survey, which covers the period from 1986
to 1990.
This survey provides information on eight innovation types that firms can have
activities (market pull, technology push) and the innovative opportunities of their
This study is another argument that goes in the favour of the newer, modern view
Cingano and Schivardi (2004) conducted a study of more than 30,000 firms in
Italy to identify the TFP growth of the firms. This data were provided by a consortium of
banks. Cingano and Schivardi explained, ―The TFP estimates in the L-S are obtained by
averaging over the firm level TFP so that the precision of the estimates increases with the
number of firms‖ (p. 14). It has been shown in Cingano and Schivardi‘s research that
TFP at firm level fulfills many of the business people‘s objectives. They support the view
that estimation of firm TFP and determination of its factors is one of the best techniques
Chan, Krinsky, and Mountain (1989) have proposed another non-parametric way
to assess TFP at firm level. Chan et al. believes that estimation of TFP at firm level is
equally important. In addition, Chan et al. have supported the TFP definition conceiving
For practitioners, however, TFP analysis has various advantages. TFP is a relative
measure showing how the ratio of total output to total input changes from one
period to the other. It is relatively inexpensive to perform and since the data are
Aw and Chen (2001) made an effort to find evidence at the firm level to measure
the difference in TFP. They did so by using data of firms from Taiwan.
For each firm in the Taiwanese manufacturing data we construct an index of total
factor productivity (TFP) in each of the three census years 1981, 1986, and 1991.
Chapter Two: An Overview of Total Factor Productivity 132
We use this index as a single measure of the firms‘ relative efficiency, a proxy for
in the theoretical model. A TFP index captures many factors that can lead to
Aw and Chen (2001) did not attempt to explain why TFP varies across firms but rather
focus on whether firms‘ relative efficiency is correlated with their decisions to enter, exit,
or remain in operation.
Probably, Burgess (1990) is one of the critics who very openly criticized
authenticity of the results provided by economists. Felipe (1997) has described that
people have produced different results from the same data. Burgess believed that the
measurement is far from perfect. Critics could point to the impact on productivity
of a large range of factors other than the two factors named above. The accuracy
of the ―estimates‖ are often open to question. However, economists are more
confident about their productivity estimates for manufacturing industry than they
are with their estimates for either public or service sectors. (Burgess, 1990, p.7)
This statement does not mean that all estimates are incorrect. Rather, it supports the point
of view of the Industry Commission of Australia (1997), which holds that the
the firm level. This is a similar approach, which Ark (1996) proposed.
The above discussion converges on one point that TFP is equally important at firm level.
It is easy to understand and business leaders can make quick changes to have better TFP.
Nevertheless, TFP at the macro level depicts TFP levels and trends in the long run and
very small scale, but it also carries weight at the international level. Schmenner and Ho
(1989) conducted a study at international level. In this study, they compared productivity
of firms.
For the plant manager, so many potential remedies for increased factory
over the world. It reports on three studies, which mailed the same survey to
factories in the US, South Korea, and to 30 other countries mainly concentrated in
This study was conducted in the late 1920s. Schmenner and Ho work clearly depicted
recognized by various scholars. It is interesting to note here the Solow, a Nobel laureate
who presented a famous model with which to estimate TFP, also accepts the importance
of productivity measurement at the firm level. ―Increasingly, however, there have been
variety of such studies has been done‖ (Baily and Solow, 2001, p.151). Baily and Solow
have quoted many studies carried out to estimate productivity (TFP) at the firm level.
They have mentioned a few studies, such as that by Jorgenson, Wagner, and Van Ark,
who carried out studies at the firm level. It is interesting to note that all such studies were
conducted at the end of the 20th century. At the same time, however, Baily and Solow
said that such studies cannot reduce the importance of TFP measurement at the aggregate
level.
The natural place to hunt for those causes is in detailed comparisons of firms or
Productivity measurement at firm level is not without biases. There are many
(1992) have discussed many difficulties during productivity measurement at the firm
Chapter Two: An Overview of Total Factor Productivity 135
level. However, they categorically mentioned that measurement at the firm level is
"micro'' levels — the level of the firm, plant, office, work group, or individual
are compared with those of the traditional measures of internal firm performance:
The observation of Misterek et al. supports the point of view of Baily and Solow that
In the above discussion, most of the studies are at firm level. Still, in the final
analysis, the results were presented at the aggregate level. It is possible to conduct TFP
only for one company. Such studies can be conducted for any type of firm, whether
Mohanty and Rajput (1987) have conducted a study to measure TFP of a steel
mill. They described the objective of the study in the following words, ―The primary
methods for a company engaged in the manufacture of steel wire ropes‖ (p. 65). Mohanty
and Rajput have selected the TFP model, which is similar to the Craig and Harris model.
Furthermore, they developed a relationship between TFP and different variables, such as
It is particularly important to note that for the current study the same method has
been adopted as in the Mohanty and Rajput work. The researcher has collected financial
and non-financial data and calculated the TFP of every firm, developing a correlation (see
chapter 3 for further details). A review of the literature shows evidence that research
methods used for the current study and models are not new. They are already tried and
TFP measurement at the aggregate level (macro level) represents the overall
picture of the industry or the whole economy. It is the sum of the TFP of individual firms.
Such aggregation raises many questions. The main doubt with respect to this aggregation
process surrounds the factors affecting TFP at firm level. These are different for different
firms. Raa (2005) has studied this problem and concluded that such simple adding does
Firms‘ productivity indices do not sum to the industry productivity index, except
when production is linear in the sense that marginal rates of substitution and
marginal rates of transformation are constant and these constants are common to
different firms may have linear production. Raa (2005) concluded, ―Aggregate
productivity is the sum of firm productivities and firm allocative efficiency changes. A
(over and above the competitive economy wide ones), weighted by input changes‖ (p.
208).
Chapter Two: An Overview of Total Factor Productivity 137
Raa further explained that before adding to get aggregate results, many details are
required about the production function of individual firms, which is not possible.
factors. At the same time, though, it can be used to develop a correlation with other
factors, such as turnover of the firm. Gebreeyesus (2008) has conducted a study of
Ethiopian firms to develop a correlation between turnover and the TFP of the firms. ―In
this paper we provide empirical evidence on firm turnover and productivity differentials
126). This study also reinforces the observation that TFP at the firm level is not less
important.
economies. It has been widely used by economists at the macro level. But some
researchers, including Portela and Thanassoulis (2006), found it useful at the micro level.
They have used the Malmquist index to compare the TFP of different banks‘ branches (at
the firm level). It is interesting to note that they conducted this study in the early 21st
century, whereas Malmquist was proposed by Swedish academic Malmquist in the 1980s
and was mainly used to compare economies at macro level. Nevertheless, Portela and
Thanassoulis have made minor alterations to the index to measure TFP at firm level.
measurement at the macro level. As discussed above, there are a number of factors that
influence productivity at the macro level. At the same time, analysis at the firm level can
present its own problems. Husband and Lee (1981) analyzed productivity of a plant by
using three different methods: (a) technical added value, (b) productivity costing, and (c)
Chapter Two: An Overview of Total Factor Productivity 138
depends on the precise definitions of input and output factors. Despite the difficulties
industry‖ (Husband and Lee, p. 32). The above statement clearly depicts that productivity
measurement at the firm level is not only important— rather, it is highly demanded.
level. On the other hand, industrial engineers, business managers, finance people, and
people associated with stock markets are more interested in conducting analyses at the
micro level. This is mainly due to their interest and stakes. But over time, economists
have been focusing more on the micro level in their analyses. ―More and more,
economists are looking at ‗micro‘ issues — that is, issues concerned with the firm, work
group, or individual — rather than ‗macro‘ issues (industry or national level) as causes of
Misterek et al. have held the view that productivity measurement at the firm level
is not only the job of people directly involved in business but also economists who are
Newman and Matthews (2006) conducted a TFP analysis of Irish dairy, using
data from firms. Their study shows that TFP measurement does not matter significantly
for industrial production system. Rather, it is equally important even in the livestock
industry.
The literature search outlined above yielded a vast amount of literature covering
many studies to estimate TFP at firm level. A closure look of all studies mentioned above
provides strong evidence that TFP models, which was initially developed by economist,
Chapter Two: An Overview of Total Factor Productivity 139
mainly used to estimate TFP at macro level, whereas, business managers and industrial
engineers prefer TFP estimation at firm level. For this purpose they developed different
TFP models. Nevertheless, in recent days, economists are also using firm level data to
estimate TFP. Apparently, it looks that both points of view are confronting each other. In
fact, it is not. The difference is due the diverse objectives. Based on this difference, they
adopt different strategies. Based on all above discussion, it can be concluded that TFP
estimation is quite possible at both levels; macro and micro. However, selection depends
upon the many factors e.g. research objectives, data availability, and capability of
researchers.
This chapter discussed the concept and significance of productivity and its
emergence. It also covered history of production functions along with the critical views
of different people related to application of production functions. This chapter also put
productivity along with concepts of partial, multifactor, and total productivity. From all
the above discussion, one can derive that productivity has several meanings and concepts,
depending on the user of the term. Productivity ranges from labour productivity to green
a common view that measurement of the current level of productivity is essential for
in the previous pages, there are a number of approaches available in the literature and
It is quite clear from the above discussion that it is hard to reach a consensus on
the literature to assess productivity. The suitability of the individual models depends
upon the measuring objectives and availability of data. In addition, the applicability of
the model varies according to the nature of the industry and level of productivity
measurement.
After the profound discussion of the different approaches, the author of this report
fully agrees with Gharneh about the two main categories of productivity measurement
produce goods or provide a specific service. Firms are recognised by their function, for
example a producer of textiles, producer of automobiles, etc. A firm that lacks production
consequently also lacks a function, which in turn means an absence of input and output.
areas. First is index numbers, a measurement that is related to the production of goods. In
other words, it mainly covers the physical numbers, e.g. number of stitching workers in a
mill and number of shirts produced. Furthermore, these numbers are used in some
indexes. This approach has its merits and demerits. Second is the accounting model,
Chapter Two: An Overview of Total Factor Productivity 141
which deals with the amount used to produce any goods or services. As reflected in the
productivity measurement yet a selection of the approach mainly depends upon the scores
of factors such as data availability, level, purpose, etc. Schreyer and Pilat (2001) explain
that the choice between the approaches depends on the purpose of productivity
Briefly, selection of the most suitable approach mainly depends upon the
following factors:
4. Organisational set up
6. Available data
The author of the report concludes that economists are interested in index
methods, which are highly useful for a long run production function and are loaded with
econometrics, as they are slaves of the accounting model, which is highly suitable for a
short run or even for cross- sectional data. It gives quick results and provides guidance
for immediate improvement. Business managers also prefer an accounting model, since
they and other stakeholders cannot wait for a long time. They need immediate action to
have a better profit. It may be an outcome of a better productivity or by using any other
means such as, change of location, new product line or even closing down the plants and
Chapter Two: An Overview of Total Factor Productivity 142
relying on outsourcing. After all, the goals of the firms are to have a high profit and they
like the measuring models that tell them about the level of profit and factors affecting
profit so that they may plan to have better profits. For this reason there are many studies
which have been conducted at a firm level. Literature provides evidence that interest to
measure productivity (partial, multi factor or total factor) at a firm level has an increasing
trend. In addition to that most of the studies have been conducted after 1980. It is also
apparent from the literature that such studies are widely available in literatures which
model depends upon the situation of business, availability of data, and objectives that
measure productivity. The observation taken from the discussion can finalise the
measure correlation, and measuring the strength of the correlation between dependent and
independent variables. As discussed in chapter one, there are five foremost objectives of
this research:
1. Measurement of TFP of PKGI (at aggregate and disaggregate level) and its
2. Finding correlation and its strength between dependent variables (TFP) and
independent variables
3. Testing of hypotheses
As Johnson and Christensen (2006) have rightly said, there is not a single
approach that can be utilized in historically research to carry out it, although there is a
1. Recognizing the research topic and formulating its problems in question form
3. Evaluation of material
4. Data synthesis
5. Report preparation
This report espouses similar processes as mentioned in the above lines. Earlier
research problem, research justification, and research objectives were discussed in detail
in chapter one (for more details see Section 1.6, 1.8). The researcher has developed a
hypothesis based on these findings. The literature review in the chapter two presented
not only plentiful definitions and concepts about productivity, but many other methods
for measuring productivity. The literature offers a good variety of models that can be
availed. After a comprehensive treatise, one single model was finalised. This chapter
explains data collection and the analytical method and its implications.
According to Johnson and Christensen (2006), for most of the 20th century, the
quantitative paradigm prevailed. During the 1980s, the qualitative paradigm came of age
as an alternative to the quantitative paradigm, and often was conceptualised as the polar
opposite of quantitative research. Finally, the modern roots of mixed research date back
Chapter Three: Data Collection and Research Methodology 145
the late 1950s. According to Johnson and Christensen (2006) mixed research became the
legitimate third paradigm with the publication of the Handbook of Mixed Methods in
Social and Behavioural Research by Tashakkori and Teddlie, although mixed research
had always been conducted by practicing researchers. They further state that presently
there are three major research paradigms in education (and in the social and behavioural
relies on collection of qualitative data. On the other hand, mixed research involves
different values or categories. Opposed to constants, these do not differ. There are
numerous types of variables (Johnson & Christensen, 2006). Besides, dependent and
independent variables also exist in which independent variables are the presumed cause
of another variable, while dependent variables are the presumed effect or outcome of
and due to this affiliation one could not say that the dependent variable is not the outcome
variable is affected by another variable. This gives the idea of intervening variables (also
called mediator or mediating variables) that take place between two other variables. For
example, in the case of TFP of PKGI, a better TFP is the result of capital investment,
Chapter Three: Data Collection and Research Methodology 146
which is used to pay for the high tech machines. Such variables are called intervening
variables. In this study, an effort has made to build up a relationship between the
dependent variable TFP and seven other independent variables. It is likely that there are
the dependent variables. Apparent relationships between the two variables in non-
explanations for the relationship. Johnson and Christensen (2006) have explained in
1. One can obtain much stronger evidence for causality emerging from
2. One cannot wind up that a relationship is causal when there is only one
second, a proper time order must be established; and third the relationship
between the two must not take roots owing to extraneous or third variables.
Chapter Three: Data Collection and Research Methodology 147
variables was ascertained. It is presumed that time series data can give better results than
cross sectional data. As discussed earlier, no time series data is available for PKGI,
therefore, cross sectional data were utilized in this situation. There might be confounding
and extraneous variables that strongly influenced the cause-effect statement. Since this is
discussed earlier in the case of experimental research, all of the above-mentioned criteria
was dealt with while on the other hand, in causal-comparative and correlation research,
which focuses on a relationship between two variables, statistics (regression analysis) can
be employed to conclude that two variables are related, as well as to determine the level
of the relationship. This report attempts to weigh the relationship between independent
and dependent variables and ascertain the meaning of the relationship. However, results
would have been better if this had been done as an experimental research.
informative results, though experimental research was not practicable for this study
because the objective of the research was to assess TFP levels of PKGI and its
In view of the research objectives, the use of cross sectional data and its implication of
different factors on TFP. To measure TFP, this report used quantitative data; however,
only to measure the impact of different variables on TFP. This research drew upon a
Chapter Three: Data Collection and Research Methodology 148
different set of variables. As discussed in the chapter two, the most common definition of
productivity is the ratio of output to input. Keeping this definition into reflection, there is
accommodate certain questions such as level of education, managerial style of the firms,
level of skill, application of IT, and level of technology were added to the questionnaire.
During the pilot survey, it originated that a part of the data is unavailable, e.g. education
and skill level of the workers. Moreover, people are often reluctant to answer such
questions. Because of these constraints, it was decided to use quantitative data in order to
quantitative data. Even so, this researcher believes that qualitative data should be
included in this report, though, as explained earlier, the researcher excluded some
The next section discusses in depth the procedure (research methodology) used to
achieve the objectives. This section will explain the rationale of the adopted research
2. Finalisation of population
3. Sampling
4. Measuring of TFP
5. Comparison of TFP
6. Testing of hypotheses
In this research, primary and secondary data were used to measure the TFP of
PKGI and its determinants. It is necessary to confirm the validity of the data before using
it. Johnson and Christensen (2006) discussed in detail the impact of data validity in
research and outlined methods to check validity. According to them, every information
source must be evaluated for authenticity and accuracy because any source can be
negative criticism.
Positive criticism refers to the confirmation that the meaning conveyed to the sources
has been understood. This is normally difficult because of problems of vagueness and
presence. The vagueness refers to uncertainty in the meaning of the words used in the
source and presence passes on to the assumption that the present-day connotation of
content of sources used. This is difficult because it requires a judgment about the
accuracy and authenticity of the source. Firsthand accounts by witnesses to an event are
As per Johnson and Christensen (2006), historians often use three heuristics in
comparing documents to each other determines whether they provide the same
information or not, and can be used to obtain information about accuracy and
authenticity. Sourcing, or identifying the author, date of creation of a document, and the
place it was created is another technique that is used to establish the authenticity or
In the research report, all of three methods will be applied prior to using data that will
The preceding part of this chapter discussed the concept, significance, application,
depending upon the user of the term. Productivity ranges from labour productivity to
green productivity; there is even an issue of social productivity. The literature has
measure productivity.
The discussion makes it quite clear that it is hard to reach an agreement about the
measurement approaches into different categories. This variation results from different
objectives of measuring productivity and numerous models are available in the literature
to gauge productivity. The suitability of the individual models depends upon the
measuring objectives and availability of data. In addition, the applicability of the model
varies according to the nature of the industry and level of productivity measurement. It is
the reason why TFP models are a good choice because they have an effective function of
accounting. The rationale of selection of this model is put forward here yet there are some
other TFP models that different authors have proposed and which are based on
accounting functions. As said earlier they are not much different from each other, the fact
goes there are serious objections on TFP models and at the same time, there are people
who are in favour of these models. Amid this controversial situation, TFP models based
on accounting function have been selected. A list of some common TFP models is as
under:
The TFP models have both advantages and disadvantages. A critical discussion on
TFP models supports the criteria of TFP model and its selection. Sumanth (1990)
describes the following advantages of the TFP model (total productivity model):
productivity indices.
3. It shows which particular input resources are being utilised inefficiently, so that
productivity cycle. That is to say, the total productivity model offers for the first
time a way of not only measuring but also evaluating, planning, and improving
units.
units, while providing routine control for the less critical operation units.
9. It helps to identify the level of achievement to benefit the ultimate goal of better
total productivity.
Chapter Three: Data Collection and Research Methodology 153
One of the principal drawbacks of this model is that it does not indicate which
does not help the firm‘s management to identify the productivity level of different
Carlaw and Lipsey criticise the TFP approach. They argue, ―TFP is not a measure
of technological change and only under ideal conditions does it measure the super normal
profits associated with technological change‖ (2003, p. 457). According to Carlaw and
Lipsey TFP is not the appropriate approach to measure productivity in all cases.
In spite of the constraints of the TFP model, many studies have worked to assess
its validity, including the above-mentioned points. Based on the above discussion and
keeping in view the study objective, availability of cross-sectional data, and data
restriction, the TFP model is the best option, and there are only minor differences among
the models, while their theme is alike. The total productivity model presented by
Sumanth, Sink, Craig and Harris, and APC was selected for the estimation of TFP of
PKGI.
Total Tangible Output = value of finished units produced+ value of partial units
Total Tangible Input = value of (human + material + capital + energy + other expenses)
input used
There is a need to cover data of total tangible input and tangible output for the
application of the TFP model in order to measure TFP. This data should travel over total
value of goods produced, value of goods in process, any other revenue generated by the
firm through input details, and covering the cost of material, energy, labour, and any
other cost incurred during the period under consideration. As mentioned in chapter one,
firms of PKGI are not bound to submit their financial reports to the Income Tax
Authority. What‘s more, majority of firms are not listed in the stock exchange however,
the Ministry of Industries and Production in Pakistan carries out detailed surveys of all
manufacturing industries and compiles an annual report. This survey is called the Census
Pakistan that publishes this report for common uses. During a visit to the Federal Bureau
of Statistics of Pakistan, it observed that the last survey conducted in 2000-01. This data
provides complete details about input and output of PKGI and 18,061 other firms of 181
In 2000-01, the Government of Pakistan collected data from 18,061 firms from
181 different sectors, including textiles, steel, leather, etc. This data will be used to
measure the TFP at the sector level. Results will be used to make a comparison of TFP
among different sectors, as well as with PKGI. The purpose of this comparison is to
gauge the ranking of TFP of PKGI in the list of other manufacturing industries of
Pakistan.
Chapter Three: Data Collection and Research Methodology 155
Numerous variables can affect the TFP of any firm. Different authors have used
different variables critically assess the productivity of the garment industry. For instance,
Bheda (2002) used 14 variables in his research on the Indian apparel industry.
Brinkerhoff and Dressler (1990) suggested the following variables to weigh up the
productivity:-
productivity of the Hong Kong garment industry and found a direct link between
productivity and firm size. Key and McBride (2003) have used outsourcing (production
following variables have been taken into account to determine a relationship between
It is very important to argue about the selection criteria of these variables before
they are used for regression analysis. The following pages briefly discuss the variables
produce various types of products for different segments of the market. The range of
products produced by PKGI clearly demonstrates it and this range can be divided into
two main categories: basic and embellish garments (basic and fashion garments). Basic
garments include polo shirts, T-shirts, and basic logo tees, none of which have
piecing, etc. There is invariably a price difference between the two types of garments.
Furthermore, production processes differ and consequently profit margins are different
for basic and fashion garments. It was found during a survey that the majority of firms
unusual that a firm would produce exclusively basic or fashion garments and it is
presumed that the product mix has a major impact on TFP. It is hypothesised that firms
having a mixture of the two types of garments will have a higher TFP.
Production capacity. Knitted garment producing firms can be classified into two
main categories: (a) vertical and (b) horizontal firms. The knitted garment production
process includes the knitting of fabric, finishing (bleaching, dyeing, printing, and
finishing of fabric), and stitching of garments. Firms that have knitting, finishing, and
stitching engagements under one roof are called vertical and firms having only a stitching
facility are called horizontal firms. They get their fabric knitted and dyed from the market
and do outsourcing for the fabric. The garment manufacturing capacity of any firm
Chapter Three: Data Collection and Research Methodology 157
primarily depends upon the number of machines it has, since garments are produced on
these machines. It is presumed that this factor has a significant impact on the TFP of the
firms. Wu (2002) has discussed the relationship between factory size and its
productivity. Wu recalled that more than 60 years ago Coase, an economist who was a
Nobel Prize winner, had explained meticulously why firms vertically integrated, as
opposed to individually buying and selling goods and services at every stage of
production. The primary reason Coase explained was inadequate information and basic
need to diminish transaction costs. Wu (2002) has further stated that in past, transaction
costs were high and, due to insufficient information, firms repeatedly preferred vertical
integration. Nevertheless, in the current era, when rapid access to information is readily
available and there is a tremendous reduction in transaction costs and time, firms find
attractive the option of concentrating on their strong points and outsourcing for other
Brush and Karnani (1996) have also supported the idea that firms should not
focus on big plants and prefer to have vertical units. According to their study, firms are
diverting to smart plants instead of developing huge projects. Recent popular business
literature has elaborated that there is a significant trend in U.S. firms to downsize.
Conventional manufacturing wisdom —the bigger the plant, the greater its efficiency—is
being seriously questioned. Numerous firms, including AT&T, FMC, and General
Electric are replacing huge manufacturing complexes with new, smaller plants.
Key and McBride (2003) have investigated the impact of contract production of
the U.S. Hog Industry on productivity. They found that the number of formal contracts
Chapter Three: Data Collection and Research Methodology 158
has increased from 11% to 34%, while output increased from 22% to 63%. Considering
these factors, an assumption says that capacity has a negative impact on TFP.
exclusively upon export. This industry sells only overruns in the local market and its
chief markets are the U.S.A and Europe. More than 60% of goods are exported to the
U.S. market (APTMA, 2006). There is a fundamental difference between the U.S. and
European markets. U.S. buyers place big orders, in contrast to the smaller orders typical
of European buyers. The average price is also different in both markets. Besides, the
garment description differs. It is assumed that firms having a mixed share of both markets
will have a high TFP compared to firms that have only one market access. Bheda (2002)
Share of financial expenses in total expenses. The interest rate of Pakistani banks
is quite high, when it is compared with banks in developed countries. During 1990, it was
more than 20% per annum. In 2000-01, the period under study, interest rates were
between 12% to 15%. The government of Pakistan offers working capital to exporting
firms at highly discounted rates under a scheme of export finance, which was discounted
to 6% in 2001. Firms that do not take advantage of this loan seek help from the market to
cover financial needs through purchasing of goods on credit. Purchase of goods from the
market on credit is expensive as compared to banks. Vendors charge more than 25%
extra to supply goods on credit. Firms with less working capital have to rely on market
credit. It is assumed that the TFP of firms that depend more a lot on bank loans is better
than others. Firms with more bank loans have to pay interest to banks. This is an expense
of the firm but its amount is less than the extra amount charged by the supplier if firm
Chapter Three: Data Collection and Research Methodology 159
gets goods and service at credit (payment after a certain period). Consequently, the share
of financial expenses of such firms is high compared to firms that do not rely upon bank
intensive industry. There is a great variation in the percentage of the labour cost in
relation to the total cost of the garment. Perhaps there is a negative linkage between
labour cost and TFP. A greater share of labour cost in the total cost of the production of
garments means that firms are relying more on manual work than machine work or there
is less automation in the production system, e.g. a traditional bundle system in stitching
instead of a modern hanger system. Gottschalk (1978) shows that payment for labour at
higher than normal market rates do not mean a correspondingly higher productivity. In
fact, there are various reasons that control the relationship between marginal productivity
and the cost of labour in total production. Gottschalk (1978) has explained a relationship
statement of the marginal productivity theory recognizes that factor payments and
Average product price. PKGI exports garments at different prices depending upon
quality, quantity, delivery time, material, size, style, etc. It was observed during this
research that every firm exports garments at different prices and the average price is
directly linked with productivity. Bheda (2002) used product price or value as a variable
in assessing productivity. He gave the name ―product category‖ to this variable. This
hypothesis asserts that firms having very low or very high garment prices have a low
TFP, whereas firms producing garments of medium prices will have a higher TFP.
Chapter Three: Data Collection and Research Methodology 160
Total sales. Total Sales show the size of the business. Au (1997) has used this
variable to assess the productivity of the Hong Kong garment industry. A negative link
The discussion can infer a number of factors contributing to TFP; however, the
significance of each factor might differ. In this study, it is assumed that all of the above-
mentioned factors have contributed to the TFP and their significance can be judged with
firms out of 900 firms were responsible for 90% of the exports (for more information see
Section 1.5). These 218 firms were selected as the population for this survey, based on
their 90% share in total exports2. Based on this relevant information, it was decided to
ignore 682 out of 900 companies due to their insignificant share in total exports.
There are two types of firms, vertical and horizontal. Vertical-firms have knitting,
wet processing, and stitching facilities under one roof, while horizontal firms have only
stitching facilities. They do outsourcing for knitting and dyeing/printing (wet process).
Using a random selection process, 49 firms were selected for the survey, which
was 24.22% of the total population. Out of 49 firms, 33 are vertical firms and 16 are
horizontal firms. A questionnaire was developed and a survey was conducted. Some
firms were visited personally and a few were contacted by phone (see Appendix A).
2
Note that PKGI is mainly export oriented.
Chapter Three: Data Collection and Research Methodology 161
For better results in the research, there should be a high degree of similarity
among the population. In this study, the population of 218 firms engaged in exporting
knitted garments. Vertical and horizontal firms differed widely, including in size,
capacity, business style, and marketing strategies. Consequently it was decided that both
types of firms, vertical and horizontal firms, would be treated separately for better results.
Lasserre and Ouellette (1988) have elaborated that there must be maximum similarities
among the sectors under study. They said that productivity measures are frequently used
to compare the performance of different sectors. Keeping all in view PKGI was classified
Both classes will be dealt with separately for accurate results (at disaggregate level).
However, to have an overall view of the PKGI, analysis at an aggregate level (combine
for vertical and horizontal) will also be done and results will be compared in order to
Correlation and regression analyses help measure the relationship and strength of
the relationship between dependent and independent variables. Siegel (2000) suggests
three basic goals to keep in mind when studying relationships in bivariate data:
can correctly predict any outcome based on the previous workings. Sales
sales.
3. Finally, the process guides the management to mediate in the process for
adjustment and control. Based on this observation one can make necessary
Chaudhry and Kamal (2005) have mentioned that correlation, like covariance, is a
measure of the level to which any two variables differ in relation to one and other. In
other words, two variables are said to be correlated if they tend to all together diverge in
the similar direction. If one variable tends to enlarge while the other variable decreases,
the correlation is said to be negative or contrary, e.g. the volume of gas decreases as the
pressure increases.
variables; both the variables are random variables, and are treated symmetrically, i.e.
Chapter Three: Data Collection and Research Methodology 163
statistical summaries, the correlation is both helpful and limited. Siegel has further stated
that if the scatter plot shows either a well-behaved linear relationship or no linear
clustering, or outliers in the data, the correlation number could be misleading and as a
result, correlation will be measured among different variables, including dependent and
independent variables.
Siegel (2000) has mentioned two ways to identify and measure correlation
According to Siegel a scatterplot displays each case or elementary unit using two
axes to represent the two factors. Berenson and Levine (1998) define six types of
scatterplots:
3. No relationship
As a result, the scatter plot will be designed with the help of SPSS software to see
correlation among different variables. Mathematically the correlation is computed for the
data using a straightforward but time consuming formula. The formula for the correlation
Chapter Three: Data Collection and Research Methodology 164
coefficient is based on bivariate data consisting of two measurements made on the first
elementary unit through the measurements made on the last one. The term in numerator
summation involves the interaction of the two variables and determines whether a
correlation will be positive or negative. The denominator merely scales the numerator so
that the resulting correlation will be an easily interpreted pure number between –1 and
higher values of one variable associated with perfectly predictable advanced values of
one variable decreases while the other increases. There are three types of relationship:-
1. Linear relationship
2. No relationship
3. Non-linear relationship
Considering the above discussion, this research will measure the strength of
correlation. This measurement tells us how two variables are correlated. It is important to
note that this correlation cannot be used for predictive purposes. In addition, this process
does not distinguish between dependent and independent variables. In chapter four, the
prediction. In this report, the main objective is to use regression analysis to develop a
statistical model that can be used to predict the values of a dependent or response variable
and Levine (1998) stated that there are four underlying assumptions that arise while using
regression analysis:
1. Normality
3. Independence of errors
4. Linearity
distributed at each value of X. The second assumption homoscedasticity requires that the
variation around the line of the regression be constant for all variables of X. It means that
Y varies the same amount when X has low or high values. The third assumption,
independence of error, requires that the population and the error (the residual difference
between each observed and average predicted value of Y) should be independent for each
value of X. The fourth assumption, linearity, states that the relationship among variables
is linear in the parameters. Based upon this discussion, the analysis will be carried out
Among all possible regression equations with various values of these coefficients,
these make the sum of squared prediction errors have the smallest possible values. The
Where:
a = Constant
For appropriate results, one should be able to interpret the regression coefficients.
According to Berenson and Levine (1998), the regression lines serve only as an
approximate predictor of the mean value of Y for a given value of X. Hence, there is a
call for development of a measure of the variability of each observation around its mean.
The measure of variability around the line of regression (that is, standard deviation) is
called standard error of the estimate. The interpretation of the standard error of the
estimate is analogous to that of the standard deviation. Similarly, the standard deviation
According to Berenson and Levine (1998), regression and correlation are perhaps
the most widely used and, unfortunately, the most widely misused statistical techniques
applied to business and economics. The difficulties come from the following sources:
matter.
As per Statsoft (2006), the chief conceptual limitation of all regression techniques
is that one can only ascertain relationships, but he or she is never sure about underlying
causal mechanisms. During data analysis in chapter four, these pitfalls will be kept in
describe unequal variability. Siegel (2000) pointed out the unequal variability in the data
as another technical difficulty that, unfortunately, arises in business and economic data.
vertical axes changes dramatically with horizontal movement. Siegel has further stated
that the problem with unequal variability is that the places with high variability, which
Chapter Three: Data Collection and Research Methodology 168
represent the least precise information, tend to influence statistical summaries the most.
Siegel (2000) has proposed two ways to address this problem. According to him,
the most common is transformation of data by using a logarithm, while the second way is
between two different variables. This relation may be of many types. According to
Berenson and Levine (1998), one of the most important questions to address in regression
analysis involves the determination of the particular straight-line model that best fits the
model. According to Berenson and Levine, the least square method is a mathematical
According to Chaudhry and Kamal (2005), the principle of least squares consists
of determining the values for the unknown parameters that will minimise the sum of the
squares of errors (or residuals), where errors are defined as the difference between
observed values and the corresponding values predicted or estimated by the fitted model
equation.
The parameter values obtained will give the least sum of errors and are known as
least square estimates known residuals. According to the principles of least squares, such
values of a and b are determined that will minimise the sum of the squares of the
residuals. In other words, the best regression line is the one, which minimizes the sum of
the squares of the vertical deviations between the observed values and corresponding
Chapter Three: Data Collection and Research Methodology 169
values predicted by the regression model. Keeping all discussion in view in chapter four,
regression analysis will be carried out by using the least squares method so that best line
always a pair of hypotheses, the null hypothesis (H0) and the alternative hypothesis (H1).
The null hypothesis represents the default possibility that one will accept unless presented
with convincing evidence to the contrary. Siegel (2000) explains that acceptance of the
null hypothesis is a very favoured position. It takes into account the benefit of the doubt.
In fact, one can end up accepting the null hypothesis without actually proving anything,
which can make the research weak and fragile. The null hypothesis is the more specific
hypothesis of the two. The null hypothesis is to be rejected only if there is convincing
statistical evidence that would rule out the null hypothesis as a reasonable possibility.
Rejecting the null hypothesis represents a stronger position than accepting the null
hypothesis. Results will be compared, taking null and alternative hypotheses into account,
There is an array of statistical analysis software available in the market. For this
study, the SPSS was selected and before selection of SPSS software, other software,
including Minitab and Stata, were checked. Results in all cases were the same, since the
same mathematical formulae were used, the main difference were the operation
Chapter Three: Data Collection and Research Methodology 170
procedure. SPSS software was found to be easy to use and understand. Accordingly,
3.18 Conclusion
attempting to fit a linear model to observed data, first determination ought to be made
whether there is a relationship between the variables of interest or not. This does not
necessarily imply that one variable causes the other (for example, higher SAT scores do
not cause higher college grades), but there is some considerable union between the two
proposed explanatory and dependent variables (i.e., the scatter plot would not indicate
increasing or decreasing trends), then fitting a linear regression model to the data
probably will not provide a useful model. A valuable numerical measure of association
between two variables is the correlation coefficient, which is a value between -1 and +1,
indicating the strength of the association of the observed data for the two variables.
After detailed discussion, the following strategy for research analysis has been
finalised:
levels;
Chapter Three: Data Collection and Research Methodology 171
variability if required;
10. The least square weighted method will be applied if felt necessary.
Chapter Four: Data Analysis and Results 172
Chapter three discussed research methodology in detail and finalised the approach
to collecting and analysing data. In line with the research methodology, primary and
secondary data were collected. Primary data were collected through a survey of the
industry using a structured questionnaire and secondary data were made available from
the Federal Bureau of Statistics of Pakistan. This chapter is aimed at data analysis and
The following list of study objectives, as detailed in Chapter One, appears here
Pakistan
for vertical and horizontal firms with the help of the TFP models based on
2. TFP of the 181 major industries (18061 reporting firms) of Pakistan will
industries in Pakistan
Before moving ahead, it is imperative to have a look on the profile of the industry
under discussion. As mentioned in Chapter One, PKGI can be divided into two main
sectors: organised and unorganised. A cottage or unorganised sector is quite small and
produces garments, mainly undergarments, for local consumption whereas the organised
sector is producing garments only to export to different parts of the world. It is important
to note that this study covers only the organised sector. The reason behind this selection
is the availability of required data for this study and its significance contribution in the
economy of Pakistan.
Chapter Four: Data Analysis and Results 174
Faisalabad, Karachi and Lahore. More than 98% of businesses are in these cities.
Furthermore, there are two main classes of PKGI; vertical and horizontal. Vertical firms
have knitting, dyeing, and apparel making facilities (cutting, stitching and finishing) all
under one roof. Horizontal firms have only apparel making facilities. Vertical firms
purchase yarn from spinning mills and convert into fabric, then dye it according to
demands and finally make apparels as per the demand of the customer. Horizontal firms
buy ready fabric or get its knitting and dyeing from commercial knitters and dyers
(outsourcing of fabric) and they do only cutting, stitching and finishing. Nevertheless, a
few horizontal firms have in house embroidery and small scale printing.
Table 4.1 and 4.2 have been made based on information collected from Pakistan
Hosiery Manufacturing Association, which is the only association of this sector. This is
secondary data, which is being used to have an overview of the PKGI. This information
would help a better understanding of the results. Table 4.1 tells about the population of
the PKGI, which is under study, and shows the total population of the PKGI under
discussion. As mentioned in Section 1.5, there are total 900 exporters but out of 900, the
major share nearly 90% is with 24% firms (218). Table 4.1 depicts that out of 218 firms,
81 firms (37.16%) firms are horizontal and rest 137 firms (62.84%) are vertical firms.
Furthermore, Table 4.1 speaks about the share of different cities in total
population. It is very clear that Lahore has 45% share of total firms, while Karachi has
second position.
Table 4.2 deals with firms selected as sample based on random sampling
techniques. According to this table, 33 firms (67.35%) are vertical firms, while 16 firms
Chapter Four: Data Analysis and Results 175
(32.65%) are horizontal firms. In addition to that, Table 4.2 shows that in sample data,
majority of the firms are established at Lahore whereas, Faisalabad has lowest share
(12.24%) in total sample data. Nevertheless, the ratio of horizontal and vertical firms in
population approximately matches with the ratio of horizontal and vertical firms in the
Table 4.1
Frequency of firms based on type and location (population)
Types of Firms Faisalabad Karachi Lahore Total Percentage
Table 4.2
Frequency of firms based on type and location (selected by using random sampling)
Types of Firms Faisalabad Karachi Lahore Total Percentage
In previous paragraphs, an overview of the PKGI was given in the form of Tables
4.1 and 4.2. These tables give a picture of the PKGI. Table 4.3 has been constructed to
have an overall observation about the data. In this table, basic statistics about the
independent variable are given. This table gives the overall view of the data and tells
about the difference between the characteristics of PKGI at aggregate and disaggregates
level. One can derive the following information from this table:
1. Sale value in U.S. Million $, is an indicator of the level of business firm is doing.
It is more likely that firms having vertical setup have high sale volume from the
firms having horizontal setup. It is clear from the Table 4.3, that mean value of
vertical firm is 4.86, which is much higher that the sale volume of horizontal
firms, which is 1.65. It is also evident that horizontal firms have Standard
Deviation (1.34), less than they have the vertical firms (5.96), which show that
spread of data.
share of labour expenses (direct and indirect both) have a reasonable share as
compared to a spinning mill, which is capital intensive industry. Table 4.3 depicts
that mean value of labour expenses in case of horizontal firm (8.26) is less than
labour expenses of vertical firms (9.60). It is more likely due to the difference in
salaries, over head expenses, and high stitching machine to operator ratio. Table
4.3 also demonstrate that there is a significant difference in the minimum and
3. Borrowing money from banks and paying interest is quite common among
business circle. It is here that firms get loan from banks and pay them interest
along with other financial charges. In this report, it is called financial expenses. It
is more likely that vertical firms, which are big in nature from horizontal firms,
have to get more loans from banks and resultantly, their financial expenses share
will be higher than horizontal firms. Table 4.3 demonstrates that vertical firms
have financial expense mean 3.73, where it is only 1.58, in case of horizontal
which are 3.60 and 13.14 for horizontal and vertical firms respectively.
4. Industry is making two types of products, simple for causal use and embellished
for people interested in fashion wear. Such clothes are printed, pieced, decorated
with appliqués, colourful embroidery. Table 4.3 demonstrates both types of firms
significant difference between mean values (48.44 and 52.58 for horizontal and
Vertical firms have double value (22.75) than of horizontal firms (11.06). It
5. The U.S. market has more than two third shares in total exports from Pakistan
(horizontal and vertical) U.S. has more than two-third shares. It is obvious from
Table 4.3 that mean of exports to U.S. is 63.75% and 79.48% for horizontal and
Chapter Four: Data Analysis and Results 178
vertical firms respectively. It shows that both firms have behaved in a similar
way.
business. It is obvious from the Table 4.3, that there is a minor difference in FOB
prices. Its mean value is 4.17 and 4.29 for horizontal and vertical firms,
respectively. It shows that it is not likely that vertical firms can charge more
higher than horizontal firms. This observation is supported from the share of
lines.
7. As discussed earlier that vertical firms have usually a bigger setup than horizontal
firms (321.82). It shows that generally, vertical firms have more production
Table 4.3
Descriptive statistics of dependent variables
As mentioned in Section 1.8, one if the objectives of this study is to calculate the
TFP of PKGI at aggregate and disaggregate level and then its comparison with other
sectors of Pakistan manufacturing industries. In the following pages, TFP has been
calculated. For this purpose, TFP models based on accounting function has been
Total Tangible Output = value of finished units produced+ value of partial units
The above equation was used to calculate TFP of PKGI and other manufacturing
sectors of Pakistan. Total Tangible Input (total cost of production) was calculated by
adding all expenses (wages, salary bill, utility cost, financial expenses, raw material cost,
and miscellaneous expenses. All these expenses are given in Appendix 1 and 2 under the
heading of Total Cost of Production. Total Tangible Output means value of finished
goods, work in process, change in stocks and raw material, and other incomes. Total of
all above mentioned figures is available in Appendix 1 and 2 under the heading of Total
Sale Value.
Table 4.4 shows the results of the data analysis. It lists the TFP of PKGI at
aggregate and disaggregate levels and TFP of 18,063 firms from 181 different
(secondary data) was used to calculate the TFP of different sectors with the help of the
TFP models based on accounting function. The following results have been derived from
the analysis:
1. Arithmetic mean of the TFP of PKGI at aggregate level is 0.976, which is less
than one. Furthermore, the TFP at a disaggregate level for horizontal and vertical
Chapter Four: Data Analysis and Results 181
firms is 0.975 and 0.976 respectively, which is also less than one. This means that
the tangible output of PKGI at aggregate and disaggregate levels is less than the
tangible input. In other words, it can be said that PKGI as a whole completely
faced a loss in the year under study. As discussed in Chapter One, a TFP of more
than 1means that the TFP of the firm is high and less than 1means that the TFP is
low. In this study, the benchmark is one. A TFP of more than 1will be considered
as a high TFP, and vice versa. If the TFP is more than one, it depicts that the total
tangible output is greater than the total tangible input. In other words, one can say
that the firm produces more than its consumption. It also means that the firm
made a profit, since more output is a gain on input, which is the ultimately
2. The TFP level of horizontal firms is 0.975, while the TFP of vertical firms is
0.976, which is slightly higher than the TFP level of horizontal firms. TFP level
of vertical firms is also same when compared with the TFP of PKGI at aggregate
levels. As a whole, however, there is not a significant difference among all three
values.
3. The median of horizontal firms is 1.01, while the median of vertical firms is
0.950. The median value of vertical firms obviously shows that more than 50% of
the firms have a TFP of less than one. Nevertheless, more than 50% of horizontal
firms have a TFP of greater than one. As a whole this indicates that horizontal
firms have better productivity than vertical firms at disaggregate level. In case the
mean. Median of horizontal and vertical tells the real picture. It is evidence that
Chapter Four: Data Analysis and Results 182
faced loss in the year 2000-01. Nevertheless, median of TFP at aggregated level
is also less than1(0.98), which shows that more than 50% of the firms at
aggregated level have beard the loss since their output was less than the input.
4. Table 4.4 shows that the standard deviation of TFP at aggregate levels is 0.127,
which is greater than the horizontal firms (0.09). It shows that in the case of the
TFP at aggregate levels, firms vary more from the average. Table 4.4 also shows
that the standard deviation of horizontal firms is 0.091, which is much less than
the vertical firms. It shows that there is less variation in the case of horizontal
firms. In other words, it can be said that the horizontal firm‘s behaviour has more
5. According to the results, the skewness value of the TFP of vertical firms is 1.28
with a positive sign, while, in the case of horizontal firms it is 1.454 with a
negative sign. It shows that in the case of vertical firms, the majority of the firms
have a lesser TFP compared to the mean vale of TFP. In the case of horizontal
firms, skewness is negative, which means that the majority of the firms have a
TFP of more than the mean value of TFP. It can be inferred from these two values
that, as a whole, horizontal firms performed better than the vertical firms.
6. Table 4.4 shows that the value of kurtosis in all three cases is different. It is quite
high in the case of PKGI at aggregate levels and of vertical firms. However, it is
significantly less in the case of horizontal firms. High kurtosis value shows that
values are nearer to mean value. Whereas, low value shows that values are spread
and there are number of observations which are away from the mean value. This
Chapter Four: Data Analysis and Results 183
table shows that horizontal firms have more data spread as compared to vertical
firms.
7. Minimum and maximum TFP values indicate that range in case of horizontal
firms is less as compared to vertical firms. This is evidence that vertical firms
8. As indicated in the above discussion, it has been observed that mean of TFP of
vertical firms is slightly higher than horizontal firms. However, at the same time,
its median is less, which shows that there are some outfitters in the data of
horizontal firms, which have reduced the mean value of TFP of horizontal firms,
and in case of vertical firms they have increased the mean value.
9. It is manifest from Table 4.4 that the mean of TFP of PKGI at aggregate level is
0.976, while the mean of 181 manufacturing industries is 1.47, which is nearly
50% higher than the TFP of PKGI. It is clear from the aforementioned values that,
as a whole, the manufacturing industry of Pakistan has performed well since its
total tangible output is greater than their tangible input. In other words, these
firms gain more than they consume. Based on the observation one can say that
these firms earned a profit. It is also obvious that the lowest TFP of 18,061 firms
is 0.34, which is quite less than one. The TFP of PKGI at aggregate and
10. These results show that mean of TFP of the Pakistani manufacturing industry
11. The Standard Deviation value of 181 manufacturing industries is 0.351, while
standard deviation of PKGI is 0.127. This indicates the variation in the data. It is
Chapter Four: Data Analysis and Results 184
obvious from these values that there is a lot of variation in the case of 181
similarity in the behaviour of different firms. Based on the above, it can be said
that the TFP of PKGI is lower than the TFP of other manufacturing industries in
Pakistan.
The above discussion is related to the TFP level achieved by the PKGI at
aggregate, disaggregates levels, and results in a comparison of the two. It can be deduced
that the TFP of PKGI is low compared to other industries in Pakistan. This scenario
shows that PKGI is not in a better shape and is facing a crisis. If this situation remains
then it is likely that many firms will have to file voluntary bankruptcy. (This observation
has been verified by the unpublished report of the Pakistan Hosiery Manufacturing
Association, the official representative of PKGI, that in 2005 more than 25% firms closed
Table 4.4
TFP of PKGI (at aggregate and disaggregate level) and major industries of Pakistan
PKGI PKGI PKGI Major
Horizontal Vertical Aggregated Industries
Firms Firms Level of
(Combined) Pakistan
N 16 33 49 181
Mean 0.975 0.976 0.976 1.470
Median 1.01 0.95 0.98 1.39
Std. Deviation 0.091 0.142 0.127 0.351
Skewness -1.45 1.28 1.03 2.24
Kurtosis 1.48 3.59 3.97 9.58
Minimum 0.75 0.72 0.72 0.34
Maximum 1.08 1.47 1.47 3.59
Chapter Four: Data Analysis and Results 185
Figure 4.1
Distribution of TFP (horizontal firms)
Figure 4.2
Distribution of TFP (vertical firms)
Chapter Four: Data Analysis and Results 186
Figure 4.3
Distribution of TFP (at aggregated level)
Figure 4.4
Distribution of TFP (manufacturing sector in Pakistan)
Chapter Four: Data Analysis and Results 187
The following research hypotheses were included in chapter one. The testing of
these hypotheses is part of the study objectives. Below, results of hypotheses testing are
given. Based on the results, the following hypotheses will be rejected or accepted. For
Ho Ha
µTFP of vertical firms = µ TFP of horizontal firms µTFP of vertical firms ≠ µ TFP of horizontal firms
µ TFP of horizontal firms is less or equal to 1 µTFP of horizontal firms is greater than 1
µTFP of vertical firms is less or equal to 1 µTFP of vertical firms is greater than 1
µTFP of PKGI at aggregate level is less or equal to 1 µ TFP of PKGI at aggregate level is greater than 1
4.4.1 Assumptions for t-test. There is a big debate in the literature about the
assumptions made before applying the t test. There are different views but the most
important is that population from which sample has been drawn is normally distributed.
As said by Elliott and Woodward (2006) this assumption is rarely if ever precisely true in
practice. It depends upon the researcher and how he or she is concerned about this
assumption. Elliot and Woodward published three assumptions that are generally
1. If the sample size is small (less than 15), then one should not use the one-
sample t-test if the data are clearly skewed or if outliers are present.
2. If the sample size is moderate (at least 15), then the one-sample t-test can
3. If the sample size is large (at least 40), then the one-sample t-test can be
Elliot and Woodward (2006) further wrote that there is an obvious variation of
these rules throughout the literature and having large sample data is based on the central
limit theorem, which says that when sample size is moderately large, the sample mean is
approximately normally distributed even when the original population is not normal.
Chaudhry and Shahid (2005) have also discussed the assumptions for t test.
2. The population from which samples has been drawn should be normal
3. In the case of two small samples, both the samples are selected randomly
from a population which should be normal and have same equal variances.
Table 4.2 tells that there are 49 firms under study. Out of these, 33 are vertical
and 16 are horizontal. Apparently, sample size in both cases is more than 15, which is
one of the fundamental requirements for t test. Based on the above assumption it was
decided to carry out the t test because the data fulfils the assumption — not fully, but to
chapter four, TFP is one of the key objectives of the firms. It is also discussed in previous
paragraphs that there are two types of firms; horizontal and vertical. Based on this
diversification, there is a need to know which type of firm or business style is better than
For this purpose, Independent-Samples t test was carried out and the following
Table 4.5
Independent t test group statistics
Types of Firm N Mean Std. Std. Error
Deviation Mean
Table 4.6
Independent t test significance values
Independent
Samples Test
F Sig. t df Sig.
(2-tailed)
not assumed
Chapter Four: Data Analysis and Results 190
Table 4.5 gives a group statistics of the firms under test. It is understandable from
Table 4.5 that there is a slight difference between mean values of horizontal and vertical
firms (0.975 and 0.976 respectively). However, this table shows that there is a significant
difference in standard deviation between two (0.91 and 1.42). Table 4.6 is the outcome of
the Levene test. After assuming that there is no equality in variance, its significance value
(0.978) is greater than 0.05. It shows that there is no significant evidence to reject the null
hypotheses, which says that there is no difference in the mean values of TFP of horizontal
From this result, it is clear that there is no significant difference in the TFP of
horizontal and vertical firms. It can be at the 5% level of significance (α=0.05) that it is
not necessary for better TFP to prefer horizontal or vertical type of firms.
4.4.3 Test of mean of TFP at aggregated level. TFP is a ratio of output to input.
In this equation, output is numerator and input is denominator. If the output and input
values are equal then it can be said that the output of a firm is equal to its input or one can
say that firm consumed same amount of input, which is equal to output. If the
denominator is smaller than the numerator, it means that firm has produce more and
consumed less and TFP will be more than 1. To check the TFP, whether it is greater
For this purpose, One-sample t test was carried out and following Tables were
obtained:
Chapter Four: Data Analysis and Results 191
Table 4.7
One sample t test group statistics (at aggregated level)
Std. Error
N Mean Std. Deviation Mean
Table 4.8
One sample t test significance values (at aggregated level)
One-Sample Test
Test Value = 1
Sig. (2-
T Df tailed)
Total Factor
Productivity -1.34 48.00 0.186
Table 4.8 shows that the p value is 0.186, which is greater than 0.05 (α= 0.05). In
this case, the null hypothesis says that TFP of aggregated firm is equal or less than1 (one
tail). For this purpose, p value is divided by two and then the p value is compared with α
value, which is 0.05. Table 4.8 shows that p/2 is 0.093, which is greater than 0.05. Based
on this result there is no enough evidence to reject the Ho. Hence, it can be said at the
level of 5% significance that TFP of aggregated firms (combined horizontal and vertical
firms) is less than 1 or maximum equal to 1. It means that PKGI as a whole did not earn
profit.
4.4.4 Test of mean of TFP of horizontal and vertical firms. In previous pages, the
mean of TFP at aggregated level was checked, and it was found that there is no evidence
Chapter Four: Data Analysis and Results 192
to reject the null hypotheses that mean of TFP is less or equal to 1. This test is also
applied to check the hypotheses about the mean of TFP of horizontal and vertical firms.
To check the TFP of horizontal and vertical firms, whether it is greater than1or not, the
Ho:
Ha:
Table 4.9
One sample t test group statistics (horizontal and vertical firms)
One-Sample
Statistics(a)
Total Factor
Productivity 16.00 0.975 0.09 0.02
One-Sample
Statistics(a)
Total Factor
Productivity 33.00 0.976 0.14 0.02
Table 4.10
One sample t test significance values (horizontal and vertical firms)
One-Sample Test(a)
Test Value = 1
T df Sig. (2-tailed)
One-Sample Test(a)
Test Value = 1
T df Sig. (2-tailed)
Table 4.10 shows that the p value (divided by two) in both cases (horizontal and
vertical) is .145 and 0.17, respectively, which is greater than 0.05 (α= 0.05). In this case,
null hypothesis says that TFP of horizontal and vertical firms is equal or less than1 (one
tail). Based on this result there is not enough evidence to reject the Ho. Hence, it can be
said at 5% level of confidence that TFP of horizontal and vertical firms is less than 1 or
maximum equal to 1. It means that horizontal and vertical firms both did not earn a profit.
In this part of chapter, an effort was carried out to test the null hypothesis, which
is one of the main objectives of this research. It was found that there is no significant
difference between the mean value of TFP of horizontal and vertical firms. Furthermore,
Chapter Four: Data Analysis and Results 195
it was derived that PKGI at aggregate and disaggregated level have a TFP value of less
than one. It means that this sector faced a loss since it has consumed more and its output
is less. This is quite alarming for the sector and begs serious efforts to make it better. In
the next part of the chapter, correlation between TFP and other independent variables will
be checked.
independent variables. This association does not ensure the dependency of the said two
variables on each other. It simply denotes the association. Its value (correlation
coefficient "r") is from +1 to -1. One with positive sign means that there is a perfect
association between two variables. However, zero means no association, but in some
cases it shows that initially there was negative and then positive association occurred
between two variables. In fact, correlation analysis estimates the degree of association
correlation analysis are based on the assumption that for any set of variables taken under
a given set of conditions, variation in each the variable is random and always follows
normal distribution.
lengthy and complex. In this process, yarn is converted into fabric with the help of
knitting machines of various types. After knitting, this fabric is bleached, dyed, printed,
Chapter Four: Data Analysis and Results 196
and finished as per the requirements of the customer. Finally, the fabric is cut and
In the process of knitted garment manufacturing, there are many factors that can
affect the TFP of PKGI. Chapter three presents a detailed discussion about variables,
which can affect the TFP of PKGI. After in-depth discussions, the following seven
variables have been selected (see for more details Section 3.4) to measure their
Since there are numerous dissimilarities between vertical and horizontal firms, it
has been decided to carry out analysis for vertical and horizontal firms separately.
Chapter Four: Data Analysis and Results 197
Table 4.11
Correlation matrix among seven independent variables (horizontal firms)
Total Factor Sale Share (%) Share (%) Share (%) U.S.A Average Number
Productivity Value of Labour of of Fashion Market FOB of
(Million Expenses Financial Garments Share Price in Stitching
U.S. $) in Total Expenses in Total (%) in U.S. $ Machines
Cost in Total Production Total Installed
Cost Exports
Total Factor Pearson 1 -0.072 -.650(**) 0.084 -0.174 -0.191 0.082 0.003
Productivity Correlation
Sale Value Pearson -0.072 1 -0.106 -0.02 -0.312 -0.191 0.038 .542(*)
(Million Correlation
U.S. $)
Sig. (2- 0.791 0.696 0.94 0.239 0.478 0.889 0.03
tailed)
Share (%) of Pearson -.650(**) -0.106 1 0.305 0.469 0.171 0.132 -0.113
Labour Correlation
Expenses in
Total Cost
Sig. (2- 0.006 0.696 0.251 0.067 0.526 0.627 0.678
tailed)
Share (%) of Pearson 0.084 -0.02 0.305 1 0.089 0.015 0.013 -0.107
Financial Correlation
Expenses in
Total Cost
Sig. (2- 0.757 0.94 0.251 0.744 0.956 0.962 0.694
tailed)
Share (%) of Pearson -0.174 -0.312 0.469 0.089 1 0.326 0.453 0.071
Fashion Correlation
Garments in
Total
Production
Sig. (2- 0.52 0.239 0.067 0.744 0.218 0.078 0.794
tailed)
U.S.A Pearson -0.191 -0.191 0.171 0.015 0.326 1 0.224 0.409
Market Correlation
Share (%) in
Total
Exports
Sig. (2- 0.478 0.478 0.526 0.956 0.218 0.405 0.115
tailed)
Average Pearson 0.082 0.038 0.132 0.013 0.453 0.224 1 0.309
FOB Price Correlation
in U.S. $
Sig. (2- 0.762 0.889 0.627 0.962 0.078 0.405 0.244
tailed)
Number of Pearson 0.003 .542(*) -0.113 -0.107 0.071 0.409 0.309 1
Stitching Correlation
Machines
Installed
Sig. (2- 0.992 0.03 0.678 0.694 0.794 0.115 0.244
tailed)
Chapter Four: Data Analysis and Results 198
Table 4.12
Correlation matrix among seven independent variables (vertical firms)
Share Share Share (%) U.S.A Number
Sale (%) of (%) of of Fashion Market Average of
Value Labour Financial Garments Share FOB Stitching
Total Factor (Million Expenses Expenses in Total (%) in Price in Machines
Productivity U.S. $) in Total in Total Production Total U.S. $ Installed
Cost Cost Exports
Total Factor Pearson
Productivity Correlation 1.000 0.081 -0.111 0.257 -0.217 -0.070 -0.025 0.070
Sig. (2-
tailed) 0.889 0.165 0.279 0.734 0.000 0.104 0.078
Number of
Stitching Pearson
Machines Correlation 0.070 0.847 0.152 -0.086 0.446 0.214 0.311 1.000
Installed
Sig. (2-
tailed) 0.700 0.000 0.400 0.636 0.009 0.231 0.078
Chapter Four: Data Analysis and Results 199
Table 4.11 indicates that in case of horizontal firms, there is a significant positive
association between (a) sale and number of stitching machines (r= .542) and (b) TFP and
share of labour expenses in total cost (r=-0.650) has a negative association with TFP.
Capacity has an obvious positive correlation with sale. This table further
demonstrates correlation between TFP and share of labour expenses in total cost
(r=-0.650). It shows that there is a negative and moderate correlation between TFP and
share of labour expenses in total cost of production. However, it looks that data is quite
collinearity among the variables and any strong correlation between TFP (DV) and seven
association between:
Above results support that there is a positive correlation between sale and
stitching capacity. Furthermore, it is apparent that fashion goods fetch high prices and
Tables 4.11 and 4.12 show that there is no significant correlation between TFP
and other independent variables. Only, in case of horizontal firms is there a significant
association (r=-6.50) between TFP and share of labour expenses in total cost of
production. Otherwise, there is no association between TFP and any other variable. This
Chapter Four: Data Analysis and Results 200
all shows that that data is quite independent. In the following pages, a regression will be
There are two broad categories of regression analysis; linear regression and curve
estimation. Linear relationship can gives a picture of relationship between one dependent
and one or more than one independent variable. Curve estimation is normally carried out
between two variables; one dependent and other independent. In this report, there are
seven independent and one dependent variable. It is also important to note that curve
variables. For example, a demand function exhibits the demand for a product as a
function of the unit price, and a cost function expresses total cost as a function of the
number of products manufactured. Academically, these functions are often called models.
In this report, curve estimation was carried out to obtain an exponential model
from two data points. The purpose was to find the equation of the line or exponential
curve passing through them. However, it quite common that that many data points that do
not lie on one line or exponential curve. To solve this problem many other techniques
were applied, for example, exponential curve, quadratic curve and many others to find
out closest to passing through all of the points. In this report, before applying linear
regression, curve estimation was carried out and it was found that for most appropriate
(OLS) be examined before doing a regression analysis (see Chapter Three for
There are three following methods of transformation: (a) logarithmic, (b) square
As per Siegel (2000), most common is the transformation of data with the help of
logarithms. Also, noting that according to Zar, dependent variables are transformed since
cases when there is unequal variability in the data, the inference will be unreliable. Too
much importance is given to the high-variability component of data and too little
importance to the more reliable low-variability component of data. Siegel further stated
that the use of advanced techniques of weighted regression analysis is also a way to
rebalance the importance of the observations. In an initial analysis, it was found that there
and as per recommendation of Siegel, TFP, dependent variable was transformed with the
help of logarithms. It was observed that transformation did not make a significant
difference in results. Based on this observation, it was decided to use data as such.
Chapter Four: Data Analysis and Results 202
4.6.1 Linearity and Data of Horizontal Firms. As discussed earlier, data should
have a linear relationship for a purposeful regression model. If there is no linearity in the
data, a regression model will not be useful. Scatterplots are one way to check the linearity
of the data. In the following pages, scatter plots will be developed to observe the
variables).
Figure 4.5
TFP and Share (%) of Labour Expenses in Total Cost (Horizontal Firms)
Chapter Four: Data Analysis and Results 203
Figure 4.6
TFP and Share (%) of Financial Expenses in Total Cost (Horizontal Firms)
Figure 4.7
TFP and Share (%) of Fashion Goods in Total Production (Horizontal Firms)
Chapter Four: Data Analysis and Results 204
Figure 4.8
TFP and U.S.A Market Share in Total Exports (Horizontal Firms)
Figure 4.9
TFP and Average FOB Price in U.S. $ (Horizontal Firms)
Chapter Four: Data Analysis and Results 205
Figure 4.10
TFP and Number of Stitching Machines (Horizontal Firms)
Figure 4.11
TFP and Sale Value in Million U.S. $ (Horizontal Firms)
Chapter Four: Data Analysis and Results 206
From Figure 4.5 to 4.11, it is obvious that there is a linear relationship between
TFP and seven independent factors. Nevertheless, Figure 4.10 shows that there is a
negligible linear relationship between TFP and number of stitching machines. It can be
assumed that in regression analysis TFP will not be dependent on number of stitching
with sale.
assumed that the relationship between variables is linear. In practice, this assumption can
virtually never be confirmed; fortunately, multiple regression procedures are not greatly
consistently look at bivariate scatter plots of the variables of interest. It is obvious in the
above scatter plots that there is a linear relationship between TFP and six independent
variables. Nevertheless, strength of relationship varies a lot, which is obvious from the
value of R2 Linear, which is given along with the scatter plot. In conclusion, it can be said
that linearity is the basic assumption for the regression analysis, which is being
4.6.2 Linearity and Data of Vertical Firms. In previous pages, there are seven
scatter plots, which tell the relationship between TFP (dependent variable) and seven
independent variables of horizontal firms. In the following pages, there are seven scatter
plots that have been developed by using TFP on X-axis and independent variables at Y-
axis. These scatter plots will be used to check the linearity of the data which is one major
Figure 4.12
TFP and Share% of Labour Expenses in Total Cost (Vertical Firms)
Figure 4.13
TFP and Share (%) of Financial Expenses in Total Cost (Vertical Firms)
Figure 4.14
Chapter Four: Data Analysis and Results 208
TFP and Share (%) of Fashion Goods in Total Production (Vertical Firms)
Figure 4.15
TFP and U.S.A Market Share in Total Exports (Vertical Firms)
Figure 4.16
Chapter Four: Data Analysis and Results 209
Figure 4.17
TFP and Number of Stitching Machines (Vertical Firms)
Figure 4.18
Chapter Four: Data Analysis and Results 210
regression model. If there is no linearity in the data, a regression model will not be useful.
Scatter plots are one way to check the linearity of the data. It is obvious from Figure 4.12
to 4.18 that the majority of the independent variables have a moderate relationship with
dependent variables (TFP). Based on all the above scatter plots, it is assumed that there is
4.6.3 Data Normality (Horizontal and Vertical Firms). The second assumption for
the regression analysis is that there should be normality in the data. As per Siegel (2000),
it is assumed in multiple regressions that the residuals (predicted minus observed values)
are distributed normally (i.e. follow the normal distribution). There are many ways to test
the normality. Most common is a histogram with normal curve. Pallant (2007) prefers
other statistical tools to test the data normality. Nevertheless, in the real world it is quite
Chapter Four: Data Analysis and Results 211
hard to have a data set able to meet the whole list of assumptions. Pallant proposes the
Kolomogrovo-Smirnov Test to check the data normality. This test was applied with the
Table 4.13
Test of normality of data (horizontal and vertical)
Types of Firm Kolmogorov-Smirnov(a)
Statistic Df Sig.
Sale Value (Million U.S. $) Horizontal Firms 0.222 16.000 0.034
Vertical Firms 0.238 33.000 0.000
Share (%) of Labour Expenses in Horizontal Firms 0.169 16.000 .200(*)
Total Cost Vertical Firms 0.067 33.000 .200(*)
Share (%) of Financial Expenses Horizontal Firms 0.132 16.000 .200(*)
in Total Cost Vertical Firms 0.187 33.000 0.005
Share (%) of Fashion Garments Horizontal Firms 0.431 16.000 0.000
in Total Production Vertical Firms 0.212 33.000 0.001
U.S.A Market Share (%) in Total Horizontal Firms 0.191 16.000 0.122
Exports Vertical Firms 0.258 33.000 0.000
Average FOB Price in U.S. $ Horizontal Firms 0.199 16.000 0.092
Vertical Firms 0.233 33.000 0.000
Number of Stitching Machines Horizontal Firms 0.260 16.000 0.005
Installed Vertical Firms 0.168 33.000 0.018
Smirnov test gives the p values. Significance of p value (less than 0.05) provides
statistical evidence from which to reject the null hypotheses, which claims that data is
normally distributed. It is apparent from Table 4.13 that data is a mix of normally
distributed values and not normally distributed values. As said by Elliot and Woodward,
assumptions of normality and linearity are rarely met in practice. It depends upon the
all this in mind, it was preferred to continue with the testing of next assumption, i.e. test
of data homogeneity.
means that the variability in scores for one variable is roughly the same as all values of
the other variable, which is related to normality. When normality is not met, variables are
not homoscedastic. As per Siegel (2000), if there is no normality in the data, it means that
data has unequal variance and is not homoscedastic. This assumption means that the
variance around the regression line is the same for all values of the predictor variable (X).
simplifies mathematical and computational treatment and may lead to good estimation
results (e.g. in data mining) even if the assumption is not true. Heteroscedasticity is
There are both graphical and statistical methods for evaluating homoscedasticity.
The graphical method is called a box plot. The statistical method is the Levene statistic,
which SPSS computes for the test of homogeneity of variances. There are many more
definitive.
variance). In this method, all independent variables are grouped and the homogeneity of
variance was checked. Tables 4.14, 4.15, 4.16, and 4.17 demonstrate that p value is less
Chapter Four: Data Analysis and Results 213
than 0.05, which shows that there is an enough statistical evidence to reject the
Table 4.14
Test of homogeneity of variances for horizontal firms
Levene
Statistic df1 df2 Sig.
Table 4.15
Robust Tests of equality of means for horizontal firms
Brown-
Forsythe 38.942 6 17.928 0.000
a Asymptotically F distributed.
Table 4.16
Test of homogeneity of variances for vertical firms
Levene
df1 df2 Sig.
Statistic
65.255 6 224 .000
Chapter Four: Data Analysis and Results 214
Table 4.17
Robust tests of equality of means for vertical firms
Statistic(a) df1 df2 Sig.
Welch 107.006 6 89.519 .000
a Asymptotically F distributed.
The above analysis found that the data do not fulfil the assumptions for regression
analysis. In all cases, the p value is less than 0.05, which shows that test is significant and
there is a sufficient evidence to reject the research hypothesis, i.e. data is homogeneous.
tested before applying regression analysis. It was found that apparently there is not a
Elliot and Woodward, Guthrie, Filliben and Heckert (2008) and Pallant, in practice it is
quite hard properly fulfil all assumptions, and violation of the required level of
assumption is quite common. At the same time, Elliot and Woodward, Guthrie et al., and
Garson (2008) wrote that one of the most significant assumptions of OLS
homoscedasticity means that the variance of residual error should be constant for all
Chapter Four: Data Analysis and Results 215
values of the independent(s). Garson concluded that presences of different error variance
at different ranges of their values will change the estimates of the regression coefficients.
In this situation, large standard errors for some ranges of the dependent and too small for
other ranges will occur and the power of significance tests will be reduced, which is to
Garson suggests that weighted least squares (WLS) regression compensates for
weighing process change the values of variables in such a way that values on the
less and those with small variances count more in estimating the regression coefficients.
Consequently, cases with greater weights contribute more to the fit of the regression line.
Resultantly, the estimated coefficients are usually very close to what they would be in
OLS regression, but under WLS regression, their standard errors are smaller.
Garson further stated that sometimes WLS regression is used to adjust fit to give
less weight to values, which are considered as outliers and less importance to points,
which are considered less reliable. There are a number of ways to give weight to make
Guthrie et al have also explained the treatment of weights. Guthrie et al. wrote
recommended to use the weighted least squares method to maximize the efficiency of
parameter estimation. This process would give less precisely measured points more
influence than they should have and would give highly precise points too little influence.
Guthrie et al. points out that weighted least squares regression does not say anything
Chapter Four: Data Analysis and Results 216
about the association with a particular type of function used to describe the relationship
between the process variables. It reflects the behaviour of the random errors in the model,
and it can be used with functions that are either linear or nonlinear in the parameters.
Applying weight to different values is quite complex. There are many ways and
techniques available in the literature to weight values. Guthrie et al. points out that the
size of the weight indicates the precision of the information contained in the associated
observation. For the provision of optimizing, the weighted fitting criterion to find the
observation to the final parameter estimates. Furthermore, it is significant to note that the
weight for each observation is given keeping the relationship with weights of the other
observations; so different sets of absolute weights can have identical effects, Guthrie et
al. concludes.
Guthrie et al. elaborated on the advantages of WLS methods, writing that WLS
method is an efficient method, particularly when there are small data sets. It provides
square has the ability to handle regression situations in which the data points are of
varying quality. If the standard deviation of the random errors in the data is not constant
across all levels of the explanatory variables, using weighted least squares with weights
that are inversely proportional to the variance at each level of the explanatory variables
yields the most precise parameter estimates possible, Guthrie et al. concluded.
It is a fact that WLS method has certain advantages, but at the same time, the
biggest disadvantage of weighted least squares is the assumption that the weights are
Chapter Four: Data Analysis and Results 217
known exactly. It is not possible in real applications. Estimated weights are often used.
Guthrie et al. commented on this, writing that it is difficult to assess the effect of such
estimated weights. It is a fact that small variations in the weights due to estimation do not
often affect a regression analysis or its interpretation. However, there are chances that
one might face very poor and unpredictable results. There are more chances of such
occurrence when the weights for extreme values of the predictor or explanatory variables
are estimated using only a few observations. Guthrie et al. warned that it is important to
remain aware of this potential problem, and to only use weighted least squares when the
Keeping all above discussion in mind, in the following pages regression analysis
will be carried out with the help of weighted least squares methods. In the following
pages, Weighted Least Squares Regression is used to answer the following research
questions:
dependent variable?
practices of horizontal and vertical firms. Based on that observation it was decided to
carry out the data analysis separately for horizontal and vertical firms. In the following
pages, regressions will be run separately for horizontal and vertical firms.
are those, which have only stitching facilities. In this study, there are only 16 firms,
which are called horizontal firms. Results of regression for horizontal firms are as under.
Chapter Four: Data Analysis and Results 218
Table 4.18
Table 4.19
ANOVA regression analysis (horizontal firms)
Sum of
Squares Df Mean Square F Sig.
Total .006 9
Chapter Four: Data Analysis and Results 219
Table 4.20
Coefficients regression analysis (horizontal firms)
Unstandardized Standardized
Coefficients Coefficients t Sig. Collinearity Statistics
Std.
B Error Beta Tolerance VIF
Share (%) of
Labour
-.015 .002 -1.401 -6.184 .001 .354 2.822
Expenses in
Total Cost
Share (%) of
Financial
.022 .006 .699 3.815 .009 .541 1.848
Expenses in
Total Cost
Share (%) of
Fashion
Garments in .002 .001 .564 2.632 .039 .396 2.524
Total
Production
The above three tables (Tables 4.18, 4.19, and 4.20) are the outcomes of the
regression run for the horizontal firms. There are a number of values given in the tables.
Table 4.18 is a summary of the regression and there three main values in this
the main outcome of the regression. As said by Pallant, R Square tells how much of the
variance in the dependent variable (TFP) is explained by the model (which includes the
seven independent variables). SPSS provided the ability to adopt a method of regression
analysis. There are five different methods listed. For this analysis, backward method has
Table 4.18 tells that R Square value is 0.891. Expressed as a percentage, this
means that this model which has seven independent variables explains 89.1% of the
variance in dependent variable (TFP). This is quite a respectable result since it covers
more than 89% variance in the dependent variable due to the seven independent
variables.
SPSS also provides an Adjusted R Square value in the output. Pallant suggests
that when a small sample is involved, the R Square value in the sample tends to be a
rather optimistic overestimation of the true value in the population. In such cases the
Adjusted R square statistic ‗corrects‘ this value to provide a better estimate of the true
population value. Table 4.18 gives an Adjusted R Square value, which is 0.836. It means
that 83.6% variance in TFP is explained by the seven independent variables. It shows that
even after selecting the adjusted value the explanation of TFP is quite high.
4.19. This tests the null hypothesis that multiple R in the population equals zero. Table
4.19, gives p value 0.005, which is less than α value (0.05). It means that there is
Table 4.20 tells which of the variables included in the model contributed to the
prediction of the dependent variable. This information is available in the output box
labelled Coefficients. There are standardised and un-standardised columns. Pallant states
standardised means that these values for each of the different variables have been
converted to the same scale so one can compare them. Pallant further states that when
they have to compare values given under the standardised column. During comparison,
Chapter Four: Data Analysis and Results 221
one has to ignore the negative sign. The highest value indicates highest contribution.
However, at the same time, a researcher has to see its significance value. Results will
only be significant if p value is less than 0.05. In Table 4.20, Share (%) of Labour
Expenses in Total Cost (Independent Variable) has the highest value (-1.401). It shows
that this variable has the highest contribution. With a p value of .001, it can be said that
Table 4.20 furthers tells about the other contributors, i.e. Share (%) of Financial
Expenses in Total Cost and Share (%) of Fashion Garments in Total Production. These
two factors have 0.699 and 0.564 standardized coefficients, respectively. Furthermore,
these factors also have p values (0.009 and 0.039 respectively) that are less than 0.05.
These values provide evidence that these two factors have a significant impact on TFP.
commonly used. Based on these values a regression equation has been made.
There are two values also appearing in Table 4.20: Tolerance and VIF (Variance
Inflation Factor). Tolerance value indicates how much of the variability of the
is calculating by using the formula 1-R2 for all variables. Pallant states that its small value
exists. Less than 0.1 values is an indicator of multicollinearity. In Table 4.20, there is no
value less than 0.1, so it means that data is independent and there is no chance of
multicollinearity.
dividing1with tolerance value. Its high value indicates the presence of multicollinearity.
Chapter Four: Data Analysis and Results 222
Table 4.20, it is less than 10, which means that VIF value also indicates that there is no
4.7.2 WLS Regression Equation (Horizontal Firms). Based on the B value under
the un- standardized column in Table 4.20, following regression equation has been made:
Where:
The regression coefficient explains the change in dependent variable, e.g. if there
is an increase of 1 in share of labour expenses in total cost firm its TFP will decrease by
1.015. It shows that increase in share of labour expenses in total cost firm will negatively
affect TFP of the firm. The above equation further explains that share of financial
expenses total cost has a positive impact on TFP. An increase of 1 on financial expenses
4.7.3 Weighted Least Squares Regression (Vertical Firms). Vertical firms are
those that have knitting, dyeing, and stitching facilities. In this study, there are only 33
vertical firms. Results of regression analysis for vertical firms are as under.
Chapter Four: Data Analysis and Results 223
Table 4.21
Regression analysis model summary (vertical firms)
Adjusted R Std. Error of the
Model R R Square Square Estimate
Table 4.22
ANOVA regression analysis (vertical firms)
Sum of
Mode Squares df Mean Square F Sig.
Total .369 16
Table 4.23
Coefficients regression analysis (vertical firms)
Std.
B Std. Error Beta Tolerance VIF B Error
Sale Value
(Million US $) .026 .008 .617 3.128 .012 .155 6.449
Share (%) of
Labour -.006 .004 -.168 -1.427 .187 .436 2.295
Expenses in
Total Cost
Share (%) of
Financial .032 .005 .815 6.389 .000 .371 2.695
Expenses in
Total Cost
Share (%) of
Fashion
Garments in -.005 .001 -.628 -5.408 .000 .447 2.235
Total
Production
USA Market
Share (%) in .002 .001 .201 1.248 .244 .232 4.318
Total Exports
Average FOB
Price in US $ .025 .021 .104 1.202 .260 .807 1.239
Number of
Stitching -.001 .000 -.431 -2.331 .045 .177 5.655
Machines
Installed
a Dependent Variable: Total Factor Productivity
b Weighted Least Squares Regression - Weighted by Standardized Residual
Chapter Four: Data Analysis and Results 225
The above three tables (Tables 4.21, 4.22, and 4.23) are the outcomes of the
regression run for the vertical firms. There are a number of values given in the tables.
Table 4.21 shows that the R Square value in this case is 0.946. This means that
this model, which has seven independent variables, explains 94.6 percent of the variance
in dependent variable (TFP). This is quite a respectable result since it covers more than
94% variance in the dependent variable due the seven independent variables.
Table 4.21 gives the Adjusted R Square value, which is 0.903. It means that
90.3% variance in TFP is explained by the seven independent variables. It shows that
even after selecting the adjusted value the explanation of TFP is quite high.
Table 4.22, labelled ANOVA. This tests the null hypothesis that multiple R in the
population equals zero. Table 4.22 gives p value 0.000, which is less than the α value
(0.05).
Table 4.23 tells which of the variables included in the model contributed to the
prediction of the dependent variable. The highest value indicates highest contribution.
Nevertheless, at the same time, one has to see its significance value. Results will be only
being significant if p value is less than 0.05. In Table 4.23, share of financial expenses
has the highest value (.815). Financial Expenses is the expenses which firms are liable to
pay banks against loans. It shows that share of finance in total cost has the highest
contribution. One has to consider test significance before reaching any conclusion. Table
4.23 shows that the above mentioned variable has p value 0.000, which is less than 0.05,
There are two values also appearing in table 4.23: Tolerance and VIF (Variance
Inflation Factor). There is no value less than 0.1 in the column of Tolerance and no value
more than 10 in the VIF column. It shows that there is no multicollinearity in the data.
4.7.4 WLS Regression Equation (Vertical Firms) Based on the B value under the
un- standardized column in Table 4.23, following regression equation has been made:
TFP =0.137 + 0.026 SV -0.006 SLE +0.032 SFE -.005SFG+0.002 USAM +0.025 FOB
-0.001 NSM
Where:
The regression coefficient explains the change in dependent variable, e.g. if there
is an increase of 1 in sale value of the firms its TFP will increase 1.026. It shows that
increase in sale will positively affect TFP of the firm. The above equation further
Chapter Four: Data Analysis and Results 227
explains that share of labour in total expenses and share of fashion garments in total
This chapter analysed data as per the research methodology described in chapter
three. Data related to total output and total input of PKGI (vertical and horizontal) and
181 major industries in Pakistan were collected, and the TFP was calculated with the help
more than1would be considered as high productivity and less than1as low productivity. It
was repeatedly observed from the results that the TFP of PKGI is low (less than one). It is
also less than the average TFP level for 181 manufacturing sectors within Pakistan. It was
also observed that the TFP of vertical firms is better than the TFP of PKGI at aggregate
levels. In contrast, the TFP of horizontal firms is slightly less than the TFP calculated at
aggregate levels. Nevertheless, the majority of horizontal firms have a TFP of more than
one, which means that the majority of horizontal firms performed better compared to
In the second part, the correlation between dependent and independent variables
was calculated. For this purpose, primary and secondary data were collected through a
survey of the industry and from the Federal Bureau of Pakistan. Correlation and
regression analysis were carried out separately for vertical and horizontal firms. Three
basic assumptions were checked before using the regression analysis. The transformation
Chapter Four: Data Analysis and Results 228
process was used to minimize the unequal variability in the data. Moreover, the most
the mean value of TFP of horizontal and vertical firms. Furthermore, it was also shown
that TFP of PKGI at aggregated level is not more than1 (see Table 4.4 to 4.11).
Correlation among independent variables was carried out separately for horizontal and
vertical firms and it was found that there is not a serious correlation among variables. It
shows that data is quite independent. It was also confirmed through regression and found
A statistical equation (model for prediction) is the outcome of the exercise. (For
more details see Section 4.6). This equation is based upon the regression analysis. As
discussed earlier, such an equation can be used to predict the dependent as well as the
independent variables. Such models, including this one, have many weaknesses. The
main weakness of the equation is that there are additional variables that can intervene or
mediate the function, referred to as intervening and mediating variables that are not taken
into account. It is assumed that taking into account all factors of production is nearly
impossible. For example, the technology level of the firm can influence the results, as
discussed in chapter two. Productivity has a direct and positive association with the level
of technology used by firms. Such factors can influence the TFP of the firm.
Furthermore, skill and education levels of the workers have a positive impact on the TFP,
It must be acknowledged that precise predictions based on this model are quite
difficult. However, this model can be used to predict the TFP of the knitted garment
Chapter Four: Data Analysis and Results 229
manufacturing firms to provide some idea of the factors influencing the TFP of the PKGI.
The main objective of regression was to answer the two questions posed in chapter one.
The first question was to identify the factor that has the highest contribution in the
variance of TFP. In the case of horizontal firms it was found that there are three factors
which have high value (in column of standardized values) but by looking at their
significance value, it was observed that only share of labour expenses in total cost has a
significant value (Standardized Beta= -1.401). In case of vertical firms, it was observed
that share of financial expenses has the highest contributor in TFP (Standardized Beta=
0.815).
The second question was to develop an equation based on regression that could be
used to predict the TFP. Two equations were developed, which explains the impact of
any change in the interdependent variables on TFP. Before running regression, normality,
linearity, and homogeneity were tested, and it was found that data partially fulfils the
assumptions. However, for better results, the WLS technique was used. This technique
improved the results and helped in developing a regression equation. In the data, it was
observed that some independent variables have significant relationships with dependent
variables.
In this analysis few tangible factors were taken into account. It is believed that
there are certain additional factors that are not included in this analysis can influence the
TFP of PKGI at aggregate and disaggregate levels. For example, missing factors include
technology level and worker‘s skill level, and both can strongly impact TFP. Data
covering intangible factors might also have a strong impact on the TFP.
Chapter Five: Conclusion and Recommendations 230
This report is the outcome of research conducted to measure the Total Factor
Productivity (TFP) level of Pakistan‘s Knitted Garment Industry (PKGI) and its
determinants. It was also part of the study to develop acceptable guidelines for the PKGI
background of production function and productivity, research methods, and finally data
analysis. This chapter will cover the whole study and will provide concluding thoughts.
In the following pages, there is a summary of the complete report and a guideline for the
industry.
PKGI is one of the major sectors of the Pakistan Textile Industry (PTI). In 2004-
2005, it had 11.36% share of total exports from Pakistan, which was the highest share
among all value added products exported from Pakistan. Its growth rate in exports is
20.80%, which is the second highest among all products being exported from Pakistan
(see Table 1.3). The Pakistan Textile Industry (PTI) as a whole has a significant share in
the economy of Pakistan. In 2004-2005, it had a 62.1% share in exports and 38% of the
labour force of Pakistan was employed in the textile sector. The clothing sector provides
a huge employment opportunity for skilled, semiskilled, and unskilled workers. This
sector adds value in the products being exported from Pakistan (see Table 1.1).
As discussed in chapter one, the PTI has shown a growth rate of 9.6% per annum
in exports from 1971 to 2005. That is quite satisfactory when compared to exports from
other sectors of Pakistan. However, when export performance of PTI is compared with
Chapter Five: Conclusion and Recommendations 231
other countries it becomes obvious that many countries from South Asia have had
stronger growth than Pakistan in the international textile and clothing trade. Although
Pakistan is the fourth largest country in cotton growing, with more than 113 Million
spindles, the performance of PTI is comparatively lower than countries like Bangladesh
and Sri Lanka, which do not even have natural resources such as cotton. Furthermore,
these countries do not have strong spinning and wet processing industries. They import
all raw materials and then export it after adding value (see Table 1.2).
two. Better productivity is one of the preferred methods for improved performance. It
was concluded that there is a strong link between productivity, performance, and
factors affecting productivity. For this study, the TFP approach was selected since this is
one of the most advocated approaches in the literature and many studies have been
The PKGI is a relatively new industry. In 1972, it held only 0.54% share of the
total exports, while in 2004-5, it held more than 11.36% share of the total exports. This
industry is primarily export oriented. Few firms do local business. The export data
Chapter Five: Conclusion and Recommendations 232
revealed that real activities of this sector started after 1995. The period for time series
data from 1995 to 2005 is limited. Furthermore, only export related data were available
The industry survey and secondary data show that the PKGI is comprised of 900
firms. Major business is in three main cities of Pakistan, and more than 90% of business
is with 218 firms (24.22% firms). Based on this observation, it was preferred to consider
these 218 firms as the population for the survey and to discount the remainder of the
There are three major departments involved in the knitted garment manufacturing
process: (a) knitting, (b) wet processing (dyeing and finishing), and (c) stitching. There
are two types of firms: (a) vertical and (b) horizontal. In a vertical set up, firms have in
house knitting, wet processing, and stitching facilities. In a horizontal set up, firms have
only a stitching facility. Such firms outsource for knitting and wet processing.
was observed from the literature that for best results the firms should be as similar as
possible. Keeping in view the prerequisite of the research methodology, it was decided to
assess the TFP and its determinants of both sectors separately. However, results of both
sectors were compared in order to evaluate which sector functions most effectively. A
mathematical model was used to calculate the TFP, for which the Sumanth Model was
The TFP model selected requires total tangible input and output data. Different
firms were visited and it was found that a vast majority of the firms are private limited,
means that they are not listed on the stock exchange and do not publish their financial
Chapter Five: Conclusion and Recommendations 233
reports. Furthermore, not all firms that export more than 80% of their goods are required
to submit financial reports to the government. In addition to that, they refused to provide
survey of the firms. However, for unknown reasons this survey is not conducted every
year. The last survey was conducted in 2001. The government office was approached by
this researcher, who collected data on 49 randomly selected firms. Out of the 49 firms, 33
firms have a vertical set up and 16 firms have a horizontal set up. These data sufficed to
measure the TFP of the PKGI at aggregate and disaggregate levels. Based on a thorough
survey of the literature and feedback from the industry through a sample survey, the
following seven factors were selected to create a structured questionnaire (see Section
3.5).
industries based on random sampling and secondary data from the Pakistan Federal
Bureau of Statistics. SPSS software was selected for analysis purposes based on its ease
As discussed in chapter one, one of the core objectives of the current study was to
calculate the TFP of the PKGI. This measure has to be established to compare its ranking
output to input, but it is difficult to comment on this ratio without comparing it to other
ratios. For this purpose, data from 18,061 firms, drawn from 181 different sectors of the
Pakistani manufacturing industry, were collected in the same time. It was their TFP that
The TFP of the PKGI was also calculated at aggregate (both vertical and
horizontal) and disaggregate (of vertical and horizontal firms separately) levels. Analysis
showed that the average TFP of 18,061 firms from 181 different sectors is 1.47, while the
TFP of the PKGI at the aggregate level is only 0.976. The TFP of vertical and horizontal
firms is 0.976 and 0.975, respectively. In comparison to other sectors of Pakistan, the
TFP of the PKGI is over 50% less, which clearly indicates that this sector is performing
As discussed in chapter one, nearly 62% of shares in exports from Pakistan are
related to the textile industry, although the textile sector has a low TFP. Such a scenario
indicates that major contributors of Pakistan‘s economy have a low TFP, which indicates
low performance of these sectors that would ultimately affect the prosperity of Pakistan.
It is also evident from the results that there is not a significant difference between
the TFP at aggregate and disaggregate levels. At aggregate levels the TFP is 0.976, while
at disaggregate levels it is 0.976 and 0.975 for vertical and horizontal firms, respectively.
This shows that the TFP is low compared to other industries (see Table 4.4).
Chapter Five: Conclusion and Recommendations 235
It was assumed that horizontal firms would have a better TFP, but results
it becomes clear that there is a significant difference in skewness values. For vertical
firms it is 1.028, while for horizontal firms it is -1.45. This means that the majority of
vertical firms have a TFP of less than 1, and the majority of horizontal firms have a TFP
of more than 1. As a whole, horizontal firms performed better than vertical firms did.
This suggests that outsourcing can improve productivity. From the above analysis one
can extrapolate the following results (for more details see Table 4.4):
PKGI at aggregate and disaggregate level with TFP of 18061 industries from 81 sectors
of Pakistan manufacturing sector. Table 4.4 shows that TFP of PKGI is 0.976, whereas
The TFP of the PKGI is less than 1. If input and output values are equal then, as
per Sumanth‘s (1990) model, TFP will be 1. It means that firm has not gained anything
and at the same time has not lost anything. For this research, ―1‖ was taken as a
benchmarking value. More than1means the TFP is high and less than1means the TFP is
low. In addition, if the TFP is plus 1, the firm‘s output is more than its input —in other
words the firm is earning a profit. In the case of a TFP of less than 1, the firm‘s output is
less than its input, meaning the firm is taking a loss. Table 4.4 shows that PKGI at
aggregate and disaggregate level have TFP less than 1, which means that at both levels
PKGI had faced losses and did have low TFP. As said earlier1was the benchmark. In
both cases Table 4.4 shows that TFP is less than 1, which supports the statement that
PKGI at both levels has low TFP. Nevertheless, the majority of the horizontal firms have
Chapter Five: Conclusion and Recommendations 236
a TFP of more than 1, while the majority of vertical firms have a TFP of less than1
(Mean of horizontal firms is less than the median and mean of vertical firms is greater
than medium). Based on this observation it can be said that horizontal firms performed
better. This might be due to the outsourcing of two out of three processes involved in
One of the objectives of the research was to test the hypothesis mentioned in
Ho Ha
µTFP of vertical firms = µ TFP of horizontal firms µTFP of vertical firms ≠ µ TFP of horizontal firms
µ TFP of horizontal firms is less or equal to 1 µTFP of horizontal firms is greater than 1
µTFP of vertical firms is less or equal to 1 µTFP of vertical firms is greater than 1
µTFP of PKGI at aggregate level is less or equal to 1 µ TFP of PKGI at aggregate level is greater than 1
carried out with the help of SPSS (see Table 4.5, 4.6). The following results have been
vertical firms. It shows that although there is a big difference in the business pattern,
there is no difference in outcome. From the survey it was found that a majority of the
mills are vertically integrated. Generally, people are of the view that vertical integration
pays more as compared to horizontal firms. However, this analysis shows that there is no
difference in TFP of horizontal and vertical firms (see Table 4.5 and 4.6). Nevertheless,
Chapter Five: Conclusion and Recommendations 237
median of horizontal firm is higher (1.01) than vertical firms (0.95). The median indicates
the number of firms in the upper and lower half. In the case of horizontal firms, the
median is greater than mean (Table 4.4) more than 50% mills have TFP greater than
mean value (0.975), whereas in case of vertical firms it is less than the mean value
(0.976). These figures demonstrates that there is no significant difference in mean values,
but median indicates that majority of the horizontal firms performed better than vertical
firms.
input and output. If output (numerator) is equal to input (denominator), the result will be
1. This result indicates that firms consumed equal to their revenue (production). In
accounting terms, one can say that these firms do not earn profit. Nevertheless, if the
value is less than 1, it means that firm has consumed more and yield is less since the
denominator is higher than numerator. Keeping that in mind, null hypotheses were
developed. These hypotheses state that TFP of PKGI is less or equal to 1. Results show
that TFP of horizontal, vertical, and at aggregated level is not greater than one. This was
tested with the help of a one-sample t test (see Tables 4.7, 4.8, 4.9. 4.10).
The above discussion supports the common observation of industry leaders that
PKGI is in crisis. Based on this observation, it is recommended that the solution does not
lie in having horizontal or vertical firms; rather, there is a need to make this sector
The second objective of this study was to identify determinants affecting the TFP.
As discussed earlier, seven different determinants were selected before conducting the
survey. Primary data covering this data were collected and the correlation between the
TFP and selected determinants was assessed with the help of SPSS software (see Section
4.5).
The correlation between the TFP and different factors is markedly different for
vertical and horizontal firms because there are significant differences between vertical
and horizontal firms, particularly in business practices, firm size, and infrastructure. In
the case of horizontal firms, there is a correlation between TFP and share of labour
expenses in total cost of production (see Table 4.11), Pearson Correlation -.650. It was
also observed no other variable has a significant correlation with TFP. Additionally, in
cases of vertical firms, Table 4.12 depicts that no independent variable has a significant
correlation with the dependent variable, TFP. All these demonstrate that data does not
retain multicollinearity.
As mentioned in chapter one, one of the objectives of this study is to identify the
independent variables that have high contribution to the variance of TFP. It is presumed
that the answer to this question will provide a direction for the PKGI. Based on this result
PKGI can plan to focus on this point, and it is expected that such focus will help improve
TFP of firms, which is the ultimate goal. Nevertheless, highly contributing factors are
Chapter Five: Conclusion and Recommendations 239
different for horizontal and vertical firms. In the current study, both will be discussed
separately.
In the case of horizontal firms, the share of labour expenses in total cost of
production has the highest standardised coefficient Beta (-1.401), with t value -6.184 and
p value 0.001 (see Table 4.20). It shows that labour expenses in total cost of production
are the highest contributing factor. As discussed in chapter one, garment manufacturing is
a labour intensive industry. Although there is a lot of automation a lot of people are still
employed to make garments. Keeping this in mind, it is suggested that industry should
focus on minimising the share of labour expenses in total cost and trying to have more
Vertical firms have a different highest contributing factor. It is clear from Table
4.23 that share of financial expenses in total cost of production has the highest
contributing factor in TFP variance. It has standardised coefficient Beta (.815), with t
value 6.389 and p value 0.000. This is evidence that horizontal and vertical firms have
different pattern. As discussed in Section 1.5, vertical firms have bigger setups when
Due to bigger setup, such firms always need more capital to run the business. For
this purpose, they rely on loans from banks. As per the policy of the government of
Pakistan, exporters are provided loans nearly at the 50% interest rate as compared to
general market rates. This is called export-refinance loan. Firms can increase their
working capital by having this loan at discounted rates and ultimately such loan increase
the financial strength of the firms, which is highly required for a smooth business. Based
on the above discussion it can be concluded that for horizontal firms, labour expenses
Chapter Five: Conclusion and Recommendations 240
share in cost of production is the highest contributor. Horizontal firms should try to
minimise the labour expense and rely on automated machines, where there is less need
for workers. However, for vertical, relying on the bank is the single factor that would
have a reasonable and significant contribution to a better TFP. Based on this result, it is
recommended that vertical firms should rely more on banks for credit because it is
5.8 Regression Equation and Determinants Affecting TFP of PKGI (Horizontal and
Vertical Firms)
model for the prediction of TFP. For this purpose, a regression was run and following
two different models were developed for horizontal and vertical firms separately (Section
3.10).
TFP =0.137 + 0.026 SV -0.006 SLE +0.032 SFE -.005SFG+0.002 USAM +0.025 FOB
-0.001 NSM
Where:
share of fashion goods, have a significant impact on the TFP of the PKGI. Nevertheless,
in the case of vertical firms, there are seven independent variables that can be used for the
the variance in the dependent variable (TFP) with the help of an independent variable. In
addition, R2 value tells how much of the variance in the dependent variable (TFP) is
explained by the model. Adjusted R2 values are 0.836 and 0.903 for horizontal and
vertical firms, respectively. These values indicate that in case of horizontal firms 83.6%,
variance in TFP can be explained by the independent variables and it is 90.3% for vertical
firms. One can use a regression equation for the prediction of dependent or independent
variables (Siegel, 2000). Pallant described this usage of regression and states, writing that
multiple regression is not just one technique but a family of techniques that can be used
to explore the relationship between one continuous dependent variable and a number of
the basis of multiple regression is correlation. However, this gives results that are more
There are two different models mentioned above for horizontal and vertical firms.
However, it is obvious that different factors have different contribution and it is natural.
This contribution is explained by the coefficient values given in the column under the
heading of B along with standard error values (Table 4.20 and 4.23) and above two
models (regression equations) have been developed based in these tables. Following
In the case of vertical firms, there is significant contribution of sale value in the
prediction of TFP. The equation indicates that if there is an increase of 1 in sale value of
the vertical firms, its TFP will increase 1.026. It shows that an increase in sale will
positively affect TFP of the firm. This clearly depicts that vertical firms should endeavour
to increase their sale. Nevertheless, sale value has no significant strength to explain the
TFP in the case of horizontal firms. As discussed in Section 1.5, that vertical firms are
compared to horizontal firms. Usually, their fixed expenditures are quite high. Obviously,
higher fixed expenditure demand that firms should have high sale volume with a higher
contribution margin to cover the fixed expenditure and contribute to better TFP. This
model supports the general notion that big firms have to focus to increase their sale since
Both equations show a negative relationship between TFP and share of labour in
total expenses. However, their coefficient is different in both models i.e. it is -0.015 and
-0.006 for horizontal and vertical firm respectively. It is commonly known that garment
Chapter Five: Conclusion and Recommendations 243
between 10% to 15% (see Table 4.3). It is obvious from the model that an increase of 1 in
labour expenses can decrease 1.015 and 1.006 TFP of the horizontal and vertical firms. It
suggests that PKGI as a whole should move towards automation and modernisation of the
stitching process instead of relying on manual work. One example is the auto clipper,
which clips the hanging thread after the completion of the stitching process. It is a
These equations show that in both cases, the Share of Financial Expenses (SFE) in
the total cost has a positive relationship with the TFP. This model explains that with the
increase of 1in the share of financial expenses, the TFP will increase by 1.22 and 1.032
for horizontal and vertical firms, respectively. The share of financial expenses has the
highest coefficient value. This shows that the financial cost in the total cost of production
has a significant impact on the TFP. Based on the result it can be suggested to PKGI to
take more help from the scheme provided by the government of Pakistan of discounted
interest rates, rather than relying on any other expensive source of capital.
It is also obvious from the regression equation that share of fashion garments in
total production has a positive impact on TFP of horizontal and negative on vertical
firms. However, its coefficient is different (.002 and -0.005). It appears true that fashion
garments are of more value than simple garments. A higher fashion garment share in total
production means a high value addition. The regression model depicts the link between
fashion garments and the TFP. According to this model, vertical firms should produce
less fashion products to attain better productivity. There is a need of more sophisticated
Chapter Five: Conclusion and Recommendations 244
machines and highly skilled labour for fashion goods production. Nevertheless, fashion
The share of U.S. market in total production has a positive impact on TFP of
vertical firms, whereas it has no relationship in the case of horizontal firms. The U.S. is
the biggest market of clothing in the world. It imports in huge quantities, whereas
Europe, which is second after the U.S., imports small quantities. Based on this pattern,
one can presume that U.S. customers take quantity discounts from suppliers. Based on
this model it can be suggested that vertical firms should not look markets other than USA
FOB price, means the offered price of supplier in U.S. $ free on board. This
model suggests that in the case of horizontal firms there is no relationship; however,
vertical firms have an association with FOB price. The model depicts that an increase of
1 in FOB price can increase 1.025 TFP of vertical firms. Based on this discussion,
The PKGI is not in a healthy state, as is clear from the figures discussed in
chapter four. Almost 50% of the firms have faced a loss during the period of 2000–2001.
In addition, those firms who earned a profit had a profit percentage less than the generally
applicable rate of interest paid by the banks. It is widely expected that many firms will
face bankruptcy if there are no changes in the current situation, meaning a dramatic
improvement in the TFP. Based on the outcome of this research, the following
horizontal firms performed better than the vertical firms (see Tables 4.4). Based
on this test, it is recommended that there should be independent units for knitting,
dyeing, and stitching. In the same company such departments should work as
strategic business units or cost centres. Every department should enjoy full liberty
2. The clothing industry is a labour intensive industry. Labour expenses are near
10% of the total expenses (see Table 4.3). This research has proved that share of
labour expenses in total cost has a negative correlation with TFP with horizontal
and vertical firms (see Tables 4.11 and 4.12). Based on these results, it is
where less labour is required— for example, automatic and high-speed machines,
hanger system in stitching halls, laser cutting machines, automatic laying systems,
etc. It is expected that less share of labour expenses in total production will lead to
better TFP.
3. Regression analysis provides evidence that firms relying on borrowing loans from
banks have higher TFP (see Tables 4.20 and 4.23). Pakistan provides funds to
exporters at discounted rates. This model suggests that both horizontal and
vertical firms should have more loans from banks to cover their expenses rather
than relying on market credit. Market credit is costly compared to bank charges;
particularly in the modern era when the Pakistani government offers export re-
4. In the case of vertical firms, the amount of sale contributes significantly to the
vertical firms that they should focus on increasing their sales. Nevertheless, TFP
of horizontal firms do not have any direct and positive relationship with sales.
5. Data (see Table 4.3) shows that firms produce a mix of simple and fashion goods.
Table 4.20 and 4.23 show that increasing the share of fashion goods in production
has negative impact for vertical firms and positive impact on horizontal firms.
fashion goods. Whereas, vertical firms prefer to more basic garments. This
supports the problem associated with PKGI (Section 1.4 and 1.5), that the
goods quantities are small and these can be properly managed in small mills. But
6. Table 4.23 suggests that vertical firms should focus on markets U.S. for better
TFP. This table shows that there is a positive correlation between TFP and U.S.
market share in the case of vertical firms. The U.S. is the biggest clothing
consumer in the world. However, at the same time, they do not offer a good price
as compared to Europe. European buyers purchase short runs but they offer a
good price. Based on this observation, it is suggested that vertical firms should
not change their focus from the U.S. to Europe, which is the second biggest
Chapter Five: Conclusion and Recommendations 247
importer in the world. This is mainly due to the high volumes required by the
There are a number of variables, which can substantially contribute to the TFP of
any firm or industry, as is the case with the PKGI. Data collection of all determinants of
the PKGI was not possible. Data related to seven determinants were collected through a
survey and from the government. There are many more influencing factors that might
have a significant impact on the TFP — for example, management style, workers‘
knowledge, skill level, and many more. Initially an attempt was made to collect such
information with the help of a structured questionnaire. However, during the pilot survey,
it was noted that people are reluctant to adequately provide such information and, in
some cases, do not have such data as workers‘ education level, etc.
As mentioned, the PKGI is exempt from filing accounts statements and annual
income tax reports. Since virtually every firm is a private limited firm that does not have
public shares, they are not bound to publish their accounts annually. Consequently, this
researcher opted to use financial data from 2000-2001 collected by the Pakistani Ministry
of Industries, and data covering seven production variables collected through a survey for
the measurement of the TFP. It was hoped this would allow the identification of factors
affecting the TFP of the PKGI. It was found during analysis that there should be
additional factors included in the analysis since the seven determinants used were
The Total Productivity model takes all tangible output and input to measure the
TFP. It is plausible that the production system of a firm is highly productive, but financial
costs or earnings on capital invested in other firms might alter its TFP. Keeping this in
mind, it is suggested that there should be another study, which would focus only on the
production process. Such a study would reveal a more accurate picture of the TFP of the
firms.
style, workers‘ skill level, working environment, government policies, etc. It is suggested
that another study should be conducted in which additional factors would be included to
morale. It will do that, but the real reason you need an improvement process is to increase
profits‖.
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Appendix 1:
Appendix 2
2 Faisal A 0.81 1.44 1.78 16.40 4.28 50.00 10.00 3.50 300
3 Lahore 0.99 3.93 3.97 13.56 4.35 75.00 100.00 4.00 400
4 Karachi 0.98 4.60 4.69 9.09 0.56 75.00 95.00 3.50 175
5 Karachi 1.05 2.05 1.95 3.86 2.33 40.00 90.00 3.50 225
6 Faisal A 0.93 0.68 0.73 4.72 6.62 25.00 50.00 3.50 200
7 Lahore 0.76 2.52 3.32 7.26 1.66 50.00 90.00 3.50 200
8 Lahore 0.95 0.55 0.58 9.87 2.16 50.00 50.00 3.50 125
9 Karachi 1.19 6.47 5.44 16.98 3.49 25.00 90.00 3.50 450
10 Lahore 0.94 1.48 1.57 6.50 0.50 0.00 100.00 3.00 125
11 Faisal A 1.47 0.81 0.55 11.66 13.14 25.00 50.00 4.50 200
12 Lahore 1.22 9.42 7.72 7.47 1.65 50.00 98.00 4.50 400
13 Karachi 1.02 4.70 4.61 0.67 9.41 50.00 70.00 3.50 500
14 Karachi 1.05 2.05 1.95 3.86 2.33 50.00 80.00 4.50 250
15 Lahore 0.90 1.90 2.11 13.82 8.60 50.00 90.00 4.50 250
16 Karachi 0.88 8.73 9.92 14.08 0.52 25.00 55.00 4.00 600
17 Lahore 1.05 13.18 12.55 8.82 4.80 75.00 90.00 4.00 600
18 Lahore 0.86 1.24 1.44 6.83 10.83 25.00 95.00 3.25 100
19 Karachi 1.11 0.84 0.76 5.59 3.32 25.00 40.00 3.50 200
20 Lahore 0.92 3.52 3.83 11.43 2.80 90.00 100.00 6.00 200
21 Lahore 0.93 26.83 28.85 10.39 2.44 75.00 95.00 4.50 750
23 Lahore 0.93 9.78 10.52 10.78 4.76 75.00 70.00 4.50 400
24 Lahore 0.98 0.12 0.12 22.96 2.51 25.00 100.00 3.50 280
25 Lahore 0.90 3.12 3.47 12.61 8.01 90.00 95.00 6.50 400
26 Karachi 0.94 9.47 10.07 13.01 3.16 75.00 80.00 6.00 500
27 Lahore 1.01 6.17 6.11 11.23 3.20 75.00 90.00 5.50 400
28 Karachi 0.96 1.85 1.93 6.60 1.53 50.00 80.00 3.50 400
29 Lahore 1.07 2.08 1.94 1.77 0.16 50.00 60.00 4.00 200
30 Lahore 1.08 1.77 1.64 9.17 0.96 50.00 80.00 6.25 150
31 Karachi 0.86 1.73 2.01 9.07 3.57 50.00 90.00 3.50 150
32 Lahore 1.05 21.33 20.31 5.60 2.43 90.00 100.00 5.50 780
33 Lahore 0.72 2.05 2.85 11.71 0.34 75.00 95.00 6.50 400
Appendices 269
Appendix 3
S. No. -----
Dear Sir
Many thanks in advance for your cooperation. The purpose of this survey is to establish links
between the productivity of the firms and other factors, like, firm location, size, and market and
marketing methodology etc. We assure you that all information will be kept confidential and will
only be used for academic purpose.
Yours truly,
Mushtaq Mangat
Appendices 270
Part One
Company Information
Company Name
Address
Contacts
Ph
Mobiles
Fax
E mail
Web site
Year of establishment
Part #02
Operational capacity
Appendices 271
Q# 01
Part #02
Operational capacity
Q# 01
Q#02
Local
EU, U.S.A,
Japan
%
Korea,
Taiwan,
China
%
Q#03
%
What are your production types and their ratios?
S# Product Type Share Remarks
1 High fashion
2 Fashion
3 Basic
Appendices 272
Q# 04
1 On salary Employees
2 On piece rate
3 On daily basis
Q# 05
1 Chief Executive
2 GM Production
3 Knitting master
4 Dyeing manager
5 Printing master
6 Stitching head
7 Head PPC
8 Head Merchandiser
9 HR manager
Appendices 273
Q# 06
Which one is your major market and also let us know the share of different markets. Where
Q# 07
$ FOB: ----------
Q#08
How many buyers are you dealing with at a time and what was the share of direct and through
buying office sales in the last year?
Number of buyers
Number of orders
Direct marketing
abroad
Local
Any other
Appendices 274
Q#09
Q#10
Q#11
Q#12
Do you have any formal training system for the following people?
Descriptions Yes/No
Managers
Supervisors
Workers
Q#13
Please let us know the involvement of your directors in the daily functioning.
1-Very High
2- High
3- Normal
4- No involvement