Total Factor Productivity Measurements: Theoretical and Empirical Analysis of Manufacturing Industry in Japan and Malaysia

Total Factor Productivity (TFP), a productivity measure which considers ALL factors of production, provides a more reliable analytical framework for the most empirical research on productivity. A production function postulates a clear relationship between vectors of maximum producible output versus a vector of production factors ( input). Prior analyses of TFP changes - using either parametric or non-parametric approaches have identified the change in TFP as the change in output controlling for input levels; i.e. the vertical shift of production function. In this comparative study, both parametric, i.e. Cobb-Douglas and Tornqvist Index, and non-parametric, i.e. Data Envelopment Analysis, or DEA - Malmquist Index, will be used to analyse and compare the TFP of the manufacturing industries in Japan and Malaysia; at the respective country's 3-digit level of industrial classifications; over the period of 1981 to 2006. Unlike the parametric approach which assumes that firms are technically efficient, the non-parametric approach takes a more relaxed perspective which assumes otherwise; and permits TFP to be decomposed into technological change and technical efficiency change. We will also see how Pure Technical Efficiency and Scale Efficiency; with competition within the manufacturing industry can influence Manufacturing TFP between the two countries throughout this period. Based on this, policy suggestions will be formulated with the assumption to increase the TFP for both countries.