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A comparative analysis of Japanese firm productivity: Solow residual and Malmquist productivity index



Author(s)

Masaru Ichihashi, Hidemichi Fujii

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DOI:10.17265/1537-1506/2009.06.003

Graduate School for International Development and Cooperation, Hiroshima University, Higashi-Hiroshima 739-8529, Japan

For some time, two major kinds of Total Factor Productivity (TFP) have existed independently of each other: the Solow residual and the Malmquist Productivity Index (MPI). The Solow residual was introduced in macro economic growth models, and the MPI has been used in micro economics and management studies. As both indices were developed independently, few studies utilize both together and compare the results. This paper uses the same data to compare the two productivity indices by setting to determine the economic implications of combining the two indices. We discovered that we could decompose TFP with each aspect of the Solow residual and MPI. We could then interpret their relationship in the business cycle. Our results indicated that the frontier shift in MPI of Japanese firms often occurred when the Solow residual increased, meaning that improving productivity with the Solow residual could be generated by a firm that could shift new production frontiers.

Total Factor Productivity; Solow residual; data envelopment analysis; Malmquist productivity index; Japanese manufacturing firms