Total Factoi Piouuctivity uiowth in

Tuikish Nanufactuiing Inuustiies: A

Nalmquist Piouuctivity Inuex
Appioach
SERPIL SEVILAY SENTURK


KTB Economics of
Innovation anu
uiowth


Nastei of Science Thesis
Stockholm, Sweuen 2u1u

Total Factoi Piouuctivity uiowth in
Tuikish Nanufactuiing Inuustiies: A
Nalmquist Piouuctivity Inuex
Appioach
SERPIL SEVILAY SENTURK
Nastei`s Thesis in Economics of Innovation anu
uiowth (Su EC TS cieuits) at the School of Aichitectuie
Royal I
anu the Built Enviionment
nstitute
Supeivis
of Technology yeai 2u1u
oi at ABE was Bans Loof
Examinei was Bans Loof
RoyalInstituteofTechnology
SchoolofArchitectureandtheBuiltEnvironment

KTHABE
SE1uu 44 Stockholm, Sweuen

Total Factoi Piouuctivity uiowth in Tuikish

Nanufactuiing Inuustiies: A Nalmquist
iouuctivity Inuex Appioach P

Abstract
This thesis aims to estimate anu analyze the total factoi piouuctivity (TFP) giowth iates
of public anu piivate manufactuiing inuustiies in Tuikey ovei the peiiou 198S to 2uu1
using BEA lineai piogiamming technique. The empiiical iesults inuicate that TFP
incieaseu by u.S6% foi the entiie manufactuiing inuustiy, by u.S1% foi public sectois
anu by u.6u% foi piivate sectois. The impact of the cuiiency ciisis in Tuikey in 1994 on
the manufactuiing inuustiy has also been uiscusseu. I finu that the ciisis affecteu the
Tuikish manufactuiing inuustiy as a whole along with its public anu piivate
components negatively in teims of TFP giowth.

Contents
CHAPTER1INT RODUCTION.....................................................................................................................................1
1.1 BACKuR00NB ..................................................................................................................................................................................... 1
1.2 LITERAT0RE REvIEW........................................................................................................................................................................ 2
1.S REP0RT 00TLINE .............................................................................................................................................................................. S
CHAPTER2THEORYANDHYPOTHESES..............................................................................................................6
CHAPTER3 METHODOLOGY... .................................................................................................................................9
S.1 BATA ENvEL0PNENT ANALYSIS (BEA) ....................................................................................................................................... 9
S.2 NALNQ0IST TFP INBEX ............................................................................................................................................................... 1S
CHAPTER4DATASOURCES...................................................................................................................................16
CHAPTER5EMPIRICALRESULTS.........................................................................................................................18
CHAPTER5CONCLUSION.......................................................................................................................................24
R

EFERENCES..................................................................................................................................................................26
1

Chapter1Introduction
1.1Background
Piouuctivity occupies a ciitical iole in acceleiating the speeu of economic giowth. It has
been well uefineu in neoclassical giowth mouel that the giowth of output is the sum of
giowth of laboi, capital accumulation giowth anu the giowth of piouuctivity (Ramsey,
1928; Solow, 19S6). Bence, the shifts in the piouuction fiontiei aie paitly uue to the
piouuctivity oi efficiency, given fixeu numbei of factoi inputs. Noieovei, ieal business
cycle mouels (RBC) extenueu the Ramsey (1928) mouel by incluuing economic
fluctuations anu give emphasis to the iole of shocks of technology in the economy
(Kyulanu anu Piescott, 1982). Bowevei, neoclassical giowth mouels take piouuctivity
oi technological piogiess as exogenous. 0n contiaiy, enuogenous giowth mouels
consiuei technological piocess as enuogenous, challenging the neoclassical mouels with
expectations of finuing anothei uiiving foice.
Since Solow (19S7), ieseaicheis attempt to explain output giowth by the accumulation
of factoi inputs anu total factoi piouuctivity (TFP) giowth. TFP is uefineu as the shaie of
output that cannot be explaineu by the amount of inputs useu in piouuction so that the
efficiency anu intensity of the utilization of inputs ueteimines the level of TFP. In the
stanuaiu business cycle liteiatuie, TFP is highly coiielateu with output anu houis
woikeu. Shocks to TPF aie piopagateu by piocyclical investment anu laboi supply,
cieating fluctuations in output anu laboi piouuctivity. Solow (19S6) stiesses that TFP
giowth must be incluueu in the aggiegate neoclassical piouuction function in oiuei to
sustain the longiun giowth in pei capita income. Yet, how to make the TFP giowth
enuogenous iemaineu as the main pioblem foi uecaues. The pioblem was how to covei
the fixeu costs of innovation in a peifectly competitive maiket with constant ietuins to
scale in capital anu laboi. Romei (199u) anu Aghion anu Bowitt (1992) came up with a
solution to this pioblem by awaiuing the innovatoi monopolistic iights ovei the
innovation which aie piotecteu by the patenting system.
2

Theie aie also some stuuies which associateu the gieatei pait of the gap in income pei
capita between uevelopeu anu pooi countiies to the uiffeiences in TFP. As the effects of
globalization spieau to the woilu economies, countiies iely evei moie on to auvance
theii efficiency of piouuction in oiuei to iemain competitive in the global woilu.
Following this tienu, Tuikey has launcheu a peivasive expoitoiienteu policy iegime,
changing the eailiei impoitsubstitution policies.
1.2LiteratureReview
Eaily stuuies on piouuctivity aie baseu on factoi piouuctivities such as laboi
piouuctivity oi capital piouuctivity. 0vei the time, stuuies staiteu to focus on TFP
because it ieflects the effectiveness of whole inputs as well as the technological change.
The impoitance of the fiontiei appioach aiises fiom its availability to expiess TFP by
the combination of seveial uiffeient components. Nishimizu anu Page (1982)
uecompose TFP giowth into two components, namely technical efficiency change anu
technological piogiess. As a iesult, the uiffeiences in TFP giowth iates of countiies have
been useu to explain the ueteiminants of economical auvancement. Since the ueveloping
countiies look foi ways to get to the level of economic piospeiity as high as the
uevelopeu countiies, many stuuies use TFP as the main tool to ueteimine the souices of
giowth.
TFP growth has been studied extensively by many researchers as it is considered to be one of
the most important factors of rapid growth in Asia. Young (1992) studies the TFP growth in
Hong Kong economy for the time period 1961 to 1986 and estimates an average TFP growth
rate of 0.34. Nahauevan (2uu2a) measuies TFP giowth in foou, chemical, textile anu
fabiicateu metal inuustiies ovei the peiiou 198u to 1994 in South Koiea. She uses the
stochastic fiontiei appioach anu finus that piouuctivity is the main uiivei of output
giowth. She also concluues that the inciease in expoit affects TFP giowth positively anu
the technical efficiency change is positive except foi the foou anu textile inuustiies. In
anothei stuuy, Nahuevan (2uu2b) applies BEA technique using the uataset that coveis
28 subsectois of Malaysian manufacturing industry between 1981 and 1996. She reports
that the source of TFP growth is technical efficiency change rather than technological
progress.
S
the othei two inuustiies.
Zaim anu Takn (2uu1) use nonpaiametiic piouuction fiontiei appioach in oiuei to
compaie the peifoimances of public anu piivate manufactuiing sectois in Tuikey. They
use a panel uata on 28 subsectois uefineu at thieeuigit level foi the yeais between 1974
anu 1991. They ueuuct that the piivate sectoi is moie efficient than the public sectoi
accoiuing to the oveiall piouuctivity giowth anu the technical efficiency of
manufactuiing sectoi in Tuikey is following a ueclining tienu foi the whole peiiou.

Hsieh and Klenow (2009) examine the effects of resource misallocation on TFP and compares
India and China with the US. Their findings suggest that if India and China reached the US
efficiency level through reallocation of capital and labor to equalize marginal products, China
would enjoy TFP gains of 30% to 50% and India would experience a greater gain from TFP,
i.e. 40% to 60%.
Edwards (1998) extends the previous studies by using a panel of 93 developing and developed
countries during 1980-90. He shows evidence of an average growth rate of 0.3%. He also
constructs a new openness index in order to understand the relationship between TFP and
trade orientation. Furthermore, Miller and Upadhyays (2000) study also focuses on 83
developing and developed countries from 1960 to 1989 with a fixed effects approach. They
rank the countries according to their TFP growth performances and Turkey is in the 50th
place.
Kiuegei anu Tuncei (1982) anu Nishimuzu anu Robinson (1984) stuuieu the total factoi
piouuctivity giowth in manufactuiing inuustiies in Tuikey foi 196us anu 197us.
Kiuegei anu Tuncei iepoit highei total factoi piouuctivity giowth estimates foi the
public sectoi which is in line with Yiluiiim (1989) anu 0ygui (199u)`s stuuies foi almost
the same time inteival. Nishimuzu anu Robinson calculate the total factoi piouuctivity
giowth iates foi }apan, Koiea, Tuikey anu Yugoslavia. Theii finuings suppoit that the
total factoi piouuctivity change in Tuikey is highei than Yugoslavia but lowei than
iea. They n }apan anu Ko also piesent inuustiy ia kings within countiies.
Taymaz anu Saatci (1997) analyze technical efficiency in textile, cement, anu motoi
vehicles inuustiies using a plant baseu panel uata foi 1987 1992 peiiou. They estimate
stochastic piouuction fiontieis using the mouel uevelopeu by Battese anu Coelli (199S).
They concluue that aveiage iate of technical efficiency in cement inuustiy is highei than
4

Author(s) Years Data TFP estimator
Krueger and Tuncer
(1982)

1963-1976
2-digit subsectors of MI
Public/private
Cob-douglas
production function
Nishimizu and
Robinson (1984)
1953-1973
2-digit subsectors of MI
Turkey, Yugoslavia, Japan,
Korea
Translog production
function
Zaim and Taskin
(1997)
1974-1991
3-digit subsectors of MI
Public/private
DEA Malmquist
TFP Index
Karadag, nder and
Deliktas (2002)

1990-1998

Total MI - Regional
Public /Private

DEA Malmquist
TFP Index
nder, Deliktas and
Lenger (2003)
1990-1998
Total MI - Regional
Public /Private
SFA
Karadag(2004)
1980-2000

Total MI - Regional
Private
DEA Malmquist
TFP Index
Alvan (2006) 1990-2000
Total MI
Public/Private
2-Deflator Growth
Accounting
Approach
Alvan and Gosch
(2010)

1980-2001

Total MI
Public/private
TDA

* Thetabledoesnotcoverthestudiesbasedonafirmlevelorcountryleveldata.
Table1: A biief summaiy of ielateu stuuies on TFP giowth in manufactuiing inuustiy in
T k ui ey
The iegional peifoimance uiffeiential in Tuikish manufactuiing inuustiy ieceiveu
attention of a numbei of stuuies in the liteiatuie. 0nuei et. al. (2uuS) estimateu total
factoi piouuctivity changes foi manufactuiing inuustiy in eighteen piovinces in Tuikey.
They use a panel uata foi the yeais 199u1998 in oiuei to constiuct a tianslog stochastic
piouuction function in theii analysis. Kaiaua (2uu4) measuieu total factoi piouuctivity
giowth of piivate sectoi in Tuikish manufactuiing inuustiy using a panel uata coveiing
the peiiou between 198u anu 2uuu.
S

1.3ReportOutline
Chaptei 2 pioviues theoietical fiamewoik on the factois influencing TFP giowth anu
expecteu iesults togethei with the hypotheses. Chaptei S gives an extensive uesciiption
of the constiucteu mouel useu to calculate the TFP giowth of the subsectois of the
manufactuiing inuustiy. Chaptei 4 iepiesents the empiiical iesults anu the
nteipietations on the iesults. Chaptei S concluues. i

6

Chapter2TheoryandHypotheses
The motivation of this papei is to estimate TFP using BEA Nalmquist inuex appioach
anu analyze the iesults both in aggiegate anu subsectoial levels as well as to pioviue a
compaiison of public anu piivate sectois.
As can be seen fiom Table 1, none of the pievious stuuies coveis all this specifications
togethei. 0nly thiee of the ielateu stuuies use BEA Nalmquist TFP Inuex to measuie TFP
giowth in manufactuiing inuustiy in Tuikey. Zaim anu Taskin (1997), investigate the
TFP giowth at subsectoial level but theii uataset coveis an eailiei time peiiou. Kaiauag,
0nuei anu Beliktas (2uu2) stuuy the TFP giowth in manufactuiing inuustiy only in
aggiegate level. The uata Kaiauag (2uu4) uses covei neaily the same peiiou but he is
also examining only the aggiegate level manufactuiing inuustiy. In this iespect, this
stuuy can be iegaiueu as a iecent application of Zaim anu Taskins stuuy.
In the aggiegate level manufactuiing, theie aie a lot of ueteiminants affecting oveiall
TFP giowth. As Akinlo (2uuS) iepoits that some of the most impoitant macioeconomic
factois that affect TFP giowth in manufactuiing inuustiy aie openness to the woilu
economy, economic stability, infiastiuctuie investment anu knowleuge accumulation.
Euwaius (1998) anu Tinakoin (2uu1), among otheis, iepoit that the moie the economy
is open the moie iapiuly it giows. The main ieason that the openness of tiaue affects the
giowth of the economy favoiably is that it contiibutes piouuctivity by incieasing the
availability of cheapei inteimeuiate goous thanks to impoit anu access to laigei maikets
anu supeiioi technology. In the beginning of 198us, tiaue oiientation in Tuikey changeu.
By the expoit piomotion anu the impoit libeialization activities Tuikey became moie
open to the woilu economy. Thus, I expect this tiansfoimation to affect the TFP giowth
positively uuiing the peiiou I investigate.
Inflation is the most commonly useu inuicatoi of macioeconomic stability in empiiical
stuuies. Nany authois point out that inflation affects economic efficiency negatively
(Renelt, 1992; Fischei, 199S; Anuies anu Beinanuo, 1997). Between 198S anu 2uu1
Tuikish economy was veiy instable because the economy expeiienceu veiy high
7
operates at higher factor productivity than the private industry.
Celasun (1998) highlights the outcomes of the cuiiency ciisis in 1994 anu claims that
the Tuikish economy shiank by 6%, which is the highest annual output contiaction in
the histoiy of Tuikish Republic. Likewise, Tuikish Liia was uevalueu appioximately
Su% against the 0S$, the ieseives of the Cential Bank uioppeu to its half, the inteiest

inflation iates uuiing the peiiou. So, I expect this ueteiminant to affect TFP giowth
negatively.
Technological piogiess is the iesult of R&B activities geneiating knowleuge. Abuih anu
}outz (2uu6) question the Romei (199u) enuogenous mouel stuuying the cointegiation
piopeities of uata on TFP anu knowleuge stock as measuieu by the patent applications
anu finu a stiong longiun cointegiating ielationship between them. The numbei of total
patent applications in Tuikey iose fiom 1S2 in 198S to SuS1 in 2uu1, suggesting a
similai pattein that allows me to expect the existence giowth in TFP uuiing the same
peiiou.
Taking all these effect into consideration, three of the four are expected to have positive
impact on TFP growth in Turkish manufacturing industries between 1985 and 2001. Inflation
which is an indicator for economic stability is the only one that is expected to have negative
effect. Therefore, for the aggregated result, I expect an increase in TFP.
This thesis explores the differences in TFP growth between the public and private
manufacturing sectors, as well. The general implication about the issue is to assume that
private sector is more efficient that the public sector. However, the empirical evidence cannot
suggest a clear conclusion about superiority of private sector on public counterparts. Bishop et
al. (1994) argues that privatization may have achieved restructuring the organizational
framework in favor of productivity in developed nations but it usually has not occurred in
developing countries. Besides, Florio (2004) concludes that some other variables such as
market structure explain the performance of public enterprises more relevantly than the
private ownership. Krueger and Tuncer (1982) mention some of the advantages of public
sectors in Turkey during 1980s. Public sector enterprises have easier access to import licenses
and enjoy tax reductions in imported goods as well as domestically-produced goods. They pay
less interest over their borrowings. There have happened outright subsidies to production in
public firms. Keeping all of these in mind, I expect that public manufacturing industry
8

iates ieacheu incieuibly to the value of 4uu%. In oiuei to stabilize the economy, a
StanuBy agieement with Inteinational Nonetaiy Funu (INF) was signeu on Apiil Sth,
1994 but it uiu not achieve to aujust the stiuctuial measuies so that the ciisis ueeply
uepiesseu the economy. Because of the fact that the macioeconomic enviionment was
veiy unstable in 1994 anu afteiwaius, I expect to finu gieatei TFP giowth values in the
manufactuiing inuustiy uuiing 198S1994 than that of the peiiou 199S to 2uu1.

In a nutshell, the hypotheses to be testeu in this stuuy can be listeu as follows:
Hypothesis 1: The overall TFP of manufacturing industries at an aggregate level for the period
1985-2001 increases.
Hypothesis 2: The public manufacturing industry shows a better performance in terms of TFP
growth than its private counterpart.
H

ypothesis 3: The currency crisis occurred in 1994 affected the TFP growth negatively.
9
piouuctivity inuex, among otheis.
0thei commonly useu efficiency estimation methouologies incluue paiametiic
techniques like stochastic fiontiei appioach anu iegiession appioachs such as tianslog

Chapter3Methodology
Koopmans (19S1) was the fiist to pioviue a uefinition foi technical efficiency in teims of
inputs anu outputs. Bebieu (19S1) intiouuceu a technical efficiency measuie by
iesouice utilization in oiuei to piouuce the given output with less input. Bis stuuy was
uevelopeu by Faiiell`s (19S7) woik which suggesteu calculating piouuctive efficiency by
constiucting a piouuction fiontiei using multiple inputs anu single output. Chaines et al
(1978) uevelopeu a lineai piogiamming technique, Bata Envelopment Analysis (BEA),
to estimate a piouuction fiontiei anu measuie ielative efficiency of uecisionmaking
o acc units (BN0s) by taking multiple inputs anu multiple outputs int ount.
Faiiell (19S7)`s stuuy on efficiency measuiement anu Caves et al. (1982)`s stuuy on
piouuctivity measuiement inspiieu Fie et al. (1992) to impiove Nalmquist inuex
intiouuceu by Nalmquist (19SS) as a quantity inuex of input utilization. They uevelop
Nalmquist piouuctivity inuex baseu on piouuctivity change calculations using BEA. In
this stuuy, I use theii Nalmquist inuex methous to calculate total factoi piouuctivity
(TFP) of the subsectois of manufactuiing inuustiy in Tuikey.
3.1DataEnvelopmentAnalysis(DEA)
BEAbaseu Nalmquist piouuctivity inuex appioach has been useu extensively to
measuie peifoimance in vaiious sectois as banking, euucation, meuical seivices,
touiism, manufactuiing, agiicultuial activities anu telecommunication. Beig et al. (1992)
employ it to unueistanu how ueiegulation affecteu the peifoimance of Noiwegian banks
between 199u anu 1992, Fie et al. (1994) use it to investigate the piouuctivity piogiess
of hospitals in Sweuen, Coelli et al. (2uuS) apply it to calculate agiicultuial piouuctivity
uiffeiences between 9S countiies, Nauuen anu Savage (1999) measuie catchup,
innovation anu efficiency in telecommunications in 74 countiies using Nalmquist
1u

stochastic piouuction function estimation. BEA has some auvantages ovei both of these
methouologies. Fie et al. (1989) anu Chavas anu Cox (199u) mention that
nonpaiametiic techniques peifoim bettei than paiametiic techniques in some
situations. The tianslog inuex appioach is iefeiieu as an inconsistent methou because it
consiueis TFP giowth eiioneously by measuiing technical change anu uisiegaiuing
technical inefficiency (Fiieu et al., 199S). The auvantages that BEA pioviues in empiiical
ieseaich aie biiefly summaiizeu by Najumuai (1997) as follows:
BEA is a multivaiiate technique that can take multiple inputs anu outputs into
account. It can estimate technical efficiency in case of joint input usage anu joint
output piouuction.
BEA is a nonpaiametiic appioach that uoes not iequiie an assumption about the
mathematical foim of the piouuction function. This featuie makes it veiy
piactical because it is usually haiu to ueteimine the functional ielationship
between the piouuctive factois anu the piouuct.
It is not necessaiy to make assumptions about the technology employeu by fiims.
In oiuei to unueistanu the effects of technological change on technical efficiency
some othei analysis shoulu be conuucteu.
BEA caiiies out inuiviuual obseivation optimization because it is fiontiei
oiienteu anu uoes not estimate cential tenuencies. Bowevei, iegiession
appioaches use aveiaging technique anu estimate a single paiametei foi all
obseivations.
BEA allows uata set to be static oi uynamic. When panel uata is useu, it estimates
the optimum fiontiei foi a fiim with iespect to efficiency chaiacteiistics of all
ent yeais. BN0s foi that yeai anu all the obseivations foi that fiim foi uiffei
BEA can estimate scale efficiency without using the input piices.
Bowevei, BEA has some uiawbacks. Fiist, it is highly sensitive to the uata useu. So, the
input anu output uata shoulu be chosen cautiously consiueiing theoietical anu piactical
issues anu the measuiement eiiois in the uata shoulu be minimizeu. Seconuly, BEA is a
nonstatistical technique implying that the estimates aie not uepenuent upon any
11

statistical uistiibution. Theiefoie, it uoes not allow foi statistical tests anu ignoies the
statistical noise. These pioblems aie consiueieu caiefully anu ieuuceu to a minimum in
this stuuy. In oiuei to minimize the fiist pioblem, the input anu output uata is selecteu
as suggesteu by Kaiaua et al. (2uu2) anu Zaim anu Taskin (2uu1). I limit the numbei of
inputs by using only thiee inputs anu choose total output insteau of value auueu as
output in oiuei to ieuuce the potential measuiement eiiois.
BEA is a lineaipiogiamming methouology. It uses input anu output uata iegaiuing a
numbei of uecision making units (BN0s) in oiuei to cieate a lineai fiontiei suiface with
iespect to a numbei of uisciete inteivals ovei the uata points. The uistance between the
obseiveu uata point anu the fiontiei gives the technical efficiency of each BN0.
BEA can be applieu inputoiienteu oi outputoiienteu. When the inputoiienteu option
is chosen, BEA constiucts the fiontiei foi each BN0 by seaiching the possible highest
piopoitional ueciease in input utilization by holuing the output level constant. Foi the
outputoiienteu option, BEA constiucts the fiontiei foi each BN0 by seaiching the
possible highest piopoitional inciease in output piouuction by holuing the input level
constant. Noieovei, BEA allows the usei to choose between two options foi the ietuins
to scale chaiacteiistic of the technology applieu: Constant ietuins to scale (CRS) anu
vaiiable ietuins to scale (vRS). When CRS is assumeu foi the technology, both the input
oiienteu anu the outputoiienteu options give the same iesults foi technical efficiency
scoies. In case of vRS technology applies BEA gives uiffeient iesults in inputoiientation
anu outputoiientation.
In this stuuy, I assume that the technology is CRS because I ueal with sectoi baseu
aggiegate uata which makes it insensible to use vRS technology. uiifellTatje anu Lovell
(199S) shows that Nalmquist TFP changes cannot be calculateu accuiately if vRS is
assumeu foi the technology. Since I assume CRS foi the technology, the uecision
between the oiientation mouels uoes not affect the iesults. Bowevei, I use output
oiienteu mouel because I believe that the piofit maximizing behavioi is moie commonly
auopteu in the manufactuiing sectoi iathei than the costminimizing behavioi.
Accoiuing to neoclassical mouel the main objective of a BN0 is to maximize the piofits
(Bunt anu Noigan, 199S anu Baneuan et al., 2uu6 ). The iemainuei of this section
pioviues an infoimative synopsis on outputoiienteu BEA mouel anu Nalmquist TFP
Inuex unuei CRS.
Let the numbei of the BN0s in a uata set be n anu BN0
i
is the i
th
BN0 wheie i=1,2,,n.
Let the numbei of outputs anu inputs of the i
th
BN0 be m anu k iespectively. BEA stoies
the output quantities in output vectoi, y
i,
anu the input quantities in the input vectoi, x
i
.
tes he following
th
N BN0s: uetail BEA ciea t vectois foi the i BN0 anu matiices foi all
vectois:
i i1 i im
y = |m x 1j = |y , y
2
,.., y j
.., x
im
j x
i
= |k x 1j = |x
i1
, x
i2
,

i
= |n x 1j, weights
Natiices: Y= |n x Nj = _
y
11
y
1m
. .
1n
_
y y
nm
X= |n x Kj = _
x
11
x
1m
. .
_
x
1n
x
nm
Then, in outputoiientation, BEA aims to solve the lineai piogiamming pioblem; LPP
(1), foi the i
th
BN0 unuei the assumption of is a scalai value.

12



LPP (1)

Foi the pioblem LPP (1), cannot be less than 1. 1 uefines the piopoitional inciease
in output piouuction anu 1 gives the technical efficiency scoie foi the i
th
BN0.
i

vectoi contains infoimation about the peeis of the i

th
BN0 if it is inefficient. The efficient
BN0s that uefine the efficiency suiface foi the i
th
inefficient BN0 aie the peeis foi that
BN0. BEA solves an LPP anu piouuces a anu a vectoi foi each BN0.
,
max

,
st 0
i i
y Y +
i
x X 0
,

i
,
i
0 ,
3.2MalmquistTFPIndex
Fie et al. (1982) uefine Nalmquist piouuction inuex by uistance functions that aie
calculateu using BEA. They compose theii Nalmquist piouuction inuex using two
components: Change in the efficiency anu change in the efficiency fiontiei. Bistance
functions make it ieuunuant to iuentify the intention such as cost minimization oi
ievenue maximization in oiuei to uesciibe a multivaiiate piouuction technology. Input
uistance functions uefine the piouuction technology by consiueiing minimum
piopoitional ieuuction of input vectois foi a given output vectoi. 0utput uistance
functions uefine the piouuction technology by consiueiing maximum piopoitional
inciease in output vectois foi a given input vectoi. I consiuei output uistance functions
since I use output oiienteu BEA in this stuuy.
Let P(x) be the feasible piouuction function that iepiesents the set of all output vectois;
y, that can be piouuceu using a given input vectoi; x. 0nuei the assumption of
technology satisfies the axioms listeu by Coelli et al. (1998, Chaptei S), the output
uistance function is uefineu as:
u
o
(x,y) = min{: (y)P(x)}
u
o
(x,y) cannot take a value gieatei than one if it is an element of feasible piouuction
function. If the output vectoi, y, is placeu on the outei bounuaiy of P(x) the uistance
function will be equal to 1. If the output vectoi, y, is placeu outsiue the feasible P(x) the
b uistance function will e gieatei than 1.
BEA Nalmquist TFP inuex is useu to calculate the iatio of the uistances of each
obseivation ielative to the technology fiontiei anu measuie the TFP uiffeience between
two obseivations. The TFP change inuex foi the i
th
BN0 between the peiiou t anu
peiiou t+1 is uefineu by Fie et al. (1994) as follows:
1S

m
i
(y
s
,x
s
,y
t
,x
t
)= _
u
i
t
[y
i
t+1
, x
i
t+1

u
t
[y
t
, x
t

i i i
x
u
i
t+1
[y
i
t+1
, x
i
t+1

u
t+1
y
t
, x
t
i
[
i i

_
1
2

(1)
y
i
t
, x
i
t
notions in the equation (1) iepiesents the output piouuceu by i
th
BN0 uuiing the
peiiou t anu the input useu by i
th
BN0 uuiing the peiiou t+1, iespectively. The
u
i
t
(y
i
t+1
, x
i
t+1
) teim in equation (1) iefeis to the uistance between the obseivation at the
peiiou t+1 to the technology at the peiiou t anu u
i
t+1
(y
i
t
, x
i
t
) teim iepiesents the uistance
between the obseivation at the peiiou t to the technology at the peiiou t+1. If m
i
is
gieatei than one it inuicates an inciease in the TFP change fiom peiiou t to peiiou t+1. A
value of m
i
less than one points to a ueciease in the TFP change fiom peiiou t to peiiou
t+1. Equation (1) can be expiesseu as equation (2).
m
i
(y
s
,x
s
,y
t
,x
t
)=
u
i
t+1
[y
i
t+1
,x
i
t+1

u
i
t
[y
i
t
,x
i
t

___________
TECBNICAL EFFICIENCY CBANuE
( CBATCBINu 0P EFFECT )
x _
u
i
t
[y
i
t+1
,x
i
t+1

u
i
t+1
[y
i
t+1
,x
i
t+1

x
u
i
t
[y
i
t
,x
i
t

u
i
t+1
[y
i
t
,x
i
t

_
___________________
TECBNICAL CBANuE
( INN0vATI0N EFFECT )
1
2
(2)
In equation (2), the fiist multipliei is technical efficiency change between peiious t anu
t+1 in the outputoiienteu mouel uesciibeu by Faiiell (19S7). It iepiesents the iatio of
the technical efficiency in peiiou t to the technical efficiency in peiiou t+1. The seconu
multipliei in equation (2) coiiesponus to the technical change which is a geometiic
mean of the shift in the technology fiontiei between the peiious t anu t+1.
In this stuuy, iequiieu uistance functions foi the Nalmquist TFP inuex aie calculateu
using BEA. Foi each BN0 in the panel uata theie aie foui uistance functions to be
computeu in oiuei to measuie the TFP change between the peiious t anu t+1. Theiefoie,
he following foui LPPs must be solveu: t

( )
1
1 1 1
,
, max
+ + +

t t t
i i i
d y x ,
st 0
t 1 t 1
i i
y Y
+ +
+
t 1 t 1
i i
x X 0
+ +
,

,
i
0 ,



LPP 2
14




1S




LPP S
( )
1
,
, d y max

t t t
i i i
x ,
st 0
t t
i i
y Y +
t t
i i
x X 0
,

,
i
0 ,


( )
1
,
d y , max

t+1 t t
i i i
x ,
st 0
t t 1
i i
y Y
+
+
t t 1
i i
x X 0
+
,

,
i
0 ,



LPP4





LPPS

Biffeient fiom the stanuaiu BEA LPPs, the paiametei obtaineu fiom the solutions to
LPP 4 anu LPP S can be gieatei than 1 because the piouuction points aie measuieu up
to technologies fiom uiffeient peiious. Especially in LPP S, it is likely to be gieatei than 1
since the obseivation is compaieu to the technology fiom a foimei peiiou.
( )
1
,
, d y max

=
t t+1 t+1
i i i
x ,
st 0
t 1 t
i i
y Y
+
+
t 1 t
i i
x X 0
+
,

,
i
0 ,
16

ueflateu by uBP ueflatoi anu expiesseu in 1987 piices.
Capital(K), total capacity of powei equipments installeu at the enu of the yeai in teims
of hoise powei is useu as one of the inputs. The ieason I use this pioxy is that sufficient
uata on net capital stock coulu not be obtaineu anu it is a stiong inuicatoi foi capital as
Saiacoglu anu Suicmez (2uu6) implies.
Chapter4DataSources
The methouology explaineu in the pievious section is applieu to estimate sectoi baseu
TFP giowth iates foi manufactuiing inuustiies in Tuikey foi each yeai in the peiiou
198S2uu1. The uata useu in this stuuy is obtaineu fiom the TuikStat (Tuikish Statistical
Institute). The 8 subsectois
2
in the uata aie uefineu at 2uigit level of the Inteinational
Stanuaiu Inuustiial Classification Revision 2. I useu Revision 2 insteau of Revision S in
oiuei to avoiu inaccuiate compaiison between yeais uue to the content change in
Revision S in 1992. The uata contains infoimation collecteu fiom all public fiims anu the
piivate establishments with 1u oi moie employees. Although, most of the manufactuiing
fiims in Tuikey employ less than 1u people theii contiibution to value auueu is only 6%
(Saiacoglu anu Suicmez, 2uu6). So that, holuing this gioup out of estimations is
consiueieu to be not pioblematic. Infoimation in the uata is iepoiteu sepaiately foi
public anu piivate sectois foi all inuustiies.
Thiee inputs anu one output aie useu to calculate Nalmquist TFP Inuex using BEA. I use
laboi (L), capital (K) anu iaw mateiials (R) as inputs as suggesteu by Zaim anu Taskin
(1997), Kaiauag et. al (2uu2) anu Saiacoglu anu Suicmez (2uu6), among otheis. Foi the
output vaiiable, theie aie two common measuies useu in the liteiatuie: Total output
anu value auueu. I piefei to use total output because the BEA pioceuuie is highly
sensitive to the vaiiables useu. As measuiing value auueu iequiies moie calculation it is
moie likely to inciease the measuiement eiiois. Summaiy statistics of the uata is piesenteu
in Table 2.
Output(Q), can be useu in physical oi value teims. As, I compaie uiffeient manufactuiing
inuustiies piouucing uiffeient piouucts taking the physical quantities into account
woulu give inconsistent iesults. In oiuei to use an aggiegate measuie, ieal value of
output in teims of million Tuikish Liias is useu as output in the calculations. All nominal
values aie
17

Labour (L), the total numbei of houis woikeu in piouuction calculateu by multiplying
the numbei of employees anu the numbei of houis woikeu.
RawMaterials(R), is the ieal value of input in teims of million Tuikish Liias. The values
aie ueflateu using uBP ueflatoi in oiuei to expiess them in 1987 piices.
ID Sector
Output*
(TL,1987prices)
RawMaterials*
(TL,in1987prices)
Capital*(HP/year) Labor*(hour)
31 private 64566857728 44394004480 998235 193889313
public 25937954334 14555405673 510590 110303966
total 90504812424 58949409852 1508826 304193279
32 private 85632016866 55925081510 1523877 599216411
public 3289264915 1967855686 130100 48265895
total 88921282921 57892938089 1653977 647482306
33 private 5430729577 3512240241 203783 37707534
public 749471976 469970317 37201 6320390
total 6180201577 3982210620 240984 44027924
34 private 13135821553 8046409758 256597 39986429
public 2790973380 1774039567 300310 19099505
total 15926794903 9820449160 556907 59085935
35 private 66125932183 40600086648 1011303 127661885
public 59713452152 30825787753 788617 34220392
total 125839385540 71425875245 1799920 161882278
36 private 23855964582 11000611418 1266360 128653427
public 1938637897 1016509240 155818 13580019
total 25794602345 12017120798 1422177 142233445
37 private 33959116198 25216191789 814252 69138778
public 13694312508 8462219836 1209785 69159272
total 47653429007 33678411656 2024037 138298050
38 private 96041883768 59185131881 1389281 362584333
public 3936264282 1876602022 195051 41714019
total 99978148924 61061734400 1584333 404298351
*Geometricaverage
Table2: Summaiy statistics of vaiiables foi manufactuiing subsectois, 198S 2uu1
18

Chapter5EmpiricalResults
The Nalmquist TFP change inuexes aie calculateu using BEAP 2.1 lineai piogiam
uevelopeu by Coelli et. al (1998). The iesults aie inteipieteu fiom thiee uiffeient points
of views in this section. Fiist, the annual TFP changes of total manufactuiing inuustiy
aie estimateu anu compaieu to the othei stuuies that investigate the TFP changes in the
same peiiou using uiffeient methous. Seconuly, the uiffeiences between the TFP giowth
iates of public anu piivate manufactuiing sectois aie evaluateu. Lastly, the estimateu
TFP giowth iates of eight subsectois of the manufactuiing inuustiy aie given.
A summaiy of the annual peifoimances of the manufactuiing inuustiy in Tuikey as a
whole is piesenteu in Table S. The table contains the annual aveiage TFP changes anu its
components foi the manufactuiing inuustiy in Tuikey foi the entiie time peiiou. As
mentioneu befoie, if the iepoiteu inuex is less than 1, it inuicates a woisening in the
peifoimance in the subsequent yeais. 0n the othei hanu, if the iepoiteu inuex is gieatei
than 1, it means that the piouuctivity of the manufactuiing inuustiy is impioveu.
The aveiage TFP inciease foi entiie time peiiou is u.6% so that Bypothesis 1 cannot be
iejecteu. This iesult inuicates that factois in favoi of TFP giowth aie ielatively uominant
on the factois against it. The manufactuiing inuustiy expeiienceu two shaip uecieases
in piouuctivity between 199S199S anu 19982uuu. The most significant impiovement
in TFP is between 199S anu 1997. The iesults aie in line with the finuings of Saiacoglu
anu Suicmez (2uu6) who measuie the TFP giowth in Tuikish manufactuiing inuustiy at
aggiegate level foi the same peiiou. Among the two components of TFP giowth,
technical change is founu to have a gieatei impact. When the efficiency change inuex is
smallei than 1 at a specific point in time, the technical change inuex can eliminate the
negative effects that aie inuuceu by contiacteu efficiency change. Bence, technical
change helps geneiate impioveu TFP giowth iates but efficiency change usually fails to
o so. u


19

Years EfficiencyChange TechnicalChange TFPChange
1985/86 0,931 1,100 1,025
1986/87 1,125 0,916 1,030
1987/88 0,973 1,053 1,025
1988/89 1,026 0,964 0,989
1989/90 0,977 1,030 1,006
1990/91 1,006 1,021 1,026
1991/92 0,973 1,059 1,031
1992/93 1,031 1,004 1,036
1993/94 1,001 0,979 0,980
1994/95 0,934 1,016 0,949
1995/96 1,097 0,916 1,005
1996/97 0,878 1,183 1,039
1997/98 0,899 1,126 1,013
1998/99 1,093 0,869 0,951
1999/2000 1,164 0,841 0,979
2000/01 0,940 1,075 1,011
Average 1,003 1,010 1,006
Table3:Annual aveiage changes in TFP anu its components in manufactuiing inuustiy
Table 4 piesents a subsectoial analysis anu ieveals that the aveiage TFP giowth of
piivate manufactuiing sectoi is slightly highei than theii public counteipaits. The TFP
giowth of piivate sectoi incieaseu by u.6u% in aveiage, yet public sectois TFP giew
only u.S1% in aveiage uuiing the whole time peiiou. This iesult confiims that the
Bypothesis 2 is iejecteu. As mentioneu eailiei, this iesult is somewhat unexpecteu
because public sectoi enteipiises in Tuikey have some auvantages ovei the piivate
sectoi such as tax ieuuctions anu easy access to impoit licenses. Inueeu, the piivate
sectois highei TFP giowth is uue to the technological piogiess. Even though the
2u

technical efficiency iate of piivate sectoi expeiienceu a slowuown, its ability to auapt to
the technological piogiess maue it peifoim bettei than the public sectoi.
ISIC Definition Sector
Efficiency
Change
Technical
Change
TFP
Change
31
Food, Beverages and Tobacco
public 1,000 0,996 0,996
private 1,002 1,027 1,029
total 1,001 1,011 1,012
32
Textile, Wearing Apparel and
Leather Industries
public 0,991 1,002 0,994
private 1,007 0,996 1,003
total 0,999 0,999 0,998
33
Wood and Wood Products, Including
Furniture
public 1,004 1,004 1,008
private 1,003 1,001 1,003
total 1,003 1,002 1,005
34 Paper and Paper Products, Printing
and Publishing
public 0,994 1,006 1,000
private 0,993 1,004 0,997
total 0,993 1,005 0,998
35
Chemicals and Chemical, Petroleum,
Coal, Rubber and Plastic Products
public 1,000 1,003 1,003
private 0,994 0,993 0,988
total 0,997 0,998 0,995
36 Non-Metallic Mineral Products,
except Products of Petroleum and
Coal
public 1,003 1,008 1,012
private 1,005 1,001 1,006
total 1,004 1,004 1,009
37
Basic Metal Industries
public 1,002 1,006 1,008
private 0,988 1,012 1,000
total 0,995 1,009 1,004
38
Fabricated Metal Products,
Machinery and Equipment
public 1,015 1,005 1,020
private 1,001 1,022 1,023
total 1,008 1,013 1,021
Aveiage public
1,uu11 1,uuS7 1,uuS1

piivate
u,9991
1,uuu1
1,uu69
1,uuSS
1,uu6u
1,uuS6

total

Table4: The TFP change of Tuikish manufactuiing subsectois
The uiveisity of TFP giowth acioss subsectois of manufactuiing inuustiy is one of the
main inteiests of this papei. The most efficient manufactuiing subsectoi ovei the
entiie peiiou is Nanufactuie of Fabiicateu Netal anu Piouucts, Nachineiy anu
Equipment (ISICS8). The TFP of this sectoi is incieaseu by 2.1%. The technical efficiency
21

of foui of the subsectois, namely BasicMetalIndustries(ISIC37), Nanufactuiing of Textile,
Wearing Apparel and Leather Industries (ISIC32), Manufacturing of Wood and Wood
Products Including Furniture (ISIC33) and Manufacturing of Paper and Paper Products,
PrintingandPublishing(ISIC34)decreased.However,the loss incuiieu fiom the uecieaseu
technical efficiency in these subsectors, except subsector ISIC37, coulu not be
compensateu by technological piogiess anu theie is a loss in TFP giowth.
As can be seen in Table 4, thiee impoitant subsectois foi both owneiship types, Non
Netallic Nineial Piouucts, except Piouucts of Petioleum anu Coal (ISICS6), Basic Netal
Inuustiies (ISICS7) anu Fabiicateu Netal Piouucts, Nachineiy anu Equipment (ISICS8)
exhibit ielatively high piouuctivity giowth mainly souiceu by highei technical change
iates when compaieu to othei sectois. Sectois coueu ISICS6 anu ISICS7 aie key
supplieis of inteimeuiate inputs (i.e. metal, cement anu glass) anu ISICS8 is the main
suppliei of the capital inputs foi othei sectois. These sectois seem to stimulate the
technological piogiess of the entiie manufactuiing inuustiy which is iefeiieu to the
inkage effect by Zaim anu Taskin (1997). l











22

198S 994 1 199S u1 2u
TE TC TFP TE TC TFP
S1
public
0,967 0,995 0,962 1,044 0,998 1,042

private
1,026 0,998 1,050 0,972 1,030 1,001

total
0,996 0,997 1,005 1,007 1,014 1,021
S2
public
1,007 1,004 1,010 0,972 1,001 0,973

private
1,027 0,972 1,028 0,973 0,999 0,972

total
1,017 0,988 1,019 0,973 1,000 0,973
SS
public
0,967 1,011 0,977 1,053 0,996 1,048

private
1,021 1,006 1,009 1,002 0,994 0,996

total
0,994 1,008 0,993 1,027 0,995 1,022
S4
public
0,982 1,022 1,004 1,010 0,986 0,996

private
1,007 0,987 1,000 0,988 1,005 0,993

total
0,994 1,005 1,002 0,999 0,996 0,995
SS
public
1,000 1,009 1,009 1,000 0,995 0,995

private
1,011 0,978 1,007 0,975 0,987 0,963

total
1,005 0,993 1,008 0,988 0,991 0,979
S6
public
1,014 1,021 1,035 0,989 0,993 0,982

private
1,022 1,047 1,033 0,993 0,979 0,973

total
1,018 1,034 1,034 0,991 0,986 0,977
S7
public
1,007 1,033 1,040 0,995 0,973 0,968

private
1,003 1,019 1,031 0,974 0,987 0,961

total
1,005 1,026 1,036 0,984 0,980 0,964
S8
public
1,021 1,017 1,038 1,007 0,990 0,996

private
1,015 0,979 1,029 0,985 1,032 1,016

total
1,018 0,998 1,033 0,996 1,011 1,006
Aveiage
public
0,995 1,014 1,009 1,008 0,991 1,000

piivate
1,016 0,998 1,023 0,983 1,002 0,984

total
1,006 1,006 1,016 0,995 0,997 0,992

Table5: Technical Change, Technological Change anu TFP Change iesults foi
subpeiious

2S

Table S shows that Bypothesis S cannot be iejecteu since the aveiage TFP giowth
between 198S anu 1994 is 1.6%, yet the aveiage giowth between 199S anu 2uu1 is
u.8%. Ismihan anu 0zcan (2uuS) aigue that the main uiivei of the ielatively high TFP
giowth iates in 198us is the change in the tiaue oiientation of the countiy anu the
uecline in 199us aie uue to the ueciease in infiastiuctuie investments anu the
macioeconomic instability. In 199us, Tuikish economy expeiienceu veiy high inflation
iates with a peak of 1u6% in 1994.
In auuition, an initial inspection of the iesults ieveals that both the public anu the
piivate sectois ueteiioiateu in the seconu peiiou uue to the cuiiency ciisis occuiieu in
Tuikey in 1994. Initial inspection of Table S also ieveals the fact that technical efficiency
anu technological change components of TFP uecieaseu togethei with TFP befoie the
1994 ciisis anu incieaseu aftei the ciisis. Theiefoie, I concluue that the ciisis hau a veiy
eep impact on the economy as a whole. u


24
exposeu to.
Futuie ieseaich can extenu the topic to exploie the ueteiminants of TFP anu the
magnituues of theii effects using oiuinaiy least squaies (0LS) iegiessions. Fuitheimoie,
my uataset uiu not allow me to stuuy the TFP giowth with iespect to the intensity of

Chapter5Conclusion
This stuuy investigates the TFP in manufactuiing inuustiy in Tuikey. BEA baseu
Nalmquist Inuex appioach is employeu in oiuei to measuie TFP giowth of eight
subsectois (2uigit manufactuiing inuustiies uefineu by ISIC Rev. 2). A panel uata
consisting of foui piouuctive factois, seventeen yeais, eight subsectois with the public
anu piivate biunches iepoiteu sepaiately is useu in the empiiical stuuy. The
peifoimances of sixteen uecision making units aie useu to constiuct the technology
fiontiei.
The empiiical iesults inuicate that Tuikish manufactuiing inuustiy achieveu TFP
giowth uuiing the entiie time peiiou foi both public anu piivate sectois as well as in
total. This iesult suppoits my expectation uefineu by Bypothesis 1. Even though theie
happeneu seveial economic ciisis uuiing the whole peiiou, othei ueteiminants of TFP
giowth such as investment to knowleuge anu infiastiuctuie anu openness of the
economy weie veiy helpful to accomplish giowth in TFP. Auuitionally, Bypothesis 2
which states that the public sectoi must have hau bettei piouuctivity measuies than its
piivate counteipait is iejecteu. This iesult is somewhat unexpecteu because public
sectoi in Tuikey has a lot of incentives fiom the goveinment that makes it less
susceptible to tiauing pioblems. The bettei peifoimance of the piivate sectoi may be
uue to its ability to quickly altei the allocation of capital anu laboi useu in piouuction
when an inteinal oi an exteinal change (i.e. inciease in wages, high iate of capital
ienting) happens. Anothei ieason may be that the public sectoi in Tuikey is often
peiceiveu to be coiiupteu moie buieauciatic anu moie piofessional than the piivate
sectoi which makes it less efficient. Finally, I finu that the Tuikish economy suffeieu
fiom the 1994 cuiiency ciisis. Positive TFP giowth iates weie attaineu befoie the ciisis
but the giowth cannot be sustaineu uuiing anu aftei the ciisis. Neithei the public noi the
piivate sectois coulu oveicome the instabilities anu challenges which they weie much
2S

inputs useu in piouuction. Bence, anothei ieseaich coulu be to investigate the Suigit
manufactuiing inuustiies categoiizing them as capital intensive, laboi intensive anu
nowleuge intensive inuustiies anu compaie theii TFP giowth iates. k

26

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