Impact of Firms’ Characteristics on Total Factor Productivity: Evidence from Pakistan

Abstract

This study has two objectives: First, it measures the firm-level total
factor productivity of Pakistan’s industrial sector for a panel of 161
firms listed on the Pakistan Stock Exchange over the period 1997-2017.
Second, it examines the impact of cost of goods sold, firm size, total
borrowings, return on assets, and interest rate on total factor
productivity using a multinomial logit model. In order to calculate firmlevel
total factor productivity, we estimated a variant of the firm-level
production function. The results indicate that firm size and return on
assets are significantly positively associated with total factor
productivity, whereas cost of goods sold and interest rate are
significantly negatively related to total factor productivity. Results on
the association between total borrowings and total factor productivity
show mixed evidence. The findings of the study are important as
aggregated total factor productivity at the macro level is a reflection of
micro-level total factor productivity. Therefore, to prevent the negative
effects of the cost of goods sold, it is recommended that the government
formulate policies such as an industry-friendly energy policy, as well as
reduce raw materials and tariff rates. Similarly, to reduce detrimental
effects on total factor productivity, the State Bank of Pakistan ought to
reconsider its interest rate policies.