Total Factor Productivity and Trade: A Panel Data Analysis

Abstract

This study tries to explore the impact of trade openness on the total factor
productivity growth in a panel of 94 countries for the period of 1964 to 2003.  First, we calculate the total factor productivity growth rates by the growth accounting technique. Second, we estimate the relation between trade openness and the total factor productivity with two different specifications, one without country size and the other with country size. To control for expected heterogeneity in the sample countries, the analysis is carried out separately for the comprehensive sample (all countries) and three subgroups based on the income. Our empirical findings, without country size, suggest that total factor productivity growth is positively affected by trade openness for the comprehensive sample and
also its three sub-groups of countries. Further, we also find that the magnitude of the trade impact on productivity growth is the highest for middle-income group of countries than low- and high-income group of countries. Results with country size suggests that country size itself, is not an important variable in describing the productivity growth, but it helps in capturing the true marginal effect of trade openness of the productivity growth. The impact of openness is stronger with country size for the comprehensive, middle and high group of income.