This paper explores how investment in different types of capital affects estimates of firm level total factor productivity (TFP) growth in the UK. We find that taking account separately of firms’ investments in intangible as well as tangible assets, and of costs of adjustment between their fixed and variable cost inputs, TFP growth within UK manufacturing firms slows only moderately, rather than exhibiting the striking slowdown reported in the prior literature. This is because the standard approach, which assumes homogeneity in capital inputs when estimating firm-level TFP, tends to overstate the revenue and implied output elasticities, thereby understating TFP. Firms’ adjustment costs in both tangible and intangible inputs also affect their variable costs, which in turn influence the identification of revenue and output elasticities, further distorting TFP estimates.
Authors Diane Coyle, Ioannis Bournakis, Jen-Chung Mei