Determinants of Productivity Differences in International Manufacturing

To access the influence of various factors on labor productivity, a production function model of a plant in a labor-intensive consumer goods industry is developed and estimated econometrically. The model is derived from a production function specified in three functional forms which is expanded to include management and quality-adjustment factors for the capital and labor inputs. The management variable is a performance ranking of the plants in terms of meeting output, quality, and cost goals. Data on approximately 30 plants from a dozen countries over the period 1975 through 1982 was used for the analysis. All of the plants are of a single multinational firm and produce similar products. Results indicate that for this firm the most important determinants of labor productivity differences among the plants are the management and worker-related factors. Managers who consistently met their output, quality, and cost targets also had high labor productivity plants. Worker skill levels were also found to be positively related to productivity and strong learning-by-doing effects were apparent in the plants. Additionally, the Latin American plants were found to have significantly lower labor productivity which none of the included variables was able to fully account for. Varying returns to scale, first increasing and then decreasing, were noted in this industry.