Effects of Research and Development on Total Factor Productivity in Iran’s Factory Industries

One of the most important goals of business managers is to maximize the efficiency by the use of the available resources and achieve higher levels of productivity. Research and development departments are generally concerned with activities such as products quality improvement, new products design, procedures optimization, technology transfer and absorption, and gaining technical knowledge for production, all in the interests of industry owners, all of which lead to the total factor productivity (TFP). This paper studied total factor productivity based on stochastic frontier analysis (SFA) in 131 industries from 1995 to 2010, and it also investigated the effectiveness of research and development, alongside other factors, on productivity. The results indicated that the highest total factor productivity during this period belonged to the industry of manufacturing motor vehicles parts and accessories with the productivity of 1.53 and the lowest belonged to the production of basic chemical materials except fertilizers and nitrogen compounds with the productivity of 0.98. During this period, the industry of manufacturing basic plastic materials and artificial rubber demonstrated the highest technical progress with 1.21 growth. Moreover, the estimation of total factor productivity model indicated that research and development, human capital, economics of scale, physical capital accumulation, private ownership of enterprises, industry export and the severity of barriers to entry have explained the process of the productivity growth during the period of study. Based on the findings of the estimated model, all variables except the severity of barriers to entry have had a positive effect on productivity.

The concept of productivity has been ignored in our country due to various reasons including lack of a proper approach towards productivity in the society. Part of every development plan must be dedicated to research. With respect to the concept of productivity, the measures taken must be of use and properly selected. Moreover, they must be done in the best way possible. Accordingly, fulfilling these two conditions will ensure productivity.
Despite their close relationship, the concepts of efficiency and productivity are different from each other. Efficiency is concerned with the comparison of the real amount (value) of a product and its potential amount (value). In contrast, productivity can be considered as the relative efficiency. In other words, efficiency is a part of productivity.
In the fifth development plan, by virtue of article 69, the competitiveness of economics and increasing the contribution of total factor productivity to the economic growth are being emphasized, and by the end of the plan, the ratio of productivity to the total economic growth must be achieved to be one third. The purpose of this study was to measure the total factor productivity in 131 industries bearing Iran’s four-digit ISIC code, from 1995 to 2010, using SFA method. Moreover, this paper studied the effectiveness of research and development as an important variable on productivity, along which the effects of other variables on productivity will also be assessed.
Research There are various approaches concerning the measurement of productivity, in some of which indexing must be done, in some the production function must be used, and in others both methods are employed. Methods based on econometric estimation are the same methods based on production or cost function. Methods which employ indexing are non-parametric methods.
The method employed for the analysis of productivity in this study was based on econometric estimation of the production function. The purpose is to establish a mathematical relationship for the output dependence on the input. Economists do this by combing economic and mathematical theories. One of the best criteria for evaluating the performance of an industry is to evaluate the efficiency frontier in the industry which was introduced by Battese and Coelli (1995). Therefore, in this study, the technical efficiency of industries have been measured using stochastic frontier production function based on the model proposed by Battese and Coelli (1995).
Findings
According to the statistics of 2010, the industries of body manufacturing (coachwork) for motor vehicles and trailer and half-trailer manufacturing had the highest R & D and the industry of toy manufacturing had the lowest R & D. Industries which are capital-intensive experienced more R & D while those which are labor-intensive had lower R & D.
The results of frontier translog functions at the average data level from 1995 to 2010 indicate that the average rate of technical growth in Iran’s industry was 0.77. It is also demonstrated that the Iranian industries, on average, display increasing returns to scale. The findings are also indicative of the fact that the average growth of TFP during the studied period was 1.28 and the industry of motor vehicle parts and accessories has the highest TFP growth at 1.53 among all Iranian factory industries.
Theoretically, it is assumed that the advance of technology is the driving force of the economic growth and TFP growth. Based on the findings of the current study, the coefficient for the ownership share of the private sector in the industry was calculated to be 0.54 which indicated that the more the ownership share of the private sector in the industry, the more the productivity of the industry. In other words, for one percent increase in the private sector ownership share, the efficiency increases up to 0.54%. Moreover, the coefficient for the exports in the industry was estimated to be 0.22 which also indicated that one percent increase in the industrial exports increased the industry productivity up to 0.22%.
The human capital coefficient was obtained to be 0.834 which signified that one percent increase in the specialized human capital in the industry resulted in the increase of the productivity in the industry up to 0.83.
The costs of research and development has been mentioned as one of the resources for the increase of productivity in all theoretical discussions. The findings of this model showed a significant positive effect of the average R & D cost accumulation on TFP, in which the increase coefficient of R & D cost accumulation for the industry is 0.039 % which increases productivity just as much. Other experimental studies have also confirmed this finding.
The CDR change coefficient is significant and negative. The coefficient is 0.059 which indicates that if the severity of barriers to entry increases for one percent, the industry productivity decreases for 0.059%.
Conclusion and Suggestions
The gap between the technical efficiency levels of industrial fields of activity and the best performance in Iran’s factory industries emphasizes the need for more studies to be conducted on the causes of such a gap. Moreover, it is required that studies be conducted concerning the productivity growth rate of Iran’s factory industries using indices such as Malmquist and Tornquist.
The following suggestions can be made based on the findings of the study in order to improve the efficiency of Iran’s factory industries. The structure of the industries must change so that optimal use is made of all input factors and this will lead to the economics of scale in the long run. Every year, industrial fields of activities must be compared and graded with respect to their efficiency and productivity so that the efficient industries are identified and accordingly supported by the government.
The Iranian industries must consider foreign markets as their target; this provides the opportunity for the increase of the production scale of the enterprises and enables them to benefit from the advantages of the economics of scale in terms of the decrease of average costs and price reduction.
In order to reduce monopoly and increase competition and productivity in the industries, it is suggested that the removal of such barriers particularly for the small industries is put on the agenda so that a competitive atmosphere is established and the social welfare is improved. It is also recommended that structural reforms and deregulation be done in order to make use of the commercial opportunities to support the industries and provide the opportunity for the increase of production and export