Oil price and total factor productivity of Korean manufacturing industries

Abstract

This paper estimates the effects of oil price change on the productivity changes of Korean manufacturing industry. We applied a stochastic frontier production model to estimate the changes of total factor productivity. The model is estimated by the recently developed KSS panel data estimator (Kneip et al, 2012) which allows for arbitrary patterns of time-varying individual effects. We decompose the sources of total factor productivity (TFP) growth into technical progress, technical efficiency change, scale effects change and allocation efficiency change following Kumbhakar (2000). Empirical results based on data from 2001-2010 show that productivity growth was driven mainly by declining technical progress together with improving technical efficiency. Scale effects and allocation efficiency exert marginal impacts on TFP growth. For the derived TFP components, the impacts of oil price have been analyzed. The effects of oil price change were different across the sample period. When the oil price is low and moves smoothly during 2001-2006, only scale effects are marginally affected. When the oil price is high and fluctuated greatly during 2007-2010, however, all the components were significantly affected, thus technical progress and scale effects increased, and technical efficiency and allocation efficiency decreased.