Determinants of Total Factor Productivity Growth in Malaysia

This paper attempts to analyse the total factor productivity (TFP) growth rate in Malaysia during 1971 – 2004 and to discuss factors that determine TFP growth. Data envelopment analysis (DEA) approach is used to estimate the changes in the production frontier. The Malmquist productivity index has decomposed total factor productivity into technological change (TECHCH) and technical efficiency change (EFFCH). Empirical results suggest that TFP growth of the Malaysian economy for the entire test period has not been encouraging due to negative contribution from technical efficiency. This result reveals that the economy were able to cause shifts in their own frontier due to innovation. The economy needs an enhancement of their productivitybased catching-up capability, specifically the effective use of human capital in the labor market, increase the number of skilled workers to operate a more sophisticated technology, and the adoption of the new technology. The results of TFP growth model show that openness to foreign companies and world economy, restructuring of the economy through a shift of resources between sectors, and the presence of foreign companies’ in Malaysia is believed to be major contributor to TFP growth.