Dynamic Decomposition of Total Factor Productivity Change in the EU Food, Beverages, and Tobacco Industry: The Effect of R&D

The main objective of this paper is to generate measures of TFP change for the food, beverages, and tobacco industry in the EU. Explicitly taking into account the fact that some of the inputs used in the industry are fixed in the short run, the generated measures of TFP change reflects the dynamic nature of the problem. The second objective is to analyse TFP change into its components and explicitly examine the effect of Research and Development (R&D) effort on TFP growth. Data are collected from EU KLEMS and the OECD Structural Analysis database. The data contain country-level information on output volume, input prices and capital stock, as well as R&D expenditure for the food, beverages, and tobacco industry for the 15 “old” EU Member States. They cover the 1970-2005 but most series contain gaps. The results show that for the period under consideration TFP in the industry grew on average at an annual rate of almost 2%. TFP growth was much faster in the 1970s and 1980s, with a considerable slowdown in the 1990s. This growth is driven primarily by growth in output and secondly by the reduction in labour input. Expenditure on R&D has a positive but relatively small effect on TFP.