Explaining TFP at firm level in Italy. Does location matter?

This study analyses how firms' internal variables and regional factors affect Total Factor Productivity (TFP) of Italian manufacturing firms. Due to the hierarchical structure of our data, we employ a multilevel model that allows for a clear distinction between firm and region-specific effects. Results refer to 2004-2006 and show, as expected, the importance of firm-specific determinants of TFP. At the same time, they indicate that location matters, in the sense that the context where firms operate plays a crucial role in determining the level of TFP. In more detail, we find that the regional endowment of infrastructure, the efficiency of local administration and the investments in R&D exert a positive effect on firms' performance. We also argue that regional gaps in the endowment of these factors help to understand the dualistic nature of the Italian economy, where a wealthy North coexists with a less developed South.