An index number method for estimating scale economies and technical progress using time-series of cross-section data: Sources of total factor productivity growth for Japanese manufacturing, 1964-1988

Sample multicollinearity often makes it difficult to estimate returns to scale. We present an index number method to overcome potential multicollinearity problems when the production function is homogeneous of degree k We apply our method to estimate empirically the effects of returns to scale and technical progress on growth in total factor productivity (TFP) using establishment data for Japanese manufacturing industries. We find that, while significant scale economies exist in many manufacturing industries, the TFP growth in the last twenty-five years is attributable primarily to technical progress. This finding also validates the current practice of assuming constant-retums-to-scale production functions in macroeconometric modelling.