What are the important factors that affect total factor productivity?


These are the factors that affect total factor productivity:

Technological Progress:

With technological progress, the inputs (R&D) are utilised efficiently and there is an increase in Total Factor Productivity. Thus inventions and discoveries in the fields of information, communication, medicine, and other areas of science & technology lead to an increase in Total Factor Productivity.


Skill levels of the workers:

Skill levels of workers in a particular country cause increase in the Total Factor Productivity. Countries and also some industries with higher level of education and skills have higher Total Factor Productivity as these workers are able to produce better outputs.

Foreign Investment:

Studies on TFP show that an increase in foreign investment in a country would increase total factor productivity as inputs increase provided this investment is used to promote efficiency of industry.


Natural Calamities:

Natural calamities like droughts, floods, fires, etc. could lead to a decrease in Total Factor Productivity as they might lead to lesser outputs for the same inputs. This is especially true of developing countries and the countries that depend a lot on agriculture as a part GDP.

Level of Competition:

Literature on productivity also refers to the level of competition as an important factor determining productivity. A country with competitive markets and a strong economy would have a higher Total Factor Productivity than others that are not free market economies.


Political Stability:

Factors like corruption, bureaucracy and instability lead to a decrease in the level of output. The more stable a country is, the more it increases Total Factor Productivity.

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