Linking Investment Bursts and Productivity:
An Empirical Investigation
Spiro E. Stefanou
Pennsylvania State University
Abstract
Today’s global market-driven economy imposes greater competitive pressure on firm
decision makers as they balance the trade off between a) exploiting the full productive potential of
their systems and technologies, and b) adopting innovations. Both avenues can lead to
enhanced profitability. Sustaining competitiveness over the long run involves attention to growth
prospects in both levels; innovations are needed to keep pushing the competitive envelope, and
efficiency gains are needed to ensure that implemented technologies can succeed.
Quantifying the importance of factors driving productivity growth such as changes in
technology and identifying the relationship between productivity and investment are challenging
tasks and have been only partially successful to date. The major complication arises from the
causality in the relationship between investment and productivity. Productivity growth implies
resource use decisions can impact the quantity of resources available for new production
planning, in particular, and activities, in general. Some of these changes may involve doing the
same thing more extensively (i.e., extracting scale economies) and some of these changes may
involve doing things differently (i.e., introducing new equipment and processes).
A detailed empirical analysis at plant-level to gain a better understanding of the
relationship between the decision to invest, productivity and plant characteristics can shed some
light to this relationship. The main objective of this study is to investigate the causal mechanism
between investment and productivity in a structural model using the non-publicly available
Census Bureau’s Longitudinal Research Database at plant-level from 1972-1995 by focusing on
various sub-industries of U.S. Food and Kindred Products Industry.
Capacity-improving investment activity is measured by lumpy investment using both
absolute and relative measures. Plant investment age, which tracks the time between investment
spikes, is calculated as the time elapsed since the plant’s most recent investment spike. Results
of the impact of investment age on TFP growth are presented for all food manufacturing plants
(SIC 20) and the case of the meat products (SIC 201) sub-industry. In both cases, the aggregate
picture presents fairly flat annual TFP growth for all plants. However, a disaggregated
investigation by quartiles presents a vastly different story. Productivity tends to increase for
investment age for only the middle quartile, while the lowest quartile presents an inverted ushaped pattern. For the highest quartile ranked plants, investment age coefficients are all
insignificant suggesting no significant impact of lumpy investment on TFP growth, suggesting
continuing operations serve the firm very well.