This paper estimates production functions using the data on the companies
in the Indian Manufacturing Industry. It assesses whether the top 50 Indian
manufacturing companies are different in productivity than Small Manufacturing
Companies, Private Foreign Companies, Privately-held Indian Companies,
NRI-held Companies and Foreign Group Companies in the manufacturing
sector. It also deals with the productivity of all the companies in the
manufacturing sector. The results indicate that in the NRI-held Companies and
Foreign Group Companies the labor variable is statistically insignificant
showing that such companies are largely automated, thus reducing the need
for labor. The paper employs multiple regression methodology. The Cobb-Douglas
Production Function has been used to test the hypothesis that different
categories of Manufacturing Companies have the same productivity trend.
The term “Production function” describes an empirical relationship between specified
outputs and inputs. A production function can be derived for a single firm, an industry,
or a nation. Thus a production function of a wheat farm may have the form:
That is, production of wheat in tons (W) depends on the use of labor measured in
days (L), acres of land (A), machinery in dollars (M), fertilizer in tons (F), mean
summer temperature measured in degrees (T) and rainfall in inches (R).
The simplest production function widely used in economics is known as the
Cobb-Douglas function. It has the following form:
Parameters (exponents) a and b are estimated from empirical data. If a+b=1, the
Cobb-Douglas production function will have two properties:
It displays constant returns to scale, that is, an increase in the amount of Labor and
K (Capital) by a given factor k will increase the output by the same factor k.
It displays diminishing returns to a single factor, that is, if we keep K constant and
increase labor, the increments in output will be smaller with each additional unit of
labor.
If a+b > 1, the production function will display increasing returns to scale.
In some cases empirically derived Cobb-Douglas production functions include a
factor accounting for technological progress: |
