Intellectual capital and total factor productivity

This paper defines total factor productivity as a function of a nation’s intellectual capital. By developing a simple model, it explored the long-run relationship between intellectual capital and total factor productivity. The value of total factor productivity for each country was computed from Penn World Tables 10 using the residual method, and an index of intellectual capital was constructed from several indicators taken from world development indicators. Using a common correlated effect approach, a panel of 29 countries over 31 years was estimated using various dynamic macro panel models. The result confirmed the existence of a positive and significant link between total factor productivity and intellectual capital index. This implies that a potential source of productivity difference lies with a nation’s research and development, human capital, processing, and marketing capabilities in boosting the general innovation process. Thus, national and regional development policies need to consider ways to improve broader innovation. Future research on total factor productivity needs to consider things outside the box.The essential causes of productivity has been a formidable question since enlightenment. In classical and pre-classical periods, the difference in productivity was attributed to differences in geographical and people's attitude to work and luxury. In neoclassical, productiveness was an effect of natural force inside material objects and hence, consider differences in material accumulation as cause of productivity difference. Following the failure of material accumulation, the difference was considered as residual or total factor productivity by exogenous growth models and later confined to technological ideas and its spillover effects by the new endogenous growth models. However, none of these could explain the twin productivity puzzles. In this paper, intellectual capital was hypothesized as an integral factor underlying the scatteredly presumed drivers of differences in productivity across countries. It also provided an empirical justification for an existence of consistent link between total factor productivity and intellectual capital across nations at all levels of development in all economic regions. This implies, the previously fragmented concepts and factors are now the characteristics of intellectual capital. The new insight could simplify the theoretical complexities and empirical inconsistencies in productivity literature. It could also beneficial for national and regional policy makers to broader their view beyond technological innovation in order to improve productivity and catch-up process.