Determinants of Total Factor Productivity: Implementing a Multi-Factor Model using Country-Level Panel Data

Total factor productivity (TFP) is widely accepted as a key driver of output growth. The existing TFP literature aims to identify productivity determinants to understand variations in income across countries. However, these studies often grapple with potential endogeneity, omitted variable issues, and cross-sectional dependence. To address these limitations, this study introduces the common factor model, which enables us to identify relevant common factors driving TFP and investigate individual responses thereto. By applying this model to country-level panel data, we identified key factors, such as research and development, trade openness, information and communication technology, and higher education, which significantly influence TFP.