Determinants of total factor productivity in the Portuguese quaternary sector

This paper studies total factor productivity (TFP) of the quaternary sector, or knowledge-based activities sector. The occupations associated with this sector are linked with knowledge and social/creative intelligence. These activities are admittedly less likely to be automated in the future due to their human heuristic requirements. A descriptive analysis of a firm-level dataset of Portuguese firms shows that this group of activities differs from others along several characteristics: the share of gross value added, capital per worker, and wage expenses. For these reasons the quaternary sector should be studied separately.

The research finds that wages, international openness, and innovation impact quaternary-sector TFP positively, as is commonly found in the manufacturing and services sector. However, a smaller impact of innovation on knowledge-based activities relative to manufacturing suggests decreasing returns to innovation. Internal firm characteristics, age and size, demonstrate a non-linear impact on quaternary TFP. Finally, contrary to the remaining sectors of economic activity, the results show that leverage impacts negatively TFP on quaternary firms. This last finding may be explained by the quaternary sector’s almost exclusive use of equity financing.

TFP is a crucial component to long-term economic progress. It is crucial to understand which factors determine the growth of this key variable. As the quaternary sector becomes increasingly important as a driver of economic growth, understanding the sources of variation in TFP in the sector can help us better forecast growth.

Click here to go to the paper by Paulo Matos and Pedro Neves.