The Relationship between Financial Performance and Total Factor Productivity: Evidence from the Czech Agricultural Sector

The Relationship between Financial Performance and Total Factor Productivity: Evidence from the Czech Agricultural Sector

Ondřej MACHEKDepartment of Business EconomicsFaculty of Business AdministrationUniversity of Economics in PragueCzech Republic

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Introduction

• Agriculture is an important sector of the economy which is often monitored by the government and international bodies.

• Agricultural sector plays an important role in the society:

• production role,

• social and demographic role,

• ecologic and landscape aesthetics role.

• At the aggregate level, performance of agricultural sectors is measured by government institutions as well as international bodies such as Eurostat and OECD

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How to Measure Productivity

• Productivity = Output / Input

• Total factor productivity takes into account all outputs and inputs => agregate them

Fisher index of productivity

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Proposed Productivity Measure

• Only one category of output is considered

• y: total sales of goods, products and services (CZK)

• Five categories of input are considered

• x1: number of employees (-)

• x2: energy consumption - toe (tonnes of oil equivalent)

• x3: other OPEX (in particular, services and depreciation) (CZK)

• x4: quantity of land used (ha)

• x5: other tangible assets (CZK)

• The weight of operating expenses (OPEX) is OPEX/revenue. The OPEX part is then divided among x1, x2 and x3 according to the proportion of labour costs, energy costs and other costs in OPEX.

• The remaining portion (1 – OPEX/revenue) is attributed to the remaining variables (x4, x5) according to their proportion in total tangible assets

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Financial Performance Measures

• Financial performance is often measured by profitability ratios.

• We employed well-known measures of profitability: • return on assets (ROA),

• return on equity (ROE),

• return on sales (ROS).

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Data

• To gather the data on the Czech agricultural sector we used the Albertina database which contains about more than 2,700,000 subjects with registered ID in Czech Republic.

• We focused on the agricultural companies in the period 2004-2011. Companies containing incomplete data were excluded from the analysis. This way we obtained 10,045 observations in total.

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Results

• The Fisher index formula produces chain indexes which can be converted to fixed-base indexes

• Output quantity index is denoted by YF, input quantity index by XF.

Year Chain indexes Fixed-base indexes

  YF XF ΔTFP YF XF ΔTFP

2004- - - 1 1 1

20051.06 1.04 0.98 1.06 1.04 0.98

20061.14 1.14 1.00 1.21 1.18 0.98

20071.19 1.23 1.04 1.44 1.46 1.01

20081.08 1.03 0.96 1.55 1.51 0.97

20090.87 0.83 0.95 1.35 1.25 0.93

20100.92 1.04 1.14 1.24 1.30 1.05

20110.95 0.98 1.04 1.17 1.28 1.10

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Results

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Results• In 2004, 2007 and 2011, agricultural enterprises in the Czech Republic attained the

best economic results since the EU accession.

• Main sources of income volatility in agriculture:

• price fluctuation,

• changes in yields (as the result of various weather conditions).

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Results

YearChain indexes

Estimated TFP growth (agriculture)

TFP growth (economy,)

2005 -1.88% 4.0%2006 -0.34% 3.6%2007 3.52% 2.7%2008 -3.94% 1.7%2009 -4.57% 0.9%2010 13.65% 0.4%2011 4.17% 0.3%

• Agricultural sector is characterized by a relatively high degree of competition, which implies a possibly higher level of productivity than in the regulated or oligopolistic sectors

• However, a higher productivity level does not necessarily imply higher productivity growth.

• Agriculture provides basic raw material for the peoples’ livelihood and it is also highly dependent on changing natural conditions

• The demand for agricultural production has been relatively steady.

• The agricultural TFP growth does not move in the same direction as the growth of the economy

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Conclusion• We observed a connection between total factor productivity and financial

performance.

• We suggest that total factor productivity, when measured by monetary aggregates such as value added, will be positively correlated to the financial profitability ratios, if the calculations are based on the same data.

• However, our analysis covered only a short time period (2004-2011) since the accession of the Czech Republic to the European Union. A longer period is needed to test the dependence statistically.

• However, for the Czech sector, data are not available due to the transition from the centrally-planned economy to the market economy in 1989 and a turbulent development since that time. This will be one of the directions of the future research.

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Thank you for your attention