Productivity of Manufacturing Industries of Nepal

Nepal continues to be a predominantly agricultural economy with around one third contribution to the country's Gross Domestic Product (GDP). Although the share of manufacturing sector is small its role in Nepal's development during the coming decades cannot be ignored as the mass production of consumer goods is getting momentum in the recent years (Sharma, 1980). Expansion of manufacturing sector, both in terms of size and productivity helps generate employment, accelerates growth, reduce poverty and bring prosperity as it has been observed in other developing countries (CBS, 2014). However, without empirical evidence from scientific studies it is hard to say which industry is more attractive in terms of factor productivity and can contribute relatively better to the economy.

In this backdrop, this paper aims to empirically estimate and test whether the C-D production function may be useful in analyzing the manufacturing industries of Nepal. Besides, in order to draw some specific conclusions, it aims to estimate the returns to scale and relative productivity of inputs used in Furniture and Pharmaceutical industries of Nepal. The results obtained would be useful to the planners and policymakers in formulating plans and policies so as to promote and/or regulate the respective manufacturing industries. In the meantime, private sectors, and those interested in the manufacturing industries of Nepal will be able to gauge the relative factor productivities of the selected industries, which will help them making investment decisions.

The development of the manufacturing sector is crucial to attain prosperity, generate employment, reduce poverty, promote trade and spur national income growth. However, Nepal’s manufacturing sector has not been able to achieve these objectives to the desired extend (CBS, 2014). The sector has had uneven growth over the years due to longstanding weaknesses in the adoption of new technology, poor infrastructure and shortage of power among others. As a result, the ratio of manufacturing output to GDP has gradually declined from 9.0 percent in 2001 to 5.5 percent in 2017 and the growth of this sector is highly unstable (CBS, 2018).

The results of Pharmaceutical industry are also in line of Furniture industry. The output of this industry also heavily dependent of technology (TFP) and the capital input, which is obvious since the pharmaceutical industry is more techno-savvy and capital intensive. The output elasticity of capital (  shows that one percent increase in capital input would lead 0.92 percent increase in the output, still it indicates decreasing returns of capital. The coefficient of TFP (  shows one percent improvements in the technology and factors other than labour and capital would contribute to rise the output by 1.72 percent. Finally, it is confirmed that the pharmaceutical industry also operating under decreasing returns to scale since the summation of  (0.9167-0.0395=0.8852) is less than unity.

It has been found, form this study, that Furniture and Pharmaceutical industries of Nepal were operating under decreasing returns to scale. This means, a given percent increase in the inputs would results lesser percent increase in total output and thus industrialists may not be motivated to expand the scale of outputs. In the meantime, it has been found that the labour input has not been able to play significant role in contributing to the output of the selected manufacturing industries. This may be due to the rampant labour unrest and deteriorating industrial relations during the census year 2011/2012 and lack of sufficient technical as well as skilled labour force in the domestic manufacturing industry. 

Although the furniture and pharmaceutical industries of Nepal are found to be capital intensive, these had not enjoyed increasing returns to capital, meaning one percent increase in capital inputs could generate less than one percent additional output. However, it can be concluded that the TFP (technology and factors other than labour and capital) had been the key contributor to the selected manufacturing industry. It is found that one percent increase in TFP would increase total output by 1.72 to 2.15 percent in a year. Based on the findings, it is suggested that the Government, policy makers and concerned private sector stakeholders should focus to ensure availability of skilled labour force, appropriate infrastructure and encourage technological innovation so as to promote the manufacturing industries to achieve higher and steady state economic growth in Nepal.