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The IUP Journal of Operations Management
Indian Manufacturing Industry: An Analysis using Cobb-Douglas Production Function
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This paper estimates production functions using the data on the companies in the Indian Manufacturing Industry. It assesses whether the top 50 Indian manufacturing companies are different in productivity than Small Manufacturing Companies, Private Foreign Companies, Privately-held Indian Companies, NRI-held Companies and Foreign Group Companies in the manufacturing sector. It also deals with the productivity of all the companies in the manufacturing sector. The results indicate that in the NRI-held Companies and Foreign Group Companies the labor variable is statistically insignificant showing that such companies are largely automated, thus reducing the need for labor. The paper employs multiple regression methodology. The Cobb-Douglas Production Function has been used to test the hypothesis that different categories of Manufacturing Companies have the same productivity trend.

The term “Production function” describes an empirical relationship between specified outputs and inputs. A production function can be derived for a single firm, an industry, or a nation. Thus a production function of a wheat farm may have the form: That is, production of wheat in tons (W) depends on the use of labor measured in days (L), acres of land (A), machinery in dollars (M), fertilizer in tons (F), mean summer temperature measured in degrees (T) and rainfall in inches (R). The simplest production function widely used in economics is known as the Cobb-Douglas function. It has the following form:

Parameters (exponents) a and b are estimated from empirical data. If a+b=1, the Cobb-Douglas production function will have two properties: It displays constant returns to scale, that is, an increase in the amount of Labor and K (Capital) by a given factor k will increase the output by the same factor k. It displays diminishing returns to a single factor, that is, if we keep K constant and increase labor, the increments in output will be smaller with each additional unit of labor. If a+b > 1, the production function will display increasing returns to scale. In some cases empirically derived Cobb-Douglas production functions include a factor accounting for technological progress:

 
 
 
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