Malmquist Firm Productivity Index

The Malmquist firm productivity index measures how a firm's total factor productivity changes between two periods and decomposes that change into two strategically meaningful parts: catching up to best practice (efficiency change) and the best-practice frontier itself shifting (technical change). The index is grounded in Caves, Christensen and Diewert's 1982 theory of productivity index numbers built from distance functions, and was made operational for empirical work by Fare, Grosskopf, Norris and Zhang in 1994, who showed how to compute it from data using linear-programming distance functions and to split it into efficiency-change and frontier-shift components. For firms, it answers whether productivity gains came from better management closing the gap to the leaders or from the whole industry's technological possibilities expanding.