Sample multicollinearity often makes it dif®cult to estimate returns to scale. We present an index number method to overcome potential multicollinearity problems when the production function is homogeneous of degree k. We apply our method to estimate empirically the effects of returns to scale and technical progress on growth in total factor productivity (TFP) using establishment data for Japanese manufacturing industries. We ®nd that, while signi®cant scale economies exist in many manufacturing industries, the TFP growth in the last twenty-®ve years is attributable primarily to technical progress. This ®nding also validates the current practice of assuming constantreturns-to-scale production functions in macroeconometric modelling. JEL Classi®cation Numbers: C43, D24, 030.
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