Does Productivity Really Matter for Profitability? Evidence from a Publicly Owned Transport Corporation

Abstract

For many years now, a variety of studies have proven the strong relationship between productivity and profitability. However, simply earning a profit does not necessarily mean that the firm is productive. Many highly productive firms face financial losses, whereas less productive ones’ experience significant profits. This paper examines the dynamics of how productivity really matters for profitability. The paper uses a non-parametric index number approach to estimate the productivity, profitability, and price performance of a publicly owned, once world’s largest, bus transport corporation operating in the Indian state of Andhra Pradesh to examine these dynamics. The paper finds that when public organizations are constrained from raising the prices of their services, productivity gains may not be adequate to counterbalance the impact of rising prices of major inputs. Moreover, loss-making organizations, even if they are publicly owned, would find it hard to improve both the quality and quantity of their services.