Since my last post I have had a meeting with Dr. Poon where not only have I received answers to the problems I faced but also constructive feedback on my partial draft. Dr. Poon has said that since we have only 12 industries but 14 coefficients in the translog functions we cannot conduct a Hausman test nor implement a random effects model. I will mention in my final treatise that this is an avenue for further research if more detailed data is made available. We have also decided not to estimate the CES-translog for now.
Since some of the results I have obtained have not been consistent Dr. Poon has suggested the following two tasks to complete to ensure that we have covered every possible avenue in the model estimation.
- Save and plot the residuals from the regression and remove and outliers which may be influencing the results.
- Re-estimate the model using one less industry and repeat for each industry.
Dr. Poon suggested the second task because we believe that it could be one industry influencing the results adversely. I have conducted some preliminary data refinement for both 1 and 2. Removing the outliers did not really affect the results. However when 2 was used the results did change. In particular I found that the industries of mining and utilities (electricity, gas and water supply) biased the results into substitution being the prevalent relationship between the capital inputs hardware and software capital, hardware capital and labour and software capital and labour. I will double check my results and pass on my findings to Dr. Poon and find out where to proceed from. It could be the case that we might not want to remove one or both of these industries and the results preliminary results obtained will need to be used.
Dr. Poon also provided me with invaluable feedback on my partial draft. He suggested that I modify my motivation to use the argument put forth by Paul Romer (1986) that although software and hardware capital are IT they play different roles in IT production. Also he has told me to remove the importance I have placed on the growth accounting framework in my literature review and to mention it in passing as it could skew the perspective of my treatise. This week I will be working on the data refinement where by the end of the week I hope to move onto the results analysis or second last chapter of my treatise. I will also be refining and implementing the feedback in to my treatise that Dr. Poon provided. In my next post I will report back on which results set will be used for results interpretation.