Table 1 presents a summary of the key variables used to empirically validate the combined stochastic-inefficiency model for 61 countries from 2002 to 2005.

Table 1. Function production variables

**Variables Definition** _YNTx_ 1 : GDP<sup>1</sup> (constant GDP at purchaser's prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value 2000 US$) of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in constant 2000 U.S. dollars. Dollar figures for GDP are converted from domestic currencies using 2000 official exchange rates. For a few countries where the official exchange rate does not reflect the rate effectively applied to actual foreign exchange transactions, an alternative conversion factor is used. _K NTx_ 1 : Gross fixed Gross fixed-capital formation (formerly gross domestic-fixed investment) includes land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment capital formation<sup>2</sup> (constant purchases; and the construction of roads, railways, and the like, including schools, 2000 US$) offices, hospitals, private residential dwellings, and commercial and industrial buildings. According to the 1993 SNA, net acquisitions of valuables are also considered capital formation. Data are in constant 2000 U.S. dollars. _LNTx_ 1 : Labor force,<sup>3</sup> total Total labor force is comprised of people who meet the International Labor Organization definition of the economically active population: all people who supply labor for the production of goods and services during a specified period. It includes both the employed and the unemployed. While national practices vary in the treatment of such groups as the armed forces and seasonal or part-time workers, in general the labor force includes the armed forces, the unemployed and first-time job-seekers, but excludes homemakers and other unpaid caregivers and workers in the informal sector. _TNTx_ 1 : Time Cyclical and Hicks neutral technological progress. _R_ & _DNTx_ 1 : Research Expenditures for research and development are current and capital expenditures (both public and private) on creative work undertaken systematically to increase knowledge, and development including knowledge of humanity, culture, and society, and the use of knowledge for expenditure<sup>4</sup> new applications. R&D covers basic research, applied research, and experimental development. New businesses registered are the number of new firms, defined as firms registered in _NBRNT_ : New the current year of reporting. Businesses Registered<sup>5</sup> _TNTx_ 1 : Year Time-varying inefficiency effect.

Notes: 1International Finance Corporation's micro, small, and medium-size enterprises database <u>(http://www.ifc.org/ifcext/sme.nsf/Content/Resources).</u> 2World Bank national accounts data, and OECD National Accounts data files. 3International Labour Organization, using World Bank population estimates. 4United Nations Educational, Scientific, and Cultural Organization (UNESCO) Institute for Statistics. 5International Finance Corporation's micro, small, and medium-size enterprises database (http://www.ifc.org/ifcext/sme.nsf/Content/Resources). Source: World Bank’s World Development Indicators (2009), and authors’ calculations.

The data source used for this analysis is the World Bank’s World Development Indicators (WDI). This database provides more than 800 development indicators, with a time series for 209 countries and 18 country groups from 1960 to 2007. From the World Bank’s World Development Indicators (WDI), we have time series observations (T=4) for 2002, 2003, 2004 and 2005. We are able to form a balanced panel data, as seen in the descriptive statistics of variables in Table 2.

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