Production Function Modeling of the Relationship between Quantity of Graduates and Federal Government Grants Case Studies: Universiti Sains Malaysia

In recent years, much work has been constructed in the area of productivity and growth in order to identify the link between factor inputs and output based on production function. However, in the field of tertiary education, there are less research to classify and discover a model to estimate the production of graduates in accord with the factor inputs. This paper discusses the usage of production function in which the properties are specified in order to fit the tertiary education sector with reference to the data of Universiti Sains Malaysia (USM). It is then estimated with the Cobb- Douglas Production function (C-D). Aspects such as the inferences caused by multicollinearity, heteroscedasticity, and autocorrelation are also analyzed. In this approach, OLS and GLS type of regression analysis have been carried out in order to analyze the productivity and growth of USM in producing graduates. A suitable model produced by using two independent variables namely emolument (from federal government operating expenditure) and capital (remaining federal government grant plus federal government developing grant), is in fact presentable in the form of C-D production function. The outcome of this study indicated a value greater than 1 for β1 and less than 0 for β2 which implies that USM is experiencing an increasing marginal product of emolument, E and negative marginal product of capital plus development grant, C