1 The Determinants of Total Factor Productivity in the EU: Insights from Sectoral Data and Common Dynamic Processes by Agnieszka Gehringer a,* Inmaculada Martinez-Zarzoso a,b Flicitas Nowak-Lehmann Danziger a Abstract This paper examines the development of total factor productivity (TFP) and the drivers of TFP for a panel of 17 EU countries in the period of 1995-2007. The most recent panel data estimation techniques are used and further improved. The purpose of this paper is threefold: First, to estimate aggregated and sectoral TFP for 17 EU countries by means of the augmented mean group estimator to control for endogeneity, cross-section dependence and heterogeneous production technology. Second, to present and discuss stylized facts concerning the development of TFP in different EU countries and different sectors. Third and most importantly, to determine the drivers of TFP. Among them we include FDI, ICT, unit wages and different types of trade openness. We find that although wages are the main driver of TFP, ICT, extra-EU trade and human capital also play a role. Keywords: sectoral TFP, common dynamic process, European Union JEL: C26; F43; O47 ________________________________________________ a Georg-August-University of Göttingen, Germany b Universidad Jaume I, Spain * corresponding author: Platz der Göttinger Sieben 3; 37073 Göttingen; Phone: +40-(0)551 39 3932; E-Mail: agnieszka.gehringer@wiwi.uni-goettingen.de