This study divides a production system into three components: production design, demand support, and operations. Efficiency is then decomposed via network data envelopment analysis and integrated into the Malmquist Productivity Index framework to develop a more detailed decomposition of productivity change. The proposed model can identify the demand effect and the identity of the root cause of technical regress. Specifically, the demand effect allows the source of technical regress to be attributed to both demand deterioration and technical regress in the production technology. An empirical study using data from 1995 to 2000 for the semiconductor manufacturing industry is presented to demonstrate and validate the proposed method. The result shows that the regress of productivity in 1997-1998 and 1999-2000 is mainly caused by demand fluctuations rather than by technical regression in production capabilities.
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