Technical efficiency, technological progress and productivity growth of large and medium manufacturing industries in Ethiopia: A data envelopment analysis

Abstract

The purpose of this study is to assess empirically how the technical efficiency scores for 43 sub-sectors and their determinants over the period 2010 to 2017 show significant variation across the sub-sectors. The study applied a two-step approach for measuring technical efficiency and its determinants. A data envelopment analysis output-orientation (i.e. both CCR & BCC models) is used to estimate technical efficiency scores for 43 sub-sectors over the period 2010 to 2017. Malmquist productivity index (MPI) output orientation is also applied to compute technical efficiency change, technological progress, and productivity change. The estimated technical efficiency score shows significant variation across the sub-sectors. Thus, we used a Tobit regression model to scrutinize what defines the variation in technical efficiency scores using three years of panel data which covers 2015 to 2017. Moreover, the 43 sub-sectors were further grouped into 14 major sub sectors and classified as public and private to examine whether there is a technical efficiency score discrepancy between the same sub-sectors operating under different ownership. For measuring overall technical efficiency, we used two output variables (i.e., value-added and operating surplus) and two input variables (i.e., total fixed assets and a total number of employees). When reducing the sub-sectors to fourteen major groups, the operating surplus was not included, thus we used value-added and total sales as output variables and total fixed assets, the total number of employees, and cost of raw materials used in the production process as input variables. To shed light on the source of inefficiency, technical efficiency is decomposed into pure technical efficiency and scale efficiency. This study found that the sector had experienced a 37 percent technical efficiency in overall average when the CCR model was used. The study also claims that public owned subsectors are less likely to be efficient than private subsectors. The regression results show the capital expenditure ratio has a significant positive influence on technical efficiency. The Malmquist index result also shows, on average, the sector had registered a 10.5% technological progress and a 13% productivity growth over the period 2010-2017. The findings of the study would have implications for policymakers, government, and firm owners in that it offers an insight into the source of productivity growth in the sector.