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About this book

Productivity growth is a keyword for sustainable economic growth in a knowledge-based society. There has been significant methodological development in the literature on productivity and efficiency analysis, e.g. SFA (Stochastic Frontier Analysis) and DEA (Data Envelopment Analysis). All these methodological developments should be matched with applications in order to provide practical implications for private and public decision-makers. This volume provides a collection of up-to-date and new applications of productivity and efficiency analysis. In particular, the case studies cover various economic issues in the Asia-Pacific region. The authors analyze the performance of manufacturing firms, banks, venture capital, broadcasting firms, as well as the issues of efficiency in the education sector, regional development, and defense industry. These case studies will shed light on the potential contribution of productivity and efficiency analysis to the enhancement of economic performance.

Table of Contents

Frontmatter

Industrial Sector and Firm Level Efficiency and Productivity Analysis

Introduction Productivity, Efficiency, and Economic Growth in the Asia-Pacific Region

Productivity growth enables an individual firm to raise profit and market share at the micro level, and it helps a country to counteract inflation, create jobs, and to force the necessary industrial restructuring at the macro level. There is widespread consensus among academic researchers in the field of growth theory, policy makers, and/or businessmen that productivity growth is indispensable to sustainable economic growth.
There is no one-size-fits-all solution to improve the productivity, since the ways and means critically depend upon the context and the condition under which firms operate. For example, the strategy for productivity growth in 2000s should be different from that in 1990s, since the parameters forming the economic condition are different and changing. Cross-sectionally, the strategy for automobile industry should not be the same as that for financial institutions, mainly because the production process and industry structure are all different from each other. Thus, the decision maker who is in charge of productivity growth should learn the characteristics of the context, and track down the relevant studies and successful policies that tackle similar sector and/or period.
J. -D. Lee, A. Heshmati

1. Factor Hoarding and Productivity: Experience from Indian Manufacturing

Growth in the neoclassical framework stems from two sources: factor accumulation and productivity growth. The growth driven by increased factor accumulation cannot be sustained because of the non-availability of factor inputs in future as well as diminishing returns to factors. Hence, economists have emphasized on productivity growth. Total factor productivity (TFP) growth is important even for developing countries like India with relatively abundant labour, as these economies face an acute shortage of some other productive resources. Many studies have been undertaken to examine the trends in productivity in India. Most of the empirical studies on productivity in India have focused on the TFP growth (TFPG) of the manufacturing sector in the post reform period. Some of these studies include Brahmananda (1982), Ahluwalia (1991), Golder (1986,1990, 2004), Srivastava (1996, 2001), Chand and Sen (2002), Unel (2003), Das (2003), and Topalova (2003). Evidence on TFPG in India as brought out by these studies vary considerably. This is due to the use of different estimation methods of TFPG, as well as the use of different data sets. None of the above studies has considered variation in input utilization rates over business cycles to compute TFP or Solow residual. In this paper, I have considered variable input utilization — variable capital utilization and variable labour efforts derived explicitly from a partial equilibrium model on Indian data. Variability of factor inputs can occur over a business cycle when firms are not able to disinvest capital or lay off workers in a downturn. It is particularly important for Indian industries which have operated till 1991 under a rigid license, permit and quota regime. During an expansion period, capital is fully utilized while in recession period, there is under utilization of capital stocks. Firms were known to hoard capital above their optimal level as they could claim a lower capital requirement for later expansion, and hence strengthen their claim for production license. On the labour front, labour protection laws have made it virtually impossible for the firms to lay off workers even when they have stopped producing. Also, training new workers is costly and firms encourage workers to work harder in the expansion period. In the typical TFP calculation, labor/capital inputs are measured as higher than ‘real’ in recessions, and as lower than ‘real’ in expansions. Accounting for factor hoarding or surplus can thus have a significant impact on TFPG estimation since the standard computation of the Solow residual fails to filter out cyclical variation in input utilization rate, assigning it to fluctuations in technology.
Dipika Das

2. Concentration, Profitability and (In)Efficiency in Large Scale Firms

The relationship between efficiency and market structure has been under investigation in the literature for a long time. According to Hicks (1935), firms with higher market power can survive in the economy even if they have higher costs since they can charge prices above the marginal cost. Although the relationship between firm performance measured by profits and market structure is obvious (Peltzman 1977), the direction of causality remains ambiguous (Clarke et al. 1984). There are different explanations of this relationship. One is to start with market power and relate the higher firm efficiency to the ability of firms with higher market power to charge prices above the cost margin. The second one, originally developed by Demsetz (1973), is based on the efficient structure of production and relates higher market power to the higher profits brought about by higher efficiencies. Although these two approaches try to explain the same relationship from the firm side, the welfare implications would be completely different. The reason for this is that in the first approach, that is, the market share hypothesis, firm performance (efficiency) is measured by the profitability of a firm and the relationship with market structure examined. According to this hypothesis, market power and efficiency are either negatively related, or not related. In the second approach, firm performance is measured by the efficiency of production. According to efficiency hypothesis, market power and efficiency are positively related. Feeny and Rogers (1999), Choi and Weiss (2005), Oustapassidis et al. (2000) and Bhattacharya and Bloch (1997) test both hypotheses for different countries and sectors and report controversial results. Thus, there is no clear evidence supporting any of the two hypotheses.
The paper is organized as follows: The next section gives a brief survey of Stochastic Frontier Analysis and presents the specification of the Stochastic Frontier Analysis used as the method of estimation in the paper. The data and variables used in the econometric analysis are introduced in the Section 2.3. Section 2.4 presents the estimation results and discusses their interpretations. Section 2.5 of the paper summarizes the conclusion of the study.
H. Dudu, Y. Kiliçaslan

3. Financial Ratio Analysis: An Application to US Energy Industry

Discriminant Analysis (DA) is a decisional tool that can predict group membership of a newly sampled observation. In DA, a group of observations whose memberships are already identified is used for the estimation of weights (or parameters) of a discriminant function by some criteria such as the minimization of misclassifications, or the maximization of correct classifications. A new sample is classified into one of the several groups by DA results.
The remaining sections of this article are organized as follows: Section 3.2 provides a brief literature review that indicates the position of this research among the existing literature on DA. A review of FRA is methodologically discussed in Sect. 3.3. Section 3.3 also documents the formulation for the multiple group classification and the characteristics of the FRA methodology. The FRA is applied to a data set on the US energy industry in Sect. 3.4. Concluding comments and future extensions are summarized in the last Sect. 3.5.
M. Goto, T. Sueyoshi

4. On Measuring Productivity Growth in Indian Industry: Analysis of Organized and Unorganized Sector in Selected Major States

The Indian industrial sector has gone through various phases since independence. During the late 1970s and 1980s, there was a stagnation in the Indian industrial production. The slowdown in industrial production observed during the 1980s was primarily on account of low productivity. There was persistence of high costs on account of adoption of obsolete technology and low quality of production. However, progress in the process of deregulation was initiated during the 1980s.
The major reforms in Indian Industrial sector were witnessed during the 1990s. For instance, in 1991, there was a gradual dismantling of industrial licensing, removal of import licensing from nearly all manufactured intermediate and capital goods, tariff reduction and relaxation of rules for foreign investment. The reforms in respect of the industrial sector were intended to free the sector from barriers to entry and from other restrictions to expansion, diversification and modification so as to improve the efficiency, productivity, and international competitiveness of the Indian industry. Against this backdrop, the paper makes an attempt to examine the impact of reforms on Industrial sector (both organized and unorganized sector) in India during the reforms period by adopting both partial factor productivity and total factor productivity approach. Further, to identify the role of technical efficiency and technical change, attempt has been made to decompose total factor productivity growth (henceforth, TFPG) into technical change and efficiency change by using Malmquist index.
The paper is organized as follows: Sect. 4.2 deals with data base and methodology adopted while in Sect. 4.3, the growth performance of the Indian manufacturing sector has been discussed. In Sect. 4.4 an attempt is made to examine the productivity performance of the organized and unorganized manufacturing sectors while Sect. 4.5 deals with policy issues followed by summary and conclusion in Sect. 4.6.
S. N. Rajesh Raj, Mihir K. Mahapatra

Performance in Financial Sector

5. Technical Efficiency of Banks in Southeast Asia

National financial systems, and banking sectors in particular, assume increasing importance and fluidity with the progress of economic development and the increase in economic openness. This notwithstanding, attempts to measure and formally monitor the performance of the banking sector have largely been confined to western developed economies. As a result, little concrete empirical information and evidence is available about banking productivity and efficiency in non-western countries. Accordingly, the aim of the present investigation is to start filling the gap left by non-industrialized countries in the empirical literature of efficiency studies of banking.
The paper examines the evolution and the contemporary state of bank efficiency in major developing economies of Southeast Asia - Indonesia, Malaysia, Philippines, and Thailand - over the period 2001–2005. During this period, the banking sectors of the sampled countries were involved in a process of restructuring that was often guided or even mandated by the respective governments. For example, the Indonesian government pursued a policy of consolidation, reducing the number of licensed banks by more than 40% (from 238 in 1997 to 134 by the end of 2004) during the sampled period. In Malaysia, the number of banks was reduced by 31%, from 36 in 1997 to 25 in 2004. In the Philippines, consolidation reduced the number of banks from 52 to 44, and in Thailand, from 16 to 12 during the period 1997–2004 (Gosh 2006, pp. 63–65). At the same time, an increase in cross-border mergers, i.e., mergers involving foreign firms, exposed the domestic banking sectors to greater competition from abroad (Deloitte-Touche 2005).
The present study measures bank performance by employing Data Envelopment Analysis (DEA). The nature and robustness of the DEA results are evaluated with bootstrapping methods. To our knowledge, these methods have not been applied in the context of developing countries in Asia. Our methodology of estimating efficiency and bootstrapping is explained in the following section. Data issues are discussed in Sect. 5.3, results are presented in Sect. 5.4, and policy implications in Sect. 5.5. Section 5.6 concludes the paper.
E. Dogan, D. K. Fausten

6. The Effect of Asset Composition Strategy on Venture Capital Firm Efficiency: An Application of Data Envelopment Analysis

The Korean government has driven the venture capital market since KTB Network was created in 1981 to provide capital to the high tech firms. Due to the venture policy, the venture capital market has undergone a compressed growth in a short period of time. In 1986, the government enacted the “Small and Medium Business Start-up Support Act” and “Finance Act to Support New Technology Businesses” to provide legal bases to establish venture capital (VC) firms. The government pushed the VC firms to carry out equity investments on small and medium businesses within the age of 7 years. Hence, the Korea Development Bank Capital and TG Venture, the archetypes of today’s VC firms, have been established to finance high tech firms such as Medison, Mirae, and Sambo Computer (Lee 2003). In spite of the efforts made by the government, until the mid-1990s, there were problems in constructing the venture capital market, due to poor system to finance technology and lack of policy measures to support the high tech firms. There was no exit system to liquidize the equity investments, and most of the investment targets were from mature industries which brought low returns. Further debt financing was preferred to equity investment because of the low risk and high interest rate.
This paper is organized as follows. Chapter 2 presents the literature reviewed and the hypotheses proposed. In Chap. 3, methodologies are presented while in Chap. 4, the data and the variables are presented. In Chap. 5, the effect of asset composition strategies on operating efficiency is estimated and analyzed. In Chap. 6, the estimation results are reviewed and policy implications addressed.
E. J. Jean, J. -D. Lee, Y. -H. Kim

7. Post Crisis Non-Bank Financial Institutions Productivity Change: Efficiency Increase or Technological Progress?

Non-Bank Financial Institutions (NBFIs) play an important dual role in a financial system. Traditionally, NBFIs comprise of a mixed bag of institutions that includes all financial institutions not classified as commercial banks. They complement the role of commercial banks, filling in financial intermediation gaps by offering a range of products and services that they offered. Nevertheless, they also compete with commercial banks, forcing the latter to be more efficient and responsive to their customers needs. Most NBFIs are also actively involved in the securities markets and in the mobilization and allocation of long-term financial resources. The state of development of NBFIs is usually a good indicator to the state of development of a country’s financial system as a whole.
Given the substantial task of the NBFIs, it is worth raising the issue of its role. In particular, since Gerschenkron (1962) classic study emphasizing the role of the banking systems in the economic development of Germany, France and Italy in the nineteenth century, it may appear that the need for NBFIs is largely redundant in the specific circumstances of the developing economies. There are two main reasons why the existence of NBFIs is important; one reason concerns the economic development and the other reason relates to financial stability. As NBFIs are established to avoid tight prudential controls applicable to banks, they play a prominent role in financial system failures. Increased competition from NBFIs could also result in banks increasing their lending volumes, by lowering their lending standards to maintain market shares. This may result in a rapid lending growth, which could indirectly result in a financial crisis.
F. Sufian, M. -Z. Abdul Majid

8. The Impact of the Wallis Inquiry on Australian Banking Efficiency Performance

Since the deregulation of the Australian financial system in early 1980s, the banking industry has undergone sweeping changes. As of December 2005, there were 53 authorised banks in Australia, including eleven foreign subsidiary banks and 29 branches of foreign banks (APRA 2005). With the entry of foreign banks and former domestic building societies into the market, domestic banks have reacted to the intensified competition by performing more efficiently and engaging more actively in mergers and acquisitions. However, the four major banks generally hold the view that the consolidation of the financial services industry and the competitiveness of the industry in the international market have been hindered by a restrictive political and regulatory environment, such as the four pillars policy prohibiting mergers among the four major banks (Guy and Whyte 2002). Therefore, it is important to analyse the performance of the Australian banking industry, with particular reference to the Wallis Inquiry into the Australian Financial System (hereafter the Inquiry) in 1996, to which the Australian Federal Government responded by adopting the four pillars policy.
S. Wu

Efficiency in Public Sector and the Role of Public Policy

9. Performance Ranking and Management Efficiency in Colleges of Business: A Study at the Department Level in Taiwanese Universities

Empirical analysis of the efficiency of higher education institutions has commonly involved the use of data envelopment analysis (DEA). Leading studies in this area include those that measure efficiency at the school level, such as Ahn et al. (1988) on US universities in 1981–1985, Glass et al. (1998) on UK universities in 1989–1992, and Avkiran (2001), Abbott and Doucouliagos (2003) and Carrington et al. (2004) on Australian universities. There are also a few studies that measure efficiency at the departmental level. For example, Madden et al. (1997) assessed the efficiency of economics departments in Australian universities, Johnes and Johnes (1993) assessed the efficiencies of economics departments in the UK in 1984–1988, Haksever and Muragishi (1998) and Colbert et al. (2000) studied the efficiency performance of MBA programs in the US, and Ray and Jeon (2003) employed a production model and DEA to examine the reputation and production efficiency of MBA programs in general.
T. -T. Fu, M. -Y. Huang

10. Efficiency of the Korean Defense Industry: A Stochastic Frontier Approach

The defense market, which is composed of a sole demander and few suppliers, is generally regarded as a monopolistic market. In this sense, it has its own characteristics that are different from other common competitive markets. High precision technology and a huge amount of capital investment in the initial stage of production are essential in the defense industry, and this necessitates subsidy policy of the government. Most of the supplies are produced in an order-based manner due to the special specification requirements and this hampers the market-driven pricing mechanism. The price is determined based on negotiations between the two parties, considering the cost of production, retrieval of the investment, and efficient allocation of the government budget.
This study is organized as follows. The history of the Korean defense industry and policies are summarized in Sect. 10.2. The data is described in Sect 10.3. In Sect 10.4, this study sets out the stochastic frontier production function for the analysis of efficiency and the model for decomposition of TFP. The results of the estimation of the stochastic frontier model are presented in Sect 10.5, where technical efficiency, testing results on factors affecting efficiency and decomposition of TFP are discussed. Lastly, Sect 10.6 presents the conclusions of this study.
Kyong-Ihn Jeong, A. Heshmati

11. Performance Measurement of Agricultural Cooperatives in Thailand: An Accounting-Based Data Envelopment Analysis

Despite the emergence of industrialisation, the agricultural sector still plays a prominent role both in the Thai economy and social development. As indicated by the National Statistical Office (2006), around 57% of the total population relies on the agricultural sector in Thailand, while the contribution of the agricultural sector to gross domestic product has gradually decreased (Office of the National Economic and Social Development Board 2005). This implies that the more the Thai economy progresses, the more the productivity inequality between the conventional and modern sectors increases. It has long been a critical question for policy makers to choose the appropriate direction of development planning to improve the above situations through many measures and interventions on the sector in Thailand.
The primary purpose of this study is to measure and investigate factors influencing Thai agricultural cooperatives’ technical efficiency including its pure technical and scale efficiencies in 2004. The study was an application of a data envelopment analysis approach in order to estimate technical efficiency, based on the financial statements of agricultural cooperatives in Thailand, and also to investigate the determinants of the efficiencies among different management policies and operation environments. The empirical results of technical efficiency and influencing factors are necessary for policy makers and cooperatives’ stakeholders to enable them to choose the appropriate direction of development planning to improve the performance of agricultural cooperatives and the Thai economy.
This paper is organized into five sections. Following this introduction, the analytical framework is explained. Next, data are described. The last two sections cover the empirical findings of this study, and conclusions and policy implications.
W. Krasachat, K. Chimkul

12. An Empirical Study on the Performance of public Financing for Small Business in Korea

Credit guarantee schemes for small business financing have been one of the most important public support programs to develop the regional economies in many countries. Even if the systems as well as the governance for each program are different in detail, most of theorists and government officials supported the economic necessity and the effective performance.
Most empirical models base on the incremental or marginal approaches to analyze the performance or productivity of the public financing using input-output model such as Data Envelopment Analysis (DEA) or cost-benefit approaches. These kinds of approaches may prove the effective performance, but not negatively. Thus, the objective of the research is to investigate whether the public financing support such as credit guarantee is ‘really’ effective. In order to analyze this effectiveness of credit guarantees, the paper shall differentiate why to support with how to support. To compare these questions, the paper shall utilize two sets of approaches toward the public financing system and its governance.
Yongrok Choi

13. The Impact of Agricultural Loans on the Technical Efficiency of Rice Farmers in the Upper North of Thailand

Rice is the major crop in Thailand and it will remain so as long as it continues to be the major export crop and the staple food of the Thai population. However, the fact is that, although Thailand is the main rice-exporting country in the world, its rice yields are among the lowest in Asia (Office of Agricultural Economics, 2004a, b). This might imply low productivity and high technical inefficiency in major rice production. In an attempt to resolve this problem, the Thai government has promoted the use of inputs in rice production, such as chemical fertiliser, highyielding varieties and chemicals, to increase the yields. The total amount of chemical fertiliser that was imported increased from about 1.3 million tonnes in 1985 to 3.9 million tonnes in 2004, with an annual growth rate of 4.6%. The value of imported chemical fertiliser also increased with a higher annual growth rate of 8.7%. The increasing use of chemical fertiliser and chemicals whose prices have been rising continuously has resulted in substantial increases in production costs.
This paper aims to answer two questions: how has rural credit contributed to the production of rice? and how do agricultural loans from the rural financial institutions affect the technical efficiency of rice farmers? This study is based on data from farmers in Chiang Mai and Chiang Rai provinces which are the main areas for major rice production in the Upper North sub-region. The results from this study will be useful for determining the government policies on rural financial institutions.
This paper is set out as follows: Sect. 2 provides an overview of the rural financial institutions. Section 3 presents survey data on rice farmers and model specifications. Section 4 discusses the results from the translog stochastic frontier production function. The last section provides policy implications and conclusions.
Y. (Kai) Chaovanapoonphol, G. E. Battese, H. -S. (Christie) Chang

Efficiency of ICT Firms

14. Efficiency Analysis of the Digital Content Industry in Korea: An Application of Order-m Frontier Model

It is a very strategic and efficient policy for Korea, a small country with few natural resources, to develop information and communication technology (ICT) as an alternative source of development. The surprisingly rapid development of the ICT industry is a result of long term and optimal R&D investment and also due to the national uniqueness of this industry field. Specially, the fast diffusion of super-highway internet has enabled the advanced foundation for this industry. With the development of ICT, a new type of industry has emerged. The digital content industry has enjoyed the benefits of the ICT industry development and has the distinct characteristics compared to traditional industries. Economic scholars are forecasting the various future possibilities and the next generation of ICT. They emphasize the necessity of moving the axis from communication network-based services to content-based services.
D. O. Choi, J. E. Oh

15. Analysis on the Technical Efficiency and Productivity Growth of the Korean Cable SOs: A Stochastic Frontier Approach

Cable TV in Korea started in 1995 to provide service of multi-channel broadcasting and this marked the beginning of the new media era as well as the initial launching of video subscription services in Korea. Thereafter, new multimedia broadcasting such as digital satellite broadcasting (DSB) in 2001 and digital multimedia broadcasting (DMB) in 2005 were subsequently introduced. At the early stage of development of the Korean Cable TV industry, operators were separately permitted as program provider (PP), system operator (SO) and network operator (NO). In order to minimize the negative structural effects from belonging to specific companies such as the Press, large conglomerates and so on, they were not allowed to have cross-ownership. As first and second SO licensees, 53 metropolitan-centered SOs and 24 provincial-centered SOs were licensed in 1994 and 1997 respectively. Thereafter, Relay Operator (RO) were two times switched to SO for the revitalization of Cable TV through the unification of the laws and regulations in this industry.
K. Kim, A. Heshmati
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