The process of the East-West integration has come to a point that enlargement appears inevitable. But are these countries really ready to join the EU in terms of competitive performance? Firstly, we construct a virtual best practice production frontier for …rms active in a European Union member state (EU) and firms in Central and East European (CEE) countries. By means of this common benchmark, we make inferences about the relative technical efficiency of firms in candidate countries. We show that technical efficiency is higher in the EU, however, firms in CEE countries are converging towards the EU average. We show that efficiency is not only di¤erent between countries, but even within countries. The latter suggests the need to look at industry-level technical efficiency. Secondly, we combine two existing techniques to develop a methodology to estimate firm level total factor productivity (TFP) change, decomposed into technical change, technical e¢ciency change and a scale component. It is mainly technical change that drives the change in TFP, i.e. technological progress. Firms in EU candidate countries are reallocating resources under decreasing returns to scale, leading to an increase in TFP. We suggest interpreting efficiency estimates as measures of firm heterogeneity.
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Paper provided by LICOS - Centre for Institutions and Economic Performance, K.U.Leuven in its series LICOS Discussion Papers with number
12302.
Find related papers by JEL classification: P2 - Economic Systems - - Socialist Systems and Transition Economies P5 - Economic Systems - - Comparative Economic Systems L6 - Industrial Organization - - Industry Studies: Manufacturing C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
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