Technical Efficiency and Its Determinants in the Manufacturing Sector: What We Know and What We Should Know

There is a larges literature on technical efficiency (TE) of manufacturing sector firms in developing country contexts, much less so for developing country contexts. Most of empirical research use either data envelopment analysis (DEA) or stochastic frontier analysis (SFA) to estimate TE. Available evidence suggests that TE of firms is low in developing countries, and there is considerable inter-firm heterogeneity in TE. Firm-level TE is correlated with (or influenced by) external factors such as liberalization of trade and foreign direct investment (FDI) and overall economic liberalization, as also by internal factors such as firm size, ownership, whether or not they operate in the formal sector, and use and adoption of ICT. However, there is mixed evidence about the extent to which liberal economic policies and firm characteristics such as size and ownership are associated with higher TE. Future research should focus on the impact of the institutional environment in which firms operate and their managerial capability on firm-level TE.