7.3 Trade and technical efficiency of Indian manufacturing firms
Parameswarn (2000) uses firm-level data to analyze the evolution of technical efficiency of Indian
firms. The data (obtained from CMIE) span the years 1989 to 1998 and are relative to 640
firms belonging to four industries: Electrical machinery, Non-electrical machinery, Electronics and
Transport equipment. In order to estimate technical in/efficiency, the author uses the stochastic
frontier production approach developed by Battese and Coelli (1995), which involves estimating a
production function of the type:
yit = f (kit ,lit,mit,t) - uit + εit (22)
where all variables are in logarithms, and yit is output of firm i at time t. The function f (∙)
represents the frontier technology, whose inputs are physical capital (kit), labor (lit), materials
(mit) and time t (to allow the frontier to shift over time). εit is an error term, and uit is a non-
negative random variable that captures technical inefficiency. Parameswarn asks which variables
affect technical efficiency in Indian manufacturing industries. His main findings are the following.
Technical efficiency (-uit) is positively and significantly correlated with R&D intensity in all
sectors, suggesting that R&D activities may contribute to reduce technical inefficiency of Indian
firms. Export intensity has a positive effect on technical efficiency in all sectors except Electronics,
where it has instead a negative and significant effect on technical efficiency. Technology import
intensity has a positive and significant effect on technical efficiency in Electrical machinery and
Transport equipment and a negative and significant effect in the other two sectors. The negative
impact of technology imports on technical efficiency in high-tech sectors such as Electronics and
Non-electrical machinery is indeed surprising. Another surprising finding is that in all sectors
technical efficiency is negatively correlated with a time dummy variable which takes a value of zero
up to 1991 and a value of one thereafter. Hence, trade liberalization seems to be associated with
an increased average technical inefficiency in Indian manufacturing.
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