What Drives the Productive Efficiency of a Firm?
The Importance of Industry, Location, R&D, and Size*
Oleg Badunenko
German Institute for Economic Research, DIW Berlin, 10108, Berlin, Germany
(e-mail: [email protected])
Michael Fritsch
Friedrich Schiller University Jena, Max Planck Institute of Economics Jena and German Insti-
tute for Economic Research (DIW Berlin), Germany (e-mail: [email protected])
Andreas Stephan
Jonkoping International Business School, CESIS Stockholm and German Institute for Eco-
nomic Research (DIW Berlin), Germany (e-mail: [email protected])
Abstract
This paper investigates the factors that explain the level and dynamics of manufacturing firm
productive efficiency. In our empirical analysis, we use a unique sample of about 39,000 firms
in 256 industries from the German Cost Structure Census over the years 1992-2005. We es-
timate the efficiencies of the firms and relate them to firm-specific and environmental factors.
We find that (1) about half the model’s explanatory power is due to industry effects, (2) firm
size accounts for another 20 percent, and (3) location of headquarters explains approximately
15 percent. Interestingly, most other firm characteristics, such as R&D intensity, outsourcing
activities, or the number of owners, have extremely little explanatory power. Surprisingly, our
findings suggest that higher R&D intensity is associated with being less efficient, though higher
R&D spending increases a firm’s efficiency over time.
Keywords: Frontier analysis, determinants of efficiency, firm performance, industry effects,
regional effects, firm size
JEL classification: D24, L10, L25
*This paper is based on a cooperation project with the German Federal Statistical Office in Wiesbaden, which
enabled access to confidential firm-level micro data from the annual Cost Structure Census in Germany. We
are grateful to Gerald Gobel, Ottmar Hennchen, and Roland Sturm at the German Federal Statistical Office for
their support of this project. The paper benefited from comments by Johan Klaesson, Charlie Karlsson, Martin
Andersson, and seminar participants at the Jonkoping International Business School, the Royal Economic Society
Conference (2005) in Nottingham, the meeting of the Verein für Socialpolitik (2005) in Bonn, the International
Industrial Organization Conference (2006) in Atlanta, the Spring Meeting of Young Economists (2006) in Seville,
and the Efficiency and Productivity Analysis Workshop (HEPAW, 2006) in Brussels.