1 Introduction
Empirical analyses show that firm productivity varies considerably even when the firms are op-
erating in the same market (for an overview, see Bartelsman and Doms (2000)). While some
firms operate at the technological frontier and earn high profits, others lag considerably behind
and barely survive. There may be many reasons for these differences, including, among others,
managerial restrictions, slow adaptation to changes in the market environment and/or technol-
ogy, location, and frictions in the labor market. It is the intent of this paper to identify the
determinants of such differences in the performance at the firm level. We analyze the level and
the development of firm technical1 efficiency, which is its relative productivity compared to the
highest attainable level. Specifically, we are looking for answers to questions such as: What are
the reasons for diverging efficiency of firms? Which factors explain why some firms are more
efficient than others? How does firm efficiency evolve over time?
Empirical investigation into the determinants of efficiency dates back to the early 1990s. For
instance, Lovell (1993) stated that identifying the factors that explain differences in efficiency
is essential for improving the results of firms, but that, unfortunately, economic theory does not
supply a theoretical model of determinants of efficiency. However, Caves and Barton (1990)
and Caves (1992) suggested that several studies have developed a strategy for identifying the
determinants of efficiency, which can be grouped into several categories: (i) factors external to
the firm; (ii) factors internal to the firm; and (iii) ownership structures (e.g., public vs. private).
To find answers to the questions set out above, we take a look at each of these categories
of determinants. In particular, we distinguish between firm-specific and environmental factors
much in the spirit of Caves and Barton (1990). Environmental factors are not under direct
control of the firm, at least not in the short run. We consider industry affiliation and firm
location to be important environmental factors. Firm-specific factors, on the other hand, are
characteristics that can be influenced by the firm in the short run. Among the firm-specific
factors we analyze are firm size, R&D intensity, and degree of outsourcing.
Our study makes several important contributions to the literature on the determinants of effi-
ciency. First, to the best of our knowledge, none of the previous analyses used such a rich dataset
to simultaneously analyze the influence of numerous firm-specific and environmental factors
on efficiency. Indeed, previous studies either focus on industry characteristics (e.g., Roudaut,
2006) or regional (e.g., Li and Hu, 2004), or size effects (e.g., Oczkowski and Sharma, 2005;
Soderbom and Teal, 2004), aand thus provide only limited insight into the relative importance
of a single influence. Second, we are not aware of any study using a representative sample of
firms for the whole manufacturing sector of a national economy. Third, we apply the concept
of partial R2 in the second step of our analysis because doing so is a more appropriate method
of describing the importance of factors than the commonly used t-values when the number of
1The terms productive and technical efficiency are used interchangeably throughout the paper.