Stochastic Frontier Analysis On The Productivity And Technical Efficiency Of China's Large And Medium Industrial Enterprises

Efficiency is the core problem in economics, and technical efficiency of the firm is the basis of the macro economies which provides guarantee of the sustainable economic development. Based on the stochastic frontier production function model, this dissertation discusses the estimation of the technical efficiency under the panel dataset, and decomposes the growth of Total Factor Productivity (TFP) into technological progress, technical efficiency, allocative efficiency and scale economy. In addition, the present study identifies and estimates the exogenous factors which determine the technical efficiency level of the firm. Panel data, also called longitudinal data or cross-sectional time series data, are data where multiple individuals (people, firms, countries etc) were observed at two or more time periods. There are two kinds of information in cross-sectional time-series data: the cross-sectional information reflected in the differences between individuals, and the time-series or within-individuals information reflected in the changes within individuals over time. Panel data regression techniques allow us to take advantage of these different types of information. The essentials of the stochastic frontier production function model are that the effects of the random shock on production as well as technical inefficiency are allowed in the model, which accounts for the fundamental as compared with the average production function model and deterministic frontier production function .The combination of the stochastic frontier model and panel data facilitates the analysis of dynamic features of the productivity and technical efficiency. Using the stochastic frontier production function analysis and a firm-level panel data collected by the National Bureau of Statistics of China, this paper examines the total factor productivity growth of China's large and medium-sized industrial enterprises sector during the years1995-2002. The major findings about the efficiency performance include: 1) The weighted average annual growth of TFP(Total Factor Productivity) in China's large and medium industrial enterprises was the as high as 6.8% with a rising trend during the years 1996-2002, while the growth rate of industrial value-added was 11.5%. The weighted average annual growth rate of TFP in year 1996 and year 1997 descends for 4.3% and 0.7% respectively, and increases quickly with 3.0%,7.5%,11.2%,8.2% and 14.0% respectively during the years 1998-2002. 2) The frontier Technological progresses have already become the core motive of TFP growth. The contribution to TFP growth by Frontier Technology Progress reached as much as 14 percentage points a year on average with a rising trend during the years 1996-2002. The contribution to the TFP growth was 2.8 percentage points in year 1996, 5.94 in year 1997, 9.01 in year 1998, 12.3 in year 1999, 15.3 in year 2000, 18.9 in year 2001 and above 22 in year 2002 respectively. We find from these data that the high growth of productivity along with frontier production function curve was mainly promoted by frontier technological progress. In a preliminary analysis, we suggest four driving forces on the frontier technology progress:(1) competition is the exterior pressure on the technological progresses; (2) the Foreign direct investment (FDI) and globalization are the headspring of technological progress; (3) the optimization of ownership structure is the interior power on technological progresses; (4) good economic and social surroundings provide the necessary prior condition to promote the technological progress. 3) The low level of the technical efficiency relative to the Frontier and increasing gap of technical efficiency among the firms are the great challenge to development of china's economy. During the years 1996-2002, the decline in Technical Efficiency (Relative to the Frontier) reduced the growth of TFP by 7.1 percentage points a year on average, and the level of the technical efficiency was 31% on average with a declining trend. The expanding gap of technical efficiency among the enterprises led to declining of industrial sector's TFP growth: by 6.4 percentage points in year 1996,6.5 in year 1997, 6.6 in year 1998, 6.7 in year 1999, 7.0 in year 2000, 7.4 in year 2001, 7.9 in year 2002. Therefore, raising the technical efficiency has been becoming another engine and challenge for future development of china's economy. 4) The approach to the market economy and improvement of the legal system enhances greatly the function of market as an important tool to allocate the limited resources. Allocative Efficiency contributed on average only 0.02 percentage points a year to the growth of TFP. The elasticity of factor close to its expensive price indicates that the enhancement of function of market to allocate resources on the whole, but there is still great room to raise productivity by improving the allocative efficiency for a firm or an industrial sector. 5) Scale Dis-Economy is the basic feature of the china's industries, and scale effect is a prospective way to raise the quality (steadiness, fastening) of economic growth. Scale Dis-Economy slowed the growth of TFP by 0.33 percentage points a year. Bringing into play scale economy relies greatly on an efficient market to expand the size of a firm. The results show that at the turn of the century, the most important part of China's industry was in the middle of an industrial productivity revolution markedly driven by both frontier technological catching up and retarded by expanding gaps of technical efficiency among enterprises. The revolution is a result of increased competition, privatization,foreign investment, and business expansion. The gaps of technical efficiency were both the driving forces of the technological progresses and the sources of industrial productivity revolution. Using the stochastic frontier production function model and a firm-level panel data during years 1995-2002 collected by the National Bureau of Statistics of China, this paper analyses the exogenous factors to determine the gaps of technical efficiency, and investigates empirically on the channels and sources of technological progresses, and thereby reveals the institutional and market foundation of China's industrial productivity revolution. The major findings include:(1) The structure of property rights is the core factor which determines the gaps of technical efficiency, and results in industrial productivity revolution; (2) The effects of technological spillover on the technical efficiency are substantial within both industrial sectors and regions, which are important sources of productivity revolution.(3) The intense market competition cannot cut down on the gaps of technical efficiency among enterprises recently, but constructs a desirable circumstance for the industrial productivity revolution. (4) The firm size does have significant effects on the technical efficiency, and then looking for a fitting firm size is vital to productivity revolution; (5) Strengthening budget constraints on State-Owned Enterprises helps to improve the technical efficiency, which is institutional measures to industrial productivity revolution; (6) The gaps of technical efficiency among economic regions due to historical and locative reasons would result in economically conglomerate effect and lead to a "swallow" developmental model ,which provide an extensive market foundation to sustain China's industrial productivity revolution . Therefore, we suggest four main measures be taken to improve the technical efficiency: Firstly, the most important measure to improve the technical efficiency is to establish the clear ownership structures, to strengthen the budget constraints on state-owned enterprises; Secondly, to deepen the development of the capital market to facilitate the efficient flow of the capital factors so as to determine the rational firm size according to the characteristic of the industrial sector; Thirdly, to relax gradually the regulations of the access to the monopolistic industrial sectors; balance the gains arising from between competition and concentration according to the circumstances of the industrial sectors; and establish correct and timely policies to improve the technical efficiency of the firm; Finally, to attach importance to the development imbalance of different economic regions, and make the east-littoral region to play positive roles to promote the whole economic efficiency by integrating the advantages of different economic regions.