Differentials at firm level productive capacity realization in Bangladesh food manufacturing: an empirical analysis

Abstract

This article empirically estimates the firm-specific productive capacity realization (PCR) indices using the stochastic frontier production function and analyses a number of variables explaining realization rates across firms and over time. Following Battese and Coelli (1995) the stochastic frontier production function is used to estimate capacity output and thereby PCR. Using the Firm level panel data from Bangladesh food manufacturing, the results show that capacity realization rates widely vary across firms and over time. The average rate of realization is about 65% implying that most of the firms are producing away from their full production capacity. This article also identifies several firm-specific and policy-related variables explaining capacity realization. The results show that firm size (SZE) and outward orientation (OPN) have positive while capital intensity (CNSTY), market structure (MSTRE) and effective rate of assistance (ERA) have negative impact on realization rates. Strikingly, both policy-related variables are statistically insignificant. Sensitivity analysis using the ‘extreme bound analysis’ also confirms the fragility (insignificance) of these two variables. Excessive support to firms and piecemeal liberalization reform may be attributed to these results. Thus, further reform of the domestic and trade policies are suggested to ensure competition and competitiveness of the manufacturing sector and of the country.