Efficiency Ranking of IT Service-Producing Firms: Case of Indian Multinationals

Abstract

Production functions often study the output of physical products with capital and labor inputs. Instead, we use 2004 to 2016 data for 55 Indian multinational companies to assess the production of services. Our estimates of flexible production functions yield estimates of scale elasticity (SCE) and elasticity of substitution (EOS) for pooled data. A subset of 31 companies with relatively complete data yields their individual SCE and EOS values, revealing their heterogeneity. Sorting the 31 companies by their SCE help name scale-efficient (high SCE) and scale inefficient (low SCE) multinationals. Similarly, a listing of 31 companies sorted by EOS allows us to name companies that are (and are not) robust to input price shocks. Using stock market data on these publicly traded companies, we report the values of three stock market criteria for top ranking companies by SCE. We also study empirical causal paths from the market criteria to EOS and SCE, suggesting that SCE and EOS do drive stock market indicators implying efficient markets. Our pooled and detailed results are relevant for government policy toward the IT sector and corporate governance issues.