Technical Efficiency Analysis of Micro-enterprises: Theoretical and Methodological Approach of the Stochastic Frontier Production Functions Applied to Nigerian Data

Abstract

This study was carried out to analyse the technical efficiency of micro-enterprises in the Nigerian economy, using cross-sectional data collected on micro-enterprises selected from block-making, metal-fabricating and sawmilling enterprises in the three geographical regions (north, southwest and southeast regions) of Nigeria. The Nigerian government has put in efforts at promoting productivity and efficiency in both public and private sectors of the economy. The ability of Nigerian economy to experience accelerated economic growth both in the short and in the long run depends on the exploitation of the potential within the micro-enterprises sector of the economy. The importance of this sector is reflected in the current economic reform programme of the Federal Government of Nigeria under the National Economic Empowerment Development Strategy (NEEDS). NEEDS is a comprehensive two- to three-year economic growth and poverty reduction plan. It then becomes important to study the current level of technical efficiency within the micro-enterprises sub-sector. Data collected were analysed using the stochastic frontier production functions. The results of the analysis show that the enterprises have varying level of technical efficiencies across enterprises, across scales of operation and across regions. Of the three geographical regions, both the least and the highest technical efficiencies come from micro-enterprises located in the southeastern regions of Nigeria. The mean technical efficiencies range between 0.66 for sawmilling enterprises and 0.82 for metal-fabricating enterprises. The results indicate that while the level of education, level of investment and number of employees positively and significantly affect the level of technical efficiency, age of enterprise, as well as age of enterprise operator/decision-maker, negatively influences the level of technical efficiency. The results of tests of hypotheses show that there is no significant difference in technical efficiency across the scale of operation, but the hypothesis of no significant difference in technical efficiency across geographical zones is rejected. Copyright 2008 The author 2007. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.