Technical Efficiency in the Informal Manufacturing Sector

Abstract

The small and medium enterprise sector plays a pivotal role in the socio-economic development and growth of countries. But there is evidence that the firms in this sector are less efficient than those in the large enterprise sector. It is therefore imperative to examine their efficiency levels in order to identify the factors that contribute to inefficiency in these firms and to generate information for designing support policies for them. This article examines the level and sources of technical efficiency in the informal manufacturing sector in the Indian state of Kerala, using the translog stochastic frontier production function. The analysis has been done for five broad industry groups and the sector as a whole using firm-level data. The findings show that high levels of technical inefficiency characterise the firms in the informal manufacturing sector in Kerala. It is found that size, ownership, region (location) and seasonality of operation significantly influence technical efficiency level in most of the industry groups. Evidence also shows that credit availability and employment of hired labour play a significant role in explaining technical efficiency levels.