Trade and efficiency of manufacturing industries in South Africa

Abstract

ABSTRACTThis paper advances and empirically tests the hypothesis that trade raises input-oriented technical efficiency through cost saving practices that reduce cost inefficiencies. Using a primal and dual True-Fixed-Effects (TFE) stochastic frontier approach on a panel dataset comprising 28 manufacturing industries in South Africa between 1970 and 2016 at 3-digit level, it found average technical and cost efficiency values of 0.83 and 0.33 respectively indicating that the industries operated 33% above their cost minimising level and could have reduced their input usage by 17% without compromising their output level. Empirical findings then confirmed a significant positive effect of import penetration and export intensity on technical efficiency that operates through reduction of cost inefficiencies. These findings do not only support our proposed hypothesis; they also corroborate the idea that competition from global trade forces local industries to rationalise their operations and give up production practices that are not consistent with the cost minimisation objective. The Department of Trade and Industry (DTI) might find these results useful as they suggest that a less restrictive trade policy that promotes exports and imports has the potential to improve resource utilisation within the manufacturing sector through downward cost adjustments.