Efficient Firms Research Articles

Riders on the storm: How do firms navigate production and market conditions amid El Niño?

This paper investigates how heavy rainfalls resulting from the 2002–03 El Niño climate pattern affect Ecuadorian firms' production and market conditions. We show that affected firms' revenue productivity (TFP-R) and markups decrease. This is due to production efficiency losses (TFP-Q) and higher marginal costs of initially less efficient firms. Decreased product output prices in response to lower product demand explain the impact on initially more efficient firms. However, the shock neither affects market shares nor survival rates of initially less efficient firms. Consequently, the productivity distribution of Ecuador's industry is not affected by the shock. We also show a swift recovery of production and market demand in the immediate aftermath of the shock. Impacts in 2002–03 are like those of the 1997–98 rainfall shock. Differentiating firms by their TFP-R rather than their production efficiency indicates firms with better (worse) market positions can mitigate the negative impacts of the shock more (less).

Operational efficiency, agency costs and the mediating role of payout policy

ABSTRACT The association between a firm’s operational efficiency and its payout policy has received little attention in literature despite their common linkage to agency costs. Our findings suggest a significant linkage between the three. First, operationally efficient firms are associated with significantly higher agency conflicts of free cash flows. Second, operationally efficient firms exhibit a significantly greater propensity to pay dividends, thereby substantially reducing the associated agency costs compared to their non-dividend paying counterparts. This mediating role of dividends remains robust when considering different measures of operational efficiency and in a matched data. Using Data Envelopment Analysis (DEA) to obtain operational efficiency and Nearest Neighbour Matching (NMM) to get a matched sample, the findings imply that a firm’s operational and managerial decisions are interconnected in managing agency problems stemming from free cash flows.

Forward contracting and the endogenous activity of heterogeneous firms

AbstractForward contracting in an ‐firm quantity‐setting oligopoly with heterogeneous costs introduces the possibility that relatively efficient firms deter the activity of inefficient rivals by reducing their margins. The equilibrium number of firms producing positive quantities can be any of depending on the level of demand relative to firm‐specific activity thresholds, with more firms active at higher demand levels. If only one firm is active, the Bertrand outcome is obtained. This potential reduction of the number of active firms may lessen the procompetitive effect of forward sales, but does not eliminate it entirely. We explore the competition policy implications of the endogenous activity of firms, in particular for merger analysis.

Innovation strategies and firm performance

Innovation is often seen as crucial for firm survival and as a way for firms to differentiate themselves from their rivals. However, innovation studies are vague about the actual importance of different innovation strategies. In this study, we distinguish between pure product, process, organizational, and marketing innovations and their combinations. We use a (balanced) panel data set with more than 15,000 firm-year observations for manufacturing firms to analyze the performance of firms with different innovation strategies. Additionally, we investigate from a societal perspective whether innovation facilitates less efficient firms to catch up, or whether firms already utilizing best practices are the main beneficiaries. Using Data Envelopment Analysis (DEA), we find the highest increase in firms’ performance among the firms with innovation strategies that combine product innovation with other innovation types. This finding applies to both the short and the longer term. We also conclude that catch-up is strongest among the firms adopting pure process innovation, whereas the other innovation strategies are primarily associated with frontiers shifts.

Improving technical efficiency in data envelopment analysis for efficient firms: A case on Chinese banks

Data Envelopment Analysis (DEA) as a data-oriented benchmarking tool is considered a powerful and promising instrument for performance evaluation in various application areas. In DEA, the set of all decision-making units (DMUs) is divided into efficient and inefficient subsets. Inefficient DMUs are improved by reducing the input and/or increasing the output, and as far as we know, efficient DMUs are abandoned with the conclusion that they are all technically and relatively efficient, and no further analysis has been suggested in the literature. In this article, we first show that there is a gap between the actual efficiency and the efficiency estimated using benchmarking tools such as DEA. This means that there is no guarantee that the efficient DMUs characterized by DEA are really efficient. Thus, there is a gap in improving the technical efficiency of efficient DMUs. In this paper, we attempt to close this gap by introducing a method to improve efficient DMUs. First, we introduce a random variable as a corrector of efficiency evaluation, and then an inverse DEA model (IDEA) is proposed to improve efficient DMUs. To demonstrate the actual applicability of the proposed approach, we present an illustrative empirical application using 106 Chinese bank data from 2021.

Economic policy uncertainty and enterprise export resilience in China: Does the digital economy matter?

In the new era of international trade, escalating uncertainty and the swift development of the digital economy stand out as two pivotal transformations. These phenomena individually exert significant influences on enterprises' exports; however, their combined effects on export resilience remain underexplored. Hence, drawing on existing theories, this paper analyzes the weakening effect of economic policy uncertainty on export resilience and explores the influence of regional digital economic development on this attenuation effect. Furthermore, empirical tests are conducted using micro-level data from China. The study findings reveal: (1) Economic policy uncertainty weakens firms' export resilience by increasing transaction costs; (2) Digital economic development mitigates this weakening effect by reducing transaction costs, with a more pronounced effect observed among highly efficient firms. The findings suggest that amid escalating uncertainty, vigorously promoting digital economic development holds profound policy significance for the high-quality development of international trade.

Was Robert Gibrat right? A test based on the graphical model methodology

AbstractUsing both regression analysis and an unsupervised graphical model approach (never applied before to this issue), we confirm the rejection of Gibrat’s Law (stating that a firm’s growth is independent of that firm’s initial size) when our firm-level data are considered over the entire investigated period, while the opposite is true when we allow for market selection; indeed, the growth behavior of the surviving most efficient firms is in line with Gibrat’s Law. This evidence reconciles early and current literature and may have interesting implications in terms of both theoretical research and policy suggestions regarding subsidies to small firms, which do not necessarily grow faster than their larger counterparts.

How do foreign-owned suppliers affect economic performance? Evidence from Italian manufacturing firms

This paper examines how the presence of foreign-owned suppliers (Inward FDI in intermediate good sectors, called input IFDI) affects both the productivity and outward FDI propensity of domestic firms. Using data from Italian manufacturing firms over the period 2005–2012, we find that the degree of a firm's involvement in innovation activities is crucial. More specifically, input IFDI, on average, boosts aggregate productivity in sectors where the majority of firms are involved in innovation activities. These industry productivity gains are due to efficiency improvements within firms, as well as the reallocation of market shares towards more efficient firms. Conversely, in sectors where few firms are involved in innovation activities, input IFDI, on average, leads to productivity losses within firms, entailing larger market share reallocation towards the best performing firms. Our findings further demonstrate that in those sectors with a high degree of innovation activity, input IFDI increases domestic firms' propensity to invest abroad, whereas the opposite is true for the other sectors.

Measuring the Queen Bee Phenomenon in technically efficient firms: implications from Southeast Asian manufacturers

This study examines the “Queen Bee Phenomenon,” that is, Southeast Asian manufacturers having female CEOs and owners. In addition, the buffering effect of female CEOs and owners on manufacturers seeking higher technical efficiencies is also examined in this research. This study uses the fractional regression and two-limit Tobit regression models to examine a combined set of cross-sectional data from surveys conducted by the World Bank, consisting of 3471 manufacturers in Southeast Asia, including those in Thailand, the Philippines, Indonesia, Malaysia, and Vietnam. Our results find that the “Queen Bee Phenomenon” does not exist in Southeast Asian manufacturing enterprises. Furthermore, manufacturers with higher technical efficiency levels are likely to hire fewer female workers; nevertheless, if female CEOs and owners run these technically efficient firms, hiring more female workers can be noticed. This research demonstrates that globalization through FDI and exports may promote female labor force participation among Southeast Asian enterprises and those seeking greater technical efficiencies.

What Are the Differences in the Area of Profitability and Efficiency When Early and Late Adopters Are Analyzed Regarding the Basel III Leverage Ratio?

This research investigates whether banks that adopted new regulatory requirements earlier, such as Basel III, are more profitable, as well as more efficient, than banks that adopted these requirements later. In addition, all 138 banks are based in the G7 member countries, which are the most developed countries in the world. Also, banks are categorized into early and late adopters based on Basel III Leverage Ratio performance by using Fitch Connect. Moreover, profitability ratios, such as the Return on Equity, Return on Assets and efficiency ratio Operating Efficiency, were collected from Fitch Connect to analyze if early adopters were more profitable and efficient than the late adopters. Also, STATA is used to analyze descriptive statistics and a univariate analysis of both groups. Furthermore, the finding is that early adopters of the Basel III Leverage Ratio are not the more profitable or efficient firms compared to late adopters as anticipated. In addition, the results of early and late adopters do not differ that much in the analysis regarding profitability and efficiency ratios. This implies that it is not necessarily correct to assume that stricter regulation, such as Basel III, will negatively affect the profitability or efficiency of banks. In addition, these results are useful to regulators and policymakers of the G7 member countries for two reasons. Also, regulators can clearly see how banks are adopting new stricter regulation.

Do recessions induce Schumpeterian creative destruction? Micro Evidence from India

According to the Schumpeterian cleansing hypothesis, economic downturns force inefficient firms off the market, freeing resources that can be allocated to more efficient firms. India, as an emerging economy, may experience a similar reallocation. The study uses micro-level data for publicly traded firms, including manufacturing and services sector firms, from 1988 to 2020. We find that reallocation is productivity-enhancing in general, i.e., credit moves from firms with low productivity to firms with high productivity, and normal economic downturns induce this efficiency-enhancing reallocation. We also observe that reallocation is less efficiency-enhancing during the Indian financial crisis, and constraints on productive firms could be one of the potential explanations for the lack of a cleansing effect.

Going green while getting lean: Decomposing carbon and green total factor productivity

While research on carbon productivity is growing rapidly, the role of structural change in green transition remains unexplored due to the scarcity of firm-level emission data. This study addresses this gap by utilizing unique register-based greenhouse gas emission data from Finland’s energy-intensive manufacturing firms for 2000–2019. Applying a structural change productivity decomposition, we break down the sector’s carbon productivity and green total factor productivity into four components: contributions from non-switching continuing firms, industry-switching continuing firms, the effects of entry and exit, and resource allocation. The findings highlight the important role of structural change in the sector’s productivity. Non-switching continuing firms emerged as the key drivers of both carbon and green total factor productivity growth. The contribution of entry and exit was negative during the financial crisis, while inefficient resource allocation significantly hindered productivity growth throughout the study period. These findings emphasize the importance of public subsidies targeted at environmentally efficient firms to enhance their competitiveness under challenging market conditions. Furthermore, the establishment of a stable yet positive carbon price would incentivize less-productive firms to adopt environmentally friendly technologies.

Price Versus Market Share with Royalty Licensing: Incomplete Adoption of a Superior Technology with Heterogeneous Firms

This article shows that the usual result of full adoption of a superior technology induced by pure royalty licensing may not hold when firms have different production technologies. By modeling a Cournot licensing game with an external innovator that offers per-unit royalty contracts to downstream firms, this article shows that full adoption of the innovation occurs only if (1) the new technology is sufficiently more efficient than the best one that is available in the market; or (2) if the firms have similar efficiency levels. Moreover, I disentangle two distinct forces that influence the innovator’s choice: a price effect (PE) and a market share effect (MSE). The former highlights the asymmetry in willingness to pay for the latest technology. The inefficient firms, which benefit the most from the cost-reducing innovation, are willing to pay a higher price to become a licensee than are their efficient rivals. The latter illustrates the innovator’s aim to maximize the volume of royalties that are collected by licensing to many firms. When PE dominates MSE, the patent holder sets a higher royalty rate and attracts fewer, less efficient firms. Otherwise, if MSE dominates, the patent holder reduces the royalty rate and attracts more firms so as to reach as many consumers as possible. From a policy perspective, I show that royalty licensing improves consumer surplus and that the positive effect increases with the number of licensees.

Penalized sieve estimation of zero‐inefficiency stochastic frontiers

SummaryStochastic frontier models for cross‐sectional data typically assume that the one‐sided distribution of firm‐level inefficiency is continuous. However, it may be reasonable to hypothesize that inefficiency is continuous except for a discrete mass at zero capturing fully efficient firms (zero‐inefficiency). We propose a sieve‐type density estimator for such a mixture distribution in a nonparametric stochastic frontier setting under a unimodality‐at‐zero assumption. Consistency, rates of convergence and asymptotic normality of the estimators are established, as well as a test of the zero‐inefficiency hypothesis. Simulations and two applications are provided to demonstrate the practicality of the method.

Technology accessibility and the local government's incentive to aid zombie firms in China

AbstractWe develop an open‐city model in which the incentive for a local government to shut down zombie firms depends on the capacity of the most efficient firms in the city to re‐employ the displaced workers in competition with the efficient firms in other cities. The model predicts that the local government has a greater incentive to shut down zombie firms when the city has better access to technology that enables the efficient firms to expand and re‐employ displaced workers. Data from Chinese cities validate the prediction. Our developed model adds to the understandings of governments' roles in China's zombie firm problems and provides a more feasible solution for reducing zombie firms.

Efficient firms are all alike, but every inefficient firm is such in its own way: Heterogeneity of costs determinants in the Italian water sector

The Italian water and sanitation services regulator, ARERA, has adopted a parametric model for assessing operators’ efficiency and set efficiency improvement targets accordingly. This approach is based on a Stochastic Frontier Approach; deviations of actual costs from the estimated standard cost are interpreted as signals of inefficiency and determine how demanding the efficiency improvement target will be in the next regulatory period. We critically assess the approach adopted by ARERA, exploiting an original dataset fed by the original data of regulatory accounts that water operators transmit to ARERA for biennial tariff reviews. This data is not publicly available and represents a novel contribution since it allows statistically significant estimates (more than 200 observations) from a detailed breakdown of information concerning costs and performance levels. Our analysis applies various alternative estimation models, completing the more traditional SFA based on the Pitt-Lee approach adopted by ARERA, with more sophisticated models aimed at overcoming the problems caused by multicollinearity and data heterogeneity. Finally, we estimate a non-parametric model based on Data Envelopment Analysis (DEA). This comparison leads to some surprising results: different models generate similar overall results, but the resulting ranking is different, and the explanatory potential is limited to dimensional variables, while quality indicators and contextual elements seem more challenging to capture. We conclude that parametric models still seem far from the possibility of supporting the regulatory process, primarily when the industry is characterised by high heterogeneity of company size and operational environments. At the same time, the DEA is a promising, more flexible, and informative approach, but still unable to support regulatory decisions.

Protection Without Discrimination

Abstract This paper shows that non-tariff measures may fully respect the non-discrimination principle of the World Trade Organisation and still act as a protectionist device. Non-tariff measures that raise costs of all firms induce some exit, reallocating market shares towards the most efficient firms. The paper analyses when this mechanism generates protectionism. With political economy motives, trade liberalisation increases the use of non-tariff measures in the non-cooperative equilibrium and a trade agreement may be welfare reducing if governments care about the most efficient firms only. Moreover, a Pareto improving agreement may require an income redistribution between countries if firm average productivity differs across countries.

The Relationship between Firm Attributes and Attitudes towards Diversity

The attitudes of creative firms towards issues of equality, diversity and inclusiveness (“EDI”) can significantly affect their willingness to sponsor and implement effective measures in the domain. It is, therefore, essential to examine the readily measurable firm attributes that influence these attitudes. We have collected a wide range of data on almost 330 creative businesses. Our empirical investigation establishes a robust and unequivocal pattern. It indicates that more established companies tend not to view the underrepresentation or the discrimination of people with various protected characteristics as problematic. Young, innovative and efficient firms on the other hand are systematically more likely to consider these same issues as prevalent. These findings are in line with the conclusions from the previous literature which relied predominantly on anecdotal evidence. The patterns that we document suggest that EDI policies and recommendations must be tailored to the precise characteristics of the firm implementing them.

Export prices and markups with a common currency: Empirical evidence from Greek exporting firms and euro adoption

We estimate the effect of euro adoption on prices using data on Greek exporters spanning over the period 1999–2007. The overall impact of the euro on the prices of exports was negligible, but it masks significant heterogeneity across firms with different levels of pre-euro productivity. Our benchmark estimates indicate that the prices set by initially high-productivity firms rose on average by 8.9%. Our evidence further shows that these firms also raised their markups after euro adoption, whereas less efficient firms lowered their markups.

Efficiency Assessment and Strategic Insights for Enhancing Pharmaceutical Industry Performance in Pakistan: A Data Envelopment Analysis Approach

Pakistan's pharmaceutical sector, pivotal for GDP, employment, and poverty reduction, comprises 759 companies in dynamic growth. We employ Data Envelopment Analysis (DEA) to identify efficient firms in 2017-2018, showcasing DEA's superiority. Evaluating ten industry leaders, e.g., Merk, Abbott, and GSK, we assess variables like Assets, Liabilities, Sales, EPS, DPS, and ROE. High Noon excels in consistent efficiency, while others improved from 2017 inefficiencies. Sanofi, despite revenue, underutilized EPS, DPS, and ROE. The study emphasizes companies' global and national standings, offering revenue and resource optimization insights, and enhancing industry efficiency. Implementing suggestions aids firms and Pakistan's GDP, advancing the pharmaceutical sector. Valuable for international stakeholders to invest in Pakistan's pharmaceutical progress.