Stochastic Frontier Analysis Method Research Articles

Is the Oil Palm Land Efficient in Indonesia?

The plantation’s sub-contribution sector to the country’s gross domestic product reflects the role oil palm plantations have played in boosting the economy. The goal of this study is to examine land efficiency and the variables that affect its value in Indonesian national superior plantations, by the application of the Stochastic Frontier Analysis (SFA) method. Age, education, financial situation, and geographic location of the farmer all affect their engagement in agriculture, particularly when it comes to spreading new techniques. Therefore, policies that are based on input variables that demonstrate substantial outcomes in boosting the output of rubber plantations in Indonesia must be implemented by the government through certain institutions.
 Keywords: palm oil, efficiency, Stochastic Frontier Analysis (SFA)

The Efficiency of Islamic Banks in the Middle East and Southeast Asia: Stochastic Frontier Approach

<p>This research aims to compare and analyze the efficiency of Islamic banking in Southeast Asia and the Middle East by examining particular inputs such as third-party funds, operational expenses, labor costs, and return on assets, focusing on financing as the output. This quantitative study uses a purposive sampling technique to sample 30 sharia banks from Southeast Asia and 30 sharia banks from the Middle East from 2015 to 2022. The data used is secondary data from BankFocus and the annual financial reports of each bank. Data was processed using the Frontier 4.1 application with the Stochastic Frontier Analysis method. The results of this research show that the efficiency of sharia banking in the Middle East is higher than sharia banking in Southeast Asia. On the other hand, the return on assets has no impact on financing, but the input of third-party funds, operational expenses, and labor costs all have an impact. These findings show the importance of efficiently supervising the management of third-party funds and costs incurred by banks in order to improve banking performance. Hence, this will ultimately lead to an increase in the efficiency of sharia banking and a growth of banking profits.</p>

Productivity analysis and technical efficiency of sweet corn farming

This study examines the determinants of productivity in Secada F1 sweet corn varieties. We conducted a survey involving 34 selected farmers to assess production efficiency using the Stochastic Frontier Analysis (SFA) method. The results highlight the significant impact of precise Lannet pesticide application and efficient labor input on sweet corn yield. Notably, our findings indicate that judicious pesticide use and skilled labor management lead to increased crop production. Technical efficiency assessments demonstrated that the majority of farmers operate within a range of 0.69 to 0.99, with an average of 0.96, highlighting their effective utilization of resources. These insights have the potential to guide and inform agricultural practices, offering valuable guidance for the industry as it navigates the intricate landscape of modern agriculture. In a contemporary context marked by agricultural complexities, these revelations contribute to the pursuit of sustainable growth within the sector.

Can China's regional carbon market pilots improve power plants' energy efficiency?

Power plants are facing huge climate change and policy risks. This paper identifies the effect of China's carbon emissions trading system (ETS) on plants' energy efficiency. For this purpose, we use a two-step approach. In the first stage, we apply a Meta-frontier Stochastic Frontier Analysis (MSFA) method to estimate the total-factor energy efficiency of China's large coal power plants. In the second stage, we use a bootstrapped truncated difference-in-differences (BT-DID) estimator to investigate the ETS' impact on power plants. Results show that the ETS trading policy significantly improves participating plants' energy efficiency by 0.043, compared to non-ETS plants, while the announcement policy doesn't. Besides, several other methods are introduced to solve the potential autocorrelation and heteroskedasticity problems in the second-stage regression. Further, we unveil that the trading policy improves plants' energy efficiency by reducing coal consumption without affecting power generation. Finally, the heterogeneity analysis proves that China Southern Power Grid, local plants, and plants with high carbon prices benefit more from ETS.

Phân tích hiệu quả của các công ty bảo hiểm ở Việt Nam

The paper analyzes the efficiency of non-life insurance companies in Vietnam by parametric approach with Stochastic Frontier Analysis (SFA) method. The data were taken from financial statements of insurance companies for the period 2015 - 2020. The results show that the mean efficiency of all non-life insurance companies in the research period is 0.524, the lowest efficiency is 0.092, the highest efficiency is 0.852. Among the non-life insurance companies studied, Tokio Marine had the highest efficiency, with a mean efficiency over the study period is 0.852, and the Global had the lowest efficiency e, with an mean efficiency during the study period is 0.076. This result also shows that the efficiency of Vietnamese non-life insurance companies in the period 2015 - 2020 is relatively low, with this result if the average output are constant, insurance companies can maximum reduction of 43.7% input.

Towards energy conservation by constructing more transportation infrastructure?: An endogenous stochastic frontier analysis framework

Whether constructing more transportation infrastructure can be helpful for the achievement of energy conservation is a long-running and debatable issue. To answer this question, the relationship between transportation infrastructure and energy efficiency must first be clarified. Nonetheless, the existence of the endogeneity problem poses a challenge to defining the relationship. In this paper, an endogenous stochastic frontier analysis method is used to investigate the influence of transportation infrastructure on energy efficiency. Based on the prefecture-city level panel data in China, we find that after addressing the endogeneity problem, the impact of transportation infrastructure on energy efficiency increases dramatically. Moreover, this impact is more pronounced in small-scale cities compared to large and medium-scale cities. Regardless of the measurement of transportation infrastructure, instrumental variable, or production function form, we get the similar conclusions, demonstrating the robustness of our findings. Additional simulation analysis shows that the energy conservation potential would be 1222–2935 million kilowatt hours if the level of transportation infrastructure could be optimized. We recommend accelerating the transportation infrastructure construction, particularly in the small-scale cities so as to boost the energy efficiency and achieve energy conservation targets.

Banking Credit Risk and Efficiency: Some Countries in ASEAN

Banking efficiency is an important strategy to increase competitiveness. The ultimate goal of improving bank performance is the ability of business groups, banks, or countries to excel in competition. Banking can increase competitiveness in various ways, including increasing efficiency. This study presents an empirical analysis of the effect of credit risk on the value of banking cost efficiency in ASEAN. Cost efficiency is measured using panel data of banks in 10 ASEAN countries, employing stochastic frontier analysis and assuming a fixed effect. The efficiency is obtained using the Panel Stochastic Frontier Analysis method. The relationship between loan risk and efficiency is assessed using a linear regression model, specifically, Feasible Generalized Least Squares. In general, banking efficiency in ASEAN exceeds 80%. Another finding from this study is a negative relationship between credit risk and banking efficiency. In this case, the risk that most significantly reduces efficiency is the risk obtained from the loan-to-asset ratio indicator. The greater the risk the bank takes, the lower the cost-efficiency value of the bank. The implications of this research include that bank managers must reduce credit risk to increase the efficiency of bank operational costs.

The Financial Density and Improvement of Urban Technological Efficiency: An Estimation Based on the Stochastic Frontier Approach

Exploring the relationship between finance and economic growth is a key direction of financial economics. However, most of the literature starts from the aggregate perspective and uses the GDP or per capita GDP as the explained variable to study the role of finance. Such a perspective ignores the heterogeneity of financial activities with respect to geographical distribution and makes it difficult to distinguish the roles of factor input and efficiency improvement. Because of this, this article introduces a “density” perspective on new economic geography and the measurement of the efficiency of the transition of development economics into financial economics. This article uses the stochastic frontier analysis (SFA) method to measure the technical efficiency (TE) of 272 cities in China from 2005 to 2018 and then, based on “forward-looking” and “backward-looking” methods, measures the impact of financial density on urban technical efficiency. This study found that overall, before the financial crisis in 2008, the contribution of financial density to technical efficiency showed a downward trend, and in the regional and provincial dimensions, the distribution of financial density’s contribution to technical efficiency was generally in line with that of backward regions, with less regularity in developed regions. In the urban dimension, the contribution rate of financial density to resource-based cities with slow technological progress or advanced cities with rich financial resources is not very prominent and may even play a negative role; however, cities that are at a medium level of development, rich in population resources, have convenient transportation, and have a certain industrial foundation can greatly promote the improvement of technical efficiency. Therefore, it may be possible to optimize the marginal contribution of urban financial density to the technical efficiency of Chinese cities by encouraging the flow of financial resources and activities from cities with small marginal effects to those with large marginal effects.

A stochastic frontier analysis of cost of efficiency in Turkish cement industry

Purpose - The main focus of this paper is to measure cost efficiency in Turkish Cement Industry using firm level data over the period 2008-2016. The measurement of cost efficiency in the industry in which there can seem usually competition infringement is of great importance regarding effective allocation of resources. The ineffective allocation of resources can bring about cost inefficiency. Methodology - In this study, efficiency is measured using a frontier analysis approach, which quantifies efficiency as the gap between the best achievable performance and actual performance. The Stochastic Frontier Analysis (SFA) method is employed to assess cost efficiency of each firm in this manner. By incorporating both statistical error and inefficiency, the SFA method recognizes that deviations from optimal performance can arise from both random errors and inefficiency factors. Findings- Empirical results show that cost efficiency scores vary between 82% and 93% by different models. The results also indicate a wide range of cost efficiencies across different size cement firms. The lowest cost efficiency score is estimated by TFE, BC95, and PL81 models in 2015. Conclusion- Average cost efficiency score varies between approximately 93% and 82%, which means that the firms can potentially achieve at least 7% and a maximum of 18% reduction in input costs. Keywords: Stochastic frontier analysis, cement industry, cost efficiency, efficiency estimation, time-varying, invariant efficiency. JEL Codes: D24, C51, L61

The management of the proceeds of the enterprise, taking into account the effectiveness of its activities based on the SFA model

Actual, which requires an effective solution, is considered the task of managing the revenue of the enterprise. In the domestic literature, this topic is not given enough attention. In practice, most enterprises introduce the revenue management methodology based on foreign experience.Revenue is the main source of cash receipts specifically from the main activity of the enterprise, as well as one of the main factors affecting the functioning of the enterprise. As a result, the amount of revenue is extremely important for the company - it should be sufficient in order to ensure the repayment of all expenses of the company and the formation of the necessary volume of profit. However, the value is not the only important characteristic of revenue, the stability of revenue in time and the regularity of its receipt are no less important.The aim of this work is to develop a dynamic model of the management of the enterprise, which differs from the model known in the literature, taking into account the parameter of the efficiency of the enterprise.As a method to assess the effectiveness of the enterprise, the parametric method of Stochastic Frontier Analysis is used. As input and output, financial indicators are used.The model was checked for 9 russian enterprises (6 operating enterprises and3 bankrupt enterprises) for the period from 2013 to 2020, related to one all - Russian classifier of types of economic activity. Data collection is made using the SPARK system, which allows you to select enterprises for research on the status of an enterprise (bankrupt / current), by the size of the enterprise (large / medium / small / micro), etc.As an example, two enterprises were considered, of which one current, another bankrupt. The calculations on the built modified model showed the possibility of using the management of the proceedings of the enterprise with the desired pace of changes and with the parameter of the effectiveness of the activity.

China's marine economic efficiency: A meta-analysis

With the rapid growth of the global economy and the depletion of land-based resources, the demand for the ocean as a major driver of economic development is increasing. In China, the marine economy has been a significant “blue engine” for national economic growth; hence, it is crucial to evaluate marine economic efficiency to understand China's marine industry's input-output status and development level. Based on 559 independent observations presented in 49 empirical primary studies, we conducted a meta-analysis to quantitatively explore the differences in measurement results and identify the factors influencing marine economic efficiency. The notable results were fourfold. (1) Significant heterogeneity is evident among the findings of the primary studies. Based on the random-effect model, China's overall marine economic efficiency is 0.720, indicating that considerable potential remains for improving economic efficiency in the marine sector. (2) The data types, estimation methods, evaluation indicators, publication types, and publication years of primary studies significantly affect marine economic efficiency estimation results. (3) At the temporal level, marine economic efficiency generally demonstrates an upward trend with the increase in the sample data years. At the spatial level, the marine economic efficiency of the Circum Bohai Sea region is significantly higher than that of the Pan-Pearl River Delta region, whereas it does not significantly differ from the Yangtze River Delta region. (4) The level of marine science and technology, as well as the marine industry structure, exerts a significant positive impact on marine economic efficiency, whereas the gross ocean product negatively impacts marine economic efficiency. Accordingly, the following insights were obtained. In terms of marine economic development policies, policymakers should intensify scientific and technological innovation, balance marine resource use and marine environmental conservation, so that power a shift of the marine economy from resource-dependent growth to the orientation of better quality and benefit. In addition, priority must be given to the synergistic development of coastal regions and marine industry structure optimization and upgrading. Future studies should use long-term panel data, focus on using the parametric stochastic frontier analysis method, and assess negative environmental impacts by constructing a green evaluation index system.

Does green technology innovation contribute to energy efficiency improvement: Empirical evidence from Chinese cities

To achieve carbon neutrality, energy efficiency improvement is an essential step. This paper measures the Malmquist energy productivity index (MEPI) to model the dynamics of total factor energy productivity utilizing the stochastic frontier analysis (SFA) method. We found evidence that city-level total factor energy efficiency (TFEE) has been greatly improved in China. However, there are significant regional differences among different cities. Then, this paper empirically examines the heterogeneous impacts of green technology innovation (GTI) on energy efficiency, and takes environmental regulation into consideration. The results show that GTI contributes to improving energy efficiency in cities with higher environmental regulations. Further, green innovation mainly improves the total factor energy productivity through technological progress instead of the catch-up effect.

ROBUST STOCHASTIC PRODUCTION FRONTIER TO ESTIMATE TECHNICAL EFFICIENCY OF RICE FARMING IN SULAWESI SELATAN

The stochastic production frontier (SPF) is the stochastic frontier analysis (SFA) method used to estimate the production frontier by accounting for the existence of inefficiency. The standard SPF assumes that the noise component follows a Normal distribution and the inefficiency component follows a half-Normal distribution. The presence of outliers in the data will affect the inaccuracy in estimating the parameters and leads to an exaggerated spread of efficiency predictions. This study uses two alternative models, the first with SPF Normal-Gamma and the second with SPF Student's t-half Normal, then the results are compared with standard SPF. This study uses data from statistics Indonesia on the cost structure of paddy cultivation household survey in 2014. This study aims to examine the effect of changes in distribution assumptions on the standard SPF model in estimating parameter value and the technical efficiency score in the presence of outliers. The parameter coefficient estimates similar results that apply to three SPF models. Only the standard error value in the alternative SPF model tends to be smaller than the standard SPF model. The Normal-Gamma model performs better in assessing residual with smaller root mean square error (RMSE) than the others, but the results of the estimated technical efficiency still contain outliers. The Student's t-half Normal model estimates technical efficiency no longer contains outliers, the range is shorter than the other models, and the results of estimating technical efficiency are not monotonous in the distribution of residual tails. The SPF Student's t-half Normal model is more robust in presence outliers than SPF Normal-half Normal and SPF Normal-Gamma.

Dynamic comparison on the technical efficiency between China's EPEs and PEs: Two-dimensional measurement based on SFA

It is of equal importance to improve the efficiency of environmental protection enterprises (EPEs) and polluting enterprises (PEs) for Environmental Protection and Green Development, which is a micro-foundation for China's economic transformation and high-quality development. This paper redefines the efficient frontier of enterprises, distinguishing between “absolute technical efficiency” (ATE) and “relative technical efficiency” (RTE), and conducts two-dimensional measurements and dynamic comparison to examine the technical efficiency characteristics of China's EPEs and PEs listed on the A-share market, based on the stochastic frontier analysis (SFA) method. The results demonstrate that, first, the ATE of EPEs exhibits a reverse upward trend, while the ATE of PEs and A-share enterprises as a whole is declining simultaneously. Second, in contrast to the shrinkage of the ATE and RTE of PEs, the efficient frontier of EPEs has experienced rapid expansion. Third, capital utilization efficiency, rather than economies of scale effects, appears to be the main obstacle impeding the technical efficiency performance of EPEs. Therefore, improving the capital utilization efficiency and the extent of coupling and coordination between capital and labor is the key to promoting the technical efficiency of EPEs. Fourth, targeted government subsidies and tax refunds for EPEs need to be improved and an external evaluation mechanism focusing on Environment, Social and Governance (ESG) rating needs to be strengthened. Consequently, it is essential to promote the combination of top-down targeted policy support and multi-dimensional external evaluation to guide capital flows and achieve their efficient utilization, which is also the basis of the environmental protection industry's high-quality development.

Does industry-university-research cooperation promote the environmental efficiency of China’s high-tech manufacturing?

As one of the important strategic measures to increase the international competitiveness of high-tech manufacturing (HTM), industry-university-research cooperation (IURC) has received increasing attention in China. However, there is little literature to explore the links between IURC and the environmental efficiency (EE) of HTM. To incorporate a variety of environmental pollution indicators into the efficiency analysis framework and reduce the adverse effects of random errors on the estimation results, this article combined the projection pursuit model with the stochastic frontier analysis (SFA) method and proposed a translog stochastic frontier model considering undesirable outputs to analyze the multiple impacts of IURC on the EE of HTM. The results show that IURC has both a significant negative direct effect and a significant positive indirect effect on HTM’s EE. Although IURC cannot directly promote EE, it has a positive impact on EE of HTM through its complementary effect with research and development (R&D) investment. The results also confirm that the average EE of the whole country is only 0.346, while that of the eastern area is 0.595, and that of the central and western areas are 0.199 and 0.171, respectively. Therefore, it is particularly urgent to improve the EE of China’s HTM industry through a variety of measures, such as promoting IURC and increasing R&D investment in environmental technology. This study not only provides an improved SFA method for measuring EE, but also deepens research on the mechanism of the impact of IURC on HTM’s EE.

The Spillover Effects of Privatization on Efficiency and Income Inequality in China

Purpose - This study examines the spatial and inter-temporal spillover effects of privatization on the corporate efficiency and regional income inequality of Chinese state-owned enterprises (SOEs).
 Design/Methodology/Approach - The spatial Durbin model (SDM) is used in regressions to examine the spatial and inter-temporal spillover effects of the privatization of SOEs on improving the efficiency and income inequality of Chinese firms across regions. A panel dataset of Chinese-listed firms from 2008 to 2018 is used. The stochastic frontier analysis method is applied in estimating corporate efficiency.
 Findings - First, the privatization of Chinese SOEs increased their efficiency, but exacerbated their income inequality. Second, the globalization activities after the privatization of Chinese SOEs increased their efficiency, but exacerbated their income inequality. Specifically, exports decrease income inequality, while outward foreign direct investment or OFDI has an inverse U-shaped effect on income inequality. Third, the privatization improved overall corporate efficiency within the province and that of neighboring provinces. Fourth, the Chinese SOE firms after privatization aggravated income equality within the province and that of neighboring provinces.
 Research Implications - In general, the results of this study indicate that the privatization of SOEs and the globalization activities after the privatization have improved the efficiency of Chinese firms, but worsened income equality within the province and that of neighboring provinces. Therefore, there is a strong need for governmental policies to cure income equality in provinces around the location of privarized firms.

Islamic bank efficiency: an efficiency method with SFA

Judging from the financial ratios, the performance of Islamic banking in Indonesia was remarkably stable both before and during the Covid-19 pandemic. However, another thing is whether this condition could make Islamic banks continue to work effectively. This study aimed to measure the cost efficiency of Islamic commercial banks in Indonesia quarter I of 2019 – quarter IV of 2020 and analyze the influencing factors in cost efficiency. The study used a saturated sampling technique with a total sample of 14 Islamic commercial banks, while the efficiency level was determined using the Stochastic Frontier Analysis (SFA) method. It turns out that PT. Bank Muamalat Indonesia Tbk. has the highest efficiency value of 0.9284. Several banks with an efficiency value of more than 0.5 are PT. Bank Aceh Syariah, PT. Bank BNI Syariah, and PT. Bank Mega Syariah. In this study, only inflation variables affect efficiency. In contrast, bank size, Return on Assets (ROA), Net Operating Margin (NOM), Non-Performing Financing (NPF), Financing to Deposit Ratio (FDR) variables, Capital Adequacy Ratio (CAR), Gross Domestic Product (GDP), and the rupiah exchange rate don’t affect the efficiency. Overall, all the company's internal variables and environmental variables affect efficiency.

Indonesian Manufacturing Industry Performance towards Global Trade: An Analytical Review of Professionalism In Islam

Economic integration involves many countries was necessary to have superior products and competitiveness in the international market. Industrial performance was a benchmark for a country's export success. This study aims to estimate industrial performance by analyzing at the level of technical efficiency and Islamic views on work professionalism where this research analyzes the workforce used in the production process. The method used in this study is the stochastic frontier analysis (SFA) method. The results found that the level of technical efficiency of companies in the manufacturing industry in Indonesia between 2010 and 2015 with a total of 10,464 companies observed a trend of declining levels of company technical efficiency. In addition, labor as one of the inputs in production is not differentiated based on the level of education, skills and experience. The results imply that companies in the Manufacturing industry in Indonesia have internal problems related to the company's technical efficiency namely professionalism.

Can Direct Subsidies or Tax Incentives Improve the R&D Efficiency of the Manufacturing Industry in China?

The understanding of the impact of different government support methods on R&D efficiency is of great significance for evaluating the performance of innovation policies in various countries. We selected 31 manufacturing industries in China from 2009 to 2015, used the stochastic frontier analysis (SFA) method to measure R&D efficiency, and used tobit regression method to examine the relationship between direct government subsidies and preferential tax policies and manufacturing R&D efficiency. The results reveal that the overall R&D efficiency of China’s manufacturing industry was low, but it has been steadily increasing, and the R&D efficiency of emerging industries was significantly higher than that of traditional industries. Tax incentives played a stable and significant role in promoting R&D efficiency in manufacturing. Affected by factors such as the government’s long-term preference and information asymmetry, direct subsidies had no significant impact on the current R&D efficiency of the manufacturing industry, and began to play a positive role after a two-year lag. Based on the above research findings, this paper suggests that progressive preferential tax rates can be designed according to the “base + increment” approach for tax preferential policies. At the same time, different proportions of tax cuts should be set for enterprises of different sizes and levels of innovation, and the focus should be on small and medium-sized enterprises and emerging industries. In terms of direct funding subsidies, the government should not only increase the support for basic research, but also give more preference to enterprises that receive tax incentives for research and development, so as to enhance the complementary effect of the two types of subsidy policies. The marginal contribution of this paper mainly includes three aspects: First, based on the Chinese situation, the impact of direct government subsidies and tax incentives on the R&D efficiency of the manufacturing industry is tested. Second, we present the evidence that direct government funding subsidies “crowd out” enterprise R&D funds. Thirdly, we describe the influence of enterprise scale, innovation level, ownership, and management ability on R&D efficiency of the manufacturing industry, and put forward the possible influence mechanism.

Efficiency of the Automotive Industry in the Visegrad Group

Abstract This article assesses the production efficiency of automotive sector companies in the V4 countries. The automotive sector has undergone dramatic changes in recent years, and its future development is still unclear. The assessment of company efficiency thus represents an important tool that could support decision-making on the future of this sector. Unfortunately, comprehensive studies based on micro-data on companies are not yet available. This article evaluates production (technical) efficiency based on accounting data of individual companies in the V4 countries using the parametric method of stochastic frontier analysis. In these analyses, efficiency is examined not only from the point of view of a country but also with respect to the size of a company. The empirical results show that not only country but also the size of a company are factors that have a statistically significant effect on company efficiency. Small companies struggle to keep up with their competitor and in general have the lowest efficiency ratings.