Comparative Measurement of Technical Efficiency among Ethiopian and Chinese Firms: The Case of Road Construction Sector
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Date
2009-10
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A.A.U
Abstract
Following the market oriented economic policy EPRDF employed; the number of local
privately owned contractors has been increased. However, the larger share of road
construction projects have been undertaken by Chinese firms and the participation of
local road construction firms is limited. In light of this, the level of technical efficiencies
and factors that are attributable to the existing level of technical inefficiencies are
investigated simultaneously using a panel data of eight firms which are categorized in to
two groups (Chinese and Ethiopian) during the study period of 2006-2008. Using a
Cobb-Douglas production function, the study employed a stochastic frontier approach.
As the likelihood ratio test indicates, half normal distribution is a better assumption for
the inefficiency term, most of the discrepancy between actual and frontier level of output
is due to technical inefficiency rather than external factors and the explanatory variables
in the inefficiency model are found to be jointly significant. The technical efficiency of
each group is estimated using the maximum likelihood estimation technique and the mean
technical efficiency score is found to be 48% for Ethiopian firms and 52% for Chinese
firms, which clearly shows the low performance of Ethiopian firms relative to Chinese
firms. On the other hand, capital labor ratio, which indicates the firms' intensification,
/let revenue, which represents firms size and incentive per worker are found to have
important effect on technical efficiency. Thus, as the results of the study indicates, there
is a need of better policies and strategies such as provision of credit in order to increase
the capacity of local firms and designing effective incentive payment strategies in order
to improve the existing level of technical efficiency and to make the local road
construction firms more competent.
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Keywords
Chinese Firms, Technical Efficiency