Technical Inefficiency and Firm Behavior: A Panel Study of Small and Medium Japanese Manufacturing Firms

Author Name OGAWA Kazuo (Kansai Gaidai University)
Creation Date/NO. August 2021 21-E-068
Research Project Study Group on Corporate Finance and Firm Dynamics
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First draft: August 2021
Revised: April 2023


This study examines the technical inefficiency of small and medium Japanese manufacturing firms by using panel data from the Basic Survey on Small and Medium Enterprises (2009-2018). We estimate the stochastic frontier production function with four production factors (regular workers, nonregular workers, capital stock and materials) and calculate the technical inefficiency of individual firms by applying a true random effects model that can distinguish technical inefficiency from firm heterogeneity.

We find that inefficient firms are smaller, rely more on nonregular workers, exhibit poorer firm performance, have a higher debt-asset ratio, pay a lower interest rate and are inactive in capital investment and R&D investment. We also find that inactive capital investment and a high debt-asset ratio are mainly responsible for causing technical inefficiency.

Published: Ogawa, Kazuo, 2023. "Technical inefficiency and firm behavior: A panel study of small and medium Japanese manufacturing firms," Social Sciences & Humanities Open, Volume 7, Issue 1 (2023), 100388.