Technical Inefficiency and Firm Behavior: A Panel Study of Japanese Small and Medium 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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This study examines the technical inefficiency of Japanese small and medium manufacturing firms by using the panel data of the Basic Survey on Small and Medium Enterprises (2009-2018).

We estimate the stochastic frontier production function with four production factors (regular workers, non-regular workers, capital stock, and materials) and calculate the technical inefficiency of individual firm by applying a true random effects model which can distinguish technical inefficiency from firm heterogeneity.

Our evidence is summarized as follows. First, technical inefficiency is overestimated when the number of total workers is used as production input for the conventional stochastic frontier model which forces firm heterogeneity into the same term as technical inefficiency. Second, the inefficient firms are smaller, rely more on non-regular workers, exhibit poorer firm performance, have higher debt-asset ratios, pay lower interest rates and are inactive in capital investment as well as R&D investment. Third, inactive capital investment and high debt-asset ratios are mainly responsible for causing the technical inefficiency.