Short- and Long-run Technical Efficiency Analysis: Application to Ethiopian Manufacturing Firms

This study attempts to investigate the level of transient and persistent technical efficiencies of large- and medium-scale manufacturing establishments in Ethiopia. A stochastic frontier approach was used for Cobb-Douglas production technology and a panel data set (1996-2015) was developed to obtain the coefficients of technical efficiency. The determinants of both components of efficiency were obtained while using the Tobit model. Results show that labor and real capital input coefficients are statistically significant, with positive input elasticities of 0.54% and 0.19%, respectively. The coefficient of the time trend variable, which captures the effect of exogenous technical progress on real value added by shifting the production frontier, is 0.019 (1.9%). Thus, as a year passes, the production frontier shifts outward due to technical change, which results in the increase of real value by 1.9%. The mean time-varying (short run), persistent (long run), and overall technical effciency effects are 64.2%, 57.2%, and 36.7%, respectively. Thus, firms can increase their output by 63.3% by removing transient and structural factors without increasing their input usage nor changing their technology. Particularly, trade variables have positive effects on transient efficiency but negative effects on persistent efficiency. Capital intensity has a negative coefficient in both cases, whereas average wage has a positive coefficient in both cases. Hence, policymakers, such as managers and public regulatory bodies, should give due attention to transient and structural problems. This study suggests that labor quality should be improved, which requires high average wage and participation in the global market. Such an improvement can be achieved by solving structural rigidities related to customs, promoting capital productivity updating and renovating the existing one, and importing capital goods that contain new technology.