Determinants of Efficiency in Manufacturing Firms: The Guide for Developing Countries

Abstract

Manufacturing is considered to be an important sector in the economy because it is able to promote wide and effective forward-looking links between other sectors of the economy. This study investigates the role of human capital as efficiency determinants for manufacturing firms using a single-step heteroscedastic SFA approach. We found that top managers' human capital, particularly experience and schooling years, has a significant impact on output and efficiency of manufacturing firms. Exports, foreign ownership, research and development (R&D) activities, and quality certification were found to be positively associated with performance. Bank loans were negatively related to total factor of production (TFP), whereas overdraft facilities showed a positive relation. Higher education of primary, secondary, and tertiary levels is a crucial factor in improving firm performance in developing countries.