Firm efficiency and firm size
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Date
2011-04-07
Authors
Chita, Mukosha Bona
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Abstract
Firm Efficiency and Firm Size
Productivity achievement has become an illusory and diminutive economic objective for most struggling Third World countries. For instance, on the performance of
the Zambian economy we note that the Gross Domestic Product (GDP) per capita has
declined from about 500 United States Dollars to about 250 United States Dollars today.
In the last three years, the GDP of the country has consistently declined by an average of about 4%. Against this background of general economic malaise, we also find specific negative performance at the sectoral and industrial level. For example the labour productivities in the manufacturing subsectors, such as food and textiles, were declining and were actually negative between 1980 and the early 90s. Given that these are two of the most significant sectors for an industrialising or developing economy as technological
and supply responses are likely to yield the highest returns, it therefore represents a serious problem in achieving developmental goals for all concerned with the Zambian economy. In addition to that, the index of labour employment, the output by subsector and investments all show negative trends over this same time period. In short, the case of the manufacturing sector in Zambia is gloomy and depressed.
Given the above economic environment, it is expedient to attempt to discern as precisely as possible the status of Zambian firms. If the general economic and specific
firm performance indicators are all mostly negative we require to be able to isolate the causes as well as the effects attributable to certain identifiable causes. One way of approaching this problem, as has been done in this study is to take account of all related information to production, labour and employment, capital utilisation and raw materials
utilisation for firms and see how each firm or groups of firms access and utilise these
inputs. This means that we set a criteria of efficiency. Generally we do this by either price or allocative efficiency, technical efficiency and/or managerial efficiency.Price or allocative efficiency entails we determine how the firm makes use of the factors of production in relation to profit maximisation subject to the prices or costs of these factors of production i.e. wages, interest and rent. Technical efficiency, which is the concept relied upon in this study entails that we try to determine how effectively an economic unit or firm will organise its inputs such as labour, capital (machinery ,equipment and land) in maximising its output. If, two or more, n, different firms (where n is any number of firms) use identically the same labour, capital, raw materials and land
and yet produce two different outputs or yield, then obviously the firm that has the greater output is more efficient than the other.
In the following pages investigations on the performance of the firms is made on
an industry level as well as a sectoral level by application of a deterministic parametric production function. This is the Cobb - Douglas production function. The regression equations used are the non - linear and linear least squares as well as the maximum likelihood least squares. In this respect, both the industry and sectoral production functions are of the 'average' type. Unlike in the stochastic approach therefore, we are not
accounting for efficiency effects attributable to random events such as machinery breakdown or idle time. in the determination of the efficiency levels in relation to the size of the firm, the most pertinent indicators or factors are then the parameters so derived. Parameters such as that of labour, capital or raw materials ac actually are also elasticity estimates. They enable
us to determine the proportionate change in the variable due to a unit change. Thus we are able to determine the rate of resource utilisation per unit of output. In addition the constant represents the technical coefficient, allowing for comparison across the board of the more technically efficient group of firms, given the size of the coefficient. Other non linear variables such as the correlation coefficient and correlation matrices that are
generated allow for a comparison of the fit of the function and the relationship between
the different variables, for example, we can determine whether the resource use is labour or capital intensive and therefore see how this fits in with the expectations of either small firms that should be labour intensive and therefore promote employment or large firms that could be capital intensive and therefore do not promote as much labour employment.
With this approach we are able to therefore compare the performance of the various
groups of firms i.e. small, medium or large sized firms production functions with the
'best practice' function or one that has exhibited the best efficiency or performance given the above factors.
Having made the above analysis, the study then attempts to isolate the causes for
such differences by categorising the firms according to their sizes in order to gauge the optimal size out of all the firms. This is done with the objective of identifying the size of firm that maximises output given an equivalent amount of inputs. This is justified by the fact that all resources are scarce and optimisation of resource use is an alternative way to productivity enhancement and economic growth and development.
The study concludes, on the basis of available evidence that as much as small
scale firms may be desirable as the seem to be an answer for employment creation, yet
due to the sometimes harsh economic adjustment measures such as structural adjustment programmes, their inability to access capital renders them susceptible to economic demise and they suffer a much higher risk of liquidation and bankruptcy than medium -large scale firms.
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Keywords
Firm--Efficiency