Stochastic Frontier Technical Efficiency and Firm Size in Korean Manufacturing Industries

This paper applies a stochastic frontier production function to Korean manufacturing industries to analyze the relationship between stochastic technical efficiency and firm size. Estimates show the following results. First, average technical efficiency is measured at about 67 percent for manufacturing as a whole. Second, in terms of explanatory power, the reciprocal, logarithmic reciprocal, and semilog models were better able to describe the structure of the relationship. Third, in every model there exists a positive relationship between technical efficiency and firm size, irrespective of functional specification. The size elasticity of efficiency ranges from 0.04 to 0.22, implying that efficiency will increase by between 0.04 percent and 0.22 percent for a percentage increase in size. This overall positive relationship between efficiency and firm size should be tested to see whether it is supported by an additional explanatory variable for technical efficiency before concluding whether Korean manufacturing firms have yet to reach the size where technical inefficiency prevails.