Measuring manufacturing firms efficiency: Evidence from East Java province, Indonesia

Abstract

Examining the technical efficiency of the manufacturing industry in Indonesia is important to develop this sector and enhance Indonesia’s economy. To measure the technical efficiency, a true fixed effect stochastic frontier model with heteroscedasticity in the idiosyncratic error and technical inefficiency component is implemented. Using the firm-level data of Large and Medium Industries (LMIs) in East Java province, Indonesia from 2017-2019, it is found that the overall technical efficiency is 0.79 with a minimum value of 0.24 and a maximum value of 0.99, indicating the potency to increase technical efficiency. Moreover, it is found that the transportation equipment industry is the most improved sector in terms of technical efficiency while the pharmaceutical and drug industry shows the highest declining trend in technical efficiency. The furniture product manufacture, garment industry, chemical product manufacture, and computer, electronic and optical product industry also experience considerably downward trend of technical efficiency.