Ownership and technical efficiency in Malaysia's automotive industry: A stochastic frontier production function analysis

Abstract

This article examines the direct effect of the extent of foreign ownership on technical efficiency in Malaysia's automotive industry by applying a stochastic frontier production function analysis to micro-panel data over the years 2000–2004. Technical efficiency in the overall automotive industry is positively related to the degree of vertical integration, the size of establishments in the respective sub-sectors, a higher quality of the work force, and a higher foreign ownership share in the establishment combined with higher net-import intensity. Foreign ownership and net-export intensity are not significant determinants of technical efficiency inthe parts sub-sector. Although majority foreign ownership is not allowed in the assembly sub-sector, this sub-sector is large, with asmall number of establishments generating scale economies in the automotive industry. The determinants of technical efficiency in the parts sub-sector show that foreign ownership per se does not enhance technical efficiency since other determinants like the degree of vertical integration and the size of establishments are significant determinants of technical efficiency.

Keywords:

• productivity
• automobiles
• organization of production
• industrialization
• multinational firms

JEL Classifications:

• D24
• L62
• L23
• O14
• F23

Acknowledgements

An earlier version of this article was presented at the international conference on ‘Asian Regionalism: Responding to Globalisation and China’, 16–17 January 2008 at the University of Nottingham, Malaysia Campus, Kuala Lumpur. I would like to thank participants of the conference for helpful suggestions, the Department of Statistics, Malaysia for providing the data, Mariani Abdul Majid, Mansor Jusoh, Zakiah Jaafar and two anonymous referees for helpful comments in writing this article. Funding provided by Universiti Kebangsaan Malaysia under grant UKM-GUP-JKKBG-08-03-015 is gratefully acknowledged. The usual disclaimer applies.

Notes

1. The study by Van Biesebroeck (2003) is based on a very rich database. It is ironical that studies on the automotive industry in developing countries are centered around development issues, technology transfer from FDI, and linkages with the domestic economy in providing industrial deepening and upgrading of the industrial sector. These same issues are also rooted in the studies of the US automotive industry with a different twist in that the American firms are trying to stay ahead of Japanese (foreign) firms in the US. The obvious difference between developing and developed countries is the rich amount of data amassed and monitoring. R&D in the latter countries enables comprehensive objective studies of the automotive industry.

2. The study by Lieberman and Dhawan (2005), using detailed micro-level data, examines issues of technical efficiency in American and Japanese firms that parallels the issues examined in this article. The current study uses establishment-level data provided by the Department of Statistics, Malaysia and the identity of owners of these establishments as well as country of origin of parents are unknown. The ‘richness’ of data used in a study, as always, will determine the ‘richness’ of the results of the study.

3. The deflators at the five-digit level are unpublished and provided by Department of Statistics, Malaysia.

4. The original panel data consisted of 106 establishments with 3 establishments having government ownership, 12 establishments having negative value added,and 2 establishments each with a single worker drawing zero wages. After deleting the 17 establishments from the balanced panel, a total of 89 establishments are left.

5. The results of the stochastic frontier analysis for the parts sub-sector presented in Table 3 does not show a model which includes all the determinants mentioned in the article. The iterations did not converge when all five explanatory variables, i.e. SIZE, VI, LQuality, FORsh, and NXint are used in the case of the parts sub-sector. Similarly, when SIZE and VI are the only two explanatory variables for technical efficiency, the iterations did not converge. Inclusion of LQuality in addition to SIZE and VI also leads to non-convergence. Model 3.5 in Table 3 is given focus in the discussion of the parts sub-sector but this model also did not converge when the constant returns to scale (CRS) restriction was imposed.

6. See Wad (2009) for a political economy perspective of the automotive industry in Malaysia and Thailand as well as Doner et al. (2006) for the competitiveness of the auto parts industry in Korea, China, Indonesia, and Japan.