Testing the production efficiency of the investment sector in Kuwait using two-stage approach

Purpose - – Testing the efficiency in the economy has been highly pronounced since the financial crisis in 2008, as many countries have started to deregulate their economic sectors. The potential impact of testing efficiency is thus the key driver of world output and welfare. For this purpose, the main objective of the Capital Market Authority consists of more regulation of securities trading to boost economic efficiency. In particular, the purpose of this paper, is to examine the efficiency of 40 investment companies in Kuwait. In this study, the authors investigate the efficiency in the investment sector in Kuwait. Studying such a case is important for several reasons. First, the investment sector in Kuwait is affected by the World Trade Organization (WTO) conditions and regulations for more market liberalization. Second, most studies on efficiency have focussed on developed countries, such as those of Europe and the USA, with very few studies examining developing countries, such as Kuwait. Third, the study efficiency features is important in helping policy makers evaluate how the investment sector will be affected by increasing competition and then formulate policies that affect that sector and the economy as a whole. Design/methodology/approach - – In this study, we use non-parametric data envelopment analysis (DEA) to estimate investment companies’ efficiency in Kuwait. The authors test predictions of the model using yearly data for 2006-2010. In the analysis, the authors follow the two-stage approach suggested by Coelliet al.(1998). In the literature on DEA efficiency score measurement, this two-stage approach is the most prominent. This approach uses the efficiency score, measured by the DEA model, as the dependent variable in a regression model with explanatory variables that are supposed to capture the impact of external factors (Hahn, 2007). In the second stage, the authors used a Tobit model to investigate factors affecting the efficiency in the Kuwaiti investment sector. Findings - – The findings of the second stage suggest that 2008-2010 had a negative impact on firms’ efficiency in Kuwait. The results confirm the substantial influence of the 2008 global financial crisis on the investment sector in Kuwait. In addition, the results show that factors affecting production efficiency in the investment sector in Kuwait include the total revenues, total assets, government participation, and Islamic firm dummy. These second-stage results are confirmed using different specifications of a fixed effect model, a random effects model, and a logit model. Originality/value - – The results may be utilized by both monetary authorities and policy makers in establishing the general economic policy in the country. A number of policy implications may be derived from the estimates obtained in the current paper. First, the results show that the investment sector in Kuwait faced a sharp drop in its efficiency in 2008 due to the global financial crisis. This result tells us that there was a spillover effect of the global financial crisis in the Kuwaiti investment market, as companies in this market are highly vulnerable to global shocks. As a result, the investment sector needs to be regulated by, for example, encouraging more company mergers and acquisitions. Second, to meet the appropriate regulations in the investment sector in Kuwait, monetary authority in Kuwait should take into consideration the WTO conditions for more openness in the economic sector. Therefore, companies in the investment sector should be more efficient to compete with foreign investment companies that decide to enter into Kuwaiti market. Therefore, the need for regulations in the Kuwaiti investment sector is more necessary than before. Third, the study of efficiency features is important to help policy makers evaluate how the investment sector will be affected by increasing competition and then formulate policies that affect that sector and the economy as a whole. Furthermore, monetary policy can play an important role in influencing the efficiency in the investment sector. Therefore, the Central Bank of Kuwait should take a leading role in regulating abnormal financial activity in the Kuwaiti market.