IDEAS home Printed from https://ideas.repec.org/a/spr/ijoeps/v15y2021i2d10.1007_s42495-021-00064-3.html
   My bibliography  Save this article

The importance of economic openness on technical efficiency in global perspective

Author

Listed:
  • Yohanes Andika Tjitrajaya

    (Parahyangan Catholic University)

  • Charvin Lim

    (Bank Indonesia)

  • Shafiah Meike Serepina Pasaribu

    (Parahyangan Catholic University)

  • Ferensky Regina Sandjaja

    (Parahyangan Catholic University)

  • Ivantia Savitri Mokoginta

    (Parahyangan Catholic University)

Abstract

Macroeconomic efficiency governs a substantial role in defining a country’s welfare. It ignites a competitive advantage in global competition and demonstrates favorable allocation of resources. The creation of macro efficiency is multidimensional, however previous literature had emphasized the relevance of economic openness. International trade enables firms to access the global demand, acquiesces scalability in expanding their production, and uphold economies of scale. Foreign direct investment (FDI) caters to the financing needs of the host countries, providing a lower cost of capital compared to internal sources. However, openness also creates interdependence among countries possibly have negative results on efficiency through the building up of downward risks and external shocks. Our study attempts to identify the influence of international trade and FDI on the technical efficiency of macroeconomics in the global context. We differentiate countries based on income level, and further investigate whether technical efficiency in each cluster responds differently to openness. Panel data is used encompassing 88 countries and 28 years (1990–2017). We apply a stochastic frontier model based on the Cobb–Douglas production function. The result characterizes high-income countries as being the most technically efficient, followed by middle- and low-income countries, consecutively. The dispersion of technical efficiency among low-income countries is relatively high compared to other income groups, indicating a wide within-group and overtime efficiency gap. Further, FDI is found to have a positive effect on technical efficiency in all income levels, but a higher proportion of FDI toward the global stock would deteriorate a country’s technical efficiency. Trade is found to be beneficial only to economies with adequate levels of export proportion. The result suggests that policymakers need to balance the source of growth, between internal and foreign-sourced. It further points to the urgency of developing export-oriented industries, filtering imports, on facing global trade.

Suggested Citation

  • Yohanes Andika Tjitrajaya & Charvin Lim & Shafiah Meike Serepina Pasaribu & Ferensky Regina Sandjaja & Ivantia Savitri Mokoginta, 2021. "The importance of economic openness on technical efficiency in global perspective," International Journal of Economic Policy Studies, Springer, vol. 15(2), pages 387-403, September.
    • Handle: RePEc:spr:ijoeps:v:15:y:2021:i:2:d:10.1007_s42495-021-00064-3
    DOI: 10.1007/s42495-021-00064-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s42495-021-00064-3
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s42495-021-00064-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Wenjun Liu & Shuliang Zou, 2013. "Does Openness Increase the Efficiency of China¡¯s Manufacturing Firms? Evidence from the World Bank Investment Climate Survey," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 8(3), pages 430-451, September.
    2. Baiashvili, Tamar & Gattini, Luca, 2020. "Impact of FDI on economic growth: The role of country income levels and institutional strength," EIB Working Papers 2020/02, European Investment Bank (EIB).
    3. Krishna G. Iyer & Alicia N. Rambaldi & Kam Ki Tang, 2008. "Efficiency externalities of trade and alternative forms of foreign investment in OECD countries," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(6), pages 749-766.
    4. Mercedes Gumbau-Albert & Joaquin Maudos, 2002. "The determinants of efficiency: the case of the Spanish industry," Applied Economics, Taylor & Francis Journals, vol. 34(15), pages 1941-1948.
    5. Jarrett Hart & Dragan Miljkovic & Saleem Shaik, 2015. "The impact of trade openness on technical efficiency in the agricultural sector of the European Union," Applied Economics, Taylor & Francis Journals, vol. 47(12), pages 1230-1247, March.
    6. Sangho Kim, 2003. "Identifying And Estimating Sources Of Technical Inefficiency In Korean Manufacturing Industries," Contemporary Economic Policy, Western Economic Association International, vol. 21(1), pages 132-144, January.
    7. Kristina Morkunaite, 2019. "A Secular Decline in Capital Productivity in G7 Countries," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 54(6), pages 385-390, November.
    8. Dimitris Christopoulos & Peter McAdam, 2013. "Openness, Efficiency and Technology: An Industry Assessment," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(1), pages 56-70, February.
    9. Krueger, Anne O, 1997. "Trade Policy and Economic Development: How We Learn," American Economic Review, American Economic Association, vol. 87(1), pages 1-22, March.
    10. Olivier Jeanne, 2012. "Capital Flow Management," American Economic Review, American Economic Association, vol. 102(3), pages 203-206, May.
    11. Robert Z. Lawrence & David E. Weinstein, 1999. "Trade and Growth: Import-Led or Export-Led? Evidence From Japan and Korea," NBER Working Papers 7264, National Bureau of Economic Research, Inc.
    12. Farrokh Nourzad, 2008. "Openness and the Efficiency of FDI: A Panel Stochastic Production Frontier Study," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(1), pages 25-35, February.
    13. Timothy J. Coelli & D.S. Prasada Rao & Christopher J. O’Donnell & George E. Battese, 2005. "An Introduction to Efficiency and Productivity Analysis," Springer Books, Springer, edition 0, number 978-0-387-25895-9, January.
    14. repec:kap:iaecre:v:14:y:2008:i:1:p:25-35 is not listed on IDEAS
    15. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-332.
    16. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    17. Rusdy Hartungi, 2006. "Could developing countries take the benefit of globalisation?," International Journal of Social Economics, Emerald Group Publishing, vol. 33(11), pages 728-743, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hussein Al-Zyoud & Asheref Illiyan & Vasim Akram, 2022. "Impact of Economic Openness on Macro Technical Efficiency in South Asia," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 28(3), pages 91-103, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hussein Al-Zyoud & Asheref Illiyan & Vasim Akram, 2022. "Impact of Economic Openness on Macro Technical Efficiency in South Asia," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 28(3), pages 91-103, November.
    2. Lundgren, Tommy & Marklund, Per-Olov & Zhang, Shanshan, 2016. "Industrial energy demand and energy efficiency – Evidence from Sweden," Resource and Energy Economics, Elsevier, vol. 43(C), pages 130-152.
    3. Kangile, Rajabu Joseph, 2015. "Efficiency In Production By Smallholder Rice Farmers Under Cooperative Irrigation Schemes In Pwani And Morogoro Regions, Tanzania," Research Theses 265681, Collaborative Masters Program in Agricultural and Applied Economics.
    4. Veronika Fenyves & Tibor Tarnóczi & Zoltán Bács & Dóra Kerezsi & Péter Bajnai & Mihály Szoboszlai, 2022. "Financial efficiency analysis of Hungarian agriculture, fisheries and forestry sector," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 68(11), pages 413-426.
    5. William Griffiths & Xiaohui Zhang & Xueyan Zhao, 2010. "A Stochastic Frontier Model for Discrete Ordinal Outcomes: A Health Production Function," Department of Economics - Working Papers Series 1092, The University of Melbourne.
    6. Helvoigt, Ted L. & Adams, Darius M., 2009. "A stochastic frontier analysis of technical progress, efficiency change and productivity growth in the Pacific Northwest sawmill industry," Forest Policy and Economics, Elsevier, vol. 11(4), pages 280-287, July.
    7. Hanousek, Jan & Kočenda, Evžen & Mašika, Michal, 2012. "Firm efficiency: Domestic owners, coalitions, and FDI," Economic Systems, Elsevier, vol. 36(4), pages 471-486.
    8. Karim L. Anaya & Michael G. Pollitt, 2014. "Does Weather Have an Impact on Electricity Distribution Efficiency? Evidence from South America," Working Papers EPRG 1404, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    9. Deng, Yaguo, 2024. "A Bayesian semi-parametric approach to stochastic frontier models with inefficiency heterogeneity," DES - Working Papers. Statistics and Econometrics. WS 43837, Universidad Carlos III de Madrid. Departamento de Estadística.
    10. Thanh Ngo & Kan Wai Hong Tsui, 2022. "Estimating the confidence intervals for DEA efficiency scores of Asia-Pacific airlines," Operational Research, Springer, vol. 22(4), pages 3411-3434, September.
    11. Bravo-Ureta, Boris E. & Higgins, Daniel & Arslan, Aslihan, 2020. "Irrigation infrastructure and farm productivity in the Philippines: A stochastic Meta-Frontier analysis," World Development, Elsevier, vol. 135(C).
    12. Jiradate Thasayaphan, 2011. "School-based Management Framework and Education Efficiency," Applied Economics Journal, Kasetsart University, Faculty of Economics, Center for Applied Economic Research, vol. 18(2), pages 1-16, December.
    13. Stefano Mainardi, 2021. "Parametric and Semiparametric Efficiency Frontiers in Fishery Analysis: Overview and Case Study on the Falkland Islands," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 79(2), pages 169-210, June.
    14. Mastromarco Camilla & Laura Serlenga & Yongcheol Shin, 2013. "Globalisation and technological convergence in the EU," Journal of Productivity Analysis, Springer, vol. 40(1), pages 15-29, August.
    15. Sanchez, Zadieshar G. & Quilloy, Antonio Jesus A., 2022. "Total Factor Productivity in Dairy Buffalo Milk Production in Nueva Ecija, Philippines," Journal of Economics, Management & Agricultural Development, Journal of Economics, Management & Agricultural Development (JEMAD), vol. 8(1), June.
    16. Radha R. Ashrit, 2023. "Estimation of technical efficiency of Indian farms for major crops during 2013–2014 and 2017–2018: a stochastic Frontier production approach," SN Business & Economics, Springer, vol. 3(2), pages 1-32, February.
    17. Papadopoulos, Alecos & Parmeter, Christopher F., 2021. "Type II failure and specification testing in the Stochastic Frontier Model," European Journal of Operational Research, Elsevier, vol. 293(3), pages 990-1001.
    18. Nguyen, Hoa-Thi-Minh & Do, Huong & Kompas, Tom, 2021. "Economic efficiency versus social equity: The productivity challenge for rice production in a ‘greying’ rural Vietnam," World Development, Elsevier, vol. 148(C).
    19. Seog-Chan Oh & Alfred J. Hildreth, 2014. "Estimating the Technical Improvement of Energy Efficiency in the Automotive Industry—Stochastic and Deterministic Frontier Benchmarking Approaches," Energies, MDPI, vol. 7(9), pages 1-27, September.
    20. Phatima MAMARDASHVILI & Dierk SCHMID, 2013. "Performance of Swiss dairy farms under provision of public goods," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 59(7), pages 300-314.

    More about this item

    Keywords

    Trade; Foreign direct investment; Technical efficiency;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:ijoeps:v:15:y:2021:i:2:d:10.1007_s42495-021-00064-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.