TECHNICAL EFFICIENCY IN MALAYSIAN MANUFACTURING FIRMS: A STOCHASTIC FRONTIER ANALYSIS APPROACH

Abstract

Liberalisation challenges, such as those that arise with the establishment of the ASEAN Free Trade Area (AFTA) and elimination of trade barriers, have led to competition among local and foreign manufacturers, requiring Malaysian manufacturing companies to achieve high productivity to address the emergence of new operations by increasing their industrial efficiency and performance. This article aims to measure the level of technical efficiency and analyse the factors that contribute to technical inefficiency in the Malaysian manufacturing industry in 2015. This study uses data from 8,653 firms based on the latest census (2015) obtained from the Statistics Department using the Stochastic Frontier Analysis (SFA). Based on the results, the companies' overall technical efficiency level was high at 0.812. For the determinants of technical efficiency, it was found that ratio of medium to high level of education, company size, information and communication technology spending, training expenses and wage rates showed a positive relationship with technical inefficiencies. The manufacturing industry needs to focus on investing in human capital and scale economic achievement, and high technology production that will increase the technical efficiency level of companies and employees.