Production efficiency measurement and its determinants across OECD countries: The role of business sophistication and innovation

Abstract Increasing efficiency and productivity should be at the core of the policy agendas of all governments. Knowing whether or not OECD economies optimize their resources in production is, therefore, an important policy issue. The purpose of this paper was to make cross-country comparisons of production efficiency, and its determinants, using mainly a parametric approach. Our proposed model was a stochastic frontier version of Battese and Coelli’s (1995) which includes both a stochastic error term and a term that can be characterized as inefficiency. The non-negative technical inefficiency effects are assumed to be a function of explanatory variables. The empirical analysis of macroeconomic performance done in this paper confirmed that OECD countries with a greater sophistication of their production processes and a higher capacity for innovation tend to be less inefficient Alternative non-parametric methods for evaluating the impact of process/contextual variables on efficiency also corroborated that business sophistication and innovation contribute to efficiency improvements across OECD countries.