Exports, foreign ownership, and firm-level efficiency in Ethiopia and Kenya: an application of the stochastic frontier model

Using the World Bank's Enterprise Survey data for Ethiopia (2006 and 2011) and Kenya (2007 and 2013), this study empirically investigates the role of exports and foreign ownership in influencing firm-level efficiency. We use the stochastic frontier analysis to estimate a Cobb-Douglas production function with inefficiency introduced in the error term. We control for heterogeneity across firms by including firm size, type of industry, innovation activity, and employees' characteristics in estimating the inefficiency equation. The results of the study show that, in both Ethiopia and Kenya, exporting helps firms lower technical inefficiency, whereas the share of foreign ownership has the expected positive sign but not statistically significant. The results also confirm that, in both countries, smaller firms and firms that employ temporary workers for a longer period tend to be less efficient. For Kenyan firms, years of work experience of managers help to lower technical inefficiency. However, innovation activities within a firm tend to raise technical inefficiency. For Ethiopian firms, years of work experience of managers do not lower inefficiency, and innovation activities do not appear to affect firms' technical inefficiency. Our findings suggest that, even within Africa, not all policy tools result in similar outcomes. We conclude that policy-makers in Ethiopia and Kenya should look into implications of relevant respective variables of interest in designing appropriate industrial policy to improve firm efficiency in their industrialization endeavors.