363

Pakistan Economic and Social Review

Volume 54, No. 2 (Winter 2016), pp. 363-384

MEASURING EFFICIENCY OF MANUFACTURING

INDUSTRIES IN PAKISTAN:
An Application of DEA Double Bootstrap Technique
HAFIZ GHULAM MUJADDAD AND HAFIZ KHALIL AHMAD*

Abstract. This is the very first study, which analyzes technical

efficiency and its sources for the large scale manufacturing
industries (LSMI) of Pakistan through DEA double bootstrap
technique. First, we applied bootstrapped DEA technique for
measuring bias-corrected technical efficiency scores by utilizing
four inputs and one output. Finally, we employed the bootstrapped
truncated regression model for determining the sources of technical
efficiency. It is found that industries should reduce their size as
there is evidence of diseconomies of scale in our results. Average
wage as a measure of workers skill level has positive impact on
technical efficiency. Finally market size does not have any
significant impact in regression analysis.

Keywords: Technical efficiency, Large scale manufacturing industries (LSMI),

DEA double bootstrap, Truncated regression, Pakistan

JEL classification: O14; H21; D61

I. INTRODUCTION
In today’s world the globe consists of the borderless economy and each
and every entity should be prepared to accept the challenges of this change if
they want to play a major role in businesses and remain competitive. An

*The authors are, respectively, Associate Research Fellow at Punjab Economic Research
Institute / Ph.D. Candidate and Assistant Professor/Chairman (Incharge) at Department of
Economics, University of the Punjab, Lahore (Pakistan).
Corresponding author e-mail: [email protected]
364 Pakistan Economic and Social Review

entity must be efficient if it wants to stay in businesses. So the performance

measurement is necessary for this purpose as the efficiency is the only
criteria for organizations to remain in business. It is essential for firms,
organizations or industries to reach at their optimal level in order to compete
with their business competitors all over the world. It is the requirement of
every country to see that its organizational performance is good with high
efficiency and productivity in order to achieve its targets. Traditional
measures of performance are sales, worker turnover, share prices and exports
etc. However, these measures do not reflect the complete picture of a firm’s
performance. In contrast to these measures, efficiency is a more
comprehensive measure as it is based on both the inputs and outputs.
Our study is the first one that analyzes efficiency of large scale
manufacturing industries using two-stage bootstrapping technique. Basically,
performance measurement is to compare the efficiency of different units,
compare the present level of efficiency to previous level of efficiency,
comparison of actual efficiency scores to planned efficiency levels,
comparison of different geographical zones or performance can be measured
by comparing the efficiency of entities functioning under the similar
conditions (Wholey & Hatry, 1992). The common criteria for measuring
technical efficiency (TE) are to maximize output or profit and minimize the
cost. Under certain circumstances, TE is determined as the skill of an
industry to produce. An organization or industry is considered as technically
efficient if it is producing maximum output from a specific amount of inputs
or it is producing a given amount of output by using the minimum amount of
inputs. The aim of the producers is to minimize the wastages.
Measuring efficiency is one of the main aspects of today’s world.
Every entity is curious about its performance and is afraid of failure which
may not only harm the industry’s reputation but may also shake the
investors’ confidence in management. Performance evaluation has two basic
features: i) it shows the effect of past decisions, and ii) it shows the
formation of financial structure of any firm or industry. It is well known that
basic purpose of efficiency evaluation is to determine whether industries are
employing their resources in the most efficient way (Duzakin and Duzakin
2007). Performance is not a simple concept but it is relatively close to
productivity and efficiency. The concept of efficiency indicates that a firm or
industry can produce by utilizing the minimum resources or inputs like
capital, labor and other expected inputs and is able to remain competitive
over the long period of time (Mayes et al., 1994).
Different researchers have defined efficiency in different ways as
 MUJADDAD and AHMAD: Measuring Efficiency of Manufacturing Industries 365

Koopmans (1951) defines TE as “There is a possible point in the commodity

space which is known as efficient point whenever an increase in one of its
coordinates (the net output of one kind) can be obtained only at the expense
of decline in some other coordinates (the net output of other kind)”. Another
definition of efficiency involves equating the inputs and outputs of an
organization with that of its peers which are performing well. These peers are
estimated in relation to the specific objective where it can be measured based
on the output maximization, profit maximization or cost minimization
(Thanassoulis, 2001).
The concept of measuring efficiency of producing units was initiated
by Farrell (1957). There are two basic techniques which can be used for
measuring efficiency; parametric and non-parametric. Aigner et al. (1977),
and Meeusen and Broeck (1977) developed the parametric approach
(stochastic frontier analysis, SFA) first. Linear programming models, which
are also known as non-parametric approach, of Charnes et al. (1978) and
Fare et al. (1985) which are based on convexity assumption are famous with
the name of data envelopment analysis (DEA). Both approaches have some
limitations: SFA necessarily requires specification of functional form and
assumptions regarding distribution of the error term. In contrast, DEA does
not require these conditions. It is assumed in DEA that decision making units
(DMUs), which are producers (economic agents), have control over the
discretionary variables but Ouellette and Vierstraete (2004) and many others
have justified that non-discretionary inputs are also present in every sector
and therefore, these environmental variables must be used in DEA model.
Simar and Wilson (2007) show that earlier studies that involved
models such as DEA based on two-stages of production processes were
defective due to their failure in describing the data generating process
(DGP). Therefore, these approaches are invalid due to the presence of serial
correlation in the estimated efficiency scores. The authors identified many
problems of these approaches which combine DEA with Tobit regression
models. Therefore, they introduced DEA double-bootstrap approach. This
approach enables construction of confidence intervals for estimated
efficiency scores and let identify its determinants.
The present study is aimed to evaluate the technical efficiency (TE) of
large scale manufacturing industries (LSMI) of Pakistan. LSMI are chosen
because it is the major part of the industrial sector which has much
importance in Pakistan. Industrial sector is the third largest sector after
services and agriculture sectors. Manufacturing sector contributes 13.5% of
Gross Domestic Product (GDP) and absorbs 14.1 percent of total employed
366 Pakistan Economic and Social Review

labor force. The productivity and performance of LSMI sector has much
importance for sustained growth and development of the country as LSMI
comprises more than fifty percent of the industrial sector.
However, it is not sufficient to measure the technical efficiency only
without determining its sources. This study measures efficiency scores of
LSMI and also assesses its determinants as Pakistan is ranked 133 among
148 in global competitiveness index (the Global Competitiveness Report
2013-14; Schwab (2014)). There is no study in Pakistan that has estimated
bias-corrected efficiency scores of manufacturing sector and assessed its
sources. This will be the first study to evaluate the technical efficiency and
its determinants by applying the DEA double bootstrap. In this study
industries are also regrouped for making them comparable.
The remaining of the study is ordered as follows: Review of literature
is given in section 2. Section 3 provides methodological framework and
describes sources of data. Empirical results of manufacturing industries are
interpreted in Section 4. Section 5 consists of conclusions and policy
recommendations.

II. REVIEW OF LITERATURE

Many studies have been done for measuring the performance of industries.
But almost every study adopted the common technique of DEA (especially in
case of Pakistan) for measuring the efficiency of different sectors including
manufacturing sector. First, we review the literature related to efficiency,
then related to Pakistan.
LITERATURE RELATED TO EFFICIENCY
Mahadevan (2002) analyzed the performance of productivity growth of 28
manufacturing industries of Malaysia over the period of 1981 to 1996. He
applied the data envelopment analysis (DEA) to compute Malmquist index
of total factor productivity (TFP) growth and technical change, change in
technical efficiency and change in scale efficiency were decomposed from
Malmquist index. They used three variables (capital, labor as inputs and
value added as output). They found that the non-ferrous metal industry
obtained the highest TFP growth i.e. 3.7 percent and petroleum refineries
obtained the lowest TFP growth i.e. -0.3 percent. They also found that the
average weighted TFP growth was 0.8 percent; technical change was 0.3
percent; technical efficiency change was 0.5 percent; pure technical
efficiency change was 0.4 percent and scale efficiency change was 0.1
percent. They argued that low TFP growth was due to the small gains in both
technical change and technical efficiency, with industries operating close to
 MUJADDAD and AHMAD: Measuring Efficiency of Manufacturing Industries 367

optimum scale.
Baten et al. (2006) analyzed the technical efficiency of selected
manufacturing industries of Bangladesh by applying the stochastic frontier
production approach over the period from 1981/1982 to 1999/2000. They
covered the selected 3-digit census factories. They included three variables
(value added, capital and labor) in their research. They applied two
alternative distributions to model the: the truncated normal distribution and
the half normal distribution. They found that estimated technical efficiency
for selected industries was 40.22% of potential output under the truncated
normal distribution while it was 55.57% of potential output for the half
normal distribution. They also examined that the time-varying inefficiency
parameter was positive which indicated that the technical efficiency declined
over the mentioned period of time.
Duzakin and Duzakin (2007) examined the performance of 480
manufacturing firms related to 12 industries of Turkey for the year 2003.
Output oriented super slacks based model of data envelopment analysis was
applied under constant returns to scale (CRS) assumption. They used two
inputs (net assets and average number of employees) and three outputs
(profit before taxes, export revenues and gross value added). They found that
standard deviation average scores deviated from 0.178 to 0.989 and they
found that 278 firms remained below average results, and only 65 firms were
identified as efficient. It was examined that the major factor of the
inefficiency in leading firms of Turkey was the lack of insufficient level of
exports.
Watanabe and Tanaka (2007) examined the efficiency of Chinese
industries over the 1994 to 2002 period at province level. They chose the
directional output distance function for estimating the two efficiency
measures of Chinese industries, one was traditional that considered only
desirable output while the other considered desirable and undesirable
outputs. They used capital, labor and materials (coal) as inputs while
industrial products as desirable output and sulfur dioxide as undesirable
output. They found that if the only desirable output is included then the
efficiency level was biased. They concluded that neglecting the undesirable
output tends to lead to an overestimate of industrial efficiency levels in
Shandong, Sichuan, and Hubei. They also found that a province’s industrial
structure has significant effects on its efficiency levels.
Ahmadi and Ahmadi (2012) examined the technical efficiency level of
manufacturing industries in Iran during 2005 to 2007. They included 23
industries from (2-digit ISIC groups) industries and country's provinces,
368 Pakistan Economic and Social Review

using output-oriented approach. They measured the relative efficiency with

Data Envelopment Analysis. Their results showed that according to CCR
model mean values have approximately downward trend while according to
BCC model nine industries had lower unit efficiency in constant returns to
scale. Technical efficiency had upward trend among provinces. In nutshell,
there were only three principal manufacturing industries and two provinces
which were identified as the best performers, namely tobacco, transport
equipment and coal, and coke. Among thirty provinces, Bushehr and North
Khorasan provinces showed the best performance. They also found that scale
inefficiency was the most important drawback of industrial firms in Iran.
Ramli and Munisamy (2013) examined the technical efficiency and
eco-efficiency of the manufacturing industries in 15 states throughout
Malaysia for the period 2001-2010. They applied two approaches i.e. Data
Envelopment Analysis (DEA) and Directional Distance Function (DDF).
They used two inputs (operating expenditure and capital) and two outputs
(one was the desirable output i.e. sales, and the second was undesirable
output i.e. CO2 emission). They found that, under free industrial zone (FIZ),
in DEA average technical efficiency deviated from 83% to 92%, and under
non-industrial free zone (NFIZ), average technical efficiency varied from
77% to 90%. They analyzed that in DDF while incorporating the desirable
and undesirable outputs, under FIZ, average eco-efficiency deviated from
88% to 92% and they found that under NFIZ average eco-efficiency varied
from 87% to 90%. They argued that this high eco-efficiency under FIZ for
the manufacturing sector demonstrated that environmental performance in
Malaysia was not adversely affected with respect to industrial development.
LITERATURE RELATED TO PAKISTAN
Din et al. (2007) analyzed TE of large scale manufacturing sector of
Pakistan. They used DEA approach under constant returns to scale (CRS)
and variable returns to scale (VRS) assumption. Data were collected from
101 industries for 1995-96 and 2000-01. Input variables included capital,
labor, industrial cost and non-industrial cost and output variable was
contribution to GDP. Under CRS, the results indicated that mean efficiency
has improved from 0.23 in 1995-96 to 0.42 in 2000-01 and only 2 industries
could maintain their ranking in both periods. Under VRS, average efficiency
score increased from 0.31 in first period to 0.49 in the second period.
Memon and Tahir (2012) evaluated efficiency of 49 manufacturing
firms of Pakistan during the 2008-2010 period using DEA. These companies
were categorized as large-sized, medium-sized and small-sized. They used
three inputs and two outputs. They found that smaller companies had
 MUJADDAD and AHMAD: Measuring Efficiency of Manufacturing Industries 369

relatively higher efficiency scores in comparison to large and medium-sized

companies. They also found that 2 larger firms, 3 medium-sized firms and 5
smaller firms operated under the most productive scale throughout the period
under study.
The aforementioned literature shows that in case of Pakistan, only DEA
technique is applied for measuring the efficiency which is not an appropriate
approach for measuring the efficiency as its efficiency scores are serially
correlated. In this study, DEA double bootstrap technique is employed for
measuring the bias-corrected TE scores of LSMI and sources of TE
efficiency that is not measured in case of Pakistan. Therefore, this study will
contribute to the existing literature about the bias-corrected TE and its
sources with respect to the appropriate technique.

III. METHODOLOGY
Measuring the efficiency of producing units was initiated by Farrell (1957).
There is much literature with respect to the Farrell’s (1957) classic definition
of technical efficiency. Basically, there are two common techniques for
measuring efficiency: parametric and non-parametric. Aigner et al. (1977)
and Meeusen and Broeck (1977) developed the parametric approach (SFA)
first. The SFA requires the specification of functional form and estimates the
cost frontier. The incorporation of the stochastic error in model specification
is the main feature of the SFA. So, this approach allows the testing of
hypothesis due to the existence of stochastic error. This approach suffers
from two drawbacks: It requires specification of functional form and
assumptions regarding distribution of the error term.
The analysis of production efficiency is widely based upon the linear
programming models of Charnes et al. (1978) and Fare et al. (1985). The
ground is provided for these methods by Farrell (1957). In that literature,
those techniques which adopted the convexity assumption are famous with
the name of data envelopment analysis (DEA). DEA is a non-parametric
approach and it does not require a priori assumption of functional
specification relating inputs to outputs and does not demand for the
distributional assumption of the error term. DEA creates an efficient frontier
for every observation. The maximum output can be gained empirically from
a given set of inputs.
In DEA technique, it is assumed that decision making units (DMUs)
have full control over the inputs which can be suggested as discretionary
variables. But it is not true in reality as Ouellette and Vierstraete (2004) and
many others have justified that there are non-discretionary inputs in every
370 Pakistan Economic and Social Review

sector and therefore, these environmental variables should be used in DEA

model. So, many approaches exist in the literature, some of them like Banker
and Morey (1986) and Ruggiero (1996) incorporate the environmental
variables in DEA model directly and measure the efficiency in a single stage
model while others like Ray (1991), Muniz (2002) and recently Simar and
Wilson (2007) omit the non-discretionary variables from the DEA model and
introduce them in the second stage.
Simar and Wilson (2007) identified severe restrictions with two stages
DEA approach which is adopted in existing literature and showed that
previous studies which used two-stage DEA approach were defective
because of their failure in describing the data generating process (DGP)
which put some doubt on the technical efficiency which is explained by DEA
efficiency scores. They say that these estimated efficiency scores are serially
correlated. Due to these two main reasons the conventional two stages DEA
models are statistically invalid. Simar and Wilson (2000) also explained that
DEA estimates exaggerate the efficiency scores and underestimate the
frontier. In view of these severe problems, Simar and Wilson (2007) adopted
the alternative estimation and statistical inference procedure. This procedure
enables construction of confidence intervals for efficiency scores on one
hand and helps identify determinants of efficiency. In this study, the same
approach is employed for analysis.
DATA ENVELOPMENT ANALYSIS AND DOUBLE BOOTSTRAP
In this study, the input-oriented variable returns to scale (VRS) model is
applied for getting the TE scores in the first stage because constant returns to
scale (CRS) can be employed where industries or firms operate at their
optimal scale. The input-oriented DEA efficiency estimator for any
data set (xi, yi) for each industry can be obtained by solving the following
linear programing equation.

ˆvrsi  min   0 Yi  i 1 `iYi;iXi  i 1 `iXi; i 1 `  1; `  0, i  1,...n
n n n
 (1)

In equation (1) x and y are observed inputs and outputs and i=1….,n is
the specific industry. The is the efficient level of inputs, is the scalar
and is the non-negative vector of constants defining the optimal weights
of inputs to outputs. The obtained value of is the technical efficiency
estimate for the ith industry. In case of input-oriented, inputs should be
decreased for getting the higher technical efficiency where =1 means
that the industry is considered fully efficient while >1 means that the
industry is inefficient and it needs to reduce the inputs for reducing the
 MUJADDAD and AHMAD: Measuring Efficiency of Manufacturing Industries 371

inefficiencies.
The bias-corrected efficiencies are estimated in the first stage and are
left truncated by 1. The second stage uses a bootstrapped truncated
regression estimated by maximum likelihood method to estimate
determinants of TE as below:
i= b + z i β + εi (2)
In Eq. (2), b is the constant term, εi is statistical noise, and zi is a vector
of specific variables (these are known as environmental variables) for
industry i that is expected to be related to the industry’s efficiency score.
WHY DOUBLE BOOTSTRAP?
Usually very few results are available for the sampling distribution of
interest. It is for this reason that bootstrap techniques are adopted by Simar
and Wilson (2000, 2007). The concept behind the bootstrapping is very
simple i.e. Simulate the sampling distribution of any specific object by
mimicking the data generating process (DGP). The DGP that gives the logic
for Simar and Wilson’s (2007) double bootstrap is the DEA model
represented by eq. (1) and the second step truncated regression described by
Eq. (2).
To apply the bootstrap procedure, it is assumed that the original sample
data is produced by the DGP and that we can simulate the DGP by using the
‘new’ or pseudo data set that is derived from the actual data set. Then DEA
model is re-estimated by incorporating this new data set. It is possible to
derive an empirical distribution of bootstrapped values by doing this process
again and again which provides a Monte Carlo approximation of the
sampling distribution and also helps out in inference measures. The
efficiency of the bootstrapped methodology and the consistency of the
statistical inference significantly depend on how well it specifies the true
DGP and on the exact re-sampling simulation to copy the DGP.
The Simar and Wilson’s (2007) algorithm 2 of bootstrap procedure is
employed in this study that provides inference about coefficients and consists
of seven steps which are defined in different studies like Barros and Barrio
(2011) and Barros and Assaf (2009) briefly.

IV. SELECTION OF DATA

Different inputs and outputs are incorporated in various studies for
performance analysis but in this study four inputs and one output are selected
for measuring efficiency of large scale manufacturing industries. The
372 Pakistan Economic and Social Review

description of variables is such that output is contribution to GDP (value of

production minus industrial cost minus net non-industrial cost) and inputs are
capital (land and building, plant and machinery and other fixed assets),
labour (employees, working proprietors, unpaid family workers and home
workers), industrial cost (cost of raw materials, fuels and electricity
consumed, payments for work done, payments for repairs and maintenance
and cost of goods purchased for resale) and non-industrial cost (cost of
payments for transport, insurance payments, copy rights and royalties,
postage and similar expenses).

V. DATA SOURCES AND REGROUPING OF INDUSTRIES

We selected 65 industries for measuring the efficiency in this study and the
analysis of the study covers the period of 1995-96, 2000-01 and 2005-06.
The data about inputs and outputs of related large scale manufacturing
industries (LSMI)1 is collected from the census of manufacturing industries
(CMI). CMI is basically designed for collecting the data on values of inputs
and outputs of LSMI and it reports data in Rs. “000” for inputs and outputs
except for employees. The data of inputs and outputs is collected as the value
at the end of the period. It was conducted every year before 1990 but after
that period it is conducted after five years. The work on CMI 2010-11 is
continuing by Pakistan Bureau of Statistics, due to this data availability
constraint, the analysis is carried upto the year 2005-06.
For efficiency analysis of industrial sector, 101 industries were
selected. But during analysis of the selected industries and their time period,
it was found that CMI 1995-96 and 2000-01 followed the Pakistan Standard
Industrial Classification (PSIC 1970) which is comparable to International
Standard Industrial Classification (ISIC 1968) at four digit level and CMI
2005-06 followed the PSIC 2007 which is developed on the basis of UN
International Standard Industrial Classification, ISIC Rev-3.1. It means data
of 1995-96 is comparable to the data of 2000-01 because both follow the
same classification while data of 2005-06 is not comparable to 1995-96 and
2000-01. So, for making the comparable set of industries, some industries
were regrouped on the basis of major activities. Some industries were
excluded from the analysis and some were merged in one industry set up for
better analysis. After this industrial setting, we were able to regroup the 65
industries which are comparable to each other. The 65 industries were also

1
According to the definition of CMI, “Large Scale manufacturing covers the establishments
registered under factories Act 1934 or qualifying for registration having 10 or more
employees”. We have used data on LSMI according to this definition.
 MUJADDAD and AHMAD: Measuring Efficiency of Manufacturing Industries 373

formed in 22 groups and it was tried to incorporate every major group of

industries. Comparable set of industries are presented in table A-1 of
appendix.
As it has already been stated in the DEA double bootstrap approach
that in the second stage of the analysis, the dependent variable is the bias-
corrected efficiencies which are derived from the first step of the procedure.
It was regressed against the environmental variables in truncated regression
which were assumed to be the sources of technical efficiencies. So, the
model at the second stage of regression is showed in the following form.
ˆ
ˆ it = β0 + β1AWit + β2SZit + β3MSit + εit (3)
Where, it is the estimated technical efficiency scores based on the
assumption of the variable returns to scale. AW represents the average wage
which is calculated by the total cost of salaries divided by number of
employees, which is counted as the employee’s skill and human capital
(Kravtsova, 2008). SZ is the industry size which is calculated by taking the
logarithm of the employment2 of the industry, which is considered as a proxy
for the economies of scale of the industry in this study. MS is the market size
which is calculated by the logarithm of contribution to GDP of a specific
group of industries. Finally, εit represent the statistical noise.

VI. ESTIMATIONS AND INTERPRETATION OF RESULTS

In the first step of the DEA double bootstrap technique, original DEA
and bootstrapped VRS efficiencies of 1995-96, 2000-01 and 2005-06 were
estimated along with confidence intervals. It was found that original DEA
exaggerates the efficiency scores and underestimates the frontier as Simar
and Wilson (2000) described the limitations of DEA. It can be noticed that
bias-corrected TE scores which are obtained after 2500 simulations, correct
the efficiency scores and remove the biasness of exaggeration from the
results. The main feature of these estimations is that they also lie within the

2
Firstly we used the value of fixed assets as the proxy for the size of the industry but now
we used the employment as the proxy for the size of the industry as suggested by reviewer
and it is found that this model gives better results than previous model, so it is included in
main body of the article and results of previous model presented in table A-5 of Appendix.
) For robustness check, we repeated the analysis by using the data of 1995-6 and 2000-01
as per suggested by other reviewer. It has been found that, still there is no efficient
industry in case of bias corrected efficiency scores and the results of second stage of this
model are presented in table A-4 of Appendix. It could be seen that signs and significance
level of this model is same as was the previous model.
374 Pakistan Economic and Social Review

confidence intervals while DEA scores do not lie within the interval because
it underestimates the frontier and it is assumed to touch the frontier before
reaching to the actual one.
As in this study input-oriented DEA Bootstrapped model was used in
the first stage, the efficiency score 1 represents the technically fully efficient
industry while estimated efficiency score of greater than 1 shows the
inefficient or less efficient industry. In case of input-oriented model, fixed
output is obtained by utilizing the different set of inputs. So, for minimizing
the inefficiencies, use of inputs should be reduced for getting the same level
of output. So, it was found that there was not even a single industry fully
efficient for the period of 1995-96, 2000-01 and 2005-06 in case of bias-
corrected TE. The group-wise mean efficiency analysis is shown in table A-2
of appendix. The efficiency analysis of industrial groups shows broad
description of the industrial sector. It can be noticed from this table that
almost every industrial group improved its efficiency. It can also be observed
from table A-3 of appendix that overall TE of LSMI has increased over the
period of time.
After estimating the bias-corrected efficiencies of three cross sections, these
bias-corrected efficiencies of three different time periods were pooled in one
equation as the truncated regression form showed in Eq. (2) and maximum
likelihood method was employed for truncated regression as described in the
second step of the Simar and Wilson’s double bootstrap procedure in the
previous section. Results of determinants of the technical efficiency scores,
standard error, t-statistics and bootstrap confidence interval at 95% i.e.,
lower bound (LB) and upper bound (UB) are presented, respectively in
columns 2 to 6 of table 1 in the text. One should remain careful while
interpreting the coefficients as it can be seen in the study of Keramidou et al.
(2011). Since the efficiency scores are based on the assumption of input-
orientation, therefore, signs of coefficients must be reversed during
interpretation for clarity in interpretation3. It means a positive coefficient
shows the negative impact on efficiency scores and vice versa because we

33
In this study input-oriented approach is utilized which indicates that firms or industries
having a score of 1 are fully efficient while those having efficiency score of greater than 1
are less efficient or inefficient. A coefficient having a positive sign means that the relevant
determinant is inversely related to efficiency. While a coefficient having a negative sign
means that the relevant determinant leads to enhance the efficiency. In order to have
straightforward interpretation we reversed the signs of our regression coefficients during
interpretation.
 MUJADDAD and AHMAD: Measuring Efficiency of Manufacturing Industries 375

are using input oriented efficiency scores as dependent variable which is

larger or equal to one.
TABLE 1

Determinants of VRS TE Scores, Using a Bootstrapped Truncated

Regression
bootstrapped confidence
Regressor Bhats S.E t-statistic interval at 95%
LB UB
constant 26.43118 12.74536 2.073789 21.79494 32.00824
Average wage -15.9285** 5.662649 -2.81291 -19.1232 -13.3802
Size 5.317381** 2.403177 2.212646 3.834783 6.012168
Market size -2.85637 1.883082 -1.51686 -3.39988 -1.7601
**indicate significance at 5% level.

In the results of second step, where coefficients are bootstrapped 1000 times,
average wage, which represents the employee’s skill, is a highly significant
and possessing a negative sign which shows that it is a favorable source of
technical efficiency. It shows that there is more competence, well-educated
and post related staffing which enhances the ability of labor to perform and it
is participating positively in the efficiency of large scale manufacturing
industries. The coefficient of size of the industry (proxy for economies of
scale) is significant at 5% level and possesses a positive sign which means it
has a negative influence on the efficiency scores. It indicates that it does not
help to promote the efficiency of the manufacturing sector and there is no
evidence of economies of scale in selected industries and not well utilization
of the production capacity. The third and the last coefficient is market size
which possesses the negative sign but that is an insignificant variable means
it is not participating in affecting the efficiency positively more. These
results are found to have the same signs as Keramidou et al. (2011) found in
their study.

VI. CONCLUSION
The purpose of this study was to measure the efficiency of the large
scale manufacturing industries. Performance analysis is one of the main
objectives of the managers of establishments because they want to know that
376 Pakistan Economic and Social Review

how well are their companies working under the given resources.
Performance analysis also helps them to see how well are their past decisions
and how they can bring their establishment to the top position. For
measuring the efficiency, there are many techniques but in this study, DEA
double bootstrap approach was applied because it is more appropriate
technique as compared to the existing approaches. DEA double bootstrap
consists of two steps. In first step, it measures the bias-corrected efficiency
scores while DEA measures the biased efficiencies and it exaggerates the
efficiency scores. It can be seen from this study that DEA efficiency scores
do not lie in the confidence interval and these scores are beyond the interval
due to the bias which exists in DEA scores while bootstrapped efficiency
scores lie within the confidence interval and these are bootstrapped by 2500
iterations.
It was found in this study that none of the industries was technically
fully efficient while industries showed performance over the period of 1995-
96, 2000-01 and 2005-06. It can be seen that the industry which was the most
inefficient in 1995-96 was not the highly inefficient in 2005-06 which means
that there is learning behavior in industries. In this study, firstly efficiency
score of individual and every industry was presented, secondly group-wise
efficiency analysis was presented and thirdly overall TE scores were shown.
In the second step of this technique, the bias-corrected efficiency
scores are used as the dependent variable with left truncation, the
bootstrapped truncated regression model is used because the common
standard regression models are inappropriate. In this study, coefficients are
bootstrapped with 1000 iterations because further iterations did not improve
the results, so 1000 iterations were considered enough in this stage. It was
found that there is no evidence of economies of scale in the manufacturing
sector and the production capacity is not well utilized. The market size does
not have any impact on the efficiencies and the average wage has a negative
sign which implies the positive impact on the efficiency scores and it shows
that labor is fully able to perform in the favor of technical efficiency due to
the well knowledge, more competent and skilled staff.
On the basis of our results, firstly it can be suggested that there is
intense need to establish latest technical universities and institutions for the
guidance of the labor and to equip them with the modern techniques required
by the industry. Secondly industries need to reduce their size as there is
evidence of diseconomies of scale.
 MUJADDAD and AHMAD: Measuring Efficiency of Manufacturing Industries 377

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380 Pakistan Economic and Social Review

APPENDIX
TABLE A-1
: Comparable Set of Industries:
1995-96 and 2000-01 2005-06
1 Manufacturing of Textiles
1 Cotton spinning Spinning of textiles
2 Cotton weaving Cotton fabrics
3 Woolen textiles Fabrics other than cotton
4 Narrow fabrics Narrow woven fabrics & embroidery
5 Made-up textile goods Made-up textile articles, not apparel
6 Knitting mills Knitted & crocheted fabrics
7 Cordage, rope and twine Cordage, rope, twine & netting
8 Spooling and thread ball making Text. yarn & thread of MM staple fibers
2 Food Manufacturing
9 Dairy products &Ice cream & Ice Dairy Product
10 Canning of fruits & vegetables Fruit and vegetable juices
11 Canning of fish & sea food Fish & fish products
12 Vegetable Ghee & Cotton seed and inedible Refined oils & fats
animal oils
13 Rice milling Rice Husking & Rice milling
14 Wheat & grain milling & Grain milled products Cereal & vegetable flour milling & Cereal grain
and other grain milling products
15 Bread & bakery products Bread, fresh pastry & cake
16 Biscuits Rusks, biscuits
17 Refined sugar Sugar
18 Confectionery, not sweetmeats & Desi” Cocoa, chocolate & sugar confectionery
sweetmeats and confectionery
19 Blending of tea Processing & blending of tea
20 Feeds for animals & Feeds for fowls Animal feeds
21 Starch Starches & starch products
3 Industrial Chemicals
22 Alkalies & Acids, salts & intermediates & Inorganic acids & compound
Sulphuric acid
23 Dyes, colours & pigments Dyes & pigments
24 Compressed gases, etc. Industrial gases
 MUJADDAD and AHMAD: Measuring Efficiency of Manufacturing Industries 381

25 Fertilizers Fertilizers & Nitrogen compounds

26 Pesticides, insecticides, etc. Pesticides & agrochemical products
27 Other industrial chemicals Chemical elements
4 Other Non-metallic Mineral Products
28 Bricks & tiles Ornamental & building stone articles
29 Cement Cement
30 Cement products Articles of concrete, cement & plaster
5 Tobacco Manufacturing
31 Cigarettes Tobacco Products
6 Iron and Steel
32 Iron & steel mills Basic iron & steel
7 Medicines
33 Medicines & basic drugs(allopathic) & Pharmaceutical preparations
Homeopathic and other medicinal preparation
8 Electrical Machinery and Supplies
34 Electrical industrial machinery DC motors, generators & transformers
35 Radio & television communication RADIO,TV & COMMUNICATION
EQUIPMENT
36 Electrical appliances & Electric fans & Electric domestic appliances
Electrical appliances except fans
37 Insulated wires & cables Insulated wire and cable
38 Electrical bulbs & tubes Electric lamps
39 Batteries Primary cells & batteries & parts
9 Transport Equipment
40 Motor vehicles Motor vehicles & trailers
41 Motor cycles, auto rickshaws Motorcycles
42 Cycles & Pedi cabs Bicycles & invalid carriages
10 Other Chemical Products
43 Perfumes & cosmetics & Polishes & waxes Perfumes & toilet preparations
44 Soap & detergents Soaps & detergents
11 Non-electrical Machinery
45 Engines & turbines Engines & turbines
46 Agricultural machinery Agricultural & forestry machinery
47 Metal & wood working machinery Manufacture of machine tools
48 Textile machinery Spinning, weaving, knitting machinery &other
textile machinery
382 Pakistan Economic and Social Review

12 Printing and Publishing

49 Books, periodicals, maps, etc. Printing & publication of books etc.
50 Job printing Service activities of printing
51 Printed cards & stationery Other publishing
13 Petroleum Refining
52 Petroleum refining and products of petroleum & Refined petroleum products
coal
14 Paper and Paper Products
53 Pulp, paper & Paperboard Pulp, paper & paperboard
54 Pulp, paper, board articles & Other paper Containers of paper & paperboard
products
15 Wearing Apparel
55 Ready-made garments Ready-made garments
16 Leather and Leather Products
56 Tanning and leather finishing Tanning & dressing of leather
57 Leather products excepts footwear Luggage, saddlery & harness
17 Ginning and Baling of Fiber
58 Ginning (Cotton and others) Cotton ginning
18 Rubber Products
59 Tyres, tubes & Retreading tyres & tubes Rubber tyres & tubes; retreading
60 Vulcanized rubber products Vulcanised & hard rubber articles
19 Glass and Glass Products
61 Glass and Glass Products Glass and Glass Products
20 Non-ferrous Metal Industries
62 Aluminium & aluminium alloys Aluminium, unwrought; alumina
63 Copper & copper alloys Copper, copper mattes
21 Surgical Instruments
64 Surgical instruments Medical/surgical/orthopedic equipment
22 Sports and Athletic Goods
65 Sports & athletic goods Sports goods
 MUJADDAD and AHMAD: Measuring Efficiency of Manufacturing Industries 383

TABLE A-2
Mean Efficiencies of the 22 Industrial Groups
t Group wise mean 1995-96 2000-01 2005-06
No of group DEA dhat.bc DEA dhat.bc DEA dhat.bc
1 Manufacturing of Textiles 6.21 8.66 3.44 4.23 2.08 2.60
2 Food Manufacturing 6.04 7.98 2.97 3.59 2.67 3.32
3 Industrial Chemicals 3.47 4.67 1.81 2.30 2.03 2.5
4 Other Non-metallic Mineral 2.93 4.10 2.41 3.04 1.72 2.18
5 Tobacco Manufacturing 1 1.67 1 1.44 1 1.43
6 Iron and Steel 2.34 3.49 1 1.44 1 1.40
7 Medicines 6.31 9.54 1 1.45 1 1.25
8 Electrical Machinary 2.98 4.16 2.20 2.63 2.51 3.08
9 Transport Equipment 4.99 6.83 3.11 3.91 2.00 2.44
10 Other Chemical Products 2.40 3.05 1.55 1.77 2.36 2.85
11 Non-electrical Machinery 3.59 4.89 1.38 1.73 1.25 1.71
12 Printing and Publishing 3.70 5.02 1.42 1.74 2.37 2.91
13 Petroleum Refining 1 1.51 1 1.41 1 1.44
14 Paper and Paper Products 4.41 6.01 2.62 3.15 1.98 2.43
15 Wearing Apparel 11.20 16.5 4.08 4.89 1.24 1.55
16 Leather and Leather Products 6.65 8.90 1.87 2.20 3.03 3.64
17 Ginning and Baling of Fibre 4.25 5.92 1.05 1.34 1 1.33
18 Rubber Products 3.80 5.19 1.30 1.51 1.49 1.88
19 Glass and Glass Products 5.22 7.30 2.11 2.65 3.42 4.28
20 Non-ferrous Metal Industries 1.85 2.66 1 1.37 2.17 2.58
21 Surgical Instruments 12.76 15.95 5.57 6.96 3.06 3.76
22 Sports and Athletic Goods 15.16 20.73 1.43 1.59 1.65 1.97
 384 Pakistan Economic and Social Review

TABLE A-3
Overall T. E. level
Year DEA Bias-Corrected
efficiencies
1995-96 4.827 6.583
2000-01 2.333 2.871
2005-06 2.132 2.650
For robustness check, by using the data of 1995-6 and 2000-01

TABLE A-4
Determinants of VRS TE Scores, Using a Bootstrapped Truncated
Regression
Regressor Bhats S.E t-statistics
constant 9.1716212 8.894823 1.03111898
Average wage -12.898164** 4.215235 -3.0598917
Size 5.5086915** 1.617621 3.40542863
Market size -0.6163304 1.14989 -0.5359907
** indicate significance at 5% level
TABLE A-5
Determinants of VRS TE Scores, Using a Bootstrapped Truncated
Regression
bootstrapped confidence
Regressor Bhats S.E t-statistic interval at 95%
LB UB
constant 24.47** 11.90 2.06 23.60 33.61
Average wage -18.68** 6.37 -2.93 -23.53 -16.66
Size 3.31* 1.71 1.93 2.49 3.87
Market size -1.91 1.67 -1.14 -2.96 -1.49
** and * indicate significance at 5% and 10% levels, respectively