Measuring the Technical Efficiency of Food Manufacturing Industry in Malaysia

Abstract

Malaysia's Third Industrial Master Plan (IMP3) for the years 2006-2020 reported that the food manufacturing industry is generally less prone to economic change and recorded 17.5% increase in 5 consecutive years. This study identifies the level of technical efficiency (TE) and analyzing the factors that determine the technical inefficiency for food manufacturing in Malaysia involving a total of 1,569 firms using Stochastic Frontier Analysis (SFA). The determining factors such as the capital-labour ratio, employee training expenditure, secondary and tertiary education standards, wage rates, information and communications technology (ICT) costs, and firm size. The SFA results indicate that the TE level of food manufacturing companies in Malaysia is 0.779, which is a high level. Additionally, the capital-labour ratio, employee training expenditure, secondary and tertiary education standards, wage rates and ICT costs are significant determining factors of the inefficiency of food manufacturing firms. However, the size of the manufacturing company was found to be an insignificant factor in determining the increased efficiency of food manufacturing companies. These results indicate that food manufacturers need to increase investment in human capital and ICT and motivate employees by raising wage rates and improving the use of capital appropriate to the level of technology.