Efficiency of textile manufacturing firms in Pakistan: A stochastic frontier production function approach

The permissible US safeguards against China's textile exports has been phase out on 01 January 2009. To accept challenges of quota free textile exports under the new economic globalization defined by the WTO regime, firm ability to export has become very important for their long-term survival and growth. This depends on firm capacity to remain internationally competitive. Productive efficiency is the key which will enable a firm to deliver products at lower costs. We want to determine the technical efficiency level of textile manufacturing firms in Pakistan during the year 2008–09. The data used is taken from the annual reports of 127 companies. A stochastic frontier production model is measured by the MLE. The LR test statistics revealed that translog production function with truncated normal distribution is appropriate for the data. The estimated value of γ shows that approximately 91.9% of the deviations in production of firms are because of difference in technical efficiency. The technical efficiency of the firms is between 42.7% and 97.8% with a mean 89.82%. This implies that in the short run on average production of the firms can be raised by at least 10.18% while utilizing existing resources and by using the best practiced (the most efficient) firm's procedures.