Data Envelopment Analysis: The Stochastic Frontier Analysis Of Kenya

955 Words 4 Pages
From the microeconomic view point, the objective of the firm is seen to be one of output maximization from a given set of inputs with minimum cost. In particular, this microeconomic notion presumes that under a free market framework firms should allocate input and output efficiently with the motive being profit maximization or cost minimization.
Most empirical analyses examine the performance of a firm by looking at their levels of efficiency (Coelli, Rao, O’Donnell & Battese, 2005). Efficiency in production therefore can be considered the ability of a firm to successful optimize the allocation of inputs in the production process so as to produce a given level of output. Efficiency can be considered from two perspectives; allocative efficiency
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Several econometric techniques have been devoted towards the analysis of technical efficiency, with the common techniques being the Stochastic Frontier Analysis (SFA) approach and Data Envelopment Analysis (DEA). Of focus in this paper is the Data Envelopment Analysis and its preference over SFA discussed in Section 3.0 under the conceptual framework.
The organisation of this paper is as follows. Section 1.2 gives the overview of Kenya’s manufacturing industry. In section 1.3 the research problem is stated. Section 1.4 presents the objectives that the study seeks to address. In section 1.5 the justification of the study is presented and is followed by empirical literature in section 2.0. An overview of the literature is presented in section 2.1 while section 3.0 presents the conceptual framework upon which the study hinges and finally section 3.1 presents the methodical frameworks, data and the estimation issues.
1.2 Overview of Kenyan Manufacturing
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If the current trend subsists to 2030, then the forecasts in Kenya’s Vision 2030, will not be attained. This will in turn mean that the country may fail to attain the sustained annual GDP rate of 10 per cent by 2030. The failure of this sector to grow will consequently, imply that generation of employment opportunities would suffer a blow, thus efforts of poverty alleviation through job creation will also be meagre if not non-existent.
It is therefore critical at this point to access the efficiency of the manufacturing sector with a view of coming up with policies that would see the sector’s performance on an upward growth. This therefore means that the county’s manufacturing sector will be more competitive. Increasing the sector’s competitiveness therefore requires a careful cross-examination of the factors that tend to perpetuate inefficiency in the sector which is at the core of this paper.
1.4 Objectives of the study
The study seeks to establish the determinants of technical efficiency of Kenya’s manufacturing

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