Technical Efficiency and Technical Change in Canadian Manufacturing Industries

Abstract

This study applies the “true fixed effects” panel stochastic frontier methodology to the Canadian KLEMS data set to estimate technical change and technical efficiency in the Canadian manufacturing sector. To account for the endogeneity of capital inputs as well as the possible problems related to omitted variables, a two-stage residual inclusion method is pursued. The first stage is estimated using the dynamic panel GMM method. The results show that Canadian manufacturing industries experienced significant declines in technical efficiencies during the last ten years. This suggests that the observed slowdown in TFP growth during the recent past is partly due to declining technical efficiency.