An examination of technical efficiency factors in the scope of decomposing total factor efficiency: Stochastic frontier analysis

Total factor productivity, one of the most important factors affecting the per capita income of countries, is the main source of long-run growth and is often regarded as equivalent to technology or the best available proxy for technology. However, in order to understand the exact nature of the concept of total factor productivity, which is known as the "Solow residual" or "the measure of our ignorance", and to distinguish one effect from another, no consensus has been reached on the measurement and decomposition of total factor productivity. In this context, using annual data for the period 2010-2018, total factor productivity is decomposed into technical efficiency, technological change and scale efficiency for 43 countries, 22 of which are middle-income countries, and the factors affecting technical efficiency are empirically analyzed by stochastic frontier analysis. The application part of the study consists of two stages. The first stage of the application, ICT utilization, demographic development, macroeconomic performance, innovation capacity and governance indices are constructed by using the principal components analysis method from the factors determined as a result of theory and literature reviews to be used in the decomposition of total factor productivity. In the second stage of the application, both total factor productivity is decomposed into technical efficiency, technological change and scale efficiency by stochastic frontier analysis and the effects of the indices constructed in the study on technical efficiency are empirically revealed. In the area of ICT utilization, France, the Republic of Korea and Germany have the highest average index values, while India, Guatemala and Egypt have the lowest average index values. In this area, Portugal, Kazakhstan and Greece show the highest improvement, while Sweden, Finland and Norway experience the highest decline. In the area of demographic development, Japan, the Netherlands and Sweden have the highest average index values, while Egypt, India and South Africa have the lowest average index values. In this area, South Africa, Turkey and Hungary are the countries with the highest improvement, while Egypt is the only country to experience a decline. In the area of macroeconomic performance, Norway, Netherlands and Denmark have the highest average index values, while Tunisia, Serbia and Egypt have the lowest average index values. In this area, Portugal, Poland and Serbia are the countries with the highest improvement, while Argentina, Tunisia and Egypt are the countries with the highest decline. In the area of innovation capacity, China, USA and Japan have the highest average index values, while Guatemala, Egypt and Colombia have the lowest average index values. In this area, China, Poland and Belgium are the countries with the highest improvement, while the USA, Japan and Finland are the countries with the highest decline. In the area of governance, Finland, Norway and Sweden have the highest average index value, while Egypt, the Russian Federation and Ukraine have the lowest. According to the empirical findings, the most important factor determining the technical efficiency of countries is innovation capacity. A one-unit increase in this variable leads to a maximum increase of 0.0171 units in technical efficiency. This variable is followed by the governance index and a one-unit increase in this index leads to a maximum increase of 0.0112 units in technical efficiency. A one-unit increase in the macroeconomic performance index leads to a maximum increase of 0.0067 units in technical efficiency, while a one-unit increase in the ICT utilization index leads to a maximum increase of 0.0058 units in technical efficiency. In the relevant period, Romania was the country that increased its technical efficiency the most and came the closest to the production frontier, followed by Kazakhstan, Thailand, India and Czechia. Seven of the top ten countries with the highest increase in technical efficiency are middle-income countries. This situation statistically reveals that middle-income countries have realized technological catch-up. The fact that Romania, Kazakhstan, Thailand, India, Bulgaria, Bulgaria, the Russian Federation and the Arab Republic of Egypt, which are in the middle-income countries group, increased their technical efficiency is evidence that confirms the catch-up/convergence hypothesis. On the other hand, Brazil was the country whose technical efficiency decreased the most and moved the furthest away from the production frontier, followed by Argentina, South Africa, Greece, Tunisia, Italy, Finland and Chile. Five of the first eight countries with the highest decrease in technical efficiency values are middle-income countries. This reveals that the realization of the catch-up/convergence hypothesis by increasing the technical efficiency of countries is not valid for all countries.