The Importance of economic openness on technical efficiency in global perspective

Abstract

Macroeconomic efficiency governs a substantial role in defining a country’s welfare. It ignites competitive advantage on global competition and demonstrate favourable allocation of resources. The creation of macro efficiency is multidimensional, however previous literatures had emphasized the relevance of economic openness. International trade enables firms to access the global demand, acquiesce scalability in expanding their production and uphold economies of scale. Foreign direct investment (FDI) caters to the financing needs of the host countries, providing lower cost of capital compared to internal sources. However, openness also create interdependence among countries possibly have negative results on efficiency through the building up of downward risks and external shocks. Our study attempts to identify the influence of international trade and FDI on the technical efficiency of macroeconomics in the global context. We differentiate countries based on income level, and further investigate whether technical efficiency in each cluster respond differently to openness. Panel data is used encompassing 98 countries and 28 years (1990 to 2017). We apply stochastic frontier model based on the Cobb-Douglas production function. The result characterizes high income countries as being the most technically efficient, followed by middle- and low-income countries, consecutively. The dispersion of technical efficiency among low income countries is relatively high compared to other income groups, indicating wide within-group and overtime efficiency gap. Further, FDI is found to have positive effect on technical efficiency in all income levels, but higher proportion of FDI toward the global stock would deteriorate a country’s technical efficiency. Trade is found to be beneficial only to economies with adequate level of export proportion. The result suggests that policymakers need to balance the source of growth, between internal and foreign-sourced. It further points the urgency of developing export-oriented industry, and to filter imports, on facing the global trade.