Measuring Productivity Growth and Capacity Utilization in Data Envelopment Analysis : An Application

This article first reviews the well-known nonparametric methods of decomposing productivity growth and finally argue that Färe et al. (1994)’s method of computing productivity growth is superior in spite of the fact that this model model is based on convexity postulate, which assumes away some important technological features such as indivisiblities, economies of scale, and economies of specialization, which all arise from concavities in production. Second, we find the measurement of capacity utilization by Färe et al. (1989) not very practical, and therefore suggest a new method to measure capacity utilization, and then decompose the cost gap between actual and minimum cost into various components that are of practical use to managers, with special emphasis on that component due to unused capacity. Finally, this study applies Färe et al. method to a sample of 60 steel units in India over the period 1989-1996 to decompose the productivity growth into its various components. The results reveal that despite technological progress, there is a decline in productivity growth due to growing inefficiency over the period. This article finally concludes by suggesting that bold institutional policy changes is to be introduced as a part of the liberalization process in order that inefficiency is substantially reduced, resulting productivity growth to increase for the time to come