Technical Efficiency and Total Factor Productivity Changes in Manufacturing Industries: Recent Advancements in Stochastic Frontier Model Approach

This paper aims to evaluate total factor productivity growth (TFPG) of Vietnamese manufacturing industries over the period 2000 – 2019. The stochastic frontier models were applied to decompose the sources of TFPG into technical efficiency changes, technological changes, allocative efficiency, and scale effects. We find that technological changes and the rate of scale component effect have been the major driving force of productivity growth in the 2-digit manufacturing industries as well as total manufacturing industry. In contrast, technical efficiency changes and allocative efficiency had negative effects on TFPG. Furthermore, TFP in the manufacturing sector has declined at an annual rate of -0.062 during the period of 2010 – 2015, then it grows continuously during the period of 2015 - 2019, with a rate of 5.4%. This study suggests that specific guidelines are required to promote productivity in each industrial sectors. For example, Industries with slow technological progress (textile and electrical products) require the introduction of new frontier technology. Government policy should encourage investments that can introduce newly developed production technology. In addition, considering allocative inefficiency, a policy to enhance TFP by improving resource allocation should be pursued, which be done by promoting free markets and lessening government intervention.