The study of efficiency gap between foreign and domestic firms and its implication
for technology spillover has found that although foreign firms are generally found to
be technically more efficient the evidence on technology spillover is less conclusive
in developing countries. This could be due to the fact that foreign firms, whose parent
companies are in the developed countries, are using a technology which may not be
appropriate for the domestic firms. We examine this inappropriate technology
hypothesis by estimating measures of allocative efficiency for both domestic and
foreign firms in eleven 3-digit manufacturing industries of India during 1990-2000.
We use stochastic frontier (econometric approach) as well as Data
Envelopment Analysis (DEA, linear programming) to measure efficiency of the firms.
Assuming a Cobb-Douglas technology, we have estimated Stochastic Production
Frontier and Stochastic Cost Frontier in each industry to measure technical efficiency
and cost efficiency of each firm and get some inference on allocative efficiency.
Using DEA we decompose total cost efficiency into technical and allocative
efficiency. Our results indicate that generally foreign firms are technically more
efficient but there is no conclusive evidence to suggest that these foreign firms are
allocatively inefficient compared to the domestic firms.