Estimation of X-inefficiency: Korea and Taiwan

Abstract

This study applies the X-inefficiency theory to analyze different characteristics of the industrial structure between Korea and Taiwan, which have achieved rapid economic growth and export expansion during the past three decades. Using the parameters of the estimated CES production function by the Arrow, Chenery, Minhas and Solow method and the Diwan method, X-inefficiency is measured by the actual input costs deviating from their cost-minimizing values. The results show that Taiwan is more capital-intensive and has a higher X-inefficiency rate in the average value of the total manufacturing sector than Korea. Since the lack of competition is the main theoretical determinant of X-inefficiency, the competitive environment hypothesis--i.e., the industry in a less competitive environment has more X-inefficiency--is proposed and tested in this study. We use X-inefficiency estimates as a dependent variable. The concentration ratio and a measure of capital-intensity are used as regressors for market competition, and the degree of foreign dependency and tariff level are used for international competition. Our empirical results from Korea and Taiwan generally support the competitive hypothesis. In conclusion, the x-inefficiency theory is applicable in both the Korean and Taiwanese economies through the estimation of the production function or a test of hypothesis by the degree of competition.