Eastern Europe and Central Asia
The substantive and relatively comprehensive interpretation of the observed differences in per capita income, GDP growth rates, and productivity across countries has been a big challenge for decades. The use of firm-level data is an attractive and valid option to avoid these issues which are related to the macro analysis. This does not mean that the firm-level approach tackles a great deal of the cross-country unobserved heterogeneity problems, but it provides tighter framework to connect the institutional specific measures with the pertinent outcomes, (Bartelsman et al., 2009).
The use of firm-level data can provide some advantages. One of which is to examine in detail whether firms could have benefited from the available skills and the output of the education system supplied in the labour market, and how these skills are being reflected in better and higher efficiency and performance levels across manufacturing firms.
One of the criticisms of using survey data for measuring firm performance is that due to its self-reporting nature, it is prone to bias. However, it is more likely that accounting data is subject to a greater element of bias as there are significant incentives in distorting financial data particularly in the areas of tax, asset reporting and remuneration. The MENA and BEEPS survey measure the business environment and does not, of itself, measure firm performance. The questions relating to performance tend to be at the end of the interview when the respondent has become comfortable with the non-judgmental nature of the process and it could therefore be argued less susceptible to bias, (Beck and Demirguc-Kunt, 2006). In addition, the variations in the aggregate data provided from different sources, and the disparities between methodologies of accounting national statistics in the Central and Eastern Europe region, and those adopted in the Western institutions, resulted in inconsistent measures of national performance and unreliable
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productivity estimates. Moreover, In the CEE region and ECA region, by extension, the prices do not imply the resource allocation connotations as in the market economy in the West, along with the distortion of the exchange rates. Consequently, it is neither possible to measure the performance nor to identify or correct the failures. Furthermore, the policy advancement will be restricted, and it will not be implemented as effectively as expected, (Piesse and Thirtle, 2000).
The selection of countries is mainly due to data availability. This is where 2013 is the year for which the latest firm-level data in the two regions of MENA and ECA was available at the time this research first started in 2014.
The choice of the manufacturing private sector is due to technicality issues. The decision to focus on the manufacturing sector firms is mainly because of data unavailability in a high percentage of the service sector firms in the Business Environment and Enterprise Performance Survey sample.
Those firms neither reported their capital’s net book value nor their capital’s replacement cost. Meanwhile in the sample at hand, more observations are available from the manufacturing private sector. This is where more than 2284 and 1800 firms in this sector from MENA and ECA respectively, reported their capital figures, either as net book values or as replacement cost of their machinery, equipment, land, and buildings. From a technical point of view, the missing capital observations in the services sector do not help much when setting the stochastic frontier production function in an appropriate manner.
It is worth noting that the MENA sample is heterogenous, and the ECA sample is even more heterogenous due to the differences in the economic, political, and historical contexts. They are also heterogenous in terms of the nature and pace of the transition process which has been taking place in each of these nations since the demise of the Soviet Union in 1990s.
However, the MENA sample can be clustered into sub-groups of countries based on some economic and political features that make them more similar. The Middle East and North Africa nations can be classified into three main groups from an economic point of view: the high income and natural resources rich countries
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including the Gulf states; the middle-income labour abundant countries including Egypt, Algeria, Morocco, and Tunisia; and the middle- and low-income war-torn nations, such as: Libya, Iraq, Yemen, and Syria. The low income with small population nations, such as: Mauritania, Djibouti, and Gaza and the West Bank.
On the other hand, Eastern Europe and Central Asia can be divided into six similar regions in terms of their history, political systems, and economic transition.
1. Central Eastern Europe CEE: which includes the Czech Republic, Poland, Slovakia, Slovenia, Bulgaria, Hungary, and Romania.
2. The Balkans: which comprises Serbia, Bosnia-Herzegovina, Croatia, Macedonia, Kosovo, Montenegro, and Albania.
3. The Baltic states: they include Estonia, Lithuania, and Latvia.
4. The Caucasus region: which consists of Azerbaijan, Armenia, and Georgia. 5. The Western Commonwealth of Independent States CIS: including Russia,
Ukraine, Belarus, and Moldova.
6. The Central Asia region CA: which comprises Kazakhstan, Tajikistan, Turkmenistan, Kyrgyzstan, and Uzbekistan.
In terms of the transition nature since the beginning of the 1990, the gap between the ECA economies has been widening between the Baltic states and the CE countries on one side, and the rest of the region on the other.
However, cross-country heterogeneity in both regions is captured both by country-level variables such as; GDP per capita, the strength of legal rights index, distance to frontier scores, life expectancy at birth, total (years), and taxation. In addition, the sample is pooled with country dummy variable named as country specific effects, and a sector dummy variable (low, medium, and high technology industries) named as sector specific effects using the stochastic frontier analysis.
Moreover, and to better allow for firm heterogeneity the analysis was extended to two types of matching analysis, propensity score matching (PSM) and Mahalanobis distance matching (MDM).
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There are various reasons for choosing these two regions, besides the panel firm-level data unavailability and inaccessibility for researchers in the human capital field in some regions.
The main reason for this choice is the different organisational structures and the dissimilarities between production functions across economies in different developmental phases, which can be a suitable platform for analysing the distinctive effects of human capital composition in each region in comparison with the others.
3.3.1.1 The Middle East and North Africa Data
The dataset which is used for the estimation of the maximum likelihood stochastic frontier production function, was sourced from the joint World Bank Group – European Bank for Reconstruction and Development – European Investment Bank Enterprise Survey, undertaken in 2013, and spanning more than (6000) private enterprises across the Middle East and North Africa region, covering both the manufacturing and services sectors. However, the researcher main focus will merely be on the manufacturing sector private firms, the survey also encompasses different firm-characteristics such as size, age, involvement in innovation and imitation, their inputs and outputs, exports and imports, spending on research and development and formal training.
The 9 middle-income MENA nations were grouped into 64 local regions as follows; (Egypt 22 regions, Israel 5, Jordan 5, Lebanon 6, Mauritania 2, Morocco 12, Tunisia 5, Yemen 8, West Bank and Gaza 2).
With regard to formal training data in MENA, more than (3200) firms from different manufacturing firms (low-tech, medium-tech, high-tech) with different sizes and ages across the MENA area are included in the analysis.
The aim of this analysis is to examine whether there is a statistically significant impact of training on firms’ performance mainly labour productivity.
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3.3.1.2 Eastern Europe and Central Asia Data
The ECA sample is collected from The Business Environment and Enterprise Performance Survey (BEEPS) by the World Bank.
The survey was conducted in (2013) and it includes more than (4300) manufacturing firms with different sizes and ages covering the Eastern European and Central Asian nations.
The manufacturing firms in the sample are chosen based on their response to the questions about the net book values and the replacement cost of their capital as these details are crucial and facilitate the estimation of the stochastic frontier production function. Subsequently, other firms among the whole population of firms, which did not report those values of capital are replaced by (blank) in the sample due to a lack of response.
The countries which are selected to be included in the sample are; Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, FYR Macedonia, Georgia, Hungary, Kazakhstan, Kosovo, Kyrgyz Republic, Latvia, Lithuania, Moldova, Mongolia, Montenegro, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Tajikistan, Ukraine, and Uzbekistan.
Using the (BEEPS) firm level data, the stochastic frontier estimation allows for technical efficiency to be impacted by human capital components, which is represented by average years of education, university degree holders, college or technical school attendees, and those who completed a secondary or vocational training school.
This is with other variables of interest, such as firm size, the percentage of foreign ownership in the firm, and loans received. There are some other control variables at the country level, such as GDP per capita across countries, and life expectancy rates at birth, which are included in the estimation to capture country specific effects, where the higher these two variables are, the more developed the country is. Another country variable is used, which is the country’s distance to the frontier score, which shows the
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distance of each economy to the frontier of the best regulatory performance observed on each of the indicators across all economies. The results are taken from the Doing Business sample observed since (2005). This allows observers to assess the gap between a specific economy’s performance and the best practice in the regulatory environment. More details about this measure are available in the World Bank Doing Business periodical publications.
Regarding the formal training data in ECA, more than (4300) manufacturing firms from different economic activities with different sizes and ages reported whether they offered training over the last three completed fiscal years.
The core of analysis is to examine whether there is a statistically significant impact of training on firm’s performance.
3.3.1.3 Variables for Stochastic Frontier Production Functions in MENA and ECA
The variables for each firm in shorthand along with their definitions are explained as follows:
1. Ln Q (Annual Gross Sales in US dollars): Total Sales (as the output variable); This represents the value of all annual sales counting the manufactured goods and goods the establishment has bought for trading divided by the exchange rates of each country’s local currency.
2. Ln Capital Input: (Capital Input); This total capital stock that a firm holds during the year it has been surveyed. It is calculated by adding up the net book value of machinery and equipment to the net book value of land and building and denoted by KA in other words, it is the actual cost of assets at the time they have been acquired, plus the costs incurred to make the asset ready to use minus the annual accumulated depreciation since the time of purchase.
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Alternatively, it capital input is measured by aggregating the rental cost of machinery and equipment with the replacement cost of land and buildings in the year in which the establishment was surveyed. This is denoted by KB.
3. Ln Labour Input: (Labour Inputs); This is represented by full time workers equivalent which effectively, considers the number of permanent full-time employees last completed year (prior to the year when the survey was conducted) who are paid and contracted for one or more than a fiscal year or guaranteed a renewal of their employment contract and working up to 8 hours a day plus temporary worker who have been hired for less than a year.
4. Ln Squared Labour: This denotes for squared labour inputs. 5. Ln Squared Capital: This represents squared capital input. 6. Ln K*L: This represents capital input multiplied by labour input.
3.3.1.4 Determinants of Technical Efficiency in MENA and ECA
One of the main objectives for studying the efficiency factors is to provide governments and regulatory systems designers with the analyses and assessments of the effects of their policies implications to increase the ability of production units (firms) to achieve the optimum level of production or the produce with the lowest level possible of cost. Another important goal is to identify the causes of inefficiency across firms in different industries, which could assist the policymakers to project more concrete macroeconomic plans to improve the business environment.
1. Ln Average Years of Education: This variable is represented by the average number of years of education of a typical full-time permanent production worker employed in the plant.
2. Ln Highly-Skilled Labour (University Degree): The percentage of the firm’s employees at the end of the fiscal year (when the survey was conducted) who had a university degree.
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3. Ln Intermediate-Skilled Production Labour : According to the Enterprise Survey Module the numbers of different types of permanent, full-time skilled production workers; are workers (up through the line supervisor level) engaged in fabricating, processing, assembling, inspecting, receiving, storing, handling, packing, warehousing, shipping (but not delivering), maintenance, repair, product development, auxiliary production for plant’s own use (e.g., power plant), recordkeeping, and other services closely associated with these production operations. Employees above the working-supervisor level are excluded from this item.
Also, these workers are skilled in that they have some special knowledge or (usually acquired) ability in their work. A skilled worker may have attended a college or technical school. Or, a skilled worker may have learned his skills on the job.
4. Ln Low-Skilled Labour (Secondary School Workers): in MENA this variable represents the number of full-time permanent employees in the establishment who had completed secondary school including vocational as their highest level of education.
5. Size: The firm size is represented by a scale of (0 – 3) where 0 denotes for micro size enterprises, 1 proxies small size enterprises, 2 for the medium size, and 3 represents the large size establishments.
6. Ln Low-Skilled Production Labour (Unskilled Workers): in ECA this variable represents the workers (up through the line supervisor level) engaged in fabricating, processing, assembling, inspecting, receiving, storing, handling, packing, warehousing, shipping (but not delivering), maintenance, repair, product development, auxiliary production for plant’s own use (e.g., power plant), recordkeeping, and other services closely associated with these production operations. Employees above the working-supervisor level are excluded from this item. Also, these workers are unskilled in that it is not required that they have special training, education, or skill to perform their job.
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7. Loan: This is a dummy variable represents whether the firm received a fund in the form of a loan from different financial sources. Institutions that granted loan are in most cases: (private, government, commercial bank etc.).
8. Loan from a Commercial Bank: This dummy variable demonstrates whether the enterprise received a loan from a commercial bank or not, denoted by (0 = No, the firm did not receive a loan from a commercial bank, 1 = yes, the firm did receive a loan from a commercial bank).
9. Firm Age: This variable represents the age of the firm in the year when the establishment was surveyed.
10. Labour Total Cost: Total cost of labour, including wages, salaries and benefits is the total annual wages and all annual benefits, including food, transport, social security (i.e. pensions, medical insurance, and unemployment insurance). 11. Total Cost: this is the product of the aggregation of (Electricity,
Communication services, Fuel, Transport for goods and workers (excluding fuel), Water, Rental of land/buildings, equipment, furniture).
12. Foreign Shareholders: Foreign ownership refers to the nationality of the shareholders. If the primary owner is a foreign national resident in the country, it is still a foreign-owned firm. If the shares are held by another company or institution and the shareholders of that institution are foreign nationals, then it is foreign-owned. This variable is proxied by the percentage of foreign ownership in the establishment in the previous year when the survey was conducted.
13. Research & Development Expenditures: This variable investigates whether the establishment did spend on research and development activities during the last three completed fiscal years, either in-house or contracted with other companies (outsourced). Research and development (R&D) is defined as creative work undertaken on a systematic basis to increase the stock of
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knowledge. For example, (laboratory research for a new chemical compound of paint would be research and development while market research surveys or internet surfing would not be research and development).
14. New Management Practices: This is also a dummy variable which represents whether a firm during the last three years, introduced any new or significantly improved organizational or management practices or structures to its market. Meaning any changes in the management structure, changes in the way workers work together, introducing new incentives for performance, changing hiring and firing practices, or changing the systems of information and monitoring that aim to enhance efficiency.
15. New Marketing Approaches: it represents whether a firm introduced new or significantly improved marketing methods we mean design, branding or packaging that changes the look of the product or perception of the service, or a new channel or form of promoting, pricing or selling the products and services including a) changes in product form and appearance that do not alter the product’s functional characteristics; b) new marketing methods in product placement such as introduction for the first time of a franchising system, of direct selling or exclusive retailing, and of product licensing; c) new marketing methods in product/service promotion such as the development and introduction of a fundamentally new brand symbol, the introduction of a personalized loyalty cards.
16. Technology licensed from a foreign owned company: It measures access to foreign technology. The license may be held by the establishment’s parent company. The answer is “no” if the establishment uses foreign technology without a license or a formal agreement.
17. GDP Per Capita:Gross domestic product (GDP) is the sum of value added by all resident producers plus any product taxes (fewer subsidies) not included in the valuation of output. GDP per capita is gross domestic product divided by
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midyear population. Growth is calculated from constant price GDP data in local currency and then converted into US dollar for comparison purposes.
18. Strength of Legal Rights Index: measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending. The index ranges from 0 to 12, with higher scores indicating that these laws are better designed to expand access to credit.
19. Distance to Frontier: the country’s distance to frontier score, which shows the distance of each economy to the frontier of the best performance observed in terms of regulatory performance on each of the indicators across all economies in the Doing Business sample since 2005. This allows observers to assess the gap between a specific economy’s performance and the best practice in the regulatory environment.
20. Life Expectancy at Birth, Total (Years): Life expectancy equals the average number of years a person born in a given country is expected to live if mortality rates at each age were to remain steady in the future. It is derived from male and female life expectancy at birth from sources such as (1) United Nations Population Division. World Population Prospects. (2) Census reports and other