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Sudan Journal of Agricultural Research

Cost efficiency of Malaysian oil and fat industry: An empirical evidence

Mohamed O. A. Bushara and Mohd. Ghazali Mohayidin

Abstract

This paper reports the application of the stochastic frontier approach, which comprises the estimation of the Battese and Coelli model specification (1993 and 1995) in which the inefficiency effects are directly influenced by a number of variables. The paper shows that the application of this stochastic frontier models can give meaningful results regarding the Cobb-Douglas cost function on balanced panel data. Results indicated that the Cobb-Douglas cost function, a homothetic cost structure, was found to be preferred over the trans-log functional form in Malaysian oil and fat industry. The industry appears to be characterized by Hicks-neutral technical progress. The mean cost inefficiencies of Malaysian oil and fat industry in the 12 different years (1985- 1996) tended to increase from 1985 to 1988 then decreased slowly and slightly up to 1996. Among the oil and fat sub-sectors, palm oil relatively seemed to be the most economically inefficient while coconut oil sub-sector is the best of the peers. Results revealed that all factors in the cost inefficiency effect results had significant effects on cost inefficiency of the average firm except for capital, labour and energy productivities. The mean cost inefficiency appeared to decline over the sample period, which is this likely to be partially the result of an increase in excess capacity in the industry during this time.
 

Sudan Journal of Agricultural Research Vol. 9 (2007) PP. 135-147