The Efficiency and Firm Performance Analysis of Nigeria Manufacturing Firms: Application of Stochastic Frontier Analysis Technique

ABSTRACT: Despite several measures adopted by the government to improve the efficiency of the manufacturing firms in Nigeria, the performance of these firms is below expectation. The poor performance of Nigerian manufacturing firms has prompted concern for Nigeria’s economic prospects in the long run. This needs to be addressed because, under this scenario, most development objectives would be difficult to achieve. Therefore, there is a need for Nigerian manufacturing firms to achieve high productivity to improve their performance. This study, therefore, evaluated the level of technical efficiency and examined the determinants of technical inefficiency in Nigerian manufacturing firms. It employed panel data of fifty-five manufacturing firms quoted in the Nigeria Stock Exchange Market from 1999 to 2020. The result from the Stochastic Frontier Analysis technique showed that all inputs (capital, labor, raw materials, cost of energy and other expenses) impacted positively on firms’ output at a 1% significance level. But the impact of raw material is the highest. It was also found that the mean efficiency for Nigerian manufacturing firms is 52.74%. Finally, it was revealed that the age of the firm, total assets and management efficiency are the technical inefficiency determinants in Nigerian manufacturing firms. This implies that the efficiency level of manufacturing firms in Nigeria can be improved by 47.26%. Also, manufacturing output can be enhanced by providing adequate raw materials. Furthermore, the efficiency of manufacturing firms in Nigeria is enabled by the managerial capability and asset size of the firms. The study suggested that government should give tax concessions on the purchase of raw materials (sourced domestically and externally) to encourage availability and use to optimize production. Also, manufacturing firms should encourage skill acquisition programs through various on-the-job training programs for managers and their entire workforce to boost labor productivity and performance. In addition, policies that will encourage good education system should be adopted by the government which will help the nation to produce trained and skilled labor force. Finally, manufacturing firms should mobilize more resources for the procurement, consolidation and expansion of the size of their assets using their undistributed corporate profit. Through its regulatory bodies [such as Federal Ministry of Industries, Trade and Investment, Nigeria Chamber of Commerce and Industry and Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)], government should enforce minimal asset requirements for each sub-sector (industry) as a basis for takeoff and subsequent renewal of licence for the manufacturing firms in Nigeria.