Dynamic multi-directional inefficiency analysis of European dairy manufacturing firms

Magdalena Kapelko , Alfons Oude Lansink

Abstract

This paper extends the method of multi-directional inefficiency analysis to account for dynamics of firms’ production decisions. The resulting approach –dynamic multi-directional inefficiency analysis –measures variable input- and investment-specific inefficiency using Data Envelopment Analysis. The empirical ap- plication focuses on panel data of large dairy manufacturing firms over the period 2005–2012 in three European regions (Eastern, Southern and Western). The results show that investments are the most inef- ficient factor for firms in all European regions, followed by labour and materials. However, the findings also suggest a high dispersion of investment-specific inefficiency scores within the sample. The paper also finds that the median dynamic inefficiency is changing rapidly in the years after the beginning of the financial crisis