Is Globalization Driving Efficiency? A Threshold Stochastic Frontier Panel Data Modelling Approach

Recently, Mastromarco, Serlenga and Shin (2010) propose a two-step approach to examine dynamic transmission mechanism under which globalization factors fos- ter technology efficiency. In this paper, we extend the MSS model by combining panel threshold regression technique advanced by Hansen (1999). This threshold stochastic frontier panel data model enables us to analyze regime-specific stochas- tic frontiers and complex time-varying patterns of technical efficiencies in a robust manner. Using a dataset of 44 countries over 1970-2007, we find that income elas- ticities of labour and capital and time-varying common efficiencies are substantially different under superior and inferior frontiers. Capital and labour inputs are more productive under superior frontier. More importantly, common efficiencies have steadily increased under superior frontier, but technical efficiency has monotoni- cally decreased for low income countries, supporting the so-called club convergence hypothesis. Furthermore, the VAR-based impulse response analyses suggest that openness factors through FDI and trade help the countries improve production technology and efficiency position relative to the frontier only after the country has reached a certain level of development.