Output and Input Efficiency of Special Economic Zones (SEZs) in India

Abstract

The purpose of this article is to measure the production efficiency of Visakhapatnam Special Economic Zone (VSEZ; a central government-operated zone) and other state and private zones working under its jurisdiction for the period 2009–2015. A panel of 30 zones, including VSEZ, is selected to estimate production frontier and technical inefficiency effects in production of zones using a stochastic frontier analysis methodology. To fit frontier, three relevant input variables, namely raw material, capital goods and labour, and one output variable, namely exports generated by the zones, are selected. The study observed that Cobb–Douglas production function is more preferable than translog function. Result shows rejection of our first null hypothesis that input variables do not make any significant contribution in output as all input variables such as raw material, capital goods and labour significantly affect the amount of output (exports). Any minor change will lead to a major change in output. Among all inputs, input elasticity of capital goods to output (exports) is highest—2.0855—implying that 1 per cent change in it will result in an increase of 2.0855 per cent in output. The 0.4350 value for the variance γ parameter in this study is not near to 1, suggesting that some of the residual variations are due to the inefficiency effects. Our null hypothesis (η = 0), that the inefficiency effects do not vary over the time, is rejected as the estimated value of (η) is significant, implying that technical inefficiency effects vary from year to year. For some zones, there is upgradation in it and reverse is found in case of others. The study also reveals that private zones are more efficient than zones operated by central and state governments. This leads to two different segments, one puts question mark on functioning and administration of the government, whereas the other supports the concepts of introducing privatisation and public–private partnership (PPP) in the case of development. JEL Classification: C01, C67, E00, F01, F13, F14, D60