Heterogeneity in Production Structures and Efficiency: An Analysis of the Czech Food Processing Industry

• DOI: http://doi.org/10.1111/1468-0106.12217
• Author: Lukáš Čechura,Heinrich Hockmann
• Date: 01 October 2017
• Published date: 01 October 2017

HETEROGENEITY IN PRODUCTION STRUCTURES AND

EFFICIENCY: AN ANALYSIS OF THE CZECH FOOD

PROCESSING INDUSTRY

LUKÁŠČECHURA*Czech University of Live Sciences

HEINRICH HOCKMANN Leibniz-Institute of Agricultural Development in

Central and Eastern Europe

Abstract. The present study analyses firm heterogeneity and sector-specific technology. The

theoretical model stands on the assumption of maximizing the return on capital and overcomes

problems involved in simple profit maximization. The results show that a random parameter model

with sector dummies and heteroscedasticity is the most appropriate model specification for

distinguishing firm-level and sector-level efficiency and heterogeneity. The heterogeneity among

firms as well as among sectors was found to be an important characteristic in Czech food processing.

This holds for production technology as well as for technical efficiency. Moreover, the decomposition

of total variance shows that intrasectoral differences in technologies are much more pronounced than

the intersectoral differences. The differences in intrasector heterogeneity also suggest that the food

processing industry will be subject to accelerated structural change in the coming years. Moreover,

we found that on average the companies highly exploit their production possibilities. However, some

companies cannot keep pace with competitors. Because leapfrogging does not appear to be present in

selected industries (except for Milling), structural change is expected to occur in such a way that the

most successful companies will strengthen their position.

1. INTRODUCTION

In recent years, the Common Agricultural Policy (CAP) has been coming under

increasing pressure, and is currently one of the most controversial areas of EU

policy. One argument that is often made against the enormous support for

agriculture is the fact that the agricultural sector makes only a minor

contribution to GDP and employment in most EU countries. Moreover, it is

argued that the payments associated with the various instruments of agricultural

policy are insufficiently targeted to meet social needs. A further drawback of

current agricultural policy is that it cannot ensure transfer efficiency; that is,

payments actually remain in the agricultural sector and are not transmitted to

sectors upstream or downstream, or the landowners (Swinnen et al., 2010;

OECD, 2002). Given these problems, it is not very surprising that various

groups in society have been calling for reform of agricultural policy.

One outcome of this process is that income support provided by agricultural

market policy will be further reduced, and more resources will be directed to

rural development (the second pillar), as well as more consumer-related issues

*Address for Correspondence: Department of Economics, Czech University of Live Sciences,

Kamýcká 129, 165 21 Praha 6 –Suchdol, Czech Republic. E-mail: cechura@pef.czu.cz. This paper

was created within the project COMPETE –‘International comparisons of product supply chains

in the agro-food sectors: determinants of their competitiveness and performance on EU and

international markets’. The project has received funding from the European Union’s Seventh

Framework Programme for research, technological development and demonstration under grant

agreement no. 312029 (www.compete-project.eu).

Pacific Economic Review, 22: 4 (2017) pp. 702–719

doi: 10.1111/1468-0106.12217

© 2017 John Wiley & Sons Australia, Ltd

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like food safety. However, it can be assumed that these changes reduce

production incentives for farmers. In this context, one has to ask whether

incentives implemented by agricultural policy can be substituted by incentives

resulting from the demand for food in general, and agricultural raw materials

in particular. The food processing industries in separate EU countries can be

regarded as the pivotal players in this context. However, at least two

requirements have to be met so that the processors can incur this function. First,

market power must not be a crucial factor in the exchange transactions of raw

materials so that processors are not able to extract rents from farmers. Second,

food processors must be highly productive, and, thus, competitive, so that they

can create a high demand which can be met by the domestic agricultural sector.

In this paper we focus on the second requirement and analyse productivity in

the Czech food processing industry. Our aim is to conduct a comparative

analysis among the different industries, and to identify the productive and less

productive sectors and companies in Czech food processing. In addition,

examine whether these companies are concentrated in individual sectors only

or spread across all branches. Based on a joint estimation of sector-specific

production functions, we focus less on the various sources of factor productivity

and their development over time,1and concentrate mainly on the development

of the technical efficiency of companies in different food processing industries.

Thus, we conduct an analysis of the intrasectoral and intersectoral differences

in technology and efficiency in the Czech food processing sectors. Technical

efficiency, as an integral part of overall economic efficiency, is an important

indicator of the competitiveness and productivity of companies, because it

provides information on the extent to which they could increase the productivity

of their inputs by catching up to the best performing companies in a sector, and,

thereby, improve the competitiveness of the whole value chain.

This analysis is related to Čechura (2009) and Čechura and Hockmann

(2010), who investigate the determinants of productivity and efficiency at the

sectoral level.2We complement their work on differences between sectors with

an analysis of the variation within a sector. Two main questions are elaborated

upon in this paper. First, because the differences among food processing

companies and food processing sectors could be significant in terms of firm

heterogeneity and sector-specific technology, we examine an appropriate model

specification for distinguishing firm-level and sector-level efficiency and

heterogeneity. The second question concerns the significance of technical

efficiency and the sectoral differences in technical efficiency. Because the Czech

agrarian sector has experienced several important institutional and economic

changes in recent decades, it is now an appropriate time to ask how well inputs

are used and how technical efficiency has contributed to the competitiveness of

food processing companies.

1This analysis was carried out in Čechura and Hockmann (2010).

2Technical efficiency in the Czech food processing industry has not yet been deeply analysed, due in

much part to the lack of an appropriate data set. Compared to the Czech food processing industry,

technical efficiency in Czech agriculture has been analysed by several authors (e.g. Mathijs et al.,

1999a,b, 2001; Curtiss, 2002; Davidova and Latruffe, 2007; Čechura 2012; Zakova-Kroupova, 2016).

HETEROGENEITY IN PRODUCTION STRUCTURES AND EFFICIENCY 703

© 2017 John Wiley & Sons Australia, Ltd