Technical Efficiency of Agro-Processing Industries: In case of Projects Financed by Development Bank of Ethiopia

Abstract

The study aims at determining the level of technical efficiency of the food and non-food Agro-processing industries over time using stochastic frontier production function model. All the parameters of the frontier function and the inefficiency model have been estimated simultaneously using Maximum likelihood estimation. The study considered 55food processing and 25 non-food agro-processing industries for the period of 2014/15- 2018/19(annex 2 and 3). The cob Douglas functional form with maximum likelihood estimation better explains the production behavior of food producing as well as non-food agro-processing industries. It shows that there is technical efficiency difference among industries in the sector. The mean technical efficiency of food Agro-processing was 0.53 while that of non-food industries was also 0.42, showing an increasing trend in both industries. Poor quality of raw materials, poor linkage between private and state farms and poor technology are the main constraint of the sector. Food agro-processing industries, slightly speaking, have better efficiency and scale of operation as compared to non-food agro-processing industries mainly attributed to the linkage between raw material producing firms with food producing industries. External constraints including lack of modern marketing skill, financial resources and lack of sufficient professional food technologist contribute more to the low level of development of the sector. In order to effectively utilize agricultural resource and benefit from this sector, efforts have to be made in improving linkage between farms with food and noon food agro-processing companies, working to scale up the production of best quality of raw materials, infrastructure development, technical and skill development and availability of updated marketing information system. The creation of conductive business environment enhances the productivity of the subsector.