Is globalization driving efficiency? A threshold stochastic frontier panel data modeling approach

In an earlier paper the authors proposed a two-step approach to examine dynamic transmission mechanism under which globalization factors foster technology efficiency. In this paper the MSS model is extended by combining a panel threshold regression technique. This threshold stochastic frontier panel data model enables the analysis of regime-specific stochastic frontiers and complex time-varying patterns of technical efficiencies in a robust manner. Using a dataset of 44 countries over 1970-2007, income elasticities of labor and capital and time-varying common efficiencies are found to be substantially different under superior and inferior frontiers. Capital and labor inputs are more productive under superior frontier. More importantly, common efficiencies have steadily increased under superior frontier, but technical efficiency has monotonically 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 to improve production technology and efficiency position relative to the frontier only after the country has reached a certain level of development. © 2012 Blackwell Publishing Ltd.