The persistence of efficiency

Profits can persist in the resource-based view (RBV) of the firm because of heterogeneity of inputs combined with resource immobility. The firm-efficiency interpretation of the RBV posits that heterogeneity in, for example, technology or know-how, leads to inter-firm efficiency differences which can persist because of imperfect imitability. Thus the persistence of efficiency leads to the persistence of profitability. There has been no empirical research into the firm-efficiency view, and this paper therefore fills that gap by utilizing a panel of 4280 firms in the manufacturing sector over the period 1983–2003. Efficiency scores are derived using data envelopment analysis (DEA) and these are then modelled in a random parameter framework where one determinant of current period efficiency is the firm’s own lagged efficiency. The estimated coefficient of efficiency persistence is found to be around 0.7, thereby offering support for the firm-efficiency view, and this varies by country and by industry.