Academic journal article The Journal of Developing Areas

EFFICIENCY CONVERGENCE TOWARDS INTERNATIONAL STANDARD: EVIDENCE FROM MALAYSIAN LISTED GOVERNMENT-LINKED COMPANIES (GLCs)

Academic journal article The Journal of Developing Areas

EFFICIENCY CONVERGENCE TOWARDS INTERNATIONAL STANDARD: EVIDENCE FROM MALAYSIAN LISTED GOVERNMENT-LINKED COMPANIES (GLCs)

Article excerpt

ABSTRACT

This paper investigates the efficiency convergence of Malaysian listed government-linked companies towards the benchmarked foreign owned firms that represent international standard. We use stochastic frontier analysis to estimate production efficiencies of 31 GLCs and 15 FFs over a period of 12 years (2001-2012). The results of the σ convergence test show a process of convergence although the speed is relatively slow. The study also observes a significant negative link between output generation and labour input, suggesting overcapacity in human capital investment, and a significant positive link between financial firms and inefficiency implying the need to enhance productivity driven personnel and knowledge based investments for firms in this sector.

JEL Classifications: C33; D24; F43

Keywords: Government-Linked Companies, Stochastic Frontier Analysis, Efficiency Convergence

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Since the implementation of the privatization programme in the 1980s, Malaysia has seen a marked increase in the commercial participation of former state owned enterprises (SOEs). While the main objective of privatizing public entities was to improve efficiency and productivity, studies find that the government in many Asian countries did not totally relinquish their control in these firms (Boubakri et al., 2004), thus, defining them as partially privatized entities or government-linked companies (GLCs). Currently, Malaysian GLCs have their monopolistic status and economic dominance felt in almost all industries. The listed GLCs represent the majority components1 in Bursa Malaysia, the Malaysian Securities Exchange Bourse, and constitutes to one-third of the total market capitalization. GLCs also employ 5.0 percent of the country's total workforce, and provide key and critical services to the community (Putrajaya Committee on GLC High Performance [PCG2], 2007). The government recently introduced several major initiatives, amongst them, are the New Economy Model (NEM) and the Government Transformation Programme (GTP), which aim at driving all efforts to transform Malaysia into a developed high-income nation by the year 2020. Together with the other private sectors, these initiatives expect the GLCs to play a major role in propelling the economy into that direction.

It was reported that GLCs historical underperformance against the broader market, could risk derailing the country's efforts to become a developed nation by 2020 (PCG, 2013). In May 2004, the government launched the GLC Transformation (GLCT) Programme, which looks at the development of high performance among selected GLCs (Top GLCs)3, that are considered "sustainable and competitive" enough to face the challenges of the 21st century (PCG, 2006). The 10-year programme (2005-2015) also attempts to enhance governance practices, shareholder value and stakeholder management. GLCs are poised to take advantage of the regional economic integration under the ASEAN Economic Community (AEC) that will be implemented by end of 2015. The AEC envisages a highly competitive economic region, fully integrated into the global economy (ISEAS, 2009). Thus, the need to examine the convergence of GLCs against the international standard is imperative. This paper will address the issue of whether the efficiency gap between the GLCs and foreign owned firms (FFs) that represent international standard are converging. The study hopes to understand the convergence speed of these firms.

FIRMS' PERFORMANCE AND EFFICIENCY CONVERGENCE: A BRIEF REVIEW OF LITERATURE

Privatization theory postulates that a firm's performance should improve once the state gives up control and transfers the ownership for commercial interest. In the last decades, countries around the world privatized their SOEs as part of their economic reform programmes; to foster private sector development and to decrease government control in the economy (Boubakri et al. …

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