Efficiency analysis of Chinese industry: A directional distance function approach

Two efficiency measures of Chinese industry were estimated at the provincial level from 1994 to 2002, using a directional output distance function. One is a traditional efficiency measure that considers only desirable output, while the other considers both desirable and undesirable outputs simultaneously. A comparison of the two measures revealed that efficiency levels are biased only if desirable output is considered. Five coastal provinces/municipalities that have attracted a large amount of foreign direct investment are found to be the most efficient when only desirable output is considered, and also when both desirable and undesirable outputs are considered. However, omitting undesirable output tends to lead to an overestimate of industrial efficiency levels in Shandong, Sichuan, and Hebei provinces. We also found that a province's industrial structure has significant effects on its efficiency levels.