Introduction

In this chapter, we focus on the examination of changes in productivity and profitability over time and decomposing them into their constituent parts. Such analysis can help to examine the impact of policy or management decisions on efficiency and whether certain approaches are better than others at improving efficiency. For instance, such analysis can examine whether the introduction of competition, the privatization of state enterprises, the removal of trade barriers, and the introduction of regulation or deregulation have resulted in efficiency improvements or, indeed, whether evidence suggests that changes are likely to lead to future efficiency improvement.

For specific industries or individual firms, one can untangle what has driven improvement in efficiency. For example, if we were to examine efficiency in agricultural production, we could examine how efficiency has changed over time and how different farms have performed over time. We could then examine if the change in productivity for a particular farm has been driven by the farm improving its relative efficiency, by scale improvement, or by general technological improvement. Extending the analysis to an examination of profitability, one can untangle what has driven the improvement in profitability. That is, one can examine whether the increase in profitability in a particular farm was driven by efficiency improvements, or whether it was driven by other factors, such as an increase in the price of produce sold, a reduction in input prices or by the farm increasing its markup. Indeed, we use farming as a way of illustrating the approaches introduced throughout this chapter. In particular, Philippine rice farms are examined in the initial set of examples, and subsequent examples examine dairy farms in Norway.

Such questions can be important from a policy perspective, in terms of whether consumers are getting value for money through companies improving their efficiency and passing such savings on to consumers or whether companies are considered to be making excessive profits.