EFFICIENCY MEASURES FOR SPANISH RETAILING FIRMS IN A REGULATED MARKET

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1 JOURNAL OF ECONOMIC DEVELOPMENT 35 Volume 3, Number 1, June 007 EFFICIENCY MEASURES FOR SPANISH RETAILING FIRMS IN A REGULATED MARKET JUSTO DE JORGE AND CRISTINA SUÁREZ * Unversdad de Alcalá The objectve of ths work s to analyze the mpact on Spansh retal frms effcency of the regulatory process experenced n the perod The ntangble nature of servces makes them more dffcult to quantfy, so we combne work measurements wh the methodology of the stochastc fronter producton functon for unbalanced panel data, and for whch the frm effects are an exponental functon of tme. Furthermore, we obtan other relevant technologcal measurements of these productve processes such as the scale and the techncal progress parameters. Our econometrc results show great heterogeney n the frms effcency but whout change over the perod and the predomnance of decreasng returns to scale. They also ndcate that technologcal progress was produced. Keywords: Effcency, Regulaton, Retal Sector JEL Classfcaton: D4, L51, L81 1. INTRODUCTION In recent decades, effcency has been a popular topc of theoretcal and emprcal research. However, emprcal evdence s stll relatvely scarce n servce sector, save for the topcs of effcency n bankng (see Heshmat (003) for an excellent survey). Ths s surprsng, especally n lght of the major role of the servce sector n our modern economes, and ths dea s, also, corroborated by the fact that servce ndustres generate over two-thrds of GNP and employment n developed countres and ther mportance s growng. In Span, the economy has become more servce orented, and n the last decades the servce sector has generated a bg proporton of employment, the number of Spansh workers employed n the servce sector has gone to approxmately 60% of total employment (see Cuadrado Roura et al. (1999) for a survey of ths sector). The character of competon dffers among servce sectors, although the nature of * The authors would lke to thank an anonymous referee whose useful comments mproved the qualy of the paper.

2 36 CRISTINA SUAREZ AND JUSTO DE JORGE competon can be affected by government regulatons or rules mposed by professonal organzatons and assocatons. Ths paper dscusses the mpact of regulatory reforms and ther effects on effcency n the Spansh retal sector. Ths sector has undergone profound changes, to a certan degree smlar to those occurrng throughout Europe (see Boylaud (000)), n partcular, Span has experenced mportant legslatve changes such as the Retal Trade Regulaton Act (1996) and the Shop Openng Hours Decree-Law (000), whch have had an mpact on retalers strateges. Ths paper estmates levels of techncal effcency reached by Spansh retal frms through an econometrc estmaton of stochastc fronter producton functons from an unbalanced panel (between 1996 and 00) of 1,050 frms. In addon to these (n)effcency ndcators other mportant technologcal measurements of these productve processes are obtaned such as the scale and techncal progress parameters. The most usual types of fronters found n emprcal servce sector lerature are determnstc fronters computed from mathematcal programmng. Those methods have a dsadvantage that s based on the fact that they do not take random factors nto account, and all devatons from the fronter are labeled as neffcences. However, ths paper estmates stochastc parametrc fronters usng a panel data approach for whch the frm effects are an exponental functon of tme, gven that ths type of fronter has relatve advantages over the rest. The remander of the paper s organzed as follows: n the next secton the theoretcal framework s developed. Then, the data, the econometrc specfcaton and the results of the estmates are dealt wh. Fnally, the man conclusons are presented.. TIME-VARYING MODEL FOR UNBALANCED PANEL DATA To measure (n)effcency of Spansh retal frms, we propose a stochastc fronter producton functon for unbalanced panel data (Battese and Coell (199)). Ths type of fronter and the computaton method present advantages wh respect to other alternatves, for example the determnstc fronters. 1 Frst, the determnstc fronters are based on the assumpton that the only type of explanaton for the devaton between the observed output and s fronter output s due to s own neffcency. Ths dea s dffcult to mantan at the emprcal level as gnores the possbly that the observed output can dffer from the potental because of two other factors: stochastc shocks and measurement error n the varables. Second, the mathematcal programmng methods have two dsadvantages wh respect to specfyng a statstcal relatonshp between the outputs and the nputs. On one hand, the fronter estmaton s made over a subsample of the whole and therefore these 1 The works of Førsund, Lovell and Schmdt (1980) and Kaljaran and Shand (1999) are excellent surveys of effcency fronters.

3 EFFICIENCY MEASURES FOR SPANISH RETAILING FIRMS 37 methods are extremely sensve to the exstence of outlers. On the other hand, the estmated coeffcents lack statstcal propertes, so s not possble to make any statstcal nference or establsh hypothess contrasts from them. The stochastc fronter producton functon proposed has frm effects whch are assumed to be dstrbuted as truncated normal random varables and, also, are allowed to vary systematcally wh tme. The model may be expressed as: Y k = β 0 + β X + ( V U ), = 1,..., N, t = 1,..., T, (1) j= 1 j j where Y denotes (the logarhm of) the producton of the -th frm n the t-th tme perod; X represents the k-th (transformatons of the) nput quantes; β stands for the output elastcy wh respect to the k-th nput; the assumed to be ndependent and dentcally dstrbuted (..d.) ndependently of the k U whch has the specfcaton: V s a random varable whch s N(0, σ V ), and dstrbuted k U = U η = U exp( η ( t T )), () U where the s a non-negatve random varable whch s assumed to account for techncal neffcency n producton and are assumed to be..d. as truncatons at zero of the N ( μ, σ μ ) dstrbuton and η s a parameter to be estmated. The last perod (t=t ) for frm contans the base level of neffcency for that frm (U = U ). If η > 0, then the level of neffcency decays toward the base level. If η < 0, then the level of neffcency ncreases to the base level, and f η = 0, then the level of neffcency reman constant. We use the parametrzaton of Battese and Corra (1977) who replace and wh σ = σ V + σ μ and γ = σ μ /( σv + σ μ ). The parameter γ must le between 0 and 1. The mposon of one or more restrctons upon ths model formulaton can provde a number of specal cases of ths partcular model whch have appeared n lerature. For example, settng η to be zero provdes the tme-nvarant model. One can also test whether any form of stochastc fronter producton functon s requred at all by testng the sgnfcance of the γ parameter. If the null hypothess, that γ equals zero, s accepted, ths would ndcate that σ s zero and hence that the U term should be μ removed from the model, leavng a specfcaton wh parameters that can be consstently estmated usng ordnary least squares. The predctons of ndvdual frm techncal effcences from the estmated stochastc producton fronters are defned as: σ V σ μ

4 38 CRISTINA SUAREZ AND JUSTO DE JORGE EF = exp( U ) = E [ exp( U ) / E ] * * * [ σ ( μ / σ )] * * Φ[ μ / σ ] 1 Φ η * 1 * (3) = exp, 1 ημ + η σ where E represents the ( T 1) vector of E s assocated wh the tme perods observed for the th frm, where E = V U ; V V ' Eσ ' * μσ η μ =, (4) σ + η η σ σ * V Vσ ' σ =, (5) σ + η η σ where η represents the ( T 1) vector of η s assocated wh the tme perods observed for the th frm, and Φ ( ) represents the dstrbuton functon for the standard normal random varable. If the frm effects are tme nvarant, then techncal effcency s obtaned by replacng η =1 and η = EMPIRICAL SPECIFICATION AND RESULTS In recent years, Span has experenced mportant legslatve changes such as the Retal Trade Regulaton Act (1996) and the Shop Openng Hours Decree-Law (000). In relaton to the Retal Trade Act (Ley de Comerco Mnorsta) 7/1996 has the objectve of fndng a balance between the dfferent forms of competon. It transfers responsbly n the regulaton of commercal establshment openng tmes to the Autonomous Communes, whch grant the lcenses they consder approprate. Ths law coexsts wh the Autonomous Communy governments exclusve responsbles n the area. The Autonomous Communes defne n each case what, n ther judgment, s a large retal outlet. In 1996, the Autonomous Communes were authorzed to grant lcenses essental for openng any major retal outlet, after evaluatng the real needs. Ths does not affect the lcense that the local councls contnue to requre. The law 6/000 (Blue Laws), regardng commercal openng hours schedules, whch extended the number of holday openngs has been one of the most mportant and relevant n the retal sector. The term Autonomous Communy refers to a regon ntegratng several countes. Whn s competence as a decentralzed nstuton, assumes the exercse of regonal self-government n agreement wh the Spansh Constuton.

5 EFFICIENCY MEASURES FOR SPANISH RETAILING FIRMS 39 The study of the consequences of the relaxaton of Blue Laws s a very complex queston. Lerature on the matter s abundant, but very dverse accordng to the geographc zones, the methodologes and the types of effects. The defnve explanaton of effects that the deregulaton of openng hours has produced n the retal sector would be n the changes n the consumer behavour (see Grunhagen and Mtelstaedt (001)). There has been a complete commercal restructurng 3 that has led to an opportuny for new commercal formats, as well as the extncton of obsolete commercal formats. In Fgure 1, we can see that the global number of retalers has decreased (9%), and ths declne s most marked among the tradonal stores (4%). On the other hand, the sze of the stores has ncreased. The number of hypermarkets has ncreased (7.9%), followed by supermarkets and self-servce stores (14.9%), and the dscount stores have made a strong appearance (4%) Tradonal Less than 100m m m m Superstore Fgure 1. Number of Stores n Each Category 3 See Gómez et al. (1999) to apprecate the effect of Spansh legslaton on commercal structures, market share and margns.

6 40 CRISTINA SUAREZ AND JUSTO DE JORGE % Tradona Less 100m m m m Superstore Source: AC Nelsen, Almarket Fgure 1-1. Percentage of Market Share per Store In Fgure 1-1, the evoluton n market shares of the dfferent types of store can also be observed. The tradonal store has lost 4.5 percent of market share n pre-packed food and the hypermarkets have lost 6.6 percent. Nevertheless, supermarkets of between 400 and,499 m have ganed ground. Ths growth trend n Spansh retalng, as well as the concentraton effects, has been mrrored by smlar behavor n Europe (Aalto-Setälä (00), Carree and Njkamp (001)). The SABE (Sstema de Análss de Balances Españoles) provdes the requred data to estmate an effcency measure. It s an annual survey whch looks at a panel of frms representatve of Spansh servce frms and contans balance sheet, cash flow and qualatve data. The database s an unbalanced panel observed over the perod SABE also provdes nformaton about the major two-dg NACE codes 4 to 4 NACE codes represent the statstcal classfcaton of economc actves whn the European Unon whch serves as a bass for complng statstcs on the producton, factors of producton (labor, raw materals, energy, etc.), fxed capal formaton operatons and fnancal operatons of frms and other entes. NACE means Nomenclature Generale des Actves Economques dans l`unon Europeenne (General Name for Economc Actves n the European Unon).

7 EFFICIENCY MEASURES FOR SPANISH RETAILING FIRMS 41 whch the frms belong. The servce sector analysed n ths paper s 5 (Retal trade, except for motor vehcles and motorcycles; repar of personal and household goods), there are 1,050 frms and 4,056 observatons are effected. The Cobb-Douglas and Translog functonal forms are the most used functonal forms n stochastc fronter analyses. In ths paper, we wsh to estmate the Translog producton fronter, snce the Cobb-Douglas producton functon mposes many restrctons. Output s measured by the yearly added value (AV), defned as sales less cost of goods plus nventores, and s converted nto real terms. 5 Labor (N) s measured as the number of employees. In ths type of study, the standard practce s to defne labor n terms of hours worked but ths nformaton s not avalable. Capal quantes (K) are defned as the marked value of assets owned by the frms, n constant prces. Table 1 shows a statstcs summary of the data used n ths study. Table 1. Summary Statstcs a Sector classfcaton Varable Mean Standard Devaton Mnmum Value Maxmum Value 5 AV N K Note: a Output (AV) and capal (K) are n thousands of euros. The translog producton functon we have: log( AV ) = β + β log( N 0 + β log( K 5 1 )log( N ) + β log( K ) + β t + ( V 6 ) + β log( N 3 U ). ) + β log( K 4 ) (6) We can test whether the form of the producton functon s requred by testng the hypothess of β3 = β4 = β5 = 0. If the null hypothess s accepted, ths would ndcate that those terms should be removed from the model, leavng a specfcaton of Cobb-Douglas producton functon. Also, we can calculate the output elastces of nputs for the mean values, and the sum of them gves us the elastcy of scale, whch ndcates the returns to scale. There s also the varable t (Tme) whch s added here wh the ntenton of regsterng the effect of techncal change n the retal sector, whch s common among frms n the same sector. V and U are the random varables 5 The use of added value n the estmaton of ths producton functon, whch ncludes only capal and labor nputs, means that changes n non-specfed nputs such as the quantes and the prces of materals used n producton wll be measured as changes n techncal effcency.

8 4 CRISTINA SUAREZ AND JUSTO DE JORGE whose dstrbutonal propertes are defned n the last secton. The stochastc fronter model, defned by Equaton (6), contans seven β parameters and the four addonal parameters assocated wh the dstrbutons of the V and U random varables, and we estmate them by maxmum-lkelhood estmaton methods. The process of estmaton proposed s the followng: Model A s the stochastc fronter producton functon n whch the frm effects,, has the tme-varyng structure defned n the last secton; Model B s the case n whch the s has half-normal dstrbuton, assumes that μ = 0 ; Model C s the tme-nvarant model, assumes that η = 0 ; Model D s the tme-nvarant model n whch the s have half-normal dstrbuton, assumes that μ =η = 0 ; Fnally, Model E s the average response functon n whch frms are assumed to be fully techncally effcent, the frm effects are absent from the model, and assumes that γ = μ = η = 0. Table dsplays the estmated coeffcents. Presented below the name of the sector, n brackets, s the name for the best model, based on the generalzed lkelhood-rato statstc. To determne the most suable model, we follow varous hypothess tests of restrcton on the parameters of the producton structure. These generalzed lkelhood rato statstcs along wh the decson are reported n the table. U U U Table. Estmatons and Hypothess Tests (perod ) SECTOR 5 Maxmum-lkelhood estmates Varable Model A Model B Model C Model D Model E C (6.964) 9.33 (15.811) (1.887)** (8.76)** (8.959)** N (0.031)** (0.033)** (0.031)** (0.033)** (0.030)** K (0.01)** (0.0)** (0.01)** (0.05)** (0.00)** N K 0.00 (0.003)** 0.01 (0.004)** 0.00 (0.003)** 0.01 (0.004)** 0.0 (0.003)** N K T (0.013) (0.008) (0.004)** 0.08 (0.004)** 0.00 (0.004)** μ (0.74)** (10.36) (Model C) η

9 EFFICIENCY MEASURES FOR SPANISH RETAILING FIRMS 43 (0.007)** (0.010)** σ = σ V + σ μ (0.013)** (0.049)** γ (0.016)** (0.015)** (0.013)** (0.016)** 0.91 (0.050)** (0.013)** 0.47 (0.010)** - Log (lkelhood) Hypothess test for parameters Null hypothess Assumptons x - statstcs Decson γ = μ = η = 0 Model A Reject H0 μ =η = 0 Model A Reject H0 μ = 0 Model A Reject H0 η = 0 Model A 4. Accept H0 γ = μ = 0 Model C ( η = 0) Reject H0 μ = 0 Model C ( η = 0) Reject H0 Notes: The estmated standard errors for the parameter estmators are presented below the correspondng estmates. *, ** ndcate sgnfcance at 10 and 5% respectvely. As can be observed, labor and capal nputs are sgnfcant across all the estmatons. Furthermore, the hypothess that the Cobb-Douglas producton functon s an adequate representaton ( H 0 : β3 = β4 = β5 = 0) s rejected ( x (3) = 91.43). The null hypothess, H0 : γ = μ = η = 0, s rejected, s evdent that the tradonal average producton functon s not an adequate representaton of the sample. Also, the hypothess that the half-normal dstrbuton s an adequate representaton for the dstrbuton of the frm effects s also rejected ( H0 : μ =η = 0 and H0 : μ = 0 ). However, the hypothess that tme-nvarant models for frm effects s not rejected. Gven that n the retal sector the tme-nvarant s approprated to the frm effects, the level of neffcency therefore remans constant over a perod characterzed by a legslatve change. Table 3 reports the elastcy of scale, the rate of techncal progress and the effcency measure. These results show that the elastcy of scale s The rate of techncal progress reveals a parameter sgnfcantly dfferent from zero and posve (3.3%), ndcatng that n the perod analyzed technologcal progress was produced, motvated perhaps by the demand fluctuatons of the retal sector and/or by the effects of new legslatve norms. The techncal effcency rate s obtaned by replacng η =1 and η = 0 n Equaton (3) due to the fact that the hypothess of tme-nvarant s accepted and therefore the level of neffcency remans constant over the perod. The mean of the effcency ndcator s and the standard devaton s 0.04 for the full sample. The hstogram (presented n Fgure ) dsplays a dsperson of effcency ndcator and great dvergence for the sector.

10 44 CRISTINA SUAREZ AND JUSTO DE JORGE Table 3. Relevant Parameters Sector Elastcy Rate of techncal Effcency measure classfcaton of scale a progress (%) Mean Mn. Value Max. Value Note: a Calculated for mean values. Seres: EF5 Observatons 1050 Mean Medan Maxmum Mnmum Std. Dev Fgure. Hstogram and Descrptve Statstcs of Effcency Indcator Sector 5: Retal Trade, exc. of Motor Vehcles & Motorcycles; Repar of Personal & Household Goods Table 4 presents a descrptve approach to the effcency measure of the retalng frms. We can dstngush between frms accordng to other varables such as age, sze or the export actvy and, also, we present an ndcator of the effcency dfference accordng to such characterstcs. Frm age s computed as the dfference between the calendar year at t and the brth-year reported by the frm, frm sze s measured as the number of employees and export actvy reports dfferences between exporters and non-exporters.

11 EFFICIENCY MEASURES FOR SPANISH RETAILING FIRMS 45 Table 4. Effcency Measure Accordng to Frm Age, Frm Sze and Export Actvy Sector classfcaton Frm Age Less or equal than More than ** ** Frm Sze Less or equal than More than ** 0.08 ** 0.11 Export Actvy Exporters Non-exporters ** Note: ** ndcates sgnfcance at 5% (test of the null hypothess s that the mean of the effcent measures s equal between groups). Our results confrm the emprcal fndngs of prevous papers that use mcro panel data to measure the relatonshp between effcency and ndcators such as age and export actvy. Effcency dfferentals between younger and older frms are substantal and sgnfcant n the Spansh retalng frms. Younger frms have a lower effcency measure than older frms. We fnd that the dfference n the effcency measure s.8 percent hgher for older frms. There s a posve relatonshp between the sze of frms and ther levels of effcency. The fgures reported ndcate that the dfference n effcency between large frms and small frms s 4.1 percent. Lookng at the exportng actves, we observe that the exporters have a hgher effcency than domestc-orented frms. On average the dfference n effcency between exporters and non-exporters s 4.6 percent. 4. CONCLUDING REMARKS For several decades effcency has been a popular topc of theoretcal and emprcal research. Ths ssue has hardly been dealt wh n the servce sector, especally n vew of the major role of the servce sector n our developed economes. The man focus of ths paper s to quantfy the (n)effcency level of the Spansh retalng frms usng an unbalanced sample observed over the perod Our nterest n analysng ths perod les n the fact that n ths perod Span has experenced mportant legslatve changes. The use of the tme-varyng model n unbalanced panel data technques for effcency fronters reveals that the mean of the effcency ndcator s around and confrms the exstence of great heterogeney among the frms whn the sector and also that the level of effcency remans constant over the regulated perod.

12 46 CRISTINA SUAREZ AND JUSTO DE JORGE Furthermore, the elastcy of scale and the rate of technologcal progress have been estmated. The Spansh retalng servce ndustry analyzed n ths paper, has returns to scale wh a parameter of We fnd that the rate of technologcal progress shows a value of 3.3%. Fnally, our results ndcate that exportng frms have, on average, a hgher effcency measure than non-exportng frms. Also, our results show that younger and smaller frms have a lower effcency measure than older and larger ones, respectvely. REFERENCES Aalto-Setälä, V. (00), The Effect of Concentraton and Market Power on Food Prces: Evdence from Fnland, Journal of Retalng, 78(3), Battese, G.E., and T.J. Coell (199), Fronter Producton Functons, Techncal Effcency and Panel Data: Wh Applcaton to Paddy Farmers n Inda, Journal of Productvy Analyss, 3, Battese, G.E., and G.S. Corra (1977), Estmaton of a Producton Fronter Model: Wh Applcaton to the Pastoral Zone of Eastern Australa, Australan Journal of Agrcultural Economcs, 1, Boylaud, O. (000), Regulatory reform n road freght and retal dstrbuton, OECD Economcs Department Workng Papers, 55. Carree, M., and J. Njkamp (001), Deregulaton n Retalng: The Dutch Experence, Journal of Economcs and Busness, 53, Cuadrado Roura et al. (1999), El sector servcos en España: Evolucón recente y perspectvas de futuro, Fundacón BBVA, Madrd. Førsund, F., C. Lovell, and P. Schmdt (1980), A Survey of Fronter Producton Functons and ther Relatonshps to Effcency Measurements, Journal of Econometrcs, 13, 5-5. Gómez, M., J. Méndez, and M.J. Yagüe (1999), The Impact of the Regulaton n the Spansh Retalers Concentraton and Performance, Eunp, Dublín. Grunhagen, M., and R.A. Mtelstaedt (001), The Impact of Store Hours and redstrbutve ncome Effects on the Retal Industry: some Projectons for Germany, Internatonal Revew of Retal, Dstrbuton and Consumer Research, 11, Heshmat, A. (003), Productvy Growth, Effcency and Outsourcng n Manufacturng and Servce Industres, Journal of Economc Surveys, 17, Kalrajan, K., and R. Shand (1999), Fronter Producton Functons and Techncal Effcency Measures, Journal of Economc Surveys, 13,

13 EFFICIENCY MEASURES FOR SPANISH RETAILING FIRMS 47 Malng Address: Departamento de Estadstca, Estructura Economca y O.E.I., Facultad de Cencas Economcas y Empresarales, Plaza de la Vctora,, 880 Alcala de Henares Madrd, Span. E-mal: crstna.suarez@uah.es. Manuscrpt receved November 005; fnal revson receved May 007.