The importance of economic openness on technical efficiency in global perspective

Macroeconomic efficiency governs a substantial role in defining a country's welfare. It ignites a competitive advantage in global competition and demonstrates favorable allocation of resources. The creation of macro efficiency is multidimensional, however previous literature had emphasized the relevance of economic openness. International trade enables firms to access the global demand, acquiesces scalability in expanding their production, and uphold economies of scale. Foreign direct investment (FDI) caters to the financing needs of the host countries, providing a lower cost of capital compared to internal sources. However, openness also creates interdependence among countries possibly have negative results on efficiency through the building up of downward risks and external shocks. Our study attempts to identify the influence of international trade and FDI on the technical efficiency of macroeconomics in the global context. We differentiate countries based on income level, and further investigate whether technical efficiency in each cluster responds differently to openness. Panel data is used encompassing 88 countries and 28 years (1990-2017). We apply a stochastic frontier model based on the Cobb-Douglas production function. The result characterizes high-income countries as being the most technically efficient, followed by middle- and low-income countries, consecutively. The dispersion of technical efficiency among low-income countries is relatively high compared to other income groups, indicating a wide within-group and overtime efficiency gap. Further, FDI is found to have a positive effect on technical efficiency in all income levels, but a higher proportion of FDI toward the global stock would deteriorate a country's technical efficiency. Trade is found to be beneficial only to economies with adequate levels of export proportion. The result suggests that policymakers need to balance the source of growth, between internal and foreign-sourced. It further points to the urgency of developing export-oriented industries, filtering imports, on facing global trade.