Examining the cost efficiency of Chinese hydroelectric companies using a finite mixture model

This paper evaluates the operational activities of Chinese hydroelectric power companies over the period 2000-2010 using a finite mixture model that controls for unobserved heterogeneity. In so doing, a stochastic frontier latent class model, which allows for the existence of different technologies, is adopted to estimate cost frontiers. This procedure not only enables us to identify different groups among the hydro-power companies analysed, but also permits the analysis of their cost efficiency. The main result is that three groups are identified in the sample, each equipped with different technologies, suggesting that distinct business strategies need to be adapted to the characteristics of China's hydro-power companies. Some managerial implications are developed.

► This paper evaluates the operational activities of Chinese electricity hydric companies. ► This study uses data from 2000 to 2010 using a finite mixture model. ► The model procedure identifies different groups of Chinese hydric companies analysed. ► Three groups are identified in the sample, each equipped with completely different “technologies”. ► This suggests that distinct business strategies need to be adapted to the characteristics of the hydric companies.