Productive performance, technology heterogeneity and hierarchies: Who to compare with whom

In this paper we argue that inappropriate handling of technological heterogeneity distorts the benchmarking process eroding performance scores. Country- and industry-specific frontier studies have been the dominant approaches in explaining productivity differentials stating that heterogeneous performance patterns are attributed to different sources. However, studies bringing together the above approaches have not been surfaced yet. We fill that void by partitioning the metafrontier to account for alternative technological hierarchies. To disentangle the layers of complexity triggering heterogeneous performance, we introduce two types of heterogeneity each one referring to different stages of the performance evaluation process. To identify the Decision making unit-Specific Heterogeneity type, attached to each entity, we propose the w-ratio as a result of an iterative algorithm developed herein. In order to identify the Hierarchical Structural Heterogeneity type arising under alternative hierarchical structures, we define thresholds of heterogeneity. Using data on seventeen European countries and thirteen industries from manufacturing and transportation from 1999 through 2006 and employing a control function approach with one endogenous covariate, we find that the DSH and the HSH type are endogenously related via the role of the state dependence while the path dependence phenomenon is a major catalyst for future technological achievements and productivity improvements. Transition economies and fragmented industries exhibit persistent technological heterogeneity regardless of the technological structure adopted, since further development is mostly affected by past characteristics of the economic environment implying low subsequent competitiveness.