Financial liberalisation, corporate governance and the efficiency of firms in Indian manufacturing

In this paper, we argue that the way in which a firm is financed will affect its efficiency. Firms obtaining finance from the government are likely to be less efficient than firms obtaining finance from banks or foreign financial institutions (FFIs). We analyse these issues by estimating a stochastic frontier for firms in seven manufacturing industries in India where these differences have been reinforced by financial de-regulation. Our results indicate that the government is generally less effective in monitoring the firms that it lends to than either banks or Indian Financial Institutions (IFIs), but neither of these institutions is particularly efficient either. Though the impact of FFIs on firm efficiency is insignificant, foreign ownership has a positive impact in a majority of the industries. Finally, likelihood ratio tests confirm that while the government and IFIs have a similar impact on firm efficiency, banks are quite distinct in a majority of industries.