Executive Summary of Evaluation Social Compliance in EPZ: Does it increase technical efficiency of Name of Evaluation enterprises? A stochastic frontier production model study Date of Final Report of Evaluation October 2012 Professor William H. Greene, NYU; Wayne Amago Bacale, IFC, Author of Final Report of Evaluation wbacale@ifc.org Date of this Executive Summary July 1, 2014 Professor William H. Greene, NYU; Wayne Amago Bacale, IFC, Author of this Executive Summary wbacale@ifc.org Number of pages of this Executive Summary 2 Modifications from original Executive Summary Without Modification Executive Summary Approved for public Paramita Dasgupta, IFC, pdasgupta@ifc.org July 10, 2014 disclosure by (name) on (date) Background With rising global competitiveness, increasing wages, and growing demands for social responsibility, enterprises in Bangladesh are grappling with a multitude of unprecedented challenges. In view of the complexities surrounding a firm’s operation, it is not entirely surprising that social compliance is often seen as yet another cost and a drag on profitability. Consequently, from the point of view of enterprises, they will comply only if the benefits of compliance outweigh the costs. Theoretically, an enterprise’s performance on social compliance is a good indicator of its overall competitiveness and efficiency. The logic behind this is simple: quality of output and productivity of workers are closely linked to wages, worker satisfaction, working hours, and other social compliance factors. Therefore, better working environment brought about by social compliance is expected to increase technical efficiency of firms, i.e. firms will produce maximum level of output for a given level of inputs. This study investigates whether the Social Compliance Program at the Export Processing Zones of Bangladesh have led to increases in technical efficiency in production. Objectives The objective of this study is to test whether increases in social compliance through the Social Management Program have led to improvements in technical efficiencies of firms in the Export Processing Zones. The following primary research questions are explored in this study:  Did increased social compliance contribute to significant increases in technical efficiency of firms in EPZs?  Do some social compliance variables increase technical efficiency more than others? If so, why? Analysis To carry out this investigation, the study employed econometric method ‘stochastic frontier analysis’, which predicts technical inefficiencies of firms. The stochastic production function assumes that for a given Page 1 of 2 combination of inputs, the firm can produce an ‘ideal’ level of output. The greater the amount by which the realized production falls short of this frontier production, the greater the level of technical inefficiency. For this study, two different production models were analyzed and compared – one that does not use the information about SMP and one that uses 14 SMP indicators. The estimates of technical efficiency from the two models, No SMP and Full Model, for each of the 45 firms in Dhaka Export Processing Zone, which were selected for this study, were compared to each other. Of the 45, 39 firms showed an increase in estimates of technical efficiency after incorporating SMP indicators in the model – the mean value for estimated efficiency of firms rises from 0.527 to 0.605 In the Full production model, the impacts of the individual social management indicators range between -0.195 and 0.117. Since this study is interested in the comprehensive impact of the program, individual analysis of these indicators does not make sense. For assessing the impact of the whole program this study added the effects of the 14 components. The sum of the partial effects for all the components is about +0.298 or approximately 30%, which is quite a large positive effect. Based on this finding, it can be concluded that increased social compliance led to a positive impact of 30% on technical efficiency for the 45 firms in the study. Conclusions and Recommendations The results from the study suggest broadly that technical efficiency increases in response to SMP and other variables in the model. However it is difficult to attach statistical significance to this result due to small sample size (45 firms) and lack of statistical significance of the individual parts. Future studies can bring more robust results if the exercise is repeated for a larger sample or panel data with multiple observations per firm. Copyright and Legal Disclaimer The material in this publication is copyrighted. IFC encourages the dissemination of the content for educational purposes. Content from this publication may be used freely without prior permission, provided that clear attribution is given to IFC and that content is not used for commercial purposes The findings, interpretations, views, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Executive Directors of the International Finance Corporation or of the World Bank or the governments they represent. The views expressed in this publication are those of its authors and do not necessarily reflect the views of the wider institution. Some of the information used in this document may come from publicly available sources such as company websites and publications. The Lessons of Experience series does not represent a commitment by IFC to require projects it finances to take certain or all of the actions specified in this publication. Instead, any issues arising in an IFC-financed project will be evaluated and addressed in the context of the particular circumstances of the project. Page 2 of 2