Efficiency Assessment of Knowledge Intensive Business Services Industry in Italy: Data Envelopment Analysis (DEA) and Financial Ratio Analysis

Knowledge Intensive Business Services (KIBS) are private enterprises or organizations mainly concerned with providing knowledge-intensive inputs to the business processes of other organizations, including private and public sector clients, that rely heavily on professional knowledge and which involve economic activities intended to result in the creation, accumulation or dissemination of knowledge. KIBS firms, such as advertising and market research, accountancy and management consulting, IT services, engineering and technical services, represent a core feature of the knowledge-based economy functioning as innovation carriers, knowledge facilitators and innovations sources. KIBS play, also, an important role in local and regional economies as source of added value and their growing importance as emergent players is a major attribute of knowledge economy and more generally in the debate about innovation systems, knowledge driven economic dynamics and competitiveness. Their role, as co-producers of innovation, in enhancing Small and MEdium-sized Enterprises (SMEs) is particularly relevant because of their prominent support in enabling SMEs to innovate in a more effective, cost-effective, and/or timely manner. The paper investigates the application of Data Envelopment Analysis (DEA) in conjunction with Financial Ratios Analysis (FRA) to estimate and compare the performance of KIBS industry in Italy over the period 2012-2017. In particular, we evaluated the three main NACE (Nomenclature générale des Activités économiques dans les Communautés Européennes) segments that identify KIBS services: NACE 72 (computing services), NACE 73 (research and development) and NACE 74 (other professional business activities). FRA, for its simplicity, has been achieved a widespread use in practice. A financial or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. DEA is a mathematical programming technique that estimates the relative efficiency of production units (Decision Making Units - DMU), computing a comparative ratio of weighted outputs to weighted inputs for each DMU and identifies best-practice frontiers over the examined data. The results obtained from the efficiency estimates and the financial ratios are used to rate firms according to these performances. The empirical investigation proposed reveals that the results of FRA approach do not provide sufficient and complete information on the efficiency of KIBS firms, while major advantages behind using of DEA are related to its structural characteristic in measuring performance and identifying opportunities for possible efficiency improvements by looking at the differences between efficient companies and inefficient ones. The empirical results obtained from the analysis of the general sector of KIBS can be further extended and focused to the comparison of firms belonging to a more specific industry sub-sector in order to benefit managers of those companies to gain insight from the industry financial performance benchmarking process.