A DEA approach for evaluating the relationship between energy efficiency and financial performance for energy-intensive firms in Korea

In order to keep pace with the global trend of controlled and proper energy usage, the Korean government has enforced its energy-related regulations. However, the firms under these regulations are of the view that this approach may threaten their financial performance. In response to the growing interest of industry in Korea, this paper investigates whether energy efficiency has a positive relationship with firms’ financial performance. For the purpose of accommodating various factors for measuring energy efficiency, we extended an existing two-stage network DEA (Data Envelopment Analysis) model that distinguished pure-energy efficiency and economy efficiency by developing a multi-period model with the aim to identify any change in efficiency during each period. An empirical analysis on Korean firms reveals interesting findings; First, while it is true that energy efficiency has changed over time, there is a difference in the magnitude of changes by industry. Firms in more energy-intensive industry have experienced more changes in their energy efficiency performance. Second, it is impossible to improve both categories of efficiency (i.e., pure-energy and economic efficiencies) at the same time. Thus, a firm should understand its current position in order to determine the extent and direction of efficiency improvements. Third, the energy efficiency has been found to have a significant relationship with financial performance. However, firms whose pure-energy efficiency was found to be relatively high did not always achieve better financial performance.