The aim of this thesis is to examine the technical efficiency and its explaining factors for the paper industry in Sweden and Europe. Panel data on an industry level comprising 12 European countries during the time of 2002‐2009 have in a first stage‐analysis been employed using a Data Envelopment Analysis for examine the efficiency. In a second‐stage analysis is the difference in efficiency of the different countries paper industries is explained by applying a Tobit regression. The study is restricted to the pure technical efficiency, where labour, capital, energy and essential materials/raw materials for paper production, have been used as input factors. The explaining factors for efficiency consists of four variables; R&D expenditures, R&D personnel, energy tax level and economic freedom. The results from DEA analysis show differences across countries in the level of efficiency. In this context, the Swedish paper industry is seen as relatively inefficient. Amongst the 12 studied paper industries Sweden is only ranked as 7:th in respect of total technical efficiency. The econometric results show that economic freedom and energy tax levels as the most significant factors for explaining variation across countries in the level of efficiency. R&D shows a low explaining power to efficiency differences between the countries industries. For policymakers, investments and policies that increases competition and energy costs have a positive impact on efficiency improvements. Despite low significance and explaining power for R&D, policies and regulations stimulating R&D may be necessary as R&D could be a case of underinvestment and thus not enough R&D will be undertaken, just relying on market power without of external intervention.