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Embodied Technological Progress and the Productivity Slowdown in Japan

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  • TOKUI Joji
  • INUI Tomohiko
  • Young Gak KIM
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    Abstract

    Concerns over the rise in the vintage of capital in the Japanese economy have focused attention on the technological progress embodied in capital. In this paper, we derive the theoretical relationship between the rate of technological progress embodied in capital, the obsolescence rate of capital, and the average vintage of capital, then we estimate these rates by using firm-level panel data from the Ministry of Economy, Trade and Industry (METI) Basic Survey of Japanese Business Structure and Activities in the period between 1997 and 2002. To measure the obsolescence rate of capital by estimating the production function, it is necessary to construct a capital stock series that takes only physical depreciation into account for each vintage capital held by each firm. To do that, we prepared industry-specific patterns of the physical depreciation ratio of capital goods, based on the pattern of the physical depreciation ratio of each type of capital goods by obtaining information from the U.S. Bureau of Labor Statistics (BLS), and the Japan Industrial Productivity Database (JIP) 2006's investment matrices cross-classified by types of capital goods and industries. We applied these industry-specific patterns of the physical depreciation ratio of capital goods to the individual firms' investment series, constructing a capital stock series in each firm. We measured the obsolescence rate by estimating the production function, which is similar to the one employed in Sakellaris and Wilson (2004). We added several control variables to their equations. The estimated obsolescence rate of machinery and equipment is found to be between 8 and 22 percent per annum, which is very close to the estimated ratios in other previous research using the production function. This estimation result implies that the average rate of technological progress embodied in machinery and equipment is between 0.2 and 0.4 percent in Japan. The average vintage of capital in the manufacturing industry in the 1990s was estimated to increase by almost two years, because of weak investment during that decade, and it has the effect of lowering the rate of productivity growth in the industry by 0.4 to 0.8 percentage points.

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    Bibliographic Info

    Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 08017.

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    Length: 28 pages
    Date of creation: Jun 2008
    Date of revision:
    Handle: RePEc:eti:dpaper:08017

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    Postal: 11th floor, Annex, Ministry of Economy, Trade and Industry (METI) 1-3-1, Kasumigaseki Chiyoda-ku, Tokyo, 100-8901
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    Web page: http://www.rieti.go.jp/
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    1. Gittleman, M. & Raa, T. ten & Wolff, E.N., 2006. "The vintage effect in TFP-growth: An analysis of the age structure of capital," Open Access publications from Tilburg University urn:nbn:nl:ui:12-192963, Tilburg University.
    2. Cummins, Jason G & Violante, Giovanni L, 2002. "Investment-Specific Technical Change in the US (1947-2000): Measurement and Macroeconomic Consequences," CEPR Discussion Papers 3584, C.E.P.R. Discussion Papers.
    3. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1995. "Long-Run Implications of Investment-Specific Technological Change," UWO Department of Economics Working Papers 9510, University of Western Ontario, Department of Economics.
    4. Kjell G. Salvanes & Ragnar Tveteras, 2004. "Plant Exit, Vintage Capital and the Business Cycle," Journal of Industrial Economics, Wiley Blackwell, vol. 52(2), pages 255-276, 06.
    5. Hulten, Charles R, 1992. "Growth Accounting When Technical Change Is Embodied in Capital," American Economic Review, American Economic Association, vol. 82(4), pages 964-80, September.
    6. Plutarchos Sakellaris & Daniel J. Wilson, 2001. "Quantifying embodied technological change," Working Paper Series 2001-16, Federal Reserve Bank of San Francisco.
    7. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557.
    8. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
    9. Jeremy Greenwood & Boyan Jovanovic, 1998. "Accounting for Growth," NBER Working Papers 6647, National Bureau of Economic Research, Inc.
      • Jeremy Greenwood & Boyan Jovanovic, 2001. "Accounting for Growth," NBER Chapters, in: New Developments in Productivity Analysis, pages 179-224 National Bureau of Economic Research, Inc.
    10. J. Bradford Jensen & Robert H. McGuckin & Kevin J. Stiroh, 2001. "The Impact Of Vintage And Survival On Productivity: Evidence From Cohorts Of U.S. Manufacturing Plants," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 323-332, May.
    11. Wolff, Edward N, 1991. "Capital Formation and Productivity Convergence over the Long Term," American Economic Review, American Economic Association, vol. 81(3), pages 565-79, June.
    12. Plutarchos Sakellaris, 2001. "Production function estimation with industry capacity data," Finance and Economics Discussion Series 2001-06, Board of Governors of the Federal Reserve System (U.S.).
    13. Charles R. Hulten, 1992. "Growth Accounting When Technical Change is Embodied in Capital," NBER Working Papers 3971, National Bureau of Economic Research, Inc.
    14. Bahk, Byong-Hong & Gort, Michael, 1993. "Decomposing Learning by Doing in New Plants," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 561-83, August.
    15. Thijs ten Raa & Ed Wolff, 2003. "The vintage effect in TFP-growth: An analysis of the age structure of capital," ERSA conference papers ersa03p11, European Regional Science Association.
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