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Measures of capacity utilization and its determinants: a study of Indian manufacturing

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  • Shailendra Gajanan
  • D. Malhotra

Abstract

We estimate Capacity Utilization (CU) rates in for selected industries in Indian manufacturing for the 20-year period 1976-1996. We estimate a generalized Leontief variable cost function, with capital as a quasi fixed input, to derive our CU measures, using error-component techniques. We note substantial variations in CU both across industries and over time. In general, we find that CU rates were higher in the earlier time-period, dropped in the mid-80s and started rising again in the early 90s. CU rates in our analysis are sensitive to input prices with the sole exception of the price of labor. We also confirm the standard result that variations in demand are a significant driving force for variations in CU. We find that CU is positively related to the magnitude of labor intensity in production. This holds for both between-industries and within-industries. Empirical results also indicate that traditional measures of CU such as minimum capital output ratio and peak-to-peak are not appropriate proxies for the short-run decision making of the firm regarding CU. As compared to the estimates derived from the choice-theoretic framework, we find that the traditional measures exhibit substantial bias.

Suggested Citation

  • Shailendra Gajanan & D. Malhotra, 2007. "Measures of capacity utilization and its determinants: a study of Indian manufacturing," Applied Economics, Taylor & Francis Journals, vol. 39(6), pages 765-776.
    • Handle: RePEc:taf:applec:v:39:y:2007:i:6:p:765-776
    DOI: 10.1080/00036840500447732
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    Cited by:

    1. Arbués, Pelayo & Baños, José F. & Mayor, Matías, 2015. "The spatial productivity of transportation infrastructure," Transportation Research Part A: Policy and Practice, Elsevier, vol. 75(C), pages 166-177.
    2. Lilai Xu (ed.), 2011. "China’s Economy in the Post-WTO Environment," Books, Edward Elgar Publishing, number 14270.
    3. Dai, Xiaoyong & Zhao, Zhiqi, 2021. "Can exporting resolve overcapacity? Evidence from Chinese steel companies," Economic Modelling, Elsevier, vol. 102(C).
    4. Salnikov, Vladimir & Galimov, Dmitry & Mikheeva, Olga & Gnidchenko, Andrey & Rybalka, Alexey, 2017. "Russian manufacturing production capacity: Primary trends and structural characteristics," Russian Journal of Economics, Elsevier, vol. 3(3), pages 240-262.
    5. Orea, Luis & Álvarez, Inmaculada C., 2019. "Spatial Production Economics," Efficiency Series Papers 2019/06, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    6. Sunday Osahon Igbinedion & Frank Iyekoretin Ogbeide, 2016. "Monetary Policy and Manufacturing Capacity Utilization: Further Evidence from Nigeria," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 14(2), pages 159-174.
    7. Arnab Deb, 2013. "Economic Reforms, Capacity Utilization, and Productivity Growth in Indian Manufacturing," Alumni working papers 2013-05, University of Connecticut, Department of Economics.
    8. Shengyu Liu & Heng Yin, 2017. "A Structural Method to Estimate Firm-level Capacity Utilization and Application to Chinese Heavy Industries," Annals of Economics and Finance, Society for AEF, vol. 18(1), pages 1-28, May.
    9. Yanrui Wu, 2011. "Has Capital been Utilized Efficiently in China?," Chapters, in: Lilai Xu (ed.), China’s Economy in the Post-WTO Environment, chapter 12, Edward Elgar Publishing.
    10. Arnab K. Deb, 2014. "Economic Reforms, Capacity Utilization and Productivity Growth in Indian Manufacturing," Global Business Review, International Management Institute, vol. 15(4), pages 719-746, December.
    11. Mohieddine Rahmouni, 2021. "Determinants of capacity utilisation by firms in developing countries: evidence from Tunisia," International Journal of Technological Learning, Innovation and Development, Inderscience Enterprises Ltd, vol. 13(3), pages 212-245.

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