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Embodied Technological Progress and the Productivity Slowdown in Japan

  • TOKUI Joji
  • INUI Tomohiko
  • Young Gak KIM
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    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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    File URL: http://www.rieti.go.jp/jp/publications/dp/08e017.pdf
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    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
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    Handle: RePEc:eti:dpaper:08017
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    1. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557.
    2. Gittleman, M. & Ten Raa, T. & Wolff, E.N., 2003. "The Vintage Effect in TPF-Growth : An Analysis of the Age Structure of Capital," Discussion Paper 2003-109, Tilburg University, Center for Economic Research.
    3. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1996. "Long-Run Implications of Investment-Specific Technological Change," RCER Working Papers 420, University of Rochester - Center for Economic Research (RCER).
    4. J. Bradford Jensen & Robert H McGuckin & Kevin J Stiroh, 2000. "The Impact of Vintage and Survival on Productivity: Evidence from Cohorts of U.S. Manufacturing Plants," Working Papers 00-06, Center for Economic Studies, U.S. Census Bureau.
    5. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
    6. Jason G. Cummins & Giovanni L. Violante, 2002. "Investment-Specific Technical Change in the US (1947-2000): Measurement and Macroeconomic Consequences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 243-284, April.
    7. 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.
    8. 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.
    9. Charles R. Hulten, 1992. "Growth Accounting When Technical Change is Embodied in Capital," NBER Working Papers 3971, National Bureau of Economic Research, Inc.
    10. 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.).
    11. 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.
    12. Plutarchos Sakellaris & Daniel J. Wilson, 2001. "Quantifying embodied technological change," Working Paper Series 2001-16, Federal Reserve Bank of San Francisco.
    13. 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.
    14. 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.
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