Capital productivity and the nature of competition

This paper measures capital productivity in West Germany, Japan and the United States and links capital productivity to financial performance. We show that West Germany and Japan have significantly lower levels of capital productivity than the United States, mainly due to lower capital utilization but also because less productive capacity was created per unit of physical assets. On a higher level of causality, we show that this mainly comes from less pressure from product market competition and weaker corporate governance in West Germany and Japan. While external factors such as government ownership and regulation were important, more than half of the productivity gap could in principle have been closed by managerial action. The lower level of capital productivity in West Germany and Japan explains a large part of the difference in per capita income between these two countries and the U.S. Moreover, the high level of capital productivity in the U.S. generated financial returns that created more new wealth than in West Germany and Japan in spite of the well-known low U.S. saving rates.