Skip to main content
SpringerLink
Log in

On the cost-reducing effects of embodied technical progress: a panel study of the steel industry in Japan

  • Published:
Journal of Productivity Analysis Aims and scope Submit manuscript

Abstract

To explicitly explain the cost-reducing effects of technical progress experienced by each firm, we assume that technical progress, namely, the prevalence of particular equipment, can be expressed by a function of logarithmic physical capital. Regarding the technology cost structure, we propose a modified dynamic cost function model that consists of the above equation, the translog variable cost equation containing technical progress as one of the factors, and Euler equations with respect to physical and research and development capital stocks. Using data on eight firms in the Japanese electric-furnace steel industry for the period 1970–1998, the model was empirically validated using the generalized method of moments. An elasticity of production cost with respect to technical progress showed a cost-reducing effect. This fact was influenced by the type of product and the extent of each firm’s R&D. Also derived from this model is one reasonable phenomenon of business-cyclically changing the use of endogenous capacity. This economic information supports the appropriateness of the above model, including the assumption of transforming technical progress into an endogenous variable, and the methods of analysis.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Similar content being viewed by others

Notes

  1. See Sect. 2.

  2. The iron- and steel-making industries in Japan can be divided into two main groups. One of these is an integral iron and steel industry that specializes in mass production, while the other is an electric-furnace steel-making industry that deals primarily with large items that are typically produced on a small scale.

  3. In the period considered in this study, blast furnace manufacturers in Japan were represented by four leading firms, in which the production and marketing administration could be managed in a similar manner because there were few differences in the types of product and the efficiency of production. In contrast, the electric-furnace manufacturers could be divided into three groups by the type of steel that they exclusively produced and there were large differences among these groups with respect to the efficiency of production and the opportunity of equipment investment.

  4. To avoid the possibility of multicolinearity during the estimation, we omitted the square of K and the cross term between CCR and R from the cost function G.

  5. Recently, the AB method (Arellano and Bond 1991) has been recommended for the estimation of models in which lagged dependent variables are used as explanatory variables in rental and adjusting costs within the Euler equations. We attempted to use the AB method to estimate the model using 2- and 3-year lagged instrumental variables of rental cost and adjusting cost with respect to physical capital K, and R&D capital R. However, no stable results were obtained. It was difficult to obtain reliable values for the parameters because the use of six equations did not allow for model estimation in comparisons of eight samples (i.e., firms), despite the 29 years of data. We considered that the necessity of using the AB method should be low in the case of such panel data.

  6. In this research, we use a function that is non-linear in time, i.e., a translog-type function. Therefore, we believe that the time trend should also be written as approximately quadratic. First differencing results in the exclusion of the constant term B 0 and the first time-trend term B t t t from the variable cost function. In addition, the constant term A 0 is added to the differenced variable cost equation.

References

  • Aghion P, Howitt P (1992) A model of growth through creative destruction. Econometrica 60:323–351

    Article  Google Scholar 

  • Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equation. Rev Econ Stud 58:277–297

    Article  Google Scholar 

  • Arrow KJ (1962) The economic implications of learning by doing. Rev Econ Stud 29:155–173

    Article  Google Scholar 

  • Bernstein JI, Nadiri M (1989) Research and development and intra-industry spillovers: an empirical application of dynamic duality. Rev Econ Stud 56:249–269

    Article  Google Scholar 

  • Bernstein JI, Nadiri M (1991) Product demand, cost of production, spillovers and the social rate of return to R&D. NBER working paper 3625

  • Borning B, Ichniowski C, Shaw K (2001) Opportunity counts: teams and the effectiveness of production incentives. NBER working paper 8306

  • Caballero R, Hoshi T, Kashyap A (2006) Zombie lending and depressed restructuring in Japan. NBER working paper 12129

  • Denison E (1964) The unimportance of the embodied question. Am Econ Rev 54(papers and proceedings):90–93

  • Engle RF, Granger CWJ (1987) Co-integration and error correction: representation, estimation, and testing. Econometrica 55(2):251–276

    Article  Google Scholar 

  • Griffin NN, Odaki K (2009) Reallocation and productivity growth in Japan: revisiting the lost decade of the 1990s. J Prod Anal 31:125–136

    Article  Google Scholar 

  • Grossman G, Helpman E (1991) Innovation and growth in the global economy. The MIT Press, Cambridge (Ohsumi K (1997) Japanese Version)

  • Hall Bronwyn H, Mairesse J (2001) A cautionary note on modeling the univariate behavior of panel data for firms. Paper presented to the German Classification Society Annual Meeting, Munich, Germany, March 14–15

  • Hansen LP (1982) Large sample properties of generalized method of moments estimators. Econometrica 50(4):1029–1054

    Article  Google Scholar 

  • Hayashi F, Prescott EC (2002) The 1990s in Japan: a lost decade. Rev Econ Dyn 5:206–235

    Article  Google Scholar 

  • Hoshi T, Kashyap AK (1990) Evidence on Q and investment for Japanese firms. J Jpn Int Econ 4:371–400

    Article  Google Scholar 

  • Ichniowski C, Shaw K, Prennushi G (1997) The effects of human resource management practices on productivity: a study of steel finishing lines. Am Econ Rev 87(3):291–313

    Google Scholar 

  • Jorgenson DW, Motohashi K (2003) Economic growth of Japan and the United States in the information age. REIT discussion paper series 03-E-015

  • Kagaku-Gijutsu-cyo (Science and Technology Agency, Japan) (1997) Science and technology indicators. Nistep Report 50: ibid. (1999) Assessment for the effects of R&D policy on economic growth. Nistep Report 64 (in Japanese)

  • Kawamoto T (2004) An attempt to measure the rate of technological progress for the Japanese economy: what do the purified Solow residuals tell us about Japan’s lost decade? Monet Econ Stud (12):147–186 (in Japanese)

  • Lucas RE Jr (1988) On the mechanics of economic development. J Monet Econ 22:3–42

    Google Scholar 

  • Morrison CJ (1992) A microeconomic approach to the measurement of economic performance: productivity growth, capacity utilization, and related performance indicators. Spring, pp 53–77

  • Nihon-Tekko-Kyokai (The Iron and Steel Institute of Japan) (1996) History of continuous casting technology of steel in Japan (in Japanese)

  • Ogawa K, Kitasaka S (1998) Asset markets and business fluctuations. NIKKEI (in Japanese)

  • Pindyck RS, Rotemberg JJ (1983) Dynamic factor demands and the effects of energy price shocks. Am Econ Rev 73(5):1066–1079

    Google Scholar 

  • Romer PM (1986) Increasing returns and long-run growth. J Political Econ 94:1002–1037

    Article  Google Scholar 

  • Romer PM (1990) Endogenous technological change. J Political Econ 98(October, Part2):s71–s102

    Google Scholar 

  • Sekine J (1995) Sustainable economic growth and technological progress. CHUOKEIZAI-SHA, INC (in Japanese)

  • Solow RM (1956) A contribution to the theory of economic growth. Q J Econ 70:65–94

    Article  Google Scholar 

  • Solow RM (1957) Technical change and the aggregate production function. Rev Econ Stat 39:312–320

    Article  Google Scholar 

  • Statistics Bureau, Management and Coordination Agency, Government of Japan (1998) Report on the survey of research and development (in Japanese)

  • Suzuki K (1993) R&D spillovers and technology transfer among and within vertical keiretsu groups: evidence from the Japanese electrical machinery industry. Int J Ind Organ 11(4):573–591

    Google Scholar 

  • Ueda S, Ogawa K (2004) An empirical study of embodied technological progress of steel industry: an econometric analysis by firm panel data. J Econ Bus Admin, Kobe University 190(6):1–18 (in Japanese)

    Google Scholar 

  • Uzawa H (1961) Neutral inventions and the stability of growth equilibrium. Rev Econ Stud 28:117–124

    Google Scholar 

  • Uzawa H (1965) Optimum technical change in an aggregative model of economic growth. Int Econ Rev 6:18–31

    Google Scholar 

  • Wolff E (1991) Capital formation and productivity convergence over the long term. Am Econ Rev 81:565–579

    Google Scholar 

  • Wolff E (1996) The productivity slowdown: the culprit at last? Follow-up on Hulten and Wolff. Am Econ Rev 86:1239–1252

    Google Scholar 

Download references

Acknowledgments

The substance of this paper was presented at the 2005 Spring Meeting of the Japanese Economic Association. The paper was improved according to the various comments made at that meeting. We would like to thank Dr. Kazuyuki Suzuki (Professor, Department of Commercial Sciences, Meiji University) for his valuable and helpful comments in relation to our work. Any shortcomings relating to this study remain our responsibility.

Author information

Authors and Affiliations

  1. Japanese Economic Association and the Iron and Steel Institute of Japan, 36-8 Arashiyamauchida-cho, Nishikyou-ku, Kyoto, 616-0027, Japan

    Shuzo Ueda

  2. Institute of Social and Economic Research, Osaka University, 6-1 Mihogaoka, Ibaraki, Osaka, 567-0047, Japan

    Kazuo Ogawa

Authors
  1. Shuzo Ueda
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Kazuo Ogawa
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Shuzo Ueda.

Appendices

Appendix 1: Defining and measuring of variables

P L L :

Nominal labor cost which means personnel expenditure; key executive earnings + employees salary & allowance + reserve for retirement allowance.

P E E :

Nominal energy cost; expenses for fuel and purchasing electric power.

P M M :

Nominal material cost; the raw material cost as shown in the financial statements minus the energy cost as described above.

P L :

Price of labor input; value divided the nominal labor cost by the average number of persons employed at the start and the end of fiscal year.

P M :

Price of material input; input-price for iron and steel on the gross-weight base of the wholesale price index.

P E :

Price of energy input; wholesale price index of commodities called fuel and energy in 1970–1974, fuel oil, petroleum gas, electric power and gas for big users in 1975–1979, and crude petroleum, natural gas and electric power after 1980.

L :

Real labor input; the average number of persons employed.

E :

Real energy input; value divided nominal energy cost by price of energy input.

M :

Real material input; value divided nominal material cost by price of material input.

Y :

Output; sum of real value added, E and M. Value added; operating profit + labor cost + depreciation + rent + taxes and public imposts. Deflator applied; factor income one for the iron and steel industry in Japan. Operating profit; gross profit on sales minus expenses for selling and general administration. Depreciation; current depreciation of tangible fixed assets + depreciation in selling expense and general administrative expense. Rent; rent in other account transfer payment + rent in selling expense and general administrative expense. Taxes and public imposts; taxes and public imposts in other account transfer payment and in selling expense and general administrative expense.

GV :

Nominal variable cost; P L L + P E E + P M M.

S L , S E , S M :

Labor cost share; P L L/GV, energy cost share; P E E/GVand material cost share; P M M/GV, respectively.

K t :

Real capital stock at the end of period t; real capital stock at the end of period t−1 (K t−1 ) + [(NK t  + AD t ) − (NK t−1  + AD t−1 )]/P IKt (not exogenously multiplied by the operating rate from the Cabinet).

NK :

Nominal tangible fixed assets. AD; nominal accumulated depreciation. Refer Ueda and Ogawa (2004) as for calculating real capital stock, K 1960 at the end of 1960 in standard price of 1990.

R t :

Real R & D knowledge stock which was calculated by dividing nominal R & D knowledge stock, NR by price index, P IR .

NR :

The year of 1959 was selected as the benchmark year for construction using the perpetual inventory method.

δ R :

Obsolescence rate of R&D knowledge stock at companies, 10.2% (Kagaku-Gijutsu-cyo 1999). Nominal R&D investment NIR;in the case before 1981, we used the value extrapolated as the product of each firm’s sales and general ratio of R&D cost to sales in an iron and steel industry, published in Kagaku-Gijutsu-cyo (1997). We put each firm’s virtual value of 1982 as standard value. In the case after 1982, we used the virtual value in each firm published in Kaisha Shiki Ho and Kaisha Nenkan (See “Appendix 2”).

P K :

Price of capital; interest rate on net debt outstanding at the end of period t–1 + depreciation rate minus yearly increasing rate in a price of investment goods.

P IK :

Price index of equipment investment cost; weighted arithmetic mean of price indices of item cost for investment goods corresponding to five classified assets which consist of non-residential building, structures, machinery, transportation equipment plus ship, and instruments plus tools.

P IR :

Price index of R&D investment cost; weighted arithmetic mean of price indices of item cost for R&D investment consisting of labor cost, material cost, tangible fixed assets cost, the other budget expenditure, etc.

P Y :

Price index of product; wholesale price index of special steel for firms A–D, stainless steel for firm S and ordinary steel for firms X–Z.

r s :

Interest rate on net debt outstanding at the end of period t−1; financial expense (interest and discount paid + bond interest expenses)/liability (short-term and long term loans payable + notes receivable discounted + bond payable).

U s :

Corporate tax rate; corporate income tax rate × (1 + prefecture inhabitants tax + municipal inhabitants tax) + enterprise tax rate.

B s :

Rate of tax saving by reserve for depreciation of period s; present discounted value of tax savings on the depreciation allowances on investment made before current period. For a firm using exponential depreciation, B s  = U s z t  = U s δ s (1 + r s )/(r s  + δ s ) (Ogawa and Kitasaka 1998; In more detail, Hoshi and Kashyap 1990).

δ s :

Accounting depreciation rate; the current depreciation of tangible fixed assets/((tangible fixed assets − construction in process account − land) + the current depreciation of assets concerned).

DIS S :

Discount rate; 1/(1 + r s ).

Appendix 2: Sources

Capacity utilization rate: Economic and Social Research Institute (ESRI), Cabinet Office, Government of Japan; Annual Report on National Accounts 2005 (in Japanese) and NEED-CDROM, NIKKEI Macroeconomic Data, 2000.1 CD-ROM.

Corporate tax rate: Collection of local-tax-law’s notification letters for examination, 1998 (in Japanese)

Deflator of income factor: Economic and Social Research Institute (ESRI), Cabinet Office, Government of Japan; Annual Report on National Accounts, 2005.

Energy cost: The Japanese old MITI (the Ministry of International Trade and Industry); Industrial Statistics Table, Vol. of Industry (in Japanese)

Financial data: Development Bank of Japan; Financial statements (in Japanese)

Continuous casting rate: Tekko-Shimbun-sha; A Yearbook of Iron& Steel (in Japanese)

Ratio of R&D cost to sales: Management and Coordination Agency, Government of Japan; Report on the Survey of Research and Development (in Japanese)

R&D expences: Toyo Keizai Shimpo-sha; Kaisha-Shiki-Ho (Japan Company Handbook). NIKKEI.; Kaisha-Nenkan (A Yearbook of Company) (in Japanese)

Wholesale price index: The Bank of Japan; Wholesale Price Index (in Japanese)

Rights and permissions

Reprints and permissions

About this article

Cite this article

Ueda, S., Ogawa, K. On the cost-reducing effects of embodied technical progress: a panel study of the steel industry in Japan. J Prod Anal 37, 141–153 (2012). https://doi.org/10.1007/s11123-011-0234-2

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11123-011-0234-2

Keywords

JEL Classifications

Search

Navigation