Externalities and Productivity Growth: Evidence from Japanese Manufacturing

Abstract

In 1976, Hugh Patrick and Henry Rosovsky edited a book entitled Asia’s New Giant, The book was not about China but about Japan’s high growth in the 1950s and 1960s. The rapid economic growth of the other parts of Asia of recent years has dwarfed Japan’s then unprecedented growth performance. The accumulating stock of knowledge of these fast growing economies offers touchstones by which alternative theories of economic growth should be judged. One strand of endogenous growth theory casts capital accumulation in a leading role in the growth process. In the work of Rebelo (1991) and King and Rebelo(1990), the aggregate production function is assumed to have a property that the private return to capital stays above the discount rate so that capital can be accumulated infinitely even in the absence of exogenous technical progress. In the work of Arrow (1962) and Romer (1986, 1987b), firms’ investments in physical capital contribute to the productivity of capital of other firms.¹ If such externalities make the aggregate production function linear in capital, sustained growth will be possible without exogenous technical progress. These models are simple and accordingly popular. Their prediction concerning the association between capital accumulation and the conventional measure of productivity, however, seems to be inconsistent with the experience of the newly industrializing countries (NICs) of East Asia.