Capital productivity and the nature of competition

Axel Börsch-Supan ()
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Axel Börsch-Supan: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 97-21, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: 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.

Pages: 38 pages
Date: 1997-05-21
Note: This is a preliminary draft for presentation at the Microeconomics Conference, Brookings Institution, Washington, D.C., June 1997. It is based on research performed during my sabbatical year at the McKinsey Global Institute, Washington, D.C., directed by William W. Lewis. Sean Greene was project coordinator. Other team members were raj Agrawal, Tom Büttgenbach, Steve Findley, Kathryn Huang, Aly Jeddy, and Markus Petry. The team benefited greatly from comments by the project advisory committee members: Ben Friedman, Zvi Griliches, Ted hall, and Bob Solow. I benefited from comments by Martin Baily, Hans Gersbach, Peter Reiss and by participants at several workshops and seminars. Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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