Fixed Costs, Imperfect Competition and Bias in Technology Measurement: Japan and the United States

The phenomenal success of East Asian economies has centered attention on the source of their economic growth. Recent studies based on neoclassical theory have produced controversial results: the most important source of economic growth of the East Asian countries (except Japan) is capital accumulation, and the estimated rate of technological progress is very small and, in some cases, substantially negative (see Tsao (1985), Kim and Lau (1994), Young (1994), and Park and Kwon (1995)). Based on these results, it is often argued that economic growth in this area cannot be sustained for a long period of time (see Krugman (1994)). Here, Japan is an interesting exception. A series of studies has shown that technological progress contributes substantially to her economic growth (see Kuroda and Jorgenson (1992)). Thus, it is an interesting research agenda to investigate the difference between the Japanese and other East Asian economies. There are, however, theoretical and resulting measurement problems in the abovementioned analyses of productivity growth which must be solved before pursuing this agenda. Most of the studies in this field assume perfect competition and constant returns to scale, although many sectors in East Asian economies are considered to be imperfectly competitive and their production entails large fixed costs. Presence of imperfect competition and fixed costs may bias the measurement of technological progress, and the results reported in the previous studies may be misleading. The first purpose of this paper is to examine the direction and the magnitude of bias in the technological progress measurement due to imperfect competition and fixed costs. We show that imperfect competition coupled with short-run fixed costs is likely to make the traditional measurement of technological progress biased. The direction of bias depends, firstly, on the relative magnitude of growth between the capital stocks and noncapital inputs, and secondly, on whether firms enjoy a pure profit in the “long run”. Here we use the word “long run” for a period long enough to cover at least one business cycle but not long enough to allow entry and exit to drive pure profit to zero. Thus, if capital growth exceeds non-capital input growth (which is the case in many industries in Japan), then the traditional measure underestimates true technological growth if pure profit is on the average positive. On the other hand, however, if pure profit is negative on the average,