R&D, Production Structure and Rates of Return in the U.S., Japanese and German Manufacturing Sectors: A Nonseparable Dynamic Factor Demand Model
The focus of this paper is an analysis of the production structure, the demand for factor inputs, and the rates of return in the manufacturing sector of three major industrialized countries, the United States, Japan and Germany. The analysis is based on a dynamic factor demand model with two variable inputs, labor and materials, and two quasi-fixed inputs, capital and R&D. Adjustment costs are explicitly specified. The demand equations are derived from an intertemporal cost-minimization problem formulated in discrete time. The adopted estimation methodology allows for non-separability in the quasi-fixed factors. The model is estimated using data from 1965–1966 to 1977–1978. Particular attention is given to the role of R&D. For all countries the rate of return on R&D is found to be higher than that of capital. Their respective magnitudes are similar across countries. Considerable differences in the input demand elasticities with respect to output and prices are observed; also, for all countries the speed of adjustment for capital is found to be higher than that for R&D.