TABLE 1 Contributions of Factor Inputs to Output Growth in Japanese Manufacturing, 1970–1988


Annual Rates (%)





Real gross domestic product (GDP)



Capital inputs, increase rates



Contribution to GDP



Labor inputs, increase rates



Contribution to GDP



Total factor productivity contribution to GDP




SOURCE: Economic Planning Agency.

productivity. Technically, the production function can be specified as a Cobb-Douglas function, with the coefficients of capital and labor constrained to be equal to their shares in output or income. 1 On this basis, total factor productivity can be estimated as residuals that cannot be explained by contributions of capital and labor input to output.

Industry comparisons in Japanese manufacturing suggest that the higher the R&D expenditure, the higher is the growth rate of total factor productivity. For instance, the electrical machinery industry, which registered the highest R&D expenditure per total wages and business investment among industries, enjoyed the highest growth rate of total factor productivity.

In manufacturing, business investment was strongly and favorably influenced by R&D expenditure. The elasticity of real business investment (divided by real total sales) with respect to real R&D expenditure (divided by real total sales) is found to be about 0.6 with the distributed lag of R&D over the present and preceding three quarters (see Table 2).

The stock of R&D capital rather than the flow of R&D expenditure should contribute to the growth of output as in the case of physical capital inputs. Furthermore, the net rather than gross stock of R&D capital is more meaningful, since amortization or depreciation of technology and knowledge is extremely rapid though it is difficult to measure. Since total factor productivity may be interpreted as a measure of the state of technological


A Cobb-Douglas production function with constant returns to scale is specified as Qt=AeλtKtαLt(1-α) with Q = output, L = labor, K = capital, t = time, A is a constant, α is capital's share of output, and λ is the residual, or the rate of growth of total factor productivity.

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