(This version: 09/2010)
This
paper studies the industrial structure change induced by factor endowment
changes, and explores the linkage between structural coherence and economic
growth. Here structural coherence is
defined as the degree that a country’s industrial structure optimally reflects
its factor endowment fundamentals.
Using
data from 28 industries across 15 countries, I examine (1) whether higher factor
endowment is generally associated with larger sizes of industries that use the
factor intensively, and (2) whether a higher level of coherence between factor
endowments and industrial structure is related to better economic growth
performance. The production factors
under study include the overall fixed capital as well as three detailed
categories of capital. The results
suggest that at least for the overall capital, the shares of capital intensive
industries were significantly bigger with higher initial capital endowment and
faster capital accumulation. More
importantly, I found a significantly positive relationship between a country’s
aggregate output growth and the degree of structural coherence in all types of
capital. Quantitatively, the structural
coherence with respect to the overall capital explains about 30% of the growth
differential among sample countries.
The
results of the paper are mostly robust to alternative measure of capital
intensity, to controls for other industry characteristics such as human capital
and degree of value-added, and to controls for other determinants of structural
change on both demand side and supply side.
(This version: 06/2010)
The
sectoral composition of US economy has shifted dramatically in the
recent decades. At the same time, knowledge and information capital has
become increasingly important in modern production process. This paper
argues that a ready explanation for the recent sectoral structural
change lies in the difference of intangible capital accumulation across
sectors. In the two-sector model of the paper, as the importance of
intangible capital increases, labor is shifted from direct goods
production to creating sector-specific intangible capital. In the
process, the real output and employment shares of the high-intangible
sector increase.
The model generates sectoral composition
change and labor productivity trend that reasonably match the data. It
also shows that conventional labor productivity calculation understates
the "true" productivity in sectoral goods production. The
underestimation is greater for the growing sector.
The empirical
regressions of the paper indicate a positive and significant
association between intangible capital investment intensity and firms'
future output and employment growth. The correlation is higher for
firms in the growing sector. At the industry level, controlling for
industry human capital intensity, physical capital intensity and IT
investment level, intangible capital intensity is positively correlated
with future industry real output and employment share growth. These
findings are consistent with the implications of the model.
The
paper also presents evidence suggesting that most growing service
industries are intangible capital intensive. Thus the theory developed
here can also help to reconcile the expansion of the service sector and
the seemingly low productivity of the sector.
Most
traditional explanations for the decreasing aggregate output volatility
- so-called "Great Moderation" - fail to accommodate, or even directly
contradict, another aspect of empirical data: the average sales
volatility for publicly-traded US firms has been increasing during the
same period. The paper aims to reconcile the opposite trends of
firm-level and aggregate volatilities.
I argue that the rise of
organization capital, or firm-specific intangible capital, is the
origin of the volatility divergence. Firms in the modern economy have
been investing heavily in intangible and organizational assets, such as
R&D, management processes, intellectual property, software, and
brand name - the "soft" capitals that distinguish a firm from the sum
of its physical properties.
Most intangible assets are
firm-specific, inseparable from the company that originally produced
them, and difficult to trade on outside market. Investing in these
organization-specific capitals insulates a firm from market-wide
shocks, but introduces higher firm-specific risk that does not equally
affect its peers. When value creation is increasingly relying on
organization capital, the impact of idiosyncratic risk factor rises,
while that of general risk factor declines. The former elevates
firm-level volatility; the latter reduces aggregate volatility, mainly
through weakening the positive co-movements among firms. Therefore, the
decrease in aggregate output volatility is not because of less
turbulent macro environment, but a result of more heterogeneity among
production units. In this sense, the Great Moderation is rather a story
of "Great Dissolution". It may indicate greater economic uncertainty
faced by individual agents, instead of less.
My empirical
investigation found that, consistent with the paper's hypotheses,
firm-level volatility increases with organizational investment, but
general factors' impact on firm performance and a firm's correlation
with others decrease with organizational investment. Simulations of the
general equilibrium model featuring organizational capital investment
are capable of replicating the volatility trends at both aggregate and
firm levels for the past two decades.
