Abstract
This chapter investigates how dynamic externalities promote industrial growth in Japanese manufacturing industries. In contrast to previous studies, this study characterizes dynamic externalities by total factor productivity. Using panel data of Japanese prefectures from 1985 through 2000, this study finds evidence of localization (MAR) externalities and urbanization (Jacobs) externalities. However, this study does not find clear evidence that dynamic externalities play the role of centripetal forces for industrial location.
This chapter is based on Otsuka (2003) “Dynamic externalities in Japanese manufacturing industries,” Journal of Applied Regional Science (Vol. 8, No. 1, pp. 55–66, in Japanese).
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
E is the spillover effects received from an agglomeration formed by individual producers in the same industry or different industries, and it incorporates technological progress embodied in the production factors, including the abilities of workers, the performance and quality of capital goods, and the quality of raw materials and intermediate input goods. This is in consideration of simultaneous growth, including from networks, externalities, complementarities, and economies of scale.
- 2.
It is assumed that E does not affect the marginal productivity of the production factor J(=K , L , M).
- 3.
Generally, constant returns to scale are not established in the short term since it is not easy to adjust capital equipment and labor. To address this problem, one approach assumes that, in the short term, all capital stock are fixed factors and labor is variable. On the other hand, there is the approach in Nishimura et al. (1999) that handles the organizational structure of a firm and the existence of managers as semi-fixed factors. Both suggest the existence of some types of fixed costs in the short term. In this study, the cost function is not specified, but regardless of the cost structure envisaged, it does not have a direct effect on the derivations (Basu and Fernald 1997, 2002).
- 4.
- 5.
Although not explicitly shown in the model, the assumption that the profit rate is close to zero even under imperfect competition can be established by considering the existence of fixed costs.
- 6.
Assuming firm i is facing perfect competition, that production has constant returns to scale, and there are no effects from externalities, (9) will be consistent with the Solow residual.
- 7.
Since the R term in (6.16) includes the input growth of the industry and it is possible that it correlates with the explanatory variable, it is necessary to remove this term for the estimations. Therefore, there is no choice but to carry out a simplification that economies of scale in firms in the same industry are the same. If this simplification were not carried out, instrumental variables would be required in the estimations, but it would be difficult to find instrumental variables that do not correlate with the error term but do correlate significantly with the explanatory variable.
- 8.
Henderson (1997) conducted research on externalities considering differences at points in time, and confirmed that externalities have a certain degree of continuity and demonstrate the existence of dynamic externalities.
- 9.
From the results of the F test to consider individual effects, where the null hypothesis was that they do not exist, the null hypothesis was rejected in most of the industries at the significance level of 1%.
- 10.
It is necessary to integrate the industry classifications when using data prior to 1985, but a new problem that arises in the process of integration is handling of concealment data.
- 11.
Conventionally, urbanization economies are considered to occur in all industries in urban areas, but here, due to data constraints, all manufacturing industries in a region are assumed as a body of industrial agglomeration.
- 12.
In this chapter, the possibility of series correlation is not considered. As it is an analysis of a log difference series, series correlations seem less likely to be a major problem compared to data level analysis.
- 13.
Price markups tend to be linked to the business cycle. Refer to Hall (1988) for further details.
- 14.
In other words, it is assumed that while each firm is a price taker in the production factors market, they face imperfect completion in the product market. However, Nishimura et al. (1999) used value-added production functions.
- 15.
The main data source is the Nikkei Needs database, which is based on companies’ securities reports. As this is a database of listed companies, it is not consistent with the Census of Manufactures. To the best of my knowledge, there is no other research that attempted to estimate price markups at the firm-level, so it is adopted as the benchmark in this chapter.
- 16.
Mano and Otsuka (2000) conducted empirical research into dynamic externalities targeting metal products, general machinery, electric machinery, transportation equipment, and precision machinery from within the two-digit manufacturing industry classifications using the 47 prefectures in Japan. The results of their analysis clarify that, in each industry, localization economies have a negative effect on growth. Based on the product cycle hypothesis, they explained the ground of locational dispersion in these industries.
- 17.
In textile mill products and apparel, and other finished products made from fabrics and similar materials, the bias in the industrial distribution over time is noticeable. However, the rates of decrease in the number of establishments and employees in these industries over the analysis period were extremely high. For example, for the number of establishments and employees in textiles in 2000 compared to 1985, the rates of change were –67.6% and –71.2% respectively, which were the highest rates in all manufacturing industries. In apparel and other finished products made from fabrics and similar materials, these rates were –26.9% and –31.1%. These rates were high compared to transportation equipment (–3.3% and –11.2%) and as this industry is highly likely to transfer its bases overseas (particularly to China), it was judged unlikely that regional specialization within Japan would act as centripetal forces.
References
Basu S, Fernald JG. Are apparent productive spillovers a figment of specification error? J Monet Econ. 1995;36(1):165–88.
Basu S, Fernald JG. Returns to scale in U.S. production: estimates and implications. J Polit Econ. 1997;105(2):249–83.
Basu S, Fernald JG. Aggregate productivity and aggregate technology. Eur Econ Rev. 2002;46(6):963–91.
Caballero RJ, Lyons RK. Internal versus externalities in European industry. Eur Econ Rev. 1990;34(4):805–26.
Caballero RJ, Lyons RK. External effects in U.S. procyclical productivity. J Monet Econ. 1992;29(2):209–25.
Hall RE. The relation between price and marginal cost in U.S. industry. J Polit Econ. 1988;96(5):921–47.
Hall RE. Invariance properties of Solow’s productivity residual. In: Diamond P, editor. Growth/productivity/unemployment: essays to celebrate Bob Solow’s birthday. Cambridge, MA/London: MIT Press; 1990. p. 71–112.
Henderson JV. Externalities and industrial development. J Urban Econ. 1997;42(3):449–70.
Klette TJ. Market power, scale economies and productivity: estimates from a panel of establishment data. J Ind Econ. 1999;47(4):451–76.
Klette TJ, Griliches Z. The inconsistency of common scale estimators when output price are unobserved and endogenous. J Appl Econ. 1996;11(4):343–61.
Krugman P. Geography and trade. Cambridge, MA/London: MIT Press; 1991a.
Krugman P. Increasing returns and economic geography. J Polit Econ. 1991b;99(3):483–99.
Mano Y, Otsuka K. Agglomeration economies and geographical concentration of industries: a case study of manufacturing sectors in postwar Japan. J Jpn Int Econ. 2000;14(3):189–203.
Nishimura K, Ohkusa Y, Ariga K. Estimating the mark-up over marginal cost: a panel analysis of Japanese firms 1971–1994. Int J Ind Organ. 1999;17(8):1077–111.
Otsuka A. Dynamic externalities in Japanese manufacturing industries. J Appl Reg Sci. 2003;8(1):55–66. (in Japanese)
Oulton N. Increasing returns and externalities in UK manufacturing: myth or reality? J Ind Econ. 1996;44(1):99–113.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2017 Springer Nature Singapore Pte Ltd.
About this chapter
Cite this chapter
Otsuka, A. (2017). A New Approach to Dynamic Externalities (I). In: A New Perspective on Agglomeration Economies in Japan. New Frontiers in Regional Science: Asian Perspectives, vol 20. Springer, Singapore. https://doi.org/10.1007/978-981-10-6490-6_6
Download citation
DOI: https://doi.org/10.1007/978-981-10-6490-6_6
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-10-6489-0
Online ISBN: 978-981-10-6490-6
eBook Packages: Economics and FinanceEconomics and Finance (R0)