Investment and technical progress in Japan

Abstract

The objective of this study is to analyze the relation between technical progress (T.P.) and physical investment in innovative industries in Japan. We choose "Electrical Devices" as representative of innovative industries. We develop a theoretical model, which refines and expands the traditional structural model of investment. As we are mainly interested in the effect of technical progress, the enhancement of the model focuses en technological improvement. The traditional structural model implies that Tobin's q is the only variable of the investment function. We have shown that Tobin's q reflects the technical progress if the type of technical progress is Hick's neutral, i.e. a disembodied one. On the other hand, if the technical progress is of an embodied type, then the investment function will have a variable other than Tobin's q. The variable represents the level of technology for the new investments. We consider the effect of unanticipated technical progress on investment behavior. In the case of Hick's neutral technical progress, Tobin's q jumps upward when the technical change is anticipated. After that, Tobin's q gradually rises until it reaches the level of a new steady state. On the other hand, if the technical progress is embodied type, Tobin's q jumps upward when the T.P. is anticipated. After that Tobin's q rises until it reaches the level of a new steady state. The movement of Tobin's q is similar for the disembodied T.P. and the embodied T.P. But the movement of the investment takes a different form in each. The movement of the investment is the same as that of Tobin's q in the case of disembodied T.P. In the case of embodied T.P., on the other hand, the investment jumps when the T.P. is anticipated, and the investment jumps again upward or downward when the embodied T.P. actually takes place. We actually estimated the investment function and tested the effectiveness of the theory. Using instrument variable method, we obtained a significant result. In particular, the adjustment cost of the electrical machinery may be smaller than that of general machinery.