Factor bias and substitution with emphasis on imported and domestic intermediate goods

Lee, Jong Dae
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The primary focus of this study is to elucidate the determinants of changes in input ratio, particularly the ratio of domestic intermediate goods to foreign intermediate goods in the Korean machinery industry. It is observed that the ratio of foreign to domestic intermediate goods demanded by each industry is the highest for the machinery industry. In addition, firms' discrimination between imported and domestic intermediate goods is conspicuous in this sector. In developing countries where industrialization proceeds on its way backward from the 'final touches' stage to the domestic production of intermediate goods, and finally to that of basic industrial materials, the relationship between the two groups of intermediate goods is of considerable importance. The rate of substitution of imported for domestically produced intermediate goods affects the rate of industrialization, economic growth and employment. The theory of induced innovation provides theoretical foundation for this study. According to this theory, any technical progress augments one or more inputs of production. This enables firms or industries to produce a certain amount of output with less inputs. A given technical progress is not necessarily related to a simple proportionate reduction of all inputs. Once the technical change is allowed we can postulate three different ways by which the optimal input ratio are influenced. The observed ratio changes or share changes might have come about through biased technical change and through ordinary input substitution in response to changes in the relative price of inputs. In addition, the non-homothetic nature of the production function is another source of change in the optimal input ratio. As an analytical method, I adopt generalized Leontief cost function approach. Our cost function incorporates imported and domestic intermediate goods as separate input groups. It amounts to a division of material input into two subgroups which have been treated as a single input group in the traditional studies of input substitution. Such a division of material input enables us to analyze the sources affecting the substitution of one for the other. Major findings of this study are as follows. (1) The most important factors that affect input ratio for the Korean machinery industry are the relative price of inputs and the biased technical change. On the contrary, the scale effect on input ratio is negligible. (2) The model justifies the disaggregation of intermediate goods into two components, domestic and foreign intermediate goods. The results show that domestic and foreign intermediate goods respond differently to the price change of other inputs, capital and labor. If we employ an alternative model that incorporates domestic and foreign intermediate goods to a single bundle, say material input, then we are forced to assume that each component of material interacts with other input price changes to the same extent, as well as in the same way. This assumption is rejected by our study. (3) Our finding of moderate complementarity between capital and labor (ELK=-.32, EKL=-.28) differs from those of most empirical studies for manufacturing data. The complementarity of the two is supported by a high ratio of skilled workers in the machinery industry compared to other industrial sectors. It is reasonable to assume that the more capital services are employed, the more technicians and specialists are needed. We have other empirical evidence that shows capital and skilled workers are complementary. (4) Domestic intermediate goods and foreign intermediate goods are found to be substitutes as expected. The substitutability between them is strong and significantly so. The relationships of individual items between the two groups are divergent. Some pairs are complements and others are substitutes. We find that the force of substitutability between individual items in foreign intermediate goods and those in domestic intermediate goods are dominant over the complementarity between them. Our study provides the first empirical evidence that they are substitutes. (5) The price elasticities and elasticities of substitution are significantly different across the subsectors in the machinery industry. (6)The Korean machinery industry experienced foreign-intermediate-goods- using and domestic-intermediate-goods-saving technical change. It implies that if prices of all inputs vary equiproportionately the ratio of F to D tends to rise.
Thesis (Ph.D.)--University of Hawaii at Manoa, 1986.
Bibliography: leaves 115-120.
x, 120 leaves 29 cm
Intermediate goods -- Korea (South), Machinery industry -- Korea (South), Imports -- Korea (South)
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Theses for the degree of Doctor of Philosophy (University of Hawaii at Manoa). Economics; no. 2010
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