Capital Deepening Research Articles

Horizontal and vertical foreign direct investment linkages, absorptive capacity and domestic investment: evidence from Indonesian plant-level data

PurposeThis study examines the effect of horizontal and vertical foreign direct investment (FDI) linkages on the investment decisions of domestic plants. It explores this link for plants in a developing country, where the dynamics of FDI spillovers on domestic investment choices are distinct from those in developed countries. It also adds to the literature by examining the role the absorptive capacity of plants plays in this nexus, enriching our understanding of the interaction between FDI and the investment choices of domestic plants and providing insights for policymakers and managers seeking to maximize the positive effects of FDI spillovers.Design/methodology/approachThis study specifies the dynamic investment equation using the Euler and Q models. This equation is estimated using the first-difference and system generalized method of moments GMM estimators, which allow us to address persistency, endogeneity and unobserved plant-specific effects. FDI exposure proxy, calculated by weighing the FDI engagement variable by firm size, captures the strength of foreign equity participation in an industry and time. Input–output (IO) tables are used to calculate the proxies for horizontal and vertical (backward and forward) FDI. Total factor productivity is calculated using a method advocated by Olley and Pakes (1996) that allows us to control for selection and simultaneity.FindingsWe find that FDI inflows into both the domestic plants’ own industry and the input-supplying industry significantly boost the capital accumulation of the average domestic plants. Differentiating plants based on their absorptive capacities reveals that the presence of foreign firms significantly increases capital deepening for domestic plants with high absorptive capacity within their own industry (horizontal linkage) and in industries that supply inputs to the FDI-exposed industry (backward linkage). However, it leads to a decrease in capital deepening for high absorptive capacity domestic plants in industries using inputs produced by the industry exposed to FDI (forward linkage).Research limitations/implicationsThese findings have implications for policymakers and managers who aim to design incentives to maximize the positive spillover effect of horizontal and vertical FDI linkages on the capital deepening of domestic plants. Exploring additional mechanisms that could play a role in this nexus, separately for plants in different industries (such as the industries in which the country has a comparative advantage), may be fruitful.Originality/valueTo our knowledge, the relationship between the investment behavior of the domestic plants and FDI linkages has not been examined for a developing country. It is useful to explore this link in developing countries, as the investment choices of plants in these nations may be impacted differently by FDI spillovers than those in advanced nations. This study further contributes to the literature by investigating whether the plants’ absorptive capacity affects the nexus between FDI linkages and investment decisions of the domestic plants. The findings are valuable for policymakers and managers who aim to increase plants’ capital accumulation in developing countries.

Productivity drivers and pro-productivity policies: G20 economies, India and South Korea

In this article we look at productivity trends, drivers of productivity growth and pro-productivity policies across the G20 economies since 1970. We distinguish between three sub-groups of G20 economies: a “leading but slowing” group of the most developed economies, a “lagging but growing” group of economies that have shown rapid growth and a “muddling through” group of economies with no sustained improvement in productivity performance. We find distinctly different dynamics between the sub-groups regarding the contributions of capital deepening and total factor productivity (TFP) to labour productivity growth. The slowdown in labour productivity growth since the 2010s has been underpinned by lower TFP growth. India is the only G20 economy which has experienced a significant improvement in TFP growth over the past few decades. We develop a typology distinguishing five domains of pro-productivity policies (accumulation of the factors of production, markets and resource allocation, technological and structural change, internationalisation, and foundational policies) and explore how these have been applied across countries and over time. We also provide a more detailed analysis of productivity and related policies for two G20 countries: India and South Korea. We argue that a revival of productivity growth in the G20 requires a greater focus on policies which balance technological progress with knowledge diffusion; more investment in intangibles and public assets; and improvements in the quality of human capital.

New-type infrastructure and urban economic resilience: Evidence from China

Rising global uncertainties pose challenges to the resilience of economic development, and new-type infrastructure, referring to a system that is supported by next-generation information technology, can be a crucial stabilizing factor in the digital era to overcome uncertainties. This study uses 5244 observations from 276 cities in China from 2003 to 2021 to investigate the impact of new-type infrastructure on urban economic resilience. The empirical findings indicate that new-type infrastructure can effectively enhance regional economic resilience, and urban economic resilience can be improved in the digital age. New-type infrastructure can effectively mitigate the adverse impact of Corona Virus disease 2019 (COVID-19) on economic resilience. The effect of new-type infrastructure on economic resilience is larger in central regions, cities with medium and large economic scales, and cities with well-developed traditional infrastructure. New-type infrastructure exhibits threshold effects with changes in mechanism variables, decreasing as the threshold of resource dependence is crossed and increasing as the threshold of capital deepening and human capital is crossed. New-type infrastructure can enhance economic resilience by promoting innovation, including digital and green innovation. In addition, new-type infrastructure can cultivate emerging industries, advance industrial structure optimization, and promote collaborative agglomeration, which also contributes to enhancing economic resilience.

Automating efficiency: The impact of industrial robots on labor investment in China

This study examines the impact of industrial robot applications on labor investment efficiency. While previous studies have mainly focused on how industrial robots affect productivity, economic structures, and labor markets, their influence on labor investment efficiency has remained relatively underexplored. Using data from Chinese manufacturing firms, our results demonstrate that the adoption of industrial robots significantly improves labor investment efficiency. This improvement is mainly achieved by optimizing the human capital structure and enhancing capital deepening. We also find that this effect is more pronounced in non-state-owned enterprises, in environments with reduced information asymmetry, and in firms with low R&D investment and labor intensity. Overall, our results highlight the positive effect of industrial robot applications on the efficiency of corporate labor investments from a microeconomic perspective, providing important insights for labor investment decisions and resource allocation optimization.

Capital deepening and land average grain yield convergence: Evidence from China

The shift of agricultural labor force to non-agricultural sectors has paralleled China's economic development, leading to a substantial rise in labor costs relative to capital. Consequently, the agricultural production has witnessed a shift towards capital-intensive practices. The capital deepening coincides with the significant increase in China's grain output while the main cause of capital deepening in China's grain production is poorly understood. This study examines the effect of increasing in various capital investments on the grain yield growth and growth convergence in China's main production areas, based on the data collected from the data set of the Compilation of Cost-Benefit Data of Agricultural Products (CCBDAP). Results show that the increases of chemical fertilizer, pesticide and machinery input have played key roles in the increase of grain yield. For early indica rice, japonica rice, wheat and maize, the average land output bears a β convergence. These findings suggest that more capital investments are supposed to accelerate the growth of grain yield per unit of land, take the opportunity of practicing the cross-provincial balance system of occupation and compensation of cultivated land. Moreover, strategic adjustments to the spatial distribution of grain cultivation are recommended to maximize the utilization of limited arable land resources while upholding national food security objectives.

Exploring the Impact of Digital Inclusive Finance on Agricultural Carbon Emissions: Evidence from the Mediation Effect of Capital Deepening

Carbon emissions from agriculture should not be underestimated. With the aim for carbon peaking and carbon neutralization and the help of digital inclusive finance, the effective reduction in carbon emissions in agriculture and animal husbandry production is crucial to achieving China’s carbon emission reduction goals. We used the balanced panel data of 31 provinces in China from 2011 to 2021 to study this issue. We empirically tested the impact, mechanism, and heterogeneity of digital inclusive finance on agricultural carbon emissions based on the systematic measurement of agricultural carbon emissions. The results revealed that (1) the development of digital inclusive finance has a significant inhibitory effect on agricultural carbon emissions, and it is an important path to reduce agricultural carbon emissions. (2) Through the intermediary effects’ analysis, it was found that capital deepening is an important transmission mechanism for the promotion of agricultural carbon emission reduction through digital inclusive finance. (3) Further analysis using the quantile regression model reveals that the impact of digital inclusive finance on agricultural carbon emissions is significantly negative at different quantiles. (4) Through the spatial Durbin model, digital inclusive finance has a space carbon enhancement effect. Finally, we put forward suggestions to promote the development of low-carbon agriculture by paying attention to the technical effect of digital inclusive finance, strengthening the connection and cooperation between various regions and promoting the carbon emission reduction role of capital deepening.

Investigating the relationship between energy‐consuming rights trading and urban innovation quality

AbstractThe Energy‐consuming rights trading policy (ECRTP) is an important environmental regulatory policy in China. The study's goal is to determine how trading in energy‐consuming rights and urban innovation status effects also promote ecological civilization and high‐quality development. The purpose of the study examines the relationship between ECRTP and urban innovation quality (UIQ). Using data from 271 Chinese cities between 2011 and 2020, a difference‐in‐difference (DID) model is used to theoretically and empirically analyze the effects of ECRTP on UIQ. The findings of the study are as follows: First, ECRTP showed a significant improvement in UIQ, although a lagged effect. This outcome offers fresh proof that the “Porter hypothesis” holds water in China. Second, mechanism analysis indicated that ECRTP could improve UIQ with industrial structure upgrading (ISU) and capital deepening. Third, analysis of spillover effects indicates that ECRTP has a key spillover impact on UIQ. Analysis of spillover effects indicates a positive influence of ECRTP on UIQ in surrounding cities. Fourth, heteroggeneity analysis further reveals the impact of ECRTP on UIQ is particularly pronounced in resource‐based and large‐scale cities. These findings are significant and also provide a valuable supplement to the existing study.

The contribution of industrial robots to labor productivity growth and economic convergence: a production frontier approach

This paper investigates the contribution of industrial robots to labor productivity growth and cross-country economic convergence in a sample of 19 developed and 16 emerging countries over the period 1999 to 2019. To answer our research questions, we extend the non-parametric production frontier framework by considering industrial robots as a separate production factor. We find a positive contribution of robotization to labor productivity growth for all countries in our sample. In the period after the financial crisis (2009 to 2019) the contribution of robot capital deepening to productivity growth gained in importance. Over the period 1999 to 2019 we find some evidence of i) unconditional β-convergence (countries with lower initial productivity levels grow faster), ii) a reduction in the dispersion of productivity levels across economies (σ-convergence) and iii) a depolarization (shift from bimodal to unimodal distribution) of the labor productivity distribution in our sample. Accumulation of ‘traditional’ physical capital is the main driver of β-convergence. Robot capital deepening significantly contributed to economic convergence and the depolarization of the labor productivity distribution, but its effect on the entire shift of the labor productivity distribution is modest and dominated by other drivers of productivity growth such as ‘traditional’ physical capital deepening and technological change.

Entry deregulation and labor share: Evidence from China

Based on the Negative List Policy (NLP) implemented in China, this paper uses Chinese A-share listed companies from 2007 to 2021 as sample and employs the staggered difference-in-differences (DID) method to examine the impact of entry deregulation on labor share. We find that after the implementation of NLP, enterprises in the treatment group experience a 4.4 % increase in labor share. Specifically, in the goods market, NLP will increase labor share by weakening market power and reducing monopoly profits. In the factor market, NLP will boost labor share by impeding capital deepening and increasing labor inputs.

Are environment-related technologies key to unlock the path towards sustainable development: An econometric analysis

The objective of this study is to investigate the correlation between energy intensity and environment-related technology in industrialized countries. By utilizing panel data from 23 countries over a span of 32 years (1990–2021), this research aims to contribute to the comprehension of the role of green innovation in sustainable development. The study employs the Stochastic Impacts by Regression on Population, Affluence, and Technology model while controlling for variables including population growth, gross domestic product in purchasing power parity, Information and Communication Technology capital deepening, renewable energy consumption, and green innovation represented by research and development expenditure on environment-related technology. The results of the analysis, employing panel unit root tests, cross-sectional dependence tests, and a Method of Moments quantile regression, reveal that green innovation has a positive influence on diminishing energy intensity, with a more substantial impact at higher quantiles. Moreover, ICT capital deepening is determined to have a positive and noteworthy effect on reducing energy intensity. The findings of this study offer valuable insights for policymakers in their endeavours to accomplish sustainable development goals.

Green productivity divergence and factor endowments: Evidence from the Yellow River Basin, China

Using panel data for the Yellow River Basin (YRB) of China from 2006 to 2017, we investigate cross-city conventional total factor productivity (TFP) and green TFP convergence, and the moderating effects of relative factor endowments on TFP growth. Allowing for cross-city and cross-time variation in the production function, we estimate TFP across cities using a nonlinear varying coefficient model, and decompose it into various input-embedded and input-free productivity components based on the new growth accounting, covering all growth-driving channels. This paper then employs a conditional convergence framework to examine whether convergence occurs, through which channels, and the effects of relative factor endowments on them. Empirical results show that lagging cities fail to achieve TFP catch-up, and that the divergence of capital-embedded and labor-embedded productivity instead triggers a widening of the cross-city TFP gap. Part of the cause of this increase in these gaps is that cities with relatively high capital deepening and capital-to-energy ratio are experiencing rapid TFP growth by driving the quality of capital and labor. Nor have these effects been altered in examining environmentally constrained or green TFP convergence.

The rarity of reswitching explained

Most studies of the frequency of reswitching and reverse capital deepening were based on two or three sector models and came to the conclusion that these phenomena are rare. Here it is shown that the probability of isolated reswitching tends to zero in large economic systems. The assumptions of the new mathematical theorems proposed are supported by an empirical enquiry. The randomness of input–output systems can help to explain the result, but is not essential. If the number of switch-points tends to infinity in large systems, it is not certain that even one represents a case of reverse capital deepening. The focus of the critique of capital will have to change.

Digital Inclusive Finance Development and Labor Productivity: Based on a Capital-Deepening Perspective

This paper examines the impact of digital inclusive finance development on labor productivity and its transmission channels using panel data from 30 provinces in China during 2011–2020. According to empirical findings, the growth of digital inclusive finance significantly improves labor productivity in China. This conclusion holds even after taking into account endogeneity problems and robustness tests. Regarding transmission channels, digital inclusive finance development enhances labor productivity by promoting capital deepening. From the perspective of the three dimensions of the current digital inclusive finance development stage, the coverage width significantly boosts labor productivity. From a regional perspective, digital inclusive finance development has a more significant impact on labor productivity in the eastern region compared to the central and western areas. From an industry perspective, digital inclusive finance development significantly enhances labor productivity in the primary and tertiary industries.

Rural Population Aging, Capital Deepening, and Agricultural Labor Productivity

Whether the aging of rural population will affect the high-quality development of China’s agriculture is an important issue facing the construction of China’s characteristic modern agriculture. Using panel data from 30 provinces in China from 1999 to 2020, this paper used fixed effects models and mediation models for econometric regressions to explore the relationship between rural population aging and agricultural development, as well as the intermediate mechanisms involved. The study found that there was a positive relationship between rural population aging and agricultural labor productivity, and aging can stimulate agricultural development. Mechanism analysis revealed that rural population aging can promote the adjustment of the structure of agricultural factors, drive the deepening accumulation of capital and other factors, promote the modernization of agricultural production methods, and ultimately achieve an increase in agricultural labor productivity. Further examination showed that the positive relationship between rural population aging and agricultural productivity gradually weakened as the degree of rural population aging deepened. The study provides empirical evidence for sustainable agricultural development in the context of population aging.

WHAT DRIVES CHINA’S LONG-TERM ECONOMIC GROWTH TREND? A RE-MEASUREMENT BASED ON A TIME-VARYING MIXED-FREQUENCY DYNAMIC FACTOR MODEL

The unprecedented downward pressure of China’s economic growth trend raises several questions, including what the current level of China’s long-term economic growth trend is, and what drives and how to inhibit the downward trend. Therefore, we develop a time-varying mixedfrequency dynamic factor model using data with different start dates to measure the trend, and perform a real-time decomposition of changes in the trend. We find that the trend has entered a downward stage since 2007, left a high-speed phase since 2012, and stepped in an accelerated downward stage since 2018. The current level of the trend is about 4%. However, the lower limit of the 90% confidence interval is below 2%, which is lower than natural rate level. Additionally, decelerated capital deepening, diminishing demographic dividend and technological recession all drive the downward trend. Compared to the relatively weak push-down effects of capital deepening and demographic dividend that are less than two percentage points, the downward trend is mainly driven by technological recession. Given that technological progress is unlikely to improve significantly in the short run, mitigating the mismatch between technological progress and obsolete capital, revitalizing existing capital stock, and increasing the efficiency of technology utilization become more feasible means.

Industry‐Specific Productivity and Spillovers Through Input–Output Linkages: Evidence from Asia‐Pacific Value Chain

Global value chains (GVCs) promote the diffusion of knowledge and technology. This paper develops an empirical production model that combines spillovers and productivity growth heterogeneity at the industry‐level. We exploit the GVCs linkages from inter‐country input–output tables to describe the interdependencies of technology within the input–output space and combine that with the Asian‐Pacific and US KLEMS database to estimate productivity growth. The spillover effects from capital deepening, intermediate deepening, and technical change are identified and decomposed into domestic and international effects. Our empirical results find that ignoring the industrial interactions leads to an overestimation of China's productivity growth, and underestimation for the US and Japan. The spillovers of capital and intermediate are found to be significantly positive. The spillovers of technical change received account for 32 to 40 percent of total productivity growth. These findings provide a better understanding of how technical changes are distributed and diffused within GVCs.

Can data center green reform facilitate urban green technology innovation? Evidence from China

With the expansion of the digital information industry, the size of global data centers is exploding. As part of a high-energy-consuming industry, data centers can support sustainable urban development through green transformation. This study uses a quasi-natural experiment of China's national green data center pilot policy implemented in 2015 to examine the impact of data center green transformation on green technology innovation in cities. Using a difference-in-difference (DID) analysis, this study finds that the national green data center pilot policy leads to higher levels of green technology innovation in cities, but the spillover effect of the policy on neighboring cities is insignificant. The mechanism test showed that the national green data center pilot policy could facilitate urban green technological innovation through capital deepening, market competition, and industrial agglomeration. In addition, the policy impact is more pronounced for cities with poorer environments, less civilization, high levels of network infrastructure, and more innovative endowments. The findings can provide new guidance for cleaner regional production from the standpoint of data center green development.

Accounting for the slowdown in UK innovation and productivity

AbstractThis paper conducts a comprehensive sources‐of‐growth analysis for the UK market sector, 2000–19, using the latest ONS data, including new estimates of intangible investment, double deflated value‐added, and updated price indices, all constructed bottom‐up from data for 40 industries. The decomposition incorporates contributions from intangible assets, both capitalized and uncapitalized, in national accounts. Our main findings are that first, slowdowns in labour productivity are largest in more intangible‐, knowledge‐, technology‐ and digital‐intensive industries, using numerous definitions. Second, the labour productivity slowdown can be accounted for largely by a slowdown in ‘innovation’, where innovation is shorthand for contributions of intangible capital deepening and TFP growth. We show that: (a) the level of labour productivity in 2019 was 27 log points (31 percentage points) less than had it continued to grow at its 2000–7 rate; (b) reallocation of labour did not contribute to the slowdown; (c) capitalization of the full range of intangibles accounts for 5% of the slowdown; (d) 35% is accounted for by a slowdown in capital deepening (25% tangible, 10% intangible), and 78% by a slowdown in TFP growth; and (e) less than one‐tenth of the TFP slowdown can be accounted for by exceptionally fast growth pre‐crisis.

Biased technical change, capital deepening, and efficiency of environmental regulations: Evidence from the Chinese provinces

This study uses the Malmquist-Luenberger index to test how the capital-biased technical change affects the efficiency of environmental regulation in China using the provincial-level panel data from 2004 to 2018. It is found that there is a significant capital-biased technical change. The total factor productivity growth promotes the provincial-level efficiency of environmental regulation. However, capital deepening hinders the enhancement of the efficiency of environmental regulation. Finally, the Spatial Durbin model estimations indicate that the capital-biased technical change positively affects the provincial efficiency of environmental regulation, and its components exhibit remarkable spatial spillover effects.

Can variable elasticity of substitution explain changes in labor shares?

In CES production functions, the magnitude of the elasticity of substitution between capital and labor (σ) is crucial to explain the evolution of the labor share. The decline in labor share observed worldwide can be explained by capital accumulation if σ>1. However, empirical evidence on the value of σ is mixed. To shed light on this issue, we employ a Variable Elasticity of Substitution (VES) production function where σ is an endogenous driver of the labor share. Using macro data for six advanced OECD economies from 1980 to 2020 we provide estimates of σ under imperfect competition. We test the prediction of the model by means of simulations. Mainly, we find that capital deepening, markup and technological change explain a significant part of the observed decline in labor shares. The results suggest complementarity between labor and capital in all the countries except the United States.