The variable elasticity of substitution function and endogenous growth : an empirical evidence from Vietnam

Purpose: To specify a Variable Elasticity of Substitution function (VES), in which the estimated Elasticity of Substitution (ES) can give some implications for the tendency of economic growth in the Vietnames manufacturing sector. Design/Methodology/Approach: The contribution and the relevant methodology is based on the Bayesian approach having some advantages over the frequentist method: (i) the simulation and prediction results are more reliable in Bayesian analysis due to combining prior knowledge about parameters with obverved data to compose a posterior model, whereas the frequentist approach is based only on available data; (ii) in probability sense, Bayesian credible intervals have a straightforward interpretation compared to frequentist confidence intervals. The Bayesian nonlinear regresion performed is suitable for fitting production functions and depicting economic growth. Findings: The specified VES function has the ES greater than one and this finding contradicts many previous empirical studies in the growth theory. This result points to the possibility of unbounded endogenous growth in the Vietnamese manufacturing sector. Practical implications: Based on the empirical results, in order to realize the possibility of endogenous growth for the studied Vietnamese manufacturing sector, policies of enforcing investment are needed. To raise the level of science and technique, as well as human capital of the Vietnamese enterprises, at the same time, there is great necessity to encourage R&D activities in both the private and public sectors. Originality/Value: Although this study organically builds upon recent studies about the link between the VES, the elasticity of factor subsitution and economic growth, its results proved that the VES is more appropriate than the Cobb-Douglas and the Constant Elasticity of Substitution (CES) to explain economic growth in the view of capital-labor relationship.peer-reviewe

Robust investment climate effects on alternative firm-level productivity measures

Developing countries are increasingly concerned about improving country competitiveness and productivity, as they face the increasing pressures of globalization and attempt to improve economic growth and reduce poverty. Among such countries, Investment Climate surveys (ICs) at the firm level, have become the standard way for the World Bank to identify key obstacles to country competitiveness, in order to prioritize policy reforms for enhancing competitiveness. Given the surveys objectives and the nature and limitations of the data collected, this paper discusses the advantages and disadvantages of using different total factor productivity (TFP) measures. The main objective is to develop a methodology to generate robust investment climate impacts (elasticities) on TFP under alternative measures. The paper applies it to the data collected for ICs in four developing countries: Costa Rica, Guatemala, Honduras and Nicaragua. Observations on logarithms of the production function variables are pooled across three countries (Guatemala, Honduras and Nicaragua). Endogeneity of the production function inputs and of the investment climate variables is addressed by using observable firm level information, a variant of the control function approach, considering IC variables as proxy and also by aggregating certain investment climate variables by industry and region. It is shown that by using this methodology it is possible to get robust IC “elasticities” on TFP for more than ten different TFP measures. The robust IC elasticity estimates for the five countries show how relevant the investment climate variables are to explain the average productivity of each country. IC variables in several categories (red tape, corruption and crime, infrastructure and, quality and innovation) account for over 30 percent of average productivity. The policy implications are clear: investment climate matters and the relative impact of the various investment climate variables helps indentifying where reform efforts should be directed in each country. It is argued that this robust methodology can be used as a benchmark to assess cross-country productivity effects in other IC surveys. This is important since similar firm-level IC surveys on several sectors (manufacturing, services, etc.) are now available at the World Bank for more than 65 developing countries.Total factor productivity measures, Investment climate, Observable fixed effects, Robust investment climate elasticities, Input-output elasticities

The Fisher/Cobb-Douglas Paradox, Factor Shares, and Cointegration

This note uses insights from cointegration analysis to reexamine two separate but related issues concerning the estimation of production function parameters. Fisher (1971) documented a paradox in estimating substitution elasticities -- the puzzling divorce between the technology underlying his simulated data and the technology estimated from these data. This note both resolves the Paradox and, based on this resolution, raises important questions about estimation strategies (pioneered by Caballero, 1994) that rely on cointegration to recover production function parameters.production function elasticities, cointegration

Does a Soft Macroeconomic Environment Induce Restructuring on the Microeconomic Level during the Transition Period? Evidence from Investment Behavior of Czech Enterprises

The paper analyzes investment behavior of industrial enterprises in the period immediately following price and foreign trade liberalization in the Czech Republic. It also focuses on the effect of Asoft@ macroeconomic environment on the microeconomic decisions. A dynamic investment function with symmetric adjustment cost function based on the Euler equation has been estimated. The derived and estimated investment function accounts for export sales in order to determine whether firms evaluate production for domestic and foreign markets differently, i.e, use the advantage of an undervalued currency. The estimation was conducted on two-year firm-level panel data from 1992 and 1993. The first major result of the empirical analysis suggests that there is no evidence that firms treat domestic sales and exports differently in the context of the adjustment cost function. The second remarkable finding contradicts the common view that firms in the transitional environment have short-term horizons. Both these findings could be interpreted as strong evidence against the idea of economic policy helping firms within a temporary soft macroeconomic environment. No evidence was found against the applicability of the constant returns to scale assumption on the Cobb-Douglas production function within the analyzed framework.

Does a Soft Macroeconomic Environment Induce Restructuring on the Microeconomic Level during the Transition Period? Evidence from Investment Behavior of Czech Enterprises

The paper analyzes investment behavior of industrial enterprises in the period immediately following price and foreign trade liberalization in the Czech Republic. It also focuses on the effect of Asoft@ macroeconomic environment on the microeconomic decisions. A dynamic investment function with symmetric adjustment cost function based on the Euler equation has been estimated. The derived and estimated investment function accounts for export sales in order to determine whether firms evaluate production for domestic and foreign markets differently, i.e, use the advantage of an undervalued currency. The estimation was conducted on two-year firm-level panel data from 1992 and 1993. The first major result of the empirical analysis suggests that there is no evidence that firms treat domestic sales and exports differently in the context of the adjustment cost function. The second remarkable finding contradicts the common view that firms in the transitional environment have short-term horizons. Both these findings could be interpreted as strong evidence against the idea of economic policy helping firms within a temporary soft macroeconomic environment. No evidence was found against the applicability of the constant returns to scale assumption on the Cobb-Douglas production function within the analyzed framework.Investment, Enterprises, Adjustment cost, Transition, Production function

Equilibrium unemployment and investment under product and labour market imperfections

The study looks at the implications of product market competition and investment for price setting, wage bargaining and thereby for equilibrium unemployment in an economy with product and labour market imperfections. We show that intensified product market competition will reduce equilibrium unemployment, whereas the effect of increased capital intensity is more complex. Higher capital intensity will decrease the equilibrium unemployment when the elasticity of substitution between capital and labour is less than one, while the reverse happens when this elasticity is higher than one, but smaller than the elasticity of substitution between products. Finally, we demonstrate how labour and product market imperfections, characterised by the wage and price setting mark-ups, affect the optimal capital stock. Our findings raise important questions for future empirical research.equilibrium unemployment; product market imperfections; investment; wage bargaining

Hospital cost functions for developing countries

There is extensive literature on hospital cost functions for industrial countries, but very little literature for developing countries. Yet the issues facing policy-makers in all countries are much the same: are hospitals overcapitalized, as is often claimed of U.S. hospitals? Are hospitals inefficient in other respects? Do hospitals vary in efficiency? Are private hospitals more efficient than their public counterparts? Should hospitals specialize or provide a broad range of services? Should costs be reduced by concentrating cases in fewer hospitals? The authors critically survey the techniques available for analyzing hospital costs and review the few hospital cost-function studies undertaken for developing countries. Although the paper is intended primarily for those working in developing countries, the discussion for cost function methodology has broad implications for interpreting econometric cost functions and for examining economies of scale and scope in both developing and industrial countries. The authors survey of econometric techniques is not uncritical. They question, for example, the validity of recent tests of over-capitalization undertaken on American hospitals. They also make general observations about the methods used to investigate economies of scope and economies of scale.Economic Theory&Research,Environmental Economics&Policies,Business in Development,Business Environment,Banks&Banking Reform

The benefits of alternative power tariffs for Nigeria and Indonesia

The authors present simulation results on the benefits of alternative power tariffs for Nigeria and Indonesia, based on several closely related models of the firm. Nigeria is representative of developing countries where the public sector is inefficient and manufacturers provide their own electricity to compensate for that inefficiency. The use of private generators by Nigerian manufacturers is virtually ubiquitous, even though the government, to protect its monopoly, did not encourage that use in the 1980s. About 89 percent of a sample of Nigerian firms produced some of their power needs internally. But many large firms underused their power plants because of the substantial quantity discounts public power offered to large manufacturers. By contrast, in Indonesia, manufacturers were offered only slight quantity discounts for public power. Indonesia has encouraged manufacturers to produce their own power. About 61 percent of Indonesian manufacturers produced some power internally. Generally, in both countries firms purchase some power from the public sector at a quantitydiscount (slight in Indonesia, considerable in Nigeria) and also produce power internally at a declining marginal cost. The reliability of public power declines as the total quantity purchased increases, because transmission gets congested. Simulations confirm that an increasing block tariff is optimal in each country and produces savings in the cost of producing public power and in firms'operating costs (including the firm's cost of producing power internally). Under increasing block tariffs, firms that purchase more public power would be charged higher marginal prices than firms that purchase less. Large firms respond to the increasing block tariff by expanding their generating capacity and reducing their reliance on public power, while smaller firms contract their capacities and buy more from the public sector. When congestion in transmission persists, cost savings are higher as the increasing block tariff reduces total use of public power which in turn improves reliability. In Nigeria, where strong quantity discounts are offered, total costs savings (for NEPA and manufacturers) under 1989 conditions are about 4 percent without congestion and increase to 9 percent when there is some congestion. In Indonesia, where quantity discounts are mild, increasing the block tariff produces only slight cost savings.Anthropology,Economic Theory&Research,Environmental Economics&Policies,Energy Technology&Transmission,Windpower,Environmental Economics&Policies,Economic Theory&Research,Energy Technology&Transmission,Power&Energy Conversion,Windpower