Capital productivity

By Bill Lewis, Raj Agrawal, Thomas Büttgenbach, Steve Findley, Aly Jeddy, Markus Petry, James Kondo, Guhan Subramanian, Axel Borsch-Supan, Kathryn Huang, Sean Greene et al.

Significant differences in capital productivity exist across nations. This report suggests that US capital productivity exceeds Germany's and Japan's because managers in the US have greater incentives and face stronger market pressures.

Objectives and approach

Capital productivity is an important factor in explaining material standards of living and is at the heart of determining rates of return. MGI's study seeks to understand the causes of capital productivity differences at the industry level to determine the relative importance of particular product, capital, and labor market factors in an economy's growth.

Aggregate capital productivity

US businesses have been using physical capital more efficiently and effectively than those in Germany or Japan. Each of the latter two's rates of capital productivity were about 35 percent lower than America's.

Automotive sector

Lean production has been critical to higher capital productivity for the automotive sector. Furthermore, superior overall organization of production through automation can benefit both labor and capital productivity. The spread of innovation at various speeds goes a long way in explaining discrepancies in capital productivity.

Processed food sector

Capacity utilization is a major driver in determining productivity in the processed food sector. Product and capital markets function jointly to pressure managers to improve productivity.

General merchandise retailing sector

By actively introducing new formats and excelling at merchandising, the US creates high levels of value added for given sales volume. While Japanese managers could improve productivity levels by affecting factors under their control, external barriers have the effect of stifling competition and hurting innovation.

Telecommunications sector

Marketing and customer orientation have a strong impact on capital productivity in the telecom sector by stimulating demand on the utilization of fixed assets and ensuring effectiveness of capital spending. Lack of separation between regulator and owner also has a clear impact in terms of productivity performance.

Electric utilities

Pricing is particularly important for strong productivity in the electric utilities sector in terms of stimulating demand, which in turn improves the utilization of a fixed asset base, and managing demand volatility. In addition, even in monopoly situations, the right incentive system for management can improve productivity.

Capital productivity and financial performance

Rates of return in the US are consistently higher than in Germany for both measures of financial performance and for all time periods between 1974 and 1993. For the average of that same period of time, the rates of return for the US were also higher than in Japan.

Implications

MGI's results show that most of the productivity differences between the countries studied can be explained by controlled decisions at the firm level. To respond, firms need to establish clear performance goals, pursue global opportunities, improve management, and increase investor pressure. The implications of not making the necessary changes are that each country risks undermining the standard of living for its citizens.

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