An Analysis On The Rate Of Return On Capital And Its Influencing Factors

The rate of return on capital (ROC) is not only an important indicator for the microscopic enterprise, but a paramount macro variable for economic growth. Thus, it has attracted a continual attention of the academic circles. However, the measurement methodologies for ROC, its influencing factors and the changing mechanism still remain unclear or disputable until now.For comparisons, this paper, employing data from46countries and Chinese regions, estimates ROC level from the perspective of capital deepening, technological progress and human capital, and its spillover effects based on a modified measurement model to interpret the changing mechanism of the rate of ROC. In addition, we further conduct an empirical test for comparison and analysis. Major implications of our findings can be summarized as follows:(1) We employ the modified measurement model to estimate the rate of ROC for China and other countries of different types. Adopting the ratio between the labor remuneration and the operating surplus, we decompose the indirect tax paid by the enterprise in the current year to distinguish it from the part undertaken by the enterprise so that we can revise the rate of return variable in the measurement model and therefore improve the precision of the model. Our estimates reveal that Chinese industrial ROC level copes with a U-shaped trend and there exists significant difference in regional group and industry group. Estimates on different types of nations show that the level of ROC for the developed countries as a whole is the lowest, the developing countries the second, and the emerging economies have the highest rate. What’s more, the findings also depict that the level of ROC in China is higher than that in other countries in most of the years; the disparity among the developed countries is relatively small, while the difference is remarkably large among the developing countries.(2) We deduce the changing mechanism affected by the capital deepening and technological progress and get the decomposition model where we introduce the motivators for the changing of ROC from the mechanism. Combing the implicit production function with the Euler Equation and the Hicks-factor-biased technological progress, this paper decomposes the changing of ROC on capital. The results indicate that the technological progress, capital deepening and the marginal output elasticity of the capital are the main factors influencing the level of ROC and the marginal output of capital is the multiplier of capital deepening which has the function to enlarge or shrink the effect of the capital deepening. Moreover, the neutral technological progress and the labor-enlargement technological progress can promote the level of ROC, while capital goods embodied technological progress lowers the return when subdividing the type of the technology.(3) Following the modified human capital model, we set forth the influence of the human capital and its spillover effect on the returns with a great accuracy. The paper modifies the classical human capital model, adding a variable--simple labor, which thus depicts the mechanism of the fluctuant of the rate of return on capital. Using the modified model of human capital, and combining the function of consumption effect, the economic equilibrium state is deduced, the result shows that:the rate of return on capital increases with the improvement of human capital; however, this impact is magnified or reduced due to the externality of human capital; the rate of return on capital rises with the increase of simple labor.(4) The research shows that:Technical progress always facilitates the increase of the rate of return on capital in all countries; the effect of capital deepening is different in different countries. Capital deepening lowers the rate of return on capital in developed and developing countries but raises it in emerging countries. Although China falls into the category of emerging country, the elasticity of marginal output of capital of China is negative just like developed countries. In other words, in China, capital deepening lowers the rate of return on capital.(5) The empirical result indicates that:human capital steadily promotes the rate of return on capital and the impacts of the spillover effect of human capital and simple labor vary in different countries. Human capital significantly promotes the rate of return on capital in both the long and short run. The negative impact of spillover effect of human capital in developed countries is not as signigicant as that in emerging economies. In emerging economies, the increase of simple labor will reduce the marginal output of capital because of crowded labor force on unit capital, and in turn, the rate of return on capital will reduce. But this impact is not so striking in other countries.(6) Chinese empirical results show that, compared with simple labor and spillover effect of human capital, technological progress and the improvement of human capital are more important for the stability of the rate of return on capital of China. Empirical results show that the technical progress (including the improvement of human capital) increases the marginal output of capital. thus to some extent offsets the decrease of the rate of return on capital caused by capital deepening. Therefore, technical progress is the major reason for why China’s the rate of return on capital doesn’t fall along with the increase of investment rate. The investment in human capital can raise the rate of return on capital, but it takes some time to take effect. In terms of the short-term dynamic adjustment coefficient, the investment in human resource will increase corporate cost in the initial stage and hence reduce the rate of return on capital.But in terms of long-term balance, either the increase of simple labor or the improvement of skilled labor human capital will significantly increase the rate of return on capital.