Growth process based on the behavior of firms

The main theme of this dissertation is to explore the economic growth process, based on the behavior of the firms. We focus the analysis on: (1) the key role of TFP growth as a driving force of economic growth; (2) the transmission mechanism by which TFP growth is “transmitted” to the change in the rate of return to capital and to changes in the relative prices of the affected products; and (3) the comparison of TFP growth between an unadjusted 2 deflator approach (introduced in this paper) and a price-adjusted one, which is closer to the more traditional approaches studying the breakdown of growth into its components.; Successful real cost reduction (or TFP improvement) typically means an increase in profit rate (increase in Δρ_j) of the firm. Firms enjoying real cost reductions also tend to increase their rate of investment (ΔK_j) and to hire more labor, with the expectation of higher profits. The current TFP growth is significantly and positively correlated with the rate of net investment increase over the next 3 or 4 years in all the cases of Japanese firms, Korean firms and SIC 3 and 4 digit Korean industries. The rate of return to capital (ρ) rises when there is a current real cost reduction, and stays higher than its initial level until year t + 3 or t + 4. This higher rate of return to capital, combined with the higher rate of net investment, produces continuously high output growth in the future.; Increase in TFP growth rate at year t raises the rate of return to capital at year t, without exception, in the case of the Korean Manufacturing industries. All of the 54 SIC 3 digit industries show positive correlation between ΔTFP _t and Δρ_t. Increased competition to take advantage of the same opportunities of TFP growth, however, tends to lower the relative price in that industry's output. The correlations of TFP growth at year t with the accumulated changes in the relative price are all negative and statistically significant for the next 5 years. This decrease in relative price is reflected in the rate of return to capital (profit), and the rate of return to capital begins to drop. The increased current rate of return to capital due to the TFP growth, converges to a ‘normal’ (initial) level, 3 to 5 years later.; The TFP growth rates in the unadjusted 2 deflator approach are quite highly correlated with those in the price-adjusted 2 deflator approach in the Korean industries. In fact, a Binomial Probability test does not reveal any significant difference between the two approaches. This suggests that the unadjusted 2 deflator approach, which does not rely on relative price information, is substantially as effective as the price-adjusted approach. Either approach can be used to clarify the key role of TFP growth as a driving force of growth. But, the unadjusted 2 deflator approach greatly expands data availability for studying growth processes at highly disaggregrated industry levels.