Undersanding China s High Invesmen Rae and FDI Levels: A Comparaive Analysis of he Reurn o Capial in China, he Unied Saes, and Japan Wenkai Sun, Renmin Universiy of China Xiuke Yang, Peking Universiy Geng Xiao, Columbia Universiy 1 Absrac: This paper analyzes aggregae reurn o capial saisics for China, he Unied Saes, and Japan in order o invesigae he causes of an unusually high invesmen rae and increasing foreign direc invesmen (FDI) inflows o China. We also analyze labor s share of 1 Wenkai Sun is an assisan professor a he School of Economics, Renmin Universiy of China, Beiing, China, 100872. E-mail: sunwk@ruc.edu.cn. Xiuke Yang was a maser suden maored in Economics a HSBC School of Business, Peking Universiy (graduaed in July 2009), Beiing, China, 100871. E-mail: yangxiuke@gmail.com. Geng Xiao is direcor of he Columbia Global Cener for Eas Asia in Beiing, Columbia Universiy, 607 SP Tower A, 1 Zhongguancun Eas Rd., Haidian, Beiing, PRC, 100084. E-mail: gx2110@columbia.edu. He was direcor of he Brookings-Tsinghua Cener for Public Policy in Beiing when his sudy was iniiaed. This aricle represens solely he views of he auhors and no he views of he Unied Saes Inernaional Trade Commission or any of is individual Commissioners. This paper should be cied as he work of he auhors only, and no as an official Commission documen. We would like o hank Rober B. Koopman, Judih M. Dean, and Shanda Xu for helpful commens and discussions. We are paricularly indebed o Will Hobbs for excellen research assisance. We would also like o hank he anonymous referee for helpful commens. 157
oupu and capial-oupu raio saisics o predic fuure rends in he reurn o capial in China. Our findings allow us o come o four conclusions: (1) China s high invesmen rae corresponds o a high reurn o capial in he counry, us as high invesmen raes in he Unied Saes and Japan hisorically correspond o a high reurn o capial. (2) A comparaively higher reurn o capial araced FDI o China. (3) Invesmen raes among hese hree counries show no signs of convergence so far. These differences will likely persis, encouraging FDI o coninue o flow ino China in near fuure. (4) The reurn o capial in China will likely decrease in he long run, as he experiences of Japan and he Unied Saes indicae, bu will only decrease and become sable afer a cerain level of capial sock and developmen is reached. Keywords: reurn o capial; invesmen rae; FDI Inroducion Over he las decade and a half, China mainained an invesmen rae higher han ha of more advanced economies, including boh Japan and he Unied Saes. Over he same period, foreign direc invesmen (FDI) inflows o he Chinese economy grew a an average rae of 19.97 percen per year, increasing from $3.5 billion in 1990 o $92.4 billion in 2008. Wha made China so aracive o invesors? In he pas few years, his quesion has been heavily debaed. China s Naional Developmen and Reform Commission (2005) concluded ha rapid indusrializaion, a high savings rae, a low consumpion rae, and a low efficiency of invesmen led o he high invesmen rae. Subsequen sudies by Li (2007), Hu (2007), Yu (2008) and many ohers have furher explored he high invesmen rae and he low consumpion rae in China. Fan (2009) discussed he same opic, comparing he poliical sysems of China and he Unied Saes, and concluded ha China s local governmens always paid more aenion o he ineress of capial and less o hose of labor, resuling in a high invesmen rae and a low consumpion rae. Concerning facors ha arac FDI flows ino China, Shen e al. (2002) found ha he human capial sock significanly affeced he locaion choice and invesmen scale of FDI. Xu e al. (2002) concluded ha FDI was mainly affeced by marke demand, he capial sock, and he 158
exchange rae. Fan and Xu (2009) also discussed he exchange rae s role in aracing FDI. Li (2004) argued ha here was a posiive correlaion beween foreign rade and FDI. Huang e al. (2006) poined ou ha he ransacion coss of foreign rade, echnology spillovers, and marke demand significanly affeced he choice of locaion for FDI. Luo (2009) sudied he source counries for FDI and concluded ha he source counry s marke size and bilaeral rade influenced FDI inflow. In his paper, we expand on hese findings and seek o undersand he effec of he reurn o capial and inernaional differences in he reurn o capial on he invesmen rae and level of FDI in China. Our main quesion is wheher he high invesmen rae and FDI in China are susainable. To answer his quesion, he mos inuiive approach is o esimae he reurn o capial in China and compare i wih ha in oher maor counries, such as he Unied Saes and Japan. If he reurn o capial in China is consisenly high, we may conclude ha he high invesmen rae in he counry is likely o las for a number of years. And if he reurn o capial in China is significanly higher han ha for oher maor counries, we can conclude ha foreign capial will coninue o flow ino China. This paper herefore esimaes he reurn o capial in China, he Unied Saes, and Japan; sudies key facors ha affec he reurn o capial; and invesigaes changes in hese facors in order o reveal he rends in China s reurn o capial and he fuure invesmen climae. Mehodology In his paper we consider a ransacion by a firm, a price aker, o purchase a uni of capial a he margin. 2 The real reurn from his ransacion is: 2 This mehodology has is origins in he Hall-Jorgenson renal price equaion and has been used in Bai, Hsieh, and Qian (2006). Deails on his mehodology are given in he appendix. 159
PY() MPK () r () ˆ PY() PK () (1) P () K Where, r (): The real rae of reurn o capial; PY () : The price of he oupu; PK () : The price of capial ; MPK () : The marginal physical produc of capial ; : The depreciaion rae of capial ; Pˆ Y () : The growh rae of PY () ; Pˆ K () : The growh rae of PK () This mehodology is simple and sraighforward: i relies only on he assumpion ha firms ake oupu prices as given. More imporanly, his mehodology is no dependan on economic srucure and hus can be used o esimae he reurn o capial boh in China, an emerging marke economy, and in Japan and he Unied Saes, which are advanced economies. I is unlikely ha one could observe he marginal physical produc of capial direcly, bu i can be inferred from daa on labor s share of income. Noe ha labor s share of oal income equals oal wages over aggregae oupu. Furher noe ha while equaion (5) in he appendix is used for calculaions in his paper, i is equivalen o equaion (1) above. China Daa sources For he Chinese Gross Domesic Produc (GDP) daa, we use wo sources: he Chinese Saisical Yearbook 2007 for 1978 2006 and he Comprehensive 160
Saisical Daa and Maerials on 55 Years of New China (1949 2004) for 1953 1977. For he invesmen goods deflaor, we use he price indices for invesmen in fixed asses released by China s Naional Bureau of Saisics since 1990; for hose before 1990, we simply use he indices from Bai, Hsieh, and Qian (2006). 3 Labor s share, heoreically, should be measured as aggregae compensaion o employees over oal income. However, he NBS only provides daa on he basic condiion of China s labor marke in he indusrial secors. These daa do no necessarily reflec he rue condiion of he aggregae labor marke. Therefore, we esimae labor s share insead, using provincial annual labor share daa, weighed by he share of provincial GDP in he aggregae GDP. To esimae he capial sock in China, we use he perpeual invenory mehod (PIM). PIM has been widely used o esimae capial socks (Gerhand, Verbies, and De Wolf, 1998; Huang, Ren, and Liu, 2002). As appendix equaion (6) indicaes, he applicaion of PIM requires esimaes and assumpions abou hree parameers: (1) he service life of he invesmen goods, (2) depreciaion, and (3) he consan price of capial invesed. For he capial sock in China, we mainly have o consider wo kinds of invesmen goods: (1) consrucion and insallaion, and (2) machinery and equipmen. According o he esimaes in Wang and Wu (2003), he useful life of consrucion and insallaion goods is 38 years and ha of machinery and equipmen is 12 years. This paper employs he declining-balance mehod of depreciaion, which applies gradually decreasing depreciaion charges over he service life of he asse and hus migh provide a more realisic reflecion of acual depreciaion. Therefore, he average annual depreciaion rae of consrucion and insallaion is 8 percen and ha of machinery and equipmen is 24 percen. 4 In China, he series frequenly used o measure annual capial invesed is invesmen in fixed asses, which is disaggregaed ino wo ypes of invesmen: consrucion and insallaion, and purchase of equipmen and insrumens. However, Xu (2000) and Bai, Hsieh, and Qian (2006) argued ha his widely used saisic migh no provide an accurae esimae of aggregae 3 Bai, Hsieh, and Qian (2006) assumed ha he price of srucures during 1978 89 equals he deflaor of value added in he consrucion indusry, and ha of machinery and equipmen equals he oupu price deflaor of he domesic machinery and equipmen indusry; for he years before 1978, Bai, Hsieh, and Qian (2006) assumed invesmen goods deflaor equals he growh rae of he aggregae price of fixed capial formaion. 4 In China, he residual value rae ranges from 3 o 5 percen; in his paper we use 4 percen as he residual value rae. 161
invesmen in China because he series includes he value of purchased land and expendiures on previously owned machinery and preexising srucures. These should no be regarded as par of reproducible capial sock; doing so migh lead o biased esimaes of he change in China s capial sock. Furhermore, he saisic couns only large invesmen proecs, an approach ha underesimaes aggregae invesmen. To circumven hese problems, many researchers recommend anoher saisic, gross fixed capial formaion, as an alernaive o esimae he change in he capial sock. This saisic subracs he value of land sales and he expendiure on preexising machinery and equipmen from he figure for invesmen in fixed asses, and adds expendiures on small invesmen proecs. Because he gross fixed capial formaion saisic is no disaggregaed ino differen ypes of invesmen, we assume ha he shares of he wo ypes of capial are he same as hose for invesmen in fixed asses 56. The Unied Saes In he Naional Economic Accouns, he U.S. Bureau of Economic Analysis (BEA) provides daa for curren-dollar and real GDP from 1929 o 2008. The BEA also provides daa on compensaion o employees for he same period, which includes wages, salary, and supplemens o wages and salary. The BEA disaggregaes fixed asses ino privae equipmen and sofware, privae non-residenial srucures, residenial srucures, durable goods owned by consumers, and governmen-owned fixed asses. Like China and Japan, he Unied Saes uses geomeric depreciaion mehods for mos asse ypes. The BEA deermines he geomeric rae for specific ypes of asses by dividing he appropriae declining-balance rae for each asse by he asse s assumed service life. The declining-balance raes used by he BEA are primarily derived from esimaes made by Hulen and Wykoff, who divided asses ino hree maor ypes: ype A asses wih exensive daa for esimaing geomeric raes of depreciaion; ype B asses wih limied sudies or oher relevan daa o suppor esimaes of he rae of declining balance; and ype C asses wih 5 The daa from 1953 o 1977 are from Hsieh and Li (1999), daa from 1978 o 2004 are from Bai, Hsieh, and Qian (2006), and daa from 2005 o 2006 are from China Saisical Yearbook 2007. 6 We iniialize he capial sock of 1952 as he raio of invesmen in 1953 o he sum of he average growh rae of invesmen in 1953 58 and he depreciaion rae. 162
no daa. 7 In his paper, we do no have o conduc in-deph research ino he depreciaion raes for differen ypes of asses in he Unied Saes, as he U.S. BEA provides daa series on capial sock as well as depreciaion in he Naional Economic Accouns. To obain he average depreciaion rae, we simply divide he depreciaion by he capial sock. Japan The Economic and Social Research Insiue (ESRI), which produces he Japanese naional accoun in he Japan Saisical Yearbook, publishes several esimaes of GDP. The naional accouns of he Japan Saisical Yearbook for 2009 provide daa on aggregae oupu for 1965 2006, whereas he naional accouns of he Hisorical Saisics of Japan (2010) provide daa on GDP for 1980 2003 under he 1993 Sysem of Naional Accouns (93SNA) and for 1955 98 under he 1968 Sysem of Naional Accouns (68SNA). In his paper, we use he daa of aggregae oupu in he Japan Saisical Yearbook 2009 for 1965 2006 and he daa in he Hisorical Saisics of Japan for 1955 64. For daa on compensaion o employees, we use he Japan Saisical Yearbook 2009 for 2003 06, 93SNA for 1980 2002, and 68SNA for 1955 79. One of he primary caegories of capial sock for which esimaes are given in he Japan Saisical Yearbook is ne capial sock (NCS), which covers such iems as buildings, srucures, ranspor equipmen, and machinery. A second is gross capial sock of privae enerprises (GCSPE), which covers all fixed asses, excluding residenial buildings owned by privae corporaions or unincorporaed enerprises and fixed asses owned by privae nonprofi insiuions. The main limiaion of he NCS is ha i is disaggregaed ino only six caegories of angible asses: (1) dwellings, (2) oher buildings, (3) oher srucures, (4) ranspor equipmen, (5) oher machinery and equipmen, and (6) culivaed asses. The curren asse classificaion is oo aggregaed o fully saisfy our research needs, as high- and low-depreciaion asses are bundled ogeher in some of he classificaions. However, he GCSPE, which is frequenly used as he main daa source for analysis of producion by indusry, is also a flawed measure of producive capaciy because i does no have asse caegories. Moreover, he GCSPE only couns he capial sock for privae enerprises, which does no provide an appropriae measure for he capial sock of he aggregae economy. Because of his, we chose o use NCS as he capial sock of Japan in his paper, and added oal invenories. 7 This informaion is primarily exraced from BEA Depreciaion Esimaes a he BEA websie. 163
According o he ESRI, depreciaion in NCS is based on he geomeric mehod for dwellings, ranspor equipmen, ec. The residual value rae is 50 percen for culivaed asses and 10 percen for oher asses. We calculae he corresponding depreciaion rae in able 1 8 and compue he aggregae depreciaion rae as a weighed average of depreciaion raes by ypes of asses, using he capial sock shares as weighs. Reurn o Capial in China, he Unied Saes and Japan Wih he above-menioned daa in hand, we can esimae he reurn o capial. In able 2, we provide our esimaes of he reurn o capial in China and lis he variables used o calculae i. In ables 3 and 4, we do he same for he reurn o capial in Japan and in he Unied Saes. Reurn o Capial in China As shown in figure 1, he reurn o capial in China varied beween 23.17 percen in 1978 and 21.82 percen in 2006, averaging over 20 percen during his 28-year period. However, here was a drasic flucuaion in he reurn o capial in China beween 1992 and 1994, wih a sharp increase in 1993 and a rapid decline in 1994. The spike in 1993 was likely due o a sharp increase in he growh rae of invesmen goods prices in 1993, which rose from 15.52 percen in 1992 o 29.35 percen in 1993. The rapid drawdown in he reurn o capial in China in 1994 was likely due o a rapid decline in he growh rae of invesmen goods prices in 1994, which fell from 29.35 percen in 1993 o 10.25 percen in 1994. Reurn o Capial in Japan As shown in figure 2, he reurn o capial in Japan was exremely volaile beween 1956 and 2006, wih a high poin of 39.43 percen in 1961 and a low of 5.4 percen in 1994. This meric seems srongly correlaed wih he counry s economic cycle. From 1956 o 1974, as Japan rebuil is los indusrial capaciy and experienced a series of economic booms, he reurn o capial in Japan was a is highes level, averaging above 31 percen. In he mid-1970s, 8 All ables and figures are locaed afer he Appendix. 164
Japan faced a severe economic challenge he 1973 world oil crisis which shocked is heavily peroleum-dependen economy. During his period, he reurn o capial plunged from 30.38 percen in 1974 o 13.94 percen in 1975. Throughou he las five years of he 1970s, his figure flucuaed around 14 percen. In he mid-1980s, he reurn o capial in Japan began anoher period of increase ha coninued unil he counry enered a recession in 1992. From 1993 o 2006, he reurn o capial in Japan remained relaively sable, albei relaively low, wih an average of 9 percen. The Reurn o Capial in he Unied Saes As shown in figure 3, he reurn o capial in he Unied Saes fell from around 15 percen afer he Second World War o around 5 percen in he las decade. During he lae 1920s, he Unied Saes enoyed a period of susained prosperiy known as he Roaring Twenies. Even in he firs hree years afer he Wall Sree Crash of 1929, he Unied Saes mainained a reurn o capial as high as 15 percen. This, however, was likely due o he negaive growh rae of he GDP deflaor. As he Grea Depression devasaed he Unied Saes economy, he reurn o capial dropped o around 6 percen by he mid- 1930s. However, he depression also led o U.S. governmen effors o resar he economy, and he reurn o capial from 1935 o 1945 averaged around 10 percen. During he period of poswar prosperiy from 1945 o 1973, he reurn o capial in he Unied Saes flucuaed beween 12 and 4 percen, averaging roughly 8 percen. The oil crisis in 1973, which caused he soaring inflaion of he 1970s, badly hur he U.S. economy. The reurn o capial in he Unied Saes averaged below 1 percen for a decade saring in 1974. To simulae he American economy afer a recession in he early 1980s, Ronald Reagan inroduced expansionary fiscal policies, which led o an economic recovery saring in 1983. The reurn o capial in he Unied Saes averaged abou 6 percen from hen unil he Clinon adminisraion. The six-year span from 1994 o 2000 winessed he emergence of a echnology-driven new economy, and he reurn o capial in he Unied Saes during his period averaged above 7 percen. Beween 2000 and 2007 he U.S. reurn o capial remained relaively sable, averaging around 6 percen. 165
Invesmen Raes and FDI: From he Perspecive of Reurn o Capial The Invesmen Rae in China Figure 4 shows ha he invesmen rae in China increased from 29.46 percen in 1978 o 42.75 percen in 2006. In he inervening period, as noed earlier, he reurn o capial in China flucuaed around 22 percen. This indicaes a posiive relaionship beween he reurn o capial and he invesmen rae. We believe he invesmen rae in China was high during he period of 1978 o 2006 because he reurn o capial in China was he highes in he world, which heighened invesors willingness o inves in he counry. The Invesmen Rae in Japan As shown in figure 5, he invesmen rae in Japan increased from 26.80 percen in 1956 o 39.02 percen in 1970 and declined o 23.46 percen in 2006, wih an average of 30.45 percen over he enire period. From 1956 o 1970, as discussed earlier, he reurn o capial in Japan increased from 31.95 o 38.38 percen, averaging 32.36 percen. Afer 1970, he reurn o capial in Japan dropped o 12.79 percen by 2006, averaging only 13.62 percen. The evidence from Japan indicaes ha invesors were willing o inves more when he reurn o capial was high and inves less when he reurn o capial was low. The Invesmen Rae in he Unied Saes From 1929 o 2007, he invesmen rae and he reurn o capial in he Unied Saes were highly correlaed. Figure 6 shows ha he invesmen rae in he Unied Saes declined during he Grea Depression in he early 1930s bu increased in he following years, rising from 15.60 percen in 1933 o 29.68 percen in 1950, he year ha marked he highes invesmen rae in he Unied Saes for 1930 2007. Afer 1950, he invesmen rae in he Unied Saes flucuaed beween 24 and 30 percen, wih an average of around 27 percen. As discussed above, he reurn o capial in he Unied Saes, afer a decline during he Grea Depression period, increased from 1.27 percen in 1934 o 11.08 percen in 1950, wih a sligh decrease in he lae 1940s when he invesmen rae fell. Beween 1950 and 2007, he reurn o capial in he Unied Saes remained relaively sable excep he period during 1974-1982. 166
Impacs on FDI inflows o China In he observed period, FDI played a deermining role in invesmen in China: is high level conribued o he high invesmen rae. One imporan facor ha affeced cross-border capial flows was he dispariy in he reurns o capial across counries. Figure 7 shows he differences in he reurns o capial beween China and he world s wo larges capial expor/impor counries, Japan and he Unied Saes, as well as he growh rae of FDI inflows in China. We can see ha he growh of FDI inflows in China increased significanly when he reurn-o-capial dispariies beween China and Japan and China and he Unied Saes widened, which is especially eviden from 1992 o 1993. The correlaion coefficien beween he growh rae of FDI inflows and he difference beween he reurn o capial in China and Japan was as high as 0.819; for he Unied Saes and China, he correlaion was 0.799. Facors Tha Affec Reurn o Capial Marginal Effec of Facors Figures 8 and 9 show ha he marginal effecs of labor s share and he capialoupu raio on he reurn o capial are always negaive, which suggess ha an increase in labor s share of income and he capial-oupu raio will lead o a decrease in he reurn o capial. In he long run, however, he marginal effecs of labor s share and he capial-oupu raio seem o converge o zero. The reurn o capial changes significanly when i is a a high level, and changes lile when i is a a relaively lower level. The reurn o capial is hus able o become sable again afer a sharp decline. In he shor run, he change in marginal reurns resuls from he changes in labor s share of income and he capial-oupu raio. In he following secion, we will discuss how hese facors change over ime and how hey affec he reurn o capial. Trends in Key Facors As appendix equaion (9) indicaes, he marginal impac of an increase in labor s share of income on he reurn o capial is always negaive i.e., he reurn o capial decreases as labor s share increases. Figure 10 shows ha labor s share of income in Japan rose from 41.44 percen in 1956 o 51.6 percen in 2006, while ha of he Unied Saes rose from 51.43 percen in 167
1930 o 56.63 percen in 2007. However, labor s share of income in China fell from 49.67 o 40.61 from 1978 o 2006. Labor s share of income in China is much lower han hose in eiher Japan or he Unied Saes, which is why he counry s reurn o capial is higher. This is very inuiive: when labor receives less compensaion, capial will earn more, which leads o a higher reurn o capial. There are wo maor reasons ha labor s share of income is so low in China. China has a large manufacuring secor, and laborers are paid less han hose who work in he service indusry. Also, an abundance of rural migran workers provide a seady flow of cheap labor for manufacurers; his is he chief reason ha labor s share of income in China has acually decreased during he las wo decades. In he fuure, as he economy develops, workers in China will undoubedly seek beer compensaion. This will lead o an increase in labor s share of income in China, us as Japan and he Unies Saes saw increases in he pas. The increase of labor s share of income will ulimaely reduce he reurn o capial in China. However, i seems likely ha Chinese labor s share of income will remain a a lower level han he Japanese or American for a number of years, given China s manufacuring-based economy and is persisenly large flow of rural workers ino manufacuring. Wha is he economic meaning of a high capial-oupu raio? Does i indicae a low GDP, or imply a high capial sock? In he cases of Japan and he Unied Saes, he wo larges economies in he world, he answer should be a high capial sock. I s naural ha Japan and he Unied Saes araced significan amouns of invesmen during he 20h cenury, which led o he accumulaion of large capial socks in he wo counries. Figure 11 shows ha he capialoupu raio in Japan increased from 1.71 in 1956 o 2.41 in 2006, while ha of China rose only a slighly from 1.47 in 1978 o 1.74 in 2006. Alhough he capial-oupu raio in he Unied Saes experienced no remarkable change during he period of 1930 o 2007, i persised a 3.4, which was much higher han boh China s and Japan s. From he experiences of Japan and he Unied Saes we can predic ha he capial sock in China will increase in he fuure, which poenially may lead o an increase in he capial-oupu raio. The high reurn o capial in China is likely o arac more invesmen, which will increase he capial sock and lead o a high capial-oupu raio. However, i seems unlikely ha he capialoupu raio in China will experience a significan increase in he near fuure because China has he world s hird larges GDP and a fas-growing economy. 168
The lower capial-oupu raio in China relaive o hose of Japan and he Unied Saes will likely cause he reurn o capial in China o remain he highes of he hree counries in he years ahead. Trends in Reurn o Capial and he Fuure Invesmen Climae in China As shown in figure 12, he reurn o capial in Japan decreased from 31.95 percen in 1956 o 12.79 percen in 2006, while ha of he Unied Saes decreased from 15.28 percen in 1930 o 6.94 percen in 2007, indicaing ha he reurn o capial seems o decline in he long run. Increases in labor s share of income and he capial-oupu raio seem o follow he developmen of he economy, leading o a decline in he reurn o capial. Also, he evidence from Japan and he Unied Saes indicaes ha he reurn o capial remains high during he early sages of economic booms. From 1965 o 1980, for example, he period ha marked he economic booms of Japan, he reurn o capial in Japan averaged above 28 percen. From 1978 o 2006, he period ha marked China s Reform and Opening Up movemen, he reurn o capial in China was also very high. As saed above, he experiences of maor developed counries indicae ha he reurn o capial in China will decrease in he fuure because of increases in labor s share of income and he capial-oupu raio. However, i seems ha he reurn o capial in China will remain higher han ha of Japan and ha of he Unied Saes in he near fuure because labor s share and he capialoupu raio are sill very low and are unlikely o significanly increase any ime soon. Considering he experience of Japan, whose reurn o capial converged o ha of he Unied Saes afer more han 40 years of economic developmen, we can conclude ha, considering he size of is economy, China will sill be able o enoy a high reurn o capial for a leas 10 more years. In addiion, as he reurn o capial in China is significanly higher han hose of oher maor counries, foreign capial will coninue o flow ino China, especially as China increasingly opens more secors o foreign invesors as par of he commimens i made oward enry ino he WTO. 169
Discussion In his paper, we ake labor s share of income and he capial-oupu raio o be he primary deerminans of he high reurn o capial observed in China. They herefore have a direc impac on he calculaions used. However, here are also many oher secondary consideraions ha may indirecly affec he reurn o capial, bu which are beyond he scope of his paper. For example, because China s financial marke is no fully developed, financing coss are high. There are also many invesmen inefficiencies in China (NDRC 2005). In addiion, because China is sill a ransiion economy, here are many invesmen uncerainies, including regulaions, pricing mechanisms, and he level of marke developmen. Businesses face more risk because of hese facors, and as a resul hey demand a higher reurn o capial as compensaion. Moreover, many secors in he Chinese marke are sill monopolies: his imperfec compeiion allows he reurn o capial in hose secors o be comparaively high. In he long run, as China s economy develops, changes in hese facors will conribue o decreases in he reurn o capial. Theoreically, a high invesmen rae and a quickly growing sock of FDI in China will have a negaive effec on he reurn o capial, aking he form of a lagging effec raher han a curren effec. When capial socks increase, he reurn o capial decreases. This is suppored by he experiences of he Unied Saes and Japan. According o our esimaes for China over he pas 30 years, we have no ye seen a significan decrease in he reurn o capial, exceping a sligh decline afer 1994. However, we can assume ha a high invesmen rae and large FDI inflows, while no causing he reurn o capial o decrease o any large exen, have had a dampening effec. We consider he reurn o capial o be sufficien for evaluaing he relaive size of FDI inflows and for predicing fuure rends. However, i is insufficien for deermining acual quaniies of FDI in China due o he complexiy of he facors which affec capial flows. China s infrasrucure, reform pah, and FDI compeiors all need o be aken ino accoun o predic invesmen and FDI wih more accuracy. 170
Since China s enry ino he WTO in 2001, he counry has become increasingly open o ouside invesmen. In addiion, local governmens have ofen adoped preferenial axaion and loan policies o arac FDI o heir regions. Many sudies have discussed he impac of globalizaion on FDI inflows in China. The specific acions of hese governmenal bodies meri furher research, as hey could be used o furher analyze he sylized conclusions made in his paper. Conclusion By esimaing he aggregae reurn o capial in China, he Unied Saes, and Japan, his paper sudies he impacs of he reurn o capial on he invesmen rae. We use our findings o beer undersand he unusually high invesmen rae and flow of FDI o China. Our findings show ha he reurn o capial in China mainained a high level of 21.9 percen during he las hree decades even higher han hose in Japan, which was over 10 percen. The invesmen rae in China increased from 29.46 percen in 1978 o 42.75 percen in 2006, again a level much higher han hose found in Japan and he Unied Saes. We also find ha he invesmen rae was always high when he reurn o capial was high and low when he reurn o capial was low, suggesing ha he invesmen rae was significanly affeced by reurn o capial. Thus, we believe ha China mainained a higher invesmen rae during he las 30 years precisely because of is higher reurn o capial. The dispariies among he reurns o capial in China, Japan, and he Unied Saes may persis ino he near fuure, mainaining curren rends of a high invesmen rae and high FDI in China. Alhough in he long run he increase in labor s share of income and in he capial-oupu raio will likely cause he reurn o capial in China o decline, our analysis shows ha China should coninue o have much higher reurn o capial han ha in Japan or he Unied Saes. Reurn o capial saisics for he Unied Saes, China, and Japan show no evidence of convergence, and neiher labor s share of income nor he capial-oupu raio in China is likely o experience a significan increase in he near fuure. 171
References Bai Chong-En, Chang-Tai Hsieh, and Yingyi Qian. 2006. The reurn o capial in China. Brookings Papers on Economic Aciviy 2:61 88. Baumol, W., P. Heim, B. Malkiel, and R. Quand. 1970. Earnings reenion, new capial and he growh of he firm. Review of Economics and Saisics 52 (4): 345 55. Brealey, R., S. Hodges, and D. Capron. 1976. The reurn on alernaive sources of finance. Review of Economics and Saisics 58 (4): 469 77. Bureau of Economic Analysis, Naional Economic Accouns, available in websie: hp://www.bea.gov/naional/index.hm China s Naional Developmen and Reform Commission, Analysis of he invesmen rae and consumpion rae in China, Augus 4 2005, hp://www.sdpc.gov.cn/ zugx/20050804_38750.hm. CCER China Economic Observer Research Group, 2007. Measuremens of China s capial reurn (1978 2006): Microeconomic underpinnings for he recen economic boom in China. China Economic Quarerly 6 (3): 723 58. Governmen of China. Naional Bureau of Saisics. Chinese Saisical Yearbook, China Saisics Press, 1978 2007. Governmen of China. Naional Bureau of Saisics. Comprehensive Saisical Daa and Maerials on 55 Years of New China (1949-2004), China Saisics Press, 2005. Fan Ming. 2009. Poliical facors of high invesmen rae and low consumpion rae in China: An explanaion based on a comparison beween he poliical sysems of China and he US. Economic Survey 2:1 4. Fan Yuein and Xu Weicheng. 2009. Analysis of he impac of RMB appreciaion on foreign direc invesmen in China. Journal of Universiy of Jinan (Social Science Ediion) Vol. 19, No. 1, 2009: 1-5. Friend, I., and F. Husic. 1973. Efficiency of corporae invesmen. Review of Economics and Saisics 55 (1): 122-127. Gugler, K., D. Mueller, and B. Yuroglu. 2003. The impac of corporae governance on invesmen reurns in developed and developing counries. Economic Journal 113 (491): 511 39. 172
Gugler, K., D. Mueller, and B. Yuroglu. 2004. Corporae governance and he reurns on invesmen. Journal of Law and Economics 47 (2): 589 633. Hu Xueqin. 2007. Some consideraions abou China s high invesmen rae. Modern Economic Research 2007 (9): 34 38. Huang Xiaoqi and Chai Min. 2006. Regional choice of FDI from he perspecive of new economic geography: An empirical sudy based on provincial panel daa. Managemen World 2006 (10): 7 13. Huang, Yongfeng, Ren Ruoen, and Liu Xiaosheng. 2002. Capial sock esimaes in Chinese manufacuring by perpeual invenory approach. China Economic Quarerly 1 (2): 377 96. Japan Minisry of Inernal Affairs and Communicaions, Hisorical Saisics of Japan, 2010. hp://www.sa.go.p/english/daa/chouki/index.hm. Japan Minisry of Inernal Affairs and Communicaions, Japan Saisical Yearbook, 1955 2009. hp://www.sa.go.p/english/daa/index.hm Kuis, L., and B. Hofman. 2006. Profis drive China s boom. Far Eas Economic Review 169 (8): 39 43. Li Qin. 2004. An empirical sudy of he relaionship beween FDI inflow and foreign rade. World Economic Research 2004 (9): 75 79. Li Rupeng. 2007. Exploring [??] he reasons for low consumpion in China. Jiangsu Commercial Forum no. 5:22 24. Luo Zhi. 2009. The deerminans of FDI inflow o China: The empirical research based on inernaional panel daa. Souhern Economy 1:33 41. McFeridge, D. 1978. The efficiency implicaions of earnings reenions. Review of Economics and Saisics 60 (2): 218 24. Meinen, Gerhard, Pie Verbies, and Peer-Paul de Wolf. 1998. Perpeual invenory mehod: Service lives, discard paerns, and depreciaion mehods. Heerlen-Voorburg, Neherlands: Saisics Neherlands. Mueller, D., and E. Reardon. 1993. Raes of reurn on corporae invesmen. Souhern Economic Journal 60 (2): 430 53. Mueller, D., and B. Yuroglu. 2000. Counry legal environmens and corporae invesmen performance. German Economic Review 1 (2): 187 220. 173
Nomura, Koi, and Tadao Fuakami. 2005. Measuring capial in Japan: Challenges and fuure direcions. Paper prepared for he 2005 Organisaion for Economic Co-operaion and Developmen Working Pary on Naional Accouns, Ocober 11 14, 2005, Paris, France. Xin Qinquan, Lin Bin, and Yang Deming. 2007. Reurn o capial invesmen and is deerminans in China: Evidence from lised companies. China Economic Quarerly 6 (4): 1143-1164. Xu Kangning and Wang Jian. 2002. Deerminans of U.S. invesmen in China, 1983-2000, Social Science in China 2002 (5): 66 77. Yu Jian. 2008. An examinaion of he high invesmen rae in China. Journal of Shanxi Finance and Economics Universiy 4:47 52. 174
Appendix PY() MPK () r () ˆ PY() PK () (1) P () Where K r (): The real rae of reurn o capial; PY () : The price of he oupu; PK () : The price of capial ; MPK () : The marginal physical produc of capial ; : The depreciaion rae of capial ; Pˆ Y () : The growh rae of PY () ; Pˆ K () : The growh rae of PK (). Noe ha labor s share in oal income equals oal wages over aggregae oupu. Thus, he share of capial in oal income is: WL () () () 1 (2) P () Y() Y Where W () is wages and L () is employmen. Addiionally, he share of paymens of capial can be given as: 175
() P () MPK () K () Y P () Y() Y PY() MPK () K () PK () P () K P () Y() Y Subsiuing equaion (1) ino () we ge:, () Where r() Pˆ () P () K () P () Y K K P () Y() Y ˆ r() P () K () P () P () K () P () Y K K K P () Y() Y () () ˆ K PK () () () PK K PK ˆ rpy() KP () K() KP () K() KP () K() KP () K() P () Y() KP () () ˆ K rpy() PK() P () Y() (3) Y KP () () K() P () : The aggregae produced asses; K K K () PK () ˆ () PK PK () KP () () K Y : The growh rae of he invesmen goods deflaor; 176
K () PK () () KP () () K : The depreciaion rae; From equaion (3) we can ge he real reurn o capial as: r () () P ˆ () () () K PY (4) KP () () P () Y() K Y Subsiuing equaion (2) ino equaion (4), we ge: r () WL () () 1 P () Y() P ˆ () P () ().. (5) Y K Y KP () K () PY () Y() d 1 K w * I 0.. (6) Where K is he capial sock a ime ; d is he service life of he invesmen goods; I is he consan value of he invesmen goods invesed years before; w is he weigh of he invesmen goods invesed years before. 177
According o equaion (5), we have: r () WL () () 1 P () Y() P ˆ () P () () Y K Y KP () K () PY () Y() 1 ( ) r () Pˆ K() PY() ().. (7) () Where WL () () () is labor s share P () Y() Y () K() P () P () Y() is he capial-oupu raio. K Y By aking a parial derivaive on reurn o capial wih respec o each of he five facors, we have: r () r () r () ˆ r () r () dr() d() d() dpk() dpy() d() () () Pˆ () P () ().. (8) Where K Y r () 1 () () r () 1 () () () r () 1 Pˆ () K 2, he marginal reurn of labor s share;, he marginal reurn of capial-oupu raio;, he marginal reurn of invesmen goods deflaor; 178
r () 1 Pˆ () Y r () 1 (), he marginal reurn of GDP deflaor;, he marginal reurn of depreciaion rae. 1 1 ( ) dr() d() d() dpˆ K() dpy() d().. (9) () () 2 Table 1: Depreciaion raes used in Japan Saisical Yearbook (by ypes of asses) Service life Depreciaion rae Dwellings 28.0 7.9 Oher buildings 37.4 6.0 Oher srucures 33.7 6.6 Transporaion equipmen 7.6 26.2 Oher machinery and equipmen 10.6 12.1 Culivaed asses 5.4 9.9 Source: Nomura and Fuakami, 2005. 179
Table 2: Variables and reurn o capial in China (%) Year Labor s share Capial oupu raio Depreciaion rae Growh of invesmen deflaor Growh of GDP deflaor Reurn o capial 1978 49.67 1.39 12.10 0.93 1.92 23.17 1979 51.38 1.37 11.97 2.15 3.58 22.07 1980 51.15 1.35 11.82 4.95 3.78 25.41 1981 52.68 1.44 11.43 1.78 2.25 20.98 1982 53.57 1.45 11.06 2.34-0.21 23.62 1983 53.54 1.43 10.82 3.76 1.04 24.44 1984 53.68 1.33 10.67 4.80 4.96 23.92 1985 52.90 1.24 10.69 8.62 10.24 25.77 1986 52.82 1.31 10.86 7.52 4.70 27.91 1987 52.53 1.33 10.81 6.98 5.17 26.60 1988 51.72 1.27 10.84 12.50 12.10 27.49 1989 51.51 1.41 10.88 9.55 8.55 24.58 1990 53.36 1.48 11.00 7.31 5.80 21.96 1991 50.03 1.44 10.91 9.05 6.87 26.09 1992 50.09 1.35 10.79 15.52 8.20 33.37 1993 50.37 1.31 10.72 29.35 15.16 41.47 1994 51.11 1.38 10.65 10.25 20.63 14.29 1995 52.56 1.37 10.74 4.97 13.71 15.25 1996 52.80 1.39 10.71 4.51 6.43 21.42 1997 52.89 1.47 10.61 2.12 1.52 22.01 1998 53.12 1.57 10.61 0.02 0.89 20.23 1999 52.42 1.64 10.59 0.15 1.27 19.59 2000 51.48 1.63 10.59 1.60 2.03 18.75 2001 51.46 1.65 10.56 0.70 2.05 17.52 2002 50.92 1.67 10.55 0.37 0.60 18.62 2003 49.62 1.65 10.55 3.09 2.59 20.48 2004 45.51 1.63 10.54 6.86 6.93 22.83 2005 41.40 1.71 10.53 1.42 4.14 21.00 2006 40.61 1.72 10.65 1.20 3.24 21.82 Source: China Saisical Yearbook, various years, and auhor s calculaions. 180
Table 3: Variables and reurn o capial in Japan (%) Year Labor s share Capial oupu raio Depreciaion rae Growh of invesmen deflaor Growh of GDP deflao Reurn o capial 1956 41.55 1.71 10.34 14.39 6.22 31.95 1957 40.81 1.54 10.00 11.59 7.16 32.79 1958 42.91 1.67 9.92-5.64-0.91 19.46 1959 42.47 1.56 9.92 1.57 5.50 23.15 1960 40.48 1.29 9.76 4.95 9.48 31.76 1961 39.53 1.17 9.83 7.96 10.21 39.43 1962 41.90 1.17 9.93 0.00 5.55 34.09 1963 42.34 1.24 10.10 0.00 7.18 29.03 1964 42.44 1.19 10.07 2.19 6.85 33.66 1965 44.12 1.22 10.04-0.53 13.94 21.48 1966 43.96 1.21 10.00 3.76 5.34 34.86 1967 43.12 1.15 9.92 4.92 5.50 39.09 1968 42.43 1.12 9.94 2.22 5.83 37.74 1969 42.51 1.13 10.11 2.66 4.93 38.59 1970 43.49 1.11 10.18 4.47 6.87 38.28 1971 46.86 1.21 10.39 1.35 5.40 29.32 1972 47.65 1.31 10.52 3.56 5.60 27.44 1973 49.05 1.25 10.30 16.31 12.71 34.17 1974 52.15 1.31 10.17 24.72 20.81 30.38 1975 55.00 1.64 10.16 3.85 7.18 13.94 1976 55.24 1.83 9.99 4.84 8.01 11.30 1977 55.38 1.79 9.76 4.76 6.75 13.16 1978 54.34 1.86 9.60 2.85 4.60 13.23 1979 54.19 1.87 9.45 6.68 2.75 19.01 1980 53.84 1.88 9.27 8.51-1.08 24.81 1981 54.13 2.04 9.35 1.74 4.52 10.33 1982 54.50 2.22 9.27 1.18 1.76 10.65 1983 55.10 2.24 9.24 0.11 1.71 9.16 1984 54.62 2.22 9.22 1.16 2.48 9.94 1985 53.11 2.11 9.26 0.73 3.01 10.65 181
Table 3: Variables and reurn o capial in Japan (%) Coninued Year Labor s share Capial oupu raio Depreciaion rae Growh of invesmen deflaor Growh of GDP deflaor Reurn o capial 1986 52.89 2.11 9.33-0.83 1.66 10.51 1987 52.57 2.09 9.37-0.73-0.36 12.92 1988 51.72 1.99 9.34 0.32 1.00 14.19 1989 51.48 1.95 9.37 1.89 2.32 15.06 1990 51.68 1.92 9.38 2.89 2.99 15.62 1991 52.49 2.01 9.42 2.20 2.94 13.43 1992 52.82 2.14 9.42 1.27 1.63 12.26 1993 53.55 2.28 9.42-0.19 0.53 10.27 1994 54.35 2.35 9.36-1.55 3.09 5.40 1995 54.51 2.37 9.26-1.48-0.50 8.97 1996 54.22 2.36 9.25-1.18-0.57 9.52 1997 54.44 2.33 9.23 0.41 0.60 10.12 1998 55.01 2.46 9.27-1.56 0.03 7.45 1999 54.88 2.57 9.27-2.14-1.29 7.44 2000 54.68 2.52 9.23-1.23-1.73 9.23 2001 54.93 2.54 9.18-2.13-1.23 7.67 2002 54.30 2.60 9.15-2.05-1.55 7.94 2003 52.74 2.57 9.08-1.77-1.60 9.12 2004 51.44 2.51 9.00-0.21-1.08 11.25 2005 51.51 2.49 9.02-0.07-1.23 11.58 2006 51.60 2.41 9.05 0.82-0.94 12.79 Source: Japan Saisical Yearbook, various years, and auhor s calculaion. 182
Table 4: Variables and Reurn o Capial in he Unied Saes (%) Year Labor's share Capial oupu raio Depreciaion rae 183 Growh of invesmen deflaor Growh of GDP deflaor Reurn o capial 1930 51.43 3.37 4.82 1.99-3.67 15.28 1931 52.03 3.47 4.63 0.56-10.36 20.14 1932 52.98 4.16 4.53-0.77-11.80 17.81 1933 52.48 4.60 4.84-1.19-2.68 6.99 1934 51.97 4.02 4.75-0.34 5.60 1.27 1935 51.02 3.67 4.79 0.37 1.98 6.94 1936 51.19 3.55 4.94 1.68 1.17 9.31 1937 52.23 3.41 4.91 1.89 4.31 6.68 1938 52.26 3.67 4.60 1.11-2.97 12.50 1939 52.17 3.50 4.63 1.87-0.91 11.81 1940 51.48 3.46 4.80 2.42 1.11 10.56 1941 51.14 3.16 5.57 3.88 6.69 7.10 1942 52.69 2.82 5.20 5.77 7.81 9.55 1943 55.19 2.56 5.57 5.79 5.38 12.37 1944 55.19 2.47 5.79 4.59 2.37 14.57 1945 55.27 2.63 6.46 1.84 2.65 9.76 1946 53.85 3.09 6.95 0.33 11.99-3.69 1947 53.24 3.26 6.88 1.58 10.89-1.82 1948 52.71 3.15 6.52 2.28 5.63 5.14 1949 53.05 3.22 5.83 2.76-0.18 11.68 1950 52.83 3.28 6.11 3.90 1.09 11.08 1951 53.46 3.49 5.71 4.09 7.18 4.54 1952 54.76 3.45 5.49 3.95 1.71 9.87 1953 55.40 3.37 5.47 4.31 1.24 10.84 1954 54.99 3.49 5.63 3.70 0.95 10.03 1955 54.44 3.45 5.74 4.24 1.78 9.94 1956 55.91 3.54 5.87 3.65 3.46 6.77 1957 55.87 3.52 5.71 3.43 3.32 6.94 1958 55.57 3.58 5.77 2.65 2.30 6.99 1959 55.49 3.43 5.69 3.58 1.23 9.64 1960 56.34 3.40 5.72 3.22 1.40 8.93 1961 56.07 3.40 5.69 3.05 1.12 9.16 1962 55.87 3.30 5.69 3.54 1.36 9.86 1963 55.90 3.24 5.72 3.74 1.06 10.58 1964 55.86 3.20 5.80 4.08 1.53 10.56 1965 55.56 3.15 5.79 4.46 1.83 10.96 1966 56.18 3.12 5.88 4.53 2.85 9.83 1967 57.06 3.18 5.87 4.01 3.09 8.56 1968 57.62 3.19 5.99 4.10 4.27 7.14 1969 58.66 3.21 5.97 3.89 4.96 5.83 1970 59.43 3.30 5.95 3.17 5.29 4.22 1971 58.46 3.34 5.95 3.28 5.00 4.77
Table 4: Variables and Reurn o Capial in he Unied Saes (%) Coninued Year Labor's share Capial oupu raio Depreciaion rae Growh of invesmen deflaor Growh of GDP deflaor Reurn o capial 1972 58.56 3.34 5.86 3.73 4.34 5.92 1973 58.67 3.41 5.87 4.02 5.58 4.70 1974 59.35 3.72 5.92 3.10 9.03-0.93 1975 57.94 3.67 5.71 2.32 9.43-1.37 1976 58.04 3.59 5.79 2.75 5.78 2.87 1977 58.13 3.61 5.91 3.26 6.35 2.60 1978 58.23 3.62 5.96 3.67 7.03 2.20 1979 58.55 3.74 5.99 3.59 8.29 0.41 1980 59.22 3.90 5.91 2.69 9.07-1.82 1981 58.37 3.81 5.83 2.54 9.39-1.76 1982 59.17 3.84 5.71 1.91 6.10 0.71 1983 57.76 3.66 5.61 2.39 3.96 4.36 1984 57.35 3.49 5.74 3.29 3.75 6.03 1985 57.46 3.42 5.87 3.48 3.04 7.00 1986 57.63 3.43 5.99 3.39 2.20 7.54 1987 58.06 3.43 6.01 3.14 2.73 6.62 1988 58.15 3.39 6.06 3.02 3.41 5.87 1989 57.37 3.34 6.15 2.83 3.78 5.66 1990 57.56 3.31 6.12 2.52 3.86 5.37 1991 57.51 3.27 6.13 1.80 3.50 5.14 1992 57.41 3.23 6.22 1.91 2.30 6.59 1993 57.15 3.23 6.21 2.21 2.31 6.97 1994 56.58 3.23 6.30 2.41 2.13 7.45 1995 56.74 3.23 6.20 2.59 2.05 7.71 1996 56.22 3.20 6.19 2.88 1.90 8.46 1997 56.19 3.17 6.20 3.03 1.66 8.99 1998 57.44 3.17 6.21 3.32 1.11 9.42 1999 57.86 3.19 6.27 3.52 1.45 9.04 2000 58.95 3.20 6.33 3.52 2.18 7.83 2001 58.72 3.26 6.33 2.93 2.40 6.85 2002 58.23 3.30 6.13 2.62 1.75 7.39 2003 57.76 3.32 6.07 2.62 2.13 7.15 2004 57.01 3.42 6.14 2.69 2.87 6.26 2005 56.65 3.52 6.17 2.57 3.26 5.45 2006 56.46 3.57 5.71 2.71 3.22 5.99 2007 56.63 3.38 5.58 2.37 2.69 6.94 Source: Naional Economic Accouns of U.S. Bureau of Economic Analysis; auhors calculaions. 184
Figure 1: Reurn o capial in China 1978 2006 (%) Figure 2: Reurn o capial in Japan 1956 2006 (%) Figure 3: Reurn o capial in he Unied Saes 1930 2007 (%) 185
Figure 4: Invesmen rae in China 1978 2006 (%) Figure 5: Invesmen rae in Japan 1956 2006 (%) Figure 6: Invesmen rae in he Unied Saes 1930 2007 (%) Figure 7: Discrepancy of reurn o capial and growh rae of FDI in China 1985 2006 186
Figure 8: Marginal effec of labor s share on reurn o capial in in China, Japan, and he Unied Saes 1930 2006 Figure 9: Marginal Effec of Capial-Oupu Raio on Reurn o Capial in China, Japan, and he Unied Saes 1930 2006 Figure 10: Labor s share of naional income in China, he Unied Saes and Japan 1930 2006 (%) 187
Figure 11: Capial-oupu raio in China, he Unied Saes and Japan 1930 2006 (%) Figure 12: Reurn o Capial in China, he Unied Saes and Japan 1930 2006 (%) 188