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Differences in increasing returns between technological sectors: A panel data investigation using the EU KLEMS database

João P. Romero (Department of Economics, Universidade Federal de Minas Gerais, Belo Horizonte, Brazil)
John S.L. McCombie (Department of Land Economy, University of Cambridge, Cambridge, UK)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 10 October 2016

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Abstract

Purpose

The purpose of this paper is twofold: to investigate the existence of different degrees of returns to scale in low-tech and high-tech manufacturing industries; and to examine whether the degrees of returns to scale change through time.

Design/methodology/approach

The empirical investigation implemented in the paper uses data from the EU KLEMS Database, covering a sample of 12 manufacturing industries in 11 OECD countries over the period 1976-2006. The investigation employed two different estimation methods: instrumental variables and system GMM. The robustness of the results was assessed by employing two different specifications of Kaldor-Verdoorn’s Law, by using lags and five-year averages to smooth business-cycle fluctuations, and by dividing the sample into two time periods.

Findings

The results reported in the paper provide strong evidence in support of the hypothesis of substantial increasing returns to scale in manufacturing. The investigation suggests that high-tech manufacturing industries exhibit larger degrees of returns to scale than low-tech manufacturing industries. Finally, the analysis revealed also that the magnitude of the returns to scale in manufacturing have increased in the last decades, driven by increases in the magnitude of returns to scale observed in high-tech industries.

Originality/value

No previous work has assessed the hypothesis that increasing returns to scale vary according to the technological content of industries. Moreover, no previous work has used system GMM or data from EU KLEMS to test Kaldor-Verdoorn’s Law. Most importantly, the findings of the paper present new evidence on the degree of returns to scale in high-tech and low-tech manufacturing industries.

Keywords

Acknowledgements

The authors would like to thank Dr Marta Spreafico and two anonymous referees for their helpful comments. The usual disclaimer applies. Financial support from the Coordination for the Improvement of Higher Education Personnel (CAPES-Brazil), process number 0257-11-7, is gratefully acknowledged.

Citation

Romero, J.P. and McCombie, J.S.L. (2016), "Differences in increasing returns between technological sectors: A panel data investigation using the EU KLEMS database", Journal of Economic Studies, Vol. 43 No. 5, pp. 863-878. https://doi.org/10.1108/JES-03-2015-0045

Publisher

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Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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