Introduction

This paper has two objectives. The first is to examine the effectiveness and usefulness of the establishment base production function for analyzing production structure. The second is to investigate how the expansion of plant capacity affects structural change, based on the parameter estimates of production functions.

The process of economic development is characterized by structural change. Sustained economic growth can be achieved only via a select subset of potential paths for structural change. We hope to illuminate at least one path that has led to sustained economic growth by analyzing rigorously the development process of the post-war Japanese economy.

By structural change we mean technological change (see Leontief et al., 1953; Carter, 1970). We use these terms interchangeably and adopt the normal input-output definition of technological change as changes in capital coefficients and intermediate input coefficients. In our model, changes in capital coefficients depend upon the magnitude of plant capacity. In a large subset of industries, changes in plant capacity are determined endogenously through the unit cost minimization behavior of corporations.

This endogeneity of changes in capital coefficients derives from our production function parameter estimates. Rather than assuming the standard homogeneous production function, we specify a function that allows limited substitutability among factors of production. We call this a non-homothetic, factor-limited production function; see, e.g., Komiya (1962), Komiya and Uchida (1963), Lau and Tamura (1972) and Nakamura (1990). Its specification and estimation are another contribution of this paper.