Estimation of a production function with domestic and foreign capital stock
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Ziesemer, Thomas Working Paper Estimation of a production function with domestic and foreign capital stock UNU-MERIT Working Papers, No. 2022-002 Provided in Cooperation with: Maastricht Economic and Social Research Institute on Innovation and Technology (UNU-MERIT), United Nations University (UNU) Suggested Citation: Ziesemer, Thomas (2022) : Estimation of a production function with domestic and foreign capital stock, UNU-MERIT Working Papers, No. 2022-002, United Nations University (UNU), Maastricht Economic and Social Research Institute on Innovation and Technology (UNU-MERIT), Maastricht This Version is available at: https://hdl.handle.net/10419/326811 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-sa/4.0/
#2022-002 Estimationofaproductionfunctionwithdomesticandforeign capitalstock ThomasZiesemer Published10January2022 MaastrichtEconomicandsocialResearchinstituteonInnovationandTechnology(UNU‐MERIT) email:[email protected]u|website:http://www.merit.unu.edu Boschstraat24,6211AXMaastricht,TheNetherlands Tel:(31)(43)3884400
UNU-MERIT Working Papers ISSN 1871-9872 Maastricht Economic and social Research Institute on Innovation and Technology UNU-MERIT UNU-MERIT Working Papers intend to disseminate preliminary results of research carried out at UNU-MERIT to stimulate discussion on the issues raised.
1 Estimationofaproductionfunctionwithdomesticandforeigncapitalstock Thomas Ziesemer, Department of Economics, Maastricht University, and UNU-MERIT. Address: P.O.Box616,NL6200MDMaastricht.E‐mail:[email protected].ORCID:0000‐ 0002‐5571‐2238. AbstractWeestimateaCobb‐Douglasproductionfunctiondistinguishingbetweenadomesticanda foreigncapitalstockbuiltfromdataofimportedmachineryandtransportequipmentforBrazil.The preferredregressionusesloglevelsestimatedbyGMM‐HAC.Resultsarethattheelasticityof productionofforeigncapitalisabout40%ofthatofdomesticcapital,thefunctionhasconstant returnstoscaleincapitalandlabourvariables,andhumancapitalandtechnicalchangearealso highlyproductive.JELcodes:C22,C51,E23,F43,O54.Keywords:time‐series,estimation,production function,openeconomy,Brazil. 1. Introduction BardhanandLewis(1970)havemergedthetwo‐gapmodelofCheneryandBruno(1962)withthe growthmodelofSolow(1956).Theresultisaneoclassicalgrowthmodelwithadomesticanda foreigncapitalstock.1Theinvestmentintheforeigncapitalstockhastobepaidfor,byexports, soonerorlaterifforeigndebtisincludedasintheextensionsunderperfectorimperfectcapital mobility(Ziesemer1995,1998).Comparedtotheneoclassicalclosed‐economymodelthestrength ofthemodelisthat(i)itdealswithgrowththroughcapitalaccumulationlinkedtointernational tradeincapitalgoods,consumptiongoodsandforeigndebt,themajoraspectsofglobalization,and (ii)ithasasteady‐stategrowthratewithincomeandpriceelasticitiesofexportdemandbecause worldincomeenterstheexportfunction,besidestechnicalchange.However,therelatedproduction functionwithdomesticandforeigncapitalstockshasneverbeenpresentedasanempirical estimate.Suchanestimateisthecontributionofthispaper. 2. Themodel TheproductionfunctionthatweestimateinthispaperisoftheCobb‐Douglastype: 𝑌𝑒 𝐾 𝑒𝑇 𝐿1𝑢 𝐾 , (1) Ydenotesoutput,Kdisdomesticcapital,Kfforeigncapital,Hhumancapital,Llabourforce,uthe unemploymentrate,Thlabouraugmentingtechnicalchangetakingintoaccounthumancapitalinits calculation,caconstant,tatimetrend,andvtastochasticterm.Enteringhumancapitalinthesame formasBarroandLee(2013)doresultsinhavingβHinthelog‐linearregression;thisworksslightly betterherethanthelog(H)version. Takinglogsof(1)weget 𝑙𝑜𝑔𝑌 𝑐 𝑏𝑡 𝛼𝑙𝑜𝑔𝐾𝛽𝐻𝛾𝑙𝑜𝑔𝑇 𝜇𝑙𝑜𝑔𝐾 𝑣 (1’) Asthevariablesmayhaveunitroots,weshouldalsoconsiderestimatingthefunctioninfirst differences: 1Importedcapitalgoodsarealsoincreasinglyrecognizedasimportantintheheterodoxliterature(Blecker 2021).
2 𝑑𝑙𝑜𝑔𝑌 𝑏 𝛼𝑑𝑙𝑜𝑔𝐾 𝛽𝑑𝐻 𝛾𝑑𝑙𝑜𝑔𝑇𝜇𝑑𝑙𝑜𝑔𝐾 𝑣 𝑣(2) In(1’)and(2)residualsaredifferent.In(2)wehaveaspecialcaseofamovingaverage.The stochastictermmayhaveserialcorrelationwithlagsjandmovingaverageresiduals𝜀. WewanttolinkthemtoanARMAprocess(seeDavidsonandMacKinnon2004,chapter13) 𝑣∑𝜌 𝑣 𝜀 ∑𝜃𝜀 (3) Theprocesswithonlythefirstsumontheright‐handsideiscalledanautoregressiveprocessof orderj,ar(p),andwithonlythesecondsumitiscalledamovingaverageprocess,ma(q).Together theyarecalledanARMA(p,q)process.𝜌and𝜃willbefoundthroughtheestimation.2Therelated parametershavetobefoundintheestimationtogetherwiththeexponentialparameters,whichare elasticitiesofproduction.Alevelmodelwillthencombine(1’)and(3),andadifferencemodelwill combine(2)and(3)andistypicallycalledARIMAXmodel,wherethe‘I’standsfor‘integrated’and theXfortheregressorsotherthantheconstant.Notethatifthetimetrendisstatistically insignificantinthelevelmodel,thentheinterceptmaybestatisticallyinsignificantinthedifference model.Using(1’)anditslaggedform,weinserttheresidualsintotheautoregressiveprocess(3)and estimatethelevelmodel 𝑙𝑜𝑔𝑌𝑐𝑏𝑡𝛼𝑙𝑜𝑔𝐾 ,𝛽𝐻 𝛾𝑙𝑜𝑔𝑇 ,𝜇𝑙𝑜𝑔𝐾 , ∑𝜌 𝑙𝑜𝑔𝑌 𝑐𝑏𝑡 𝛼𝑙𝑜𝑔𝐾, 𝛽𝐻 𝛾𝑙𝑜𝑔𝑇 , 𝜇𝑙𝑜𝑔𝐾 ,𝜀 ∑𝜃𝜀 (4) Similarly,using(2)anditslaggedform,weinserttheresidualsintothedifferencedversionofthe autoregressiveprocess(3)andestimatethedifferencedmodel 𝑑𝑙𝑜𝑔𝑌 𝑏𝛼𝑑𝑙𝑜𝑔𝐾 ,𝛽𝑑𝐻 𝛾𝑑𝑙𝑜𝑔𝑇 ,𝜇𝑑𝑙𝑜𝑔𝐾 , ∑𝜌 𝑑𝑙𝑜𝑔𝑌𝑏 𝛼𝑑𝑙𝑜𝑔𝐾,𝛽𝑑𝐻 𝛾𝑑𝑙𝑜𝑔𝑇 ,𝜇𝑑𝑙𝑜𝑔𝐾 , 𝑑𝜀∑𝜃𝑑𝜀 . (5) Wewillpresentestimatesofspecialcasesofthesemodelsinwhichsomeofthe𝜌,𝜃arezero.The residualin(5)isindifferences,whicharemovingaverages,indicatingoverdifferencing. Overdifferencingisnotaproblemiftheserialcorrelationistakenintoaccount(MaddalaandKim 1998). 3. Thedata WeusedataforBrazil.WetakeoutputasGDPinconstant2010localcurrencyunits,unemployment rates,andlabourforcedatafromWorldDevelopmentIndicators(WDI),(WorldBank2021).As unemploymentrateshavegaps,werunaregressionforOkun’slaw,makeaforecastanduseits valuestofillthegaps.WeusetechnicalchangedatafromZiesemer(2021)selectingtheelasticityof substitutionclosetounitywithaCESparameterof0.99correspondingalmostexactlyequaltothe Cobb‐Douglasfunctionbecauseitiscontainedthereinbothselectionprocedures;theselevelshave fallensinceabout1980inasimilarwayastheTFPdatafromPWT9.1,whichareconstructedslightly differently.Weconstructtheforeigncapitalstockfromimportedmachineryandtransport equipmentincurrent1000$(1989‐2020fromtheWorldIntegratedTradeSolution,WITS),multiplyit by1000andtheofficialexchangerate,dividebytheGDPdeflatorfromWDIandmultiplyitby100. Thenweapplytheperpetualinventorymethodtothisinvestmentvariable.Forthisweusethe averagedepreciationrateof4.25%fromPWT9.1fortheyears1989‐2017,whichalsoentersthe 2Forfirm‐levelpaneldataBlundellandBond(2000)useanar(1)process.
3 constructionoftheinitialvaluefoundasthe1989importedinvestmentgoodsdividedbytherateof depreciationplusagrowthrateof4.7%,whichisthecapitalgrowthrateforBrazilin1989in Ziesemer(2021).Thedomesticcapitalstockisobtainedinthesameway,basedongrossfixed capitalformationdatafromWDIdiminishedbytheimportedmachineryandtransportequipment; byconstruct,thisvariablealsoincludesinvestmentinbuildings.Humancapitaldataaretakenfrom PWT9.1;theyareconstructedasindexbetween1and5,andthereforecangrowonlytoitsupper limitandactasshiftersoftheproductionfunctionratherthanpermanentlygrowingfactors. 4. Econometrics,estimationresultsandinterpretation InTable1,column1,weshowaleast‐squaresestimateforthelevelmodel(4).Theelasticityof productionoftheforeigncapitalstockisonly40%ofthatofthedomesticcapitalstock,hereandin thenexttworegressionsincolumns2and3.Timetrendsareneversignificantbecauseweincludea technicalchangevariable.Allothervariableshaveelasticitiesofproductionascommoninthe literature.Thelowelasticityofproductionmaybeexplainedbyissuesoftechnologytransferas discussedintheliteratureonappropriatetechnology.Whenconsideringreturnstoscaleweshould notincludehumancapitalbecauseitsindexmaximumvalueof5doesnotallowtakingarbitrary multiples.Returnstoscaleareclosetounitywithap(crs)=0.8inaWaldtest. AllvariablesarenotindependentoftheGDPbecausetheyareendofperiodvaluesincludingcurrent investmentsandaretherebyendogenous.Therefore,weusealsothetwo‐stageleastsquares methodinthesecondcolumnandGMMinthethirdcolumnofTable1.Leastsquaresandtwo‐stage leastsquaresconsiderheteroscedasticityandserialcorrelationonlyinthestandarderrorsand covariances.GMMestimatorstakethemintoaccountalsointhecoefficientestimateshowninTable 1,column3.Theelasticitiesofproductionarenowhigherforhumancapitalandtechnicalchange andslightlylowerfordomesticcapitalandlabourvariablesthanthoseofTable1,column1and2. Theresultisclosetoconstantreturnstoscale. Thear(5)coefficientsprobablyindicateabusinesscycleeffect.3Aswedonotusedataformachine andlabourhours,factorsarefullyusedinbooms,butinotherperiodsthereisloweroutputwhereas theloweruseofthefactors’hoursisnotcapturedinourdata.Intheproductionfunctionasdefined forthesedata,theeconomyisbelowthefunction,notonit,wheneverfactorsrunlesshoursand thismayleadtoar(5)termsindicatingthatevery5yearstheeconomyisinasimilarsituation. Moving‐averagetermsmakeGMMestimatesdependentoninitialvaluesandtherebyunstable.We havedroppedthemfromtheanalysisofthelevelequationbecauseremovingdifferencinginthe formofar(1)terms(seeNau2020)doesnotsolvetheinstabilityproblem. Moreover,havingaGMMresultsuggeststhattheestimateofthecovariancematrixhasconverged. However,withadditionalobservationsitmightincreaseifthereareunitroots(Davidsonand MacKinnon2004,ch.14).Avector‐error‐correctionmodelbasedonaVARwithlaglengthonebased ontheSICcriterion(becauseofthelownumbersofobservations)wouldsuggestthatthemodelhas fivecointegratingequations(r=5)fromthetracetestortwo(r=2)fromthemaximum‐eigenvalue test,whichwouldimplyoneorfour(K‐r=6‐r)uniteigenvaluesinthesystemofcointegrated equations.ForaVECMestimate,wehaveatoosmallnumberofobservations.Therefore,wealso estimatedthedifferencedmodel(5),although(i)themodelsofcolumn1to3havebeentestedfor ar(1)termsandactuallyincludear(2)andar(5)termsand(ii)thevaluesofDurbin‐Watsonstatistic seemtoprecludefirst‐orderserialcorrelationasinthepresenceofunitrootswithoutcointegration. Asimpleleast‐squaresresultincolumn4ofTable1withoutanyarormatermsleadstovery 3Theeconometricsliteratureoftendiscussesthisunderseasonaleffects,whicharesimilartobusinesscycle effectswithalessclearnumberofperiodsincontrasttothefourseasons.
4 plausibleelasticityandconstant‐returns‐to‐scaleresultsbuttheDurbin‐Watsonstatisticsignalshigh first‐orderserialcorrelation.AddingARMA(p,q)terms(formatermsseenotestocolumn5,Table1) andusinginstrumentsagainstendogeneityagainwegettheresultsincolumn5ofTable1from2SLS (two‐stage‐leastsquares)estimation.Themovingaveragesintheresultsforadifferencedmodel usingGMM(notshown)turnouttobeinfirstdifferencesasinequation(5)andthissuggests removingthedifferencing(Nau2020),referringusbacktothelevelapproachasincolumns1‐3of Table1.Moreover,forthedifferencedmodelestimatedwithGMM‐HACestimatewecannotavoid theproblemofweakinstruments(notshown). Table1:Estimationresultsforthelevelanddifferencedmodels Variable,MethodLeast sq.(a) 2SLS(b)GMM‐ HAC(c) Leastsquares (differenced)(d) 2SLS (differenced)(e) constant4.26 (2.33) 3.77, (1.68) 4.46 (3.02) ‐0.009, (‐1.00) ‐0.008 (‐2.51) logKd0.2865 (4.7) 0.3, (4.44) 0.283 (6.22) 0.256, (1.834) 0.287 (5.99) H0.278 (6.26) 0.264, (4.90) 0.283 (7.56) 0.363, (3.158) 0.35 (6.23) logTh0.697 (16.5) 0.69, (12.4) 0.71 (25.8) 0.6, (9.60) 0.75 (28.25) Log(L*(1‐u))0.625 (10.7) 0.615, (9.4) 0.61 (16.67) 0.6, (5.83) 0.539 (9.87) logKf(‐2)0.115 (3.61) 0.123, (3.94) 0.12 (5.18) 0.16, (1.83) 0.226 (5.16) ARterms𝜌=0.34 (2.52) 𝜌=‐0.2 (‐2.16) 𝜌 =0.349, (2.49) 𝜌=‐0.196, (‐1.96) 𝜌=0.358 (2.91) 𝜌=0.21 (3.85) ‐ 𝜌=‐0.357 (‐1.87) Adjustedsample1995‐20171995‐20171995‐20171991‐20171997‐2017 Adj.R‐sq., J‐stat.(p(J)) 0.9995, ‐ 0.9995, 11.74(0.3) 0.9995, 8.31(0.6) 0.92, ‐ 0.9877 12,(0.446) Durbin‐Watsonst.2.162.132.171.412.64 Andrewsbandwith,(f)1.17651.0751.17163.582.8121 returnstoscale(g)1.02651.0381.0121.021.052 DependentVariable:LOG(Y);d(log(y))incolumn4and5.T‐valuesbelowcoefficientsinparenthesis.HAC standarderrors&covariance(Bartlettkernel).(a)ARMAConditionalLeastSquares(Gauss‐Newton/Marquardt steps);p≤0.0474.(b)Instrumentspecification:C,LOG(KD(‐1)),(H(‐1)),LOG(TH099(‐1)),LOG(L(‐1)*(1‐U2(‐1))), LOG(KF47(‐2));constantinsignificant,otherp≤0.069;Laggeddependentvariable®ressorsfromar(2)and ar(5)termsaddedtoinstrumentlist;noIVdropped.(c)s.e.heteroscedasticity&autocorrelationconsistent; weightingmatrix:HAC(Bartlettkernel,Andrewsbandwidth=1.23;InstrumentspecificationC,LOG(KD(‐3)), (H(‐3)),LOG(TH099(‐3)),LOG(L(‐3)*(1‐U2(‐3))),LOG(KF47(‐2))isstrongerthanusinglag1;Sequential1‐step weightingmatrix&coefficientiteration;MABackcast:19931994;p≤0.0086;laggeddependentvariable& regressorsfromar(2)andar(5)termsaddedtoinstrumentlist;noIVdropped.(d)LeastSquares;Newey‐West HACstandarderrors&covariance(Bartlettkernel);constantinsignificant,otherp≤0.1.(e)MABackcast: 1992‐1996;MAterms𝜃=‐1.18(‐145.9),𝜃=0.274(33.28);instruments:allregressorswithlags1,2,5,6 exceptd(log(Kf47(‐2)))(automaticallyde‐selected).(f)Bartlettkernel.(g)SumofcoefficientsofKd,Kf,labour.
5 Aregressionsufferinglessfromweakinstrumentsisthe2SLSregressionincolumn5ofTable1.The instrumentsfortechnologyandlabourareweak,buttheregressiondoesnotdependoninitial values.Allcoefficientsareabithigherhereandwefindslightlyincreasingreturnstoscale,although withap=0.397fortheconstantreturnshypothesis.AnotherweakpointclearlyistheDurbin‐ Watsonstatisticof2.64.Butthe2SLSregressionforthedifferencedmodelstillshowsthatincaseof unitrootsanddifferencingthereisareasonableestimate.Thedifficultyhereisthechoiceofvalid instruments.DenotingtheregressormatrixasX,ourendogeneityassumptionisE(X’u)>0,implying E(X(‐l)’u(‐l))>0.UsinglagsasinstrumentsimposesE(X(‐l)’u)=0.Theinstrumentselectionpresented innote(e)toTable1takesthisintoaccountbywayofusinginstrumentswithlagq+1formaterms withq=1,5. Insteadofchoosingbetweenlevelanddifferencemodelwecanalsoestimate(4)and(5)asasystem ofequations,wherethecorrespondingdifferenceandleveltermshavethesamecoefficientsexcept fortheconstants.Table2containstheresults.Theweighted‐least‐squaresmethodmultipliesthe equationbyestimatedinverseconditionalvariances.TheSURmethodtakesintoaccountthe contemporaneouscorrelationsoftheresidualsofthetwoequations.The3SLSmethodalsodoesso butusesalsoinstrumentstodealwithendogeneity.THEGMM‐HACmethodusesinstrumentsand usesheteroscedasticityandserialcorrelationconsistent(HAC)estimationforcoefficientsand standarderrorsincludingcontemporaneouscorrelationoftheresiduals.Byandlarge,variableshave similarsizeofcoefficientsacrossmethodsinTable2.Theexceptionsarethelabourcoefficientin column5,whichisabithigherandtheforeigncapitalcoefficientsincolumns3and5,whichareabit lower. TheJ‐statisticfortheIVestimatorsshouldbechi‐squaredistributed.Itshouldnotbetoohighandits p‐valuethereforenottoolowtobeinthechi‐squaredistribution(DavidsonandMacKinnon2004); butitshouldalsonotbetoolowanditsp‐valuetoohigh,becausethatwouldmeanthatinstruments dotoolittle(Roodman2009).Theseresultsjudgeaboutinstrumentsandspecification.AllIV estimationsinTable1haveareasonablep(J)andtherearenoweakinstruments.OnlytheGMM‐ HACestimatestakeheteroscedasticityandserialcorrelationintoaccountinaconsistentway.Ap(J) =0.598incolumn3ofTable1indicatesavoidingatoohighortoolowJ‐statistic.TheGMM‐HAC estimateinlevelsisourpreferredregressionbecauseinstrumentsarewellcorrelatedwith regressors(seeappendix),estimationisheteroscedasticityandserialcorrelationconsistent(HAC), andtheJ‐statisticisneithertoohighnortoolow.Ithasalmostconstantreturnstoscale4anda strongimpactoftechnicalchangeandhumancapitalandtherebydynamicallyincreasingreturnsto scale.Theelasticitiesofproductionofcapitaladdupto0.4,astandardvalueforaggregatecapitalin theliterature(seePerkinsetal.2013).OtherestimatorsinTable1and2donothaveallofthese propertiesbutstillshowsimilarresults.ThesystemversionofGMM‐HACinTable2suffersfroma lowJ‐statisticandahighp(J)indicatingthatinstrumentsdotoolittleofbiascorrection. Nevertheless,thedifferencedsingleequationmodelandthesystemmodelsupporttheideaof havingaproductionfunctionwithforeigncapital. ModerndevelopmentsineconometricshavemovedfromAR(I)MAmodelstothemoregeneralcase ofARDLmodelsincludingerror‐correctionmodels(seeChoetal.2021).However,inourcaseofa lownumberofobservationswhere(V)ECMsdonotwork,AR(I)MAXmodelsmaybeagoodwayout becausetheyestimatelessparameters. 4Thep‐valueforthehypothesisofconstantreturnstoscaleis0.8,implyingthatthecrshypothesiscannotbe rejected.
6 Table2:Estimationresultsforthesystemmodel Variable,MethodIterativeLSWeight.LS(a)SUR(b)3SLS(c)GMMHAC(d) Constant (differencedeq.) ‐0.0023 (‐1.09) ‐0.0027 (‐1.4) ‐0.0007 (‐0.95) 0.0002, (0.106) ‐0.003 (‐6.44) Constant(leveleq.)5.935 (1.67) 4.0 (1.79) 5.267 (2.41) 3.71 (1.84) 3.08 (3.04) logKd0.242 (1.94) 0.293, (4.01) 0.246 (3.61) 0.292, (4.62) 0.25 (8.56) H0.274 (4.01) 0.259, (5.14) 0.309 (6.19) 0.26, (5.56) 0.258 (12.22) logTh0.601 (17.29) 0.673, (26.2) 0.693 (27.18) 0.688, (28.76) 0.617 (47.4) Log(L*(1‐u))0.6 (8.84) 0.613, (11.97) 0.6716 (13.21) 0.634, (12.14) 0.8 (40.2) logKf(‐2)0.122 (2.27) 0.128, (3.95) 0.089 (3.05) 0.124, (4.26) 0.089 (5.54) ARtermsdiff.eq.‐ 𝜌‐0.333 (1.85) 𝜌 0.333 (‐2.06) 𝜌‐0.25 (‐1.85) 𝜌0.4 (2.976) 𝜌0.249 (4.16) ARtermsleveleq. 𝜌0.856 (7.64) 𝜌0.377 (3.55) 𝜌‐0.176 (1.7) 𝜌0.31 (3.83) 𝜌‐0.134 (‐1.91) 𝜌0.375 (4.31) 𝜌‐0.17 (‐2.22) 𝜌0.769 (29.16) Adjustedsample1991‐20171992‐20171995‐20171995‐20171992‐2017 Det.resid.covariance2.39E‐105.11E‐101.24E‐102.06E‐105.35E‐10 Adj.R‐sq.:diffeq. Leveleq. 0.92, 0.999 0.913, 0.9995 0.93, 0.9995 0.943, 0.9995 0.898, 0.99925 Durbin‐Watson:diffeq Leveleq 1.41, 1.45 1.985, 1.955 1.75, 1.93 2.31, 2.11 2.03 2.32 returnstoscale(g)0.9651.0341.0071.051.052 (a),(b),(d):Iteratecoefficientsafterone‐stepweightingmatrix.(c)Sequentialweightingmatrix&coefficient iteration.Instruments:C,D(LOG(KD(‐4))),D(H(‐4)),D(LOG(TH099(‐4))),D(LOG(L(‐4)*(1‐U2(‐4)))),D(LOG(KF47(‐ 2)))fordifferencedequationC,LOG(KD(‐1)),(H(‐1)),LOG(TH099(‐1)),LOG(L(‐1)*(1‐U2(‐1))),LOG(KF47(‐2))for levelequation,andlaggeddependentvariablesandregressorsfromartermsaddedtoinstrumentlistoflevel anddifferenceequation;lag4instrumentsarestrongerfordifferenceequationthanlag3.(d)Kernel:Bartlett, Bandwidth:VariableNewey‐West(11),Noprewhitening;J‐statistic0.116,p(J)=1;Instruments:C,D(LOG(KD(‐ 2))),D(H(‐2)),D(LOG(TH099(‐2))),D(LOG(L(‐2)*(1‐U2(‐2)))),D(LOG(KF47(‐2)))forthedifferenceeq.,C,LOG(KD(‐ 2)),(H(‐2)),LOG(TH099(‐2)),LOG(L(‐2)*(1‐U2(‐2))),LOG(KF47(‐2)),andlaggeddependentvariablesand regressorsfromartermsaddedtoinstrumentlistoflevelanddifferenceequation. 5. Conclusionandsuggestionsforfurtherresearch Ourestimatesshowthataproductionfunctionwithforeigncapitalasusedbymodelsbasedon BardhanandLewis(1970)canbedefendedasempiricallyrealisticandthereforethemodelshavea solidempiricalbasis.However,theautoregressiveprocessesemployedhereareundersuspicionof hidingmis‐specificationinsomepartsoftheliterature.Thiswouldbethecaseifactuallythe productionfunctionsareofamoregeneralCESorVEStype.Theelasticitiesofproduction,whichare