Knowledge that Transforms

[1] Haavelmo, Trygve: Comment on Leontief, Wassily, Rates of Long-Run Economic Growth and Capital Transfer from Developed to Underdeveloped Areas, Study Week on The Econometric Approach to Development Planning (October 7-13, 1963), Pontificiae Academiae Scientiarvm Scripts Varia, (Amsterdam: North-Holland Publishing Company, 1965). [2] Chenery, Hollis and Alan M. Strout, Assistance and Economic Development, American Economic Review, 56, no. 4 (Sept. 1966), 679-733. [3] Rahman, Md. Anisur: Welfare Economics of Foreign Aid, Pakistan Development Review, Summer, 1967.

An article by Michael D. Intriligator entitled Embodied Technical Change and Productivity in the United States 1929-1958 appeared in the February 1965 issue of this REVIEW. To judge the importance of embodied and disembodied technical progress, Intriligator computed 40 correlations of gross national product, excluding GNP originating in government and housing, with capital and labor input. All 40 regressions resulted from combining four alternative measures of labor input, three of them mine, with five alternative capital series based on different assumptions about embodiment, and two methods of handling trend. To match Intriligator's GNP measure, labor input must exclude all general government employees. The data Intriligator actually used, however, include all government employment: civilian, military, and work relief. The period covered, 19291958, spanned the Great Depression, World War II, and the Korean War, periods in which the share of government employment was fluctuating violently, as well as a postwar period in which most of the employment increase was devoted to government. Intriligator's results consequently seem to have no apparent meaning. An interesting feature of the article is that all 40 regressions Intriligator computed have high correlation coefficients despite his use of irrelevant data; only one is below 0.95 and most are above 0.98. This may give further reason for skepticism about the utility of inferring causation -in this case, degree of embodiment-from minor differences in the goodness of fit of time series.

In recent years, several case studies have been conducted on the operations of individual foreign subsidiaries of United States firms.1 While these are useful, they do not provide a means of comparing the operating characteristics of direct foreign investments as they may relate to the level of development of the countries in which they reside. There also have been some excellent comparative studies.2 These have concentrated upon comparisons of United States controlled enterprises abroad with those controlled either by other expatriate groups or by nationals. Perhaps the only intercountry comparison of the operating characteristics of United States direct foreign investments was that by Anthony Y. C. Koo.3 Koo's analysis utilized data from an Office of Business Economics survey of United States investments in Latin America. Thus it was confined to a group of countries which were all relatively less-developed (as of 1955). Because that survey did not provide country data on an industry sector basis, Koo was unable to examine for country differences within industry sectors. The purpose of this article is to partially close this gap. Our objective is to explore the question: Are the performance characteristics of direct foreign investments within industry sectors significantly influenced by the level of development of the country or region which harbor those investments? To examine this question comprehensively, it would be useful to have time series data on a large cross section of countries and several industry sectors. Data should be designed to reflect the economic contribution of investments in various sectors. We could then evaluate the extent to which there may be inherent difficulties faced by lessdeveloped countries difficulties which restrain them from fully realizing the potential contributions of direct foreign investment. To evaluate and compare the economic contribution of various sectors to the host country, it would be useful to know the effects of investments upon:

Aggregate measures of output per man or output per man-hour, such as those regularly published in the Economic Report of the President, are frequently used as indicators of changes in aggregate productivity. These measures reflect both changes in output per man (or man-hour) in individual sectors of the economy and sectoral shifts in the composition of output. While this dual nature has been long recognized, it has not received sufficient attention.' The causative forces for productivity growth in a particular sector are entirely different from those accounting for shifts among sectors.2 Table 1 presents a measure of composition effects which allows for the separate analysis of sectoral productivity change and sectoral shifts. The measure which is used here has been discussed at length elsewhere.3 Briefly the procedure used derives from the following propositions: (1) Aggregate measures of output per man are derived by dividing aggregate output by an aggregate input measure, be it the total number of men or man-hours. (2) The output per man measure thus derived is an implicitly weighted average of output per man in all sectors of the economy, number of men being used as weights.4 As a result the aggregate input measure is equally weighted while the aggregate productivity measure is differentially weighted. (3) Because there is no justification for differentially weighting productivity that would not apply to the input measure, it is less arbitrary to isolate the weighting factor as a third component of output, which might be termed the effect of composition.5 Consistency is thus afforded in the treatment of aggregate input and productivity measures, and greater emphasis is placed on sectoral shifts as a source of growth in output.