We assess the cost-reducing impacts of increasing stocks of “high-tech” equipment (O capital). Our empirical analysis is based on a dynamic production theory model and annual data for two-digit U.S. manufacturing industries (1952–1991). We find evidence of overinvestment in O capital in the mid to late 1980s, following a period of strong investment incentives in the late 1970s. By the end of the 1980s, however, the returns to investment and falling prices for O capital more than justified the high investment levels in nondurable-goods industries, and the benefit–cost ratio was also increasing for durable-goods industries. The underlying substitution patterns suggest that high-tech capital expansion increases demand for most capital and noncapital inputs overall, but saves on materials inputs. In durables industries, however, both energy and “other” capital appear somewhat substitutable with O capital, and in nondurables industries increasing high-tech intensity may be a factor underlying stagnating labor demand.“We see computers everywhere except in the productivity statistics.”Attributed to Robert M. Solow

Theoretical models of endogenous growth identify capital accumulation and returns as a potential stimulus to economic growth. Existing empirical studies, however, are based on a limited notion of these returns, which follows from the simple production function framework used for estimation. The purpose of this study is to examine growth issues using dynamic cost function estimation. This methodology enables us to broaden the concept of returns to include returns arising from short-run quasi-fixity of private capital, long-run (internal) scale economies, and external “knowledge” factors—overall investment in research (R&D), technology (high-tech capital), and education (human capital). Based on detailed industry-level data, we find evidence of increasing returns to scale arising from cost savings on variable inputs, although diminishing returns to capital are prevalent. Our results also show that knowledge factors augment growth. More importantly, they appear to explain a substantial proportion of measured scale economies.