Investment in Capital Assets and Economic Performance: The U.S. Chemicals and Primary Metals Industries in Transition

Abstract

The effects of market and technological conditions on the investment and markup behavior of firms, and their resulting impacts on economic performance, are closely interrelated and complex. In this paper determinants of and linkages among these are explored for two industries with very different performance records and development patterns over the past three decades -the chemicals and primary metals industries. The analysis is carried out using a production theory model that permits explicit assessment of the motivations underlying firm decisions, based on BLS data from 1955-86. General capital (K) investments are distinguished from investments in innovative or high tech capital such as office and communications equipment (0) and technical and scientific apparatus (S). Investment behavior and thus capacity utilization are explicitly modeled as responses to adjustment costs for capital assets. This approach facilitates the measurement of technological and behavioral factors underlying investment, input demand and pricing decisions. This in turn allows investment patterns and their determinants across capital assets to be interpreted, and their linkages with productive and financial performance to be identified.