The extent and sources of cost and efficiency differences between U.S. and Japanese motor vehicle producers

In this paper we present estimates of cost and efficiency differences between U.S. and Japanese producers over the period 1970–1984 based on an econometric cost function methodology rather than on the financial accounting, plant inspection, and nonparametric index number frameworks usually used. Researchers who have used financial accounting and plant inspection data drawn from individual companies have obtained very different results concerning relative U.S.-Japanese productivity from those who have applied index number techniques to three-digit motor vehicle data. We are able to reconcile these results by correcting a bias in the construction of three-digit real output. We also develop a capacity utilization model derived from short-run equilibrium analysis which is useful when the production and cost data have substantial short-run cyclical elements, and production is characterized by so few non-quasi-fixed factors that estimation of a variable cost function is precluded by degrees of freedom difficulties. We demonstrate that the cost difference estimates for 1979 which were influential in the debate that resulted in the Voluntary Restraints Agreements were overestimates of the Japanese advantage. We estimate that in 1979 Japanese producers enjoyed a 24% cost advantage and a 13% efficiency advantage. By 1984 the cost advantage had increased to 55%, of which two-fifths was due to an undervalued yen. The Japanese efficiency advantage had increased to 18%. However, in spite of their efficiency disadvantage, we estimate that U.S. producers would have had a production cost advantage by 1987, after the large relative appreciation of the Japanese yen.