A Multi-asset and Country Analysis of Capital-output Ratios

ABSTRACT

Several studies have considered factors influencing capital output differences among countries and reported that factors such as education of the workforce, capital allocation, taxes, and business profits partly explain capital-output differences. We disaggregate capital investment into six categories for nine major industrialized nations during the 1998 to 2016 period. The regression estimates of capital-output against several production factors show that capital-output ratios are a positive function of the education level of the workforce and R&D intensity, and a decreasing function of the tax burden on business profits. Among the countries studied, China, the UK, Italy, and India appear to be the most efficient in terms of capital-output ratios for the several capital investment categories examined.

KEYWORDS:

• Capital-output ratio
• implied cost of capital
• corporate tax burden
• union density
• education of the workforce
• research and development intensity

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The capital-output ratio is the amount of capital input required to produce one unit of output. Stated differently, it can be seen as the efficiency index of input required to produce one unit of output.

² The assumption is that the tax shield allowed on capital investment may vary among countries, which will affect the after-tax cost of the investment.

³ An exhaustive search for the cost of capital for the countries studied yielded the cost of capital for the nine countries in different time periods for a single year or based on different calculations. We used the implied cost of capital from Schroder’s (2020) study because the calculation was based on the 1995 to 2009 period, which falls within our study period (1998 to 2016), and it contained the cost of capital for all nine countries used in our study.

⁴ The data for China were not available.

⁵ The estimates were generated on SAS (Sas Institute Inc. 2019).

⁶ To account for the fact that both China and India are not unionized, we re-restimated the results without India and China, but the results were invariant to the alternative estimation.