Firm Size, Rate of Return on Capital, and Increasing Returns to Scale—The Japanese Financial and Information Communication Service Sectors—

Parallel to the increasing income inequalitiesInequality in OECD countries, a few large firms have become mega giants, generating superstar firmsSuperstar firms and superstar managersSuperstar managers, particularly in the financial and information communication service sectors. This implies that increasing returns to scaleIncreasing return(s) to scale in these service sectorsService sector can produce this winner-take-most phenomenonWinner-take-most phenomenon. In this chapter, focusing on annual time series dataData for Japanese service sectorsJapanese service sectors including banking and information and communication service industries as well as some Japanese manufacturing sectorsJapanese manufacturing sectors, the study empirically analyzes the hypothesis that these industries show increasing returns to scale by investigating the correlation between firm sizeFirm size and the rate of return on capitalRate of return on capital. The analysis finds a positive relationship between firm size and the rate of return on capital in most service sectorsService sector. Thus, economies of scale are most likely to prevail in these service sectorsService sector even in Japanese economy, which suffered a prolonged stagnation. Conversely, in the Japanese manufacturing sectorsJapanese manufacturing sectors, such as transportation equipment and electrical machinery, equipment, and suppliesElectrical machinery, equipment, and supplies, the trend in the rate of return on capitalRate of return on capital by firm sizeFirm size can synchronize. Thus, this finding suggests that these manufacturing sectorsManufacturing sector are characterized by constant returns to scaleConstant returns to scale.