In Search of Spillover Effects in West German Manufacturing

This paper first replicates Basu and Fernald's (1995) US results to find no externalities from aggregate West German manufacturing to gross industry output changes and approximately constant internal returns to scale. However, when we distinguish between upswings and downturns in aggregate activity, spillovers appear, associated with upswings. Finally we allow asymmetry in the industry production function and find increasing returns when inputs rise, but constant returns when inputs decline. The evidence for externalities is weaker under asymmetric input changes, but is not entirely removed. We conclude that asymmetries are important at both industry and aggregate level.