This article has two main objectives: to assess and compare the profitability of Japanese and American firms and industries during the latter half of the 1980s; and to explore the relationship between firm profitability and national competitiveness. The study reveals that: Japanese firms in most industries were less profitable than American firms; after adjusting for differences in tax rates, accounting practices, and debt levels, Japanese firms had lower returns on assets and operating margins than American firms, but similar returns on equity; the returns of Japanese companies exhibited far less volatility than the returns of American companies; and differences in the average returns of Japanese firms in different industries were extremely small. The link between profitability and competitiveness depends on the effect profits have on firm strategy, particularly the firm's investment strategy. In the U.S., the desire for profits may have encouraged firms to pursue strategies which are not consistent with national competitiveness. Conversely, Japanese firms have tended to adopted strategies which promote competitiveness.
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