intangible investment and economic growth in japan kyoji fukao (hitotsubashi university, rieti,...

Intangible Investment and Economic Growth in Japan

Kyoji FUKAO (Hitotsubashi University, RIETI, NISTEP)

Tsutomu MIYAGAWA(Gakushuin University, RIETI)

Prepared for a teleconference with members of the OECD “New Sources of Growth Project”

June 14, 2011

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BackgroundRIETI Program “Raising Industrial and Firm Productivity (FY

2011-2015)” (Program Leader: Fukao; Leader of the Intangible Investment Project:

Miyagawa)

Grant-in-Aid for Scientific Research (S) “Empirical Research on Intangible Investment in Japan ( ERII, FY 2010-2014)”

(Project Leader: Miyagawa)

Research for Japan’s SciSIP Program (FY 2011-2013) and Implementation of Japan’s Third Innovation Survey at the 1st Theory-Oriented Research Group, National Institute of Science and Technology Policy (NISTEP)

(Group Leader: Fukao; Research Fellow: Miyagawa)2

Agenda

1. Motivation and Research Agenda of the RIETI Program “Raising Industrial and Firm Productivity”

2. Empirical Research on Intangible Investment in Japan

3. Research Agenda for Japan’s SciSIP Program and Implementation of Japan’s Third Innovation Survey at NISTEP

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1. Motivation of the RIETI Program “Raising Industrial and Firm Productivity”

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• TFP growth in the manufacturing sector has declined sharply.

• TFP growth in the non-manufacturing sector has been very low for a long time.

Japan's TFP Growth by Sector

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1970-75 1975-80 1980-85 1985-90 1990-95 1995-2000

2000-2006

Manufacturing sector

Non-manufacturing sector (market economy)

What Is Needed to Accelerate TFP Growth?

Large Manufacturers Still Achieve Rapid TFP Growth

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• In the manufacturing sector, TFP growth of large firms has actually accelerated. Small and medium-sized firms (SMEs) have been left behind.

※工業統計表の甲票と乙票を分析対象にしているため、　　 1999分析期間を年までにしている。

TFP Growth by Factory Size (Annual Growth Rate)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1980-1985 1985-1990 1990-1995 1995-1999

Average TFP growth

Top quartile in terms of salesSecond quartile

Third quartile

Bottom quartile

Possible reasons:

(a) SMEs left behind in R&D and internationalization

(b) decrease in technology spillovers from large firms.

The Market Selection Process Is Not Working

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Decomposition of TFP Growth in the Manufacturing Sector (Annual Growth Rate)

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1981-1985 1985-1990 1990-1995 1995-2000

Entry effect

Exit effect

Reallocationeffect

Within effect

TFP growth

The “exit effect” is negative and is a drag on TFP growth. Japan's economy has a low “metabolism.”

It is the productive factories that are being shut down. Less productive factories remain.

Why Has TFP Growth in the Non-manufacturing Sector Been So Low for Such a Long Time?

• Slow selection mechanism (entry and exit rates are low)• Stagnation of ICT investment• Stagnation of investment in intangiblesThese factors are closely related with labor market issues.– Example: in order to avoid changes in corporate structure,

employment adjustment, and training of workers, firms choose to purchase custom software rather than packaged software.

– Expected high closure cost of firms decreases incentives for starting-up of new businesses by all parties.

– Firms usually do not train their part-time workers.– Because they avoid employment adjustment (e.g., termination),

firms do not or cannot expand their outsourcing.7

Japan’s ICT Investment-GDP Ratio is Very Low in Comparison with Other Major Developed Economies

8

0

2

4

6

8

10

12

14

%

ICT Investment-GDP Ratio in Major Developed Economies

Japan

Korea

US

UK

France

Germany

Italy

Source: Fukao, Miyagawa, Pyo and Rhee (2009).

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Japan Has Been Left Behind in “Intangible” Investment in Economic Competencies (Corporate Organization, Off-JT, Advertising, etc.)

Research Agenda The aim of the program is to measure industry- and firm-level

productivity and its determinants for Japan and various East Asian countries and to conduct research on policies to raise productivity.

•The Program will update and expand the Japan Industrial Productivity (JIP) and China Industrial Productivity (CIP) databases in collaboration the WIOD Project and World KLEMS Project.•The Program will construct an industrial productivity database by

prefecture for Japan and examine the impact of the recent earthquake on regional economies and policies for reconstruction. •Using micro data from Japan, China, Korea and Taiwan, the

Program will conduct research on productivity differentials between firms, and policies for raising productivity in the service sector. •The Program will measure, at the industry and firm level,

intangible investment. 10

Agenda




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Fukao et, al. (2009) estimated the aggregate intangible investment in Japan, following Corrado, Hulten and Sichel (2005, 2009).

(1) Annual intangible investment in Japan was on average 53 trillion yen (450 billion Euro) from 2000 to 2005.

(2) The ratio of intangible investment to GDP in Japan was 11.1%, which is similar to the estimates for the US by CHS (2009) and for the UK by Marrano, Haskel and Wallis (2009).

(3) However, investment in economic competencies is relatively small among advanced countries.

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International Comparison in Intangible Investment/GDP Ratio

Total investmentComputerized

informationInnovative property

Economiccompetencies

Japan All industries 11.1 2.2 6.0 2.9(2000-05)

Manufacturing 16.6 2.1 11.5 3.0(2000-05)Service 9.2 2.4 3.6 3.2

(2000-05)Australia Market economy 9.6 1.3 3.6 4.7

(2005-06)Canada All industries 9.8 1.0 5.0 3.8

（2005）France Market economy 8.3 0.9 3.1 4.4

（2004）Germany Market economy 7.1 0.8 3.5 2.9

（2004）Italy Market economy 5.2 0.7 2.3 2.2

（2004）Korea All industries 6.7 1.6 3.2 1.9

Netherlands All industries 8.4 1.4 1.8 5.2（2005）

Spain Market economy 5.2 0.8 2.5 2.0（2004）

UK Market economy 13.0 2.1 3.9 6.9(2004)

US Non-farm business 13.8 1.9 5.3 6.6

(2000-2003)

(Source) Barnes and McClue (2009), CHS (2009), Fukao et al (2009), Marrano, Haskel and Wallis(2009), Pyo, Chun, and Rhee(2010)


Using intangible investment data, we examine the contribution of intangible assets to economic growth in Japan by following CHS (2009). The growth accounting results are as follows:

1. The contribution of intangible capital accumulation to labor productivity has declined since 1990.

2. When we compare the results in growth accounting between Japan and the US, we find that the gap in labor productivity growth between two countries can be explained by the difference in intangible capital deepening.

3. If intangible capital deepening in Japan was as large as in the US, Japanese productivity growth would catch up with the US.

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Growth accounting with intangibles(%)

US1985-90 1990-95 1995-2000 2000-05 1995-2003

Growth rate of labor productivity 4.40 1.65 2.27 2.53 3.09

Contribution of capital deepening 2.66 1.75 1.34 1.17 1.68

Contribution of tangible capital 1.77 1.25 0.86 0.83 0.85Contribution of intangible capital 0.89 0.49 0.47 0.33 0.84

Labor composition 0.44 0.49 0.51 0.42 0.33

Contribution of MFP growth 1.30 -0.59 0.43 0.95 1.08

1) Source: Fukao et, al. (2009) and CHS (2009)

Japan


• Two approaches to estimate intangibles at the firm level:

• Miyagawa and Kim (2008) showed the existence of intangible assets which are complementary to R&D and advertising expenditures.

• They estimated that measured intangible assets increased MFP growth rate at 0.1% at the firm level.

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• Following Bloom and Van Reenen (2007), Professor Lee of Seoul National University and I conducted interview surveys with respect to organizational management and human resource management in Japanese and Korean firms.

• Based on the results of our interview surveys, we constructed a measure evaluating the management practices of the firm and examined the effects of management practices on firm performance.

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The Distribution of Firms in Japan and Korea by Industry

Industry

Electric machinery 44 ( 7.7% ) 51 ( 14.6% )

Information and communication machinery 73 ( 12.7% ) 96 ( 27.4% )

Motor vehicles 52 ( 9.1% ) 140 ( 40.0% )

Precision machinery 25 ( 4.4% ) 10 ( 2.9% )

Internet-based services 15 ( 4.3% )

Information service 11 ( 3.1% )

Media activities 14 ( 2.4% ) 9 ( 2.6% )

Retail 230 ( 40.1% ) 18 ( 5.1% )

Total 573 350

KoreaJapan

Number of Firms Number of Firms

135 ( 23.6% )

The Distribution of Firms in Japan and Korea by Number of Employees

50-99 100-299 300-499 500-999 1000- Total 50-99 100-299 300-499 500-999 1000- Total

Manufacturing 25 63 31 32 43 194 42 180 31 30 14 297

Information relatedservices

43 59 13 17 17 149 5 22 3 0 5 35

Retail 43 80 42 40 25 230 0 11 1 0 6 18

Total 111 202 86 89 85 573 47 213 35 30 25 350

KoreaJapan

IndustryNumber of Employees Number of Employees

0.2

.4.6

.8K

erne

l den

sity

1 2 3 4Average score

Korea Japan

Distribution of Management Scores (All firms)


• A summary of the production function estimations including management scores.

(1) Better management practices with respect to human resource management are related to good firm performance. This relations are significant in Korean firms in particular.

(2) In Japanese firms, organizational reform improves firm performance in the service sector.

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・ In ERII project, we extend the previous studies on intangible investment at the aggregate, industry, and firm levels.

• Research project at the aggregate level: we extend the estimation by Fukao et, al. (2009) to 2008 or 2009. Using the extended estimation, we can examine the effects of Leaman Shock to the accumulation in intangible assets.

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• Research project at the industry level: we will estimate intangible investment by industry.

• We will classify the market economy into 25-30 industries, harmonizing with EU and Korean industry classifications.

• Using our estimates, we will examine the complementary role of intangible assets on ICT assets.

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Industry classification

Agriculture, foprestry, fisheries and mining

Food , beverages ,and tabacco

Textile

Pulp and paper

Chemical products

Petorium, coal, and plastic products

Clay and stone

Iron

Non-ferrous metal and fabricated metal products

General machineries

Information and communication machineries

Electric machinery

Transportation machinery

Other machineries

Other manufacturing products

Construction

Electric, gas and water supply

Wholesale

Retail

Finance and insurance

Transportation and post

Communication service and broadcasting

Education (private and non-profit)

Health care(private and non-profit)

Information service

Newpaper and printing

Other services


• Research project at the firm level(1)Management practices and firm performance:・We will conduct interview surveys on management

practices again.・ As Samsung Economic Research Institute

collaborates with our project, we will get the data of about 1000 firms in Japan and Korea.・ Using these data, we will conduct a similar work to

Miyagawa et, al. (2010).

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(2) Comprehensive estimates of intangible assets.・ Using the data of listed firms, we will estimate intangible

assets at the firm level following Hulten (2010) and Piekkola (2011).

・ In this project, We will examine the effects of intangible assets on firm values.

・ ERII project collaborates with RIETI research project on intangible investment.

・ Our research activities in ERII project are published at the website http://www.erii.jp/english/index.html.

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Agenda




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The aim of this project is to create the data infrastructure to develop the “Science of STI Policy” and analyze the economic impact of innovations and STI policies.

•Our group will construct a database of input for innovation (intangible investment), innovation itself, and outcomes of innovation (TFP and economic growth) at the industry and the regional level. •We will also focus on knowledge spillover effects among

firms and from government activities, such as basic science research and university education, to firms. For this analysis, we will use micro data of supplier relationships, location of factories, patents, etc.

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intangible investment and economic growth in japan kyoji fukao (hitotsubashi university, rieti,...

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