Intangible Investment in Japan: Measurement and Contribution to Economic Growth

Transcription

1 Intangible Investment in Japan: Measurement and Contribution to Economic Growth Prepared for presentation at the seminar of the the Crawford School, the Australian National University August 21, 2007 Kyoji Fukao (Hitotsubashi University and RIETI) Sumio Hamagata (Central Research Institute of Electric Power Industry) Tsutomu Miyagawa (Gakushuin University and RIETI) Konomi Tonogi (Hitotsubashi University and RIETI)

2 Contents 1. An Overview of the Pattern of Economic Growth and Productivity Improvement in Japan, the Major EU Economies, and the US. Why is intangible investment important for the Japanese economy? 2. Measurement of intangible investment in Japan 3. Implications of our study 4. Discussion August 21, 2007 Crawford School 2

3 1. Motivation: Why is intangible investment important for the Japanese economy? Although the Japanese economy has been recovering since 2002, the average growth rate since 2000 is only 1.5%, which is lower than the estimated potential growth rate (2%). There have been few studies which compare TFP growth and the impact of the ICT revolution in the major EU economies, Japan and the US at the industry level, probably because of the lack of appropriate data for a broad and rigorous international comparison. Researchers of the Japan Industrial Productivity (JIP) Database Project, including the authors, have joined the EU KLEMS consortium and supplied original data on Japan for the EU KLEMS database. August 21, 2007 Crawford School 3

4 1. Motivation: Why is intangible investment important for the Japanese economy? (contd.) The JIP Database was constructed in order to measure sectoral productivity growth in Japan. It includes data on output, intermediate inputs, labor, and capital for 108 industries for the period (we can extend the data up to 2004 using a more aggregated industry classification). The JIP Database can be found at: The first public-release version of the EU KLEMS database became available online at the EU KLEMS website, on March 15. August 21, 2007 Crawford School 4

5 Growth Accounting for the Market Sector in Japan, the US, and the Major EU Economies Annual average, % Japan Germany France UK Italy US Annual average, % Japan Germany France UK Italy US Contribution of TFP growth Contribution of capital input growth Contribution of labor input growth Gross value added growth Source: EU KLEMS Database, March August 21, 2007 Crawford School 5

6 US dollar in 2000 GK price 40,000 35,000 30,000 25,000 20,000 15,000 10,000 Real GDP per Capita of East Asian Countries Based on PPP of 2000 China Japan South Korea Taiwan USA France 5, Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.2, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, September year August 21, 2007 Crawford School 6

7 Overview of Economic Growth and Productivity Improvement It is not the gap in TFP growth but differences in factor input growth that caused the large difference in the economic growth performance of France, the UK and Italy, which registered acceleration in economic growth after 1995, on the one hand and Japan on the other in the period after August 21, 2007 Crawford School 7

8 Figure 4. TFP Growth in the Market Sector: by Sector and by Country Electrical machinery, post and communication Manufacturing, excluding electrical machinery Other goods-producing industries Japan Germany France UK Italy US Japan Germany France UK Italy US Japan Germany France UK Italy US Other goods producing industries Finance and business services Distribution services Personal and social services Japan Germany France UK Italy US Japan Germany France UK Italy US Japan Germany France UK Italy US Source: EU KLEMS Database, March August 21, 2007 Crawford School 8

9 Overview (contd.) The four major EU economies (Germany, France, the UK and Italy) and Japan experienced a slowdown in TFP growth of a similar magnitude after Only the US accomplished an exceptional acceleration in TFP growth. TFP growth in the electrical machinery, post and communication sector was still highest in Japan among the six economies after However, like in other countries, the share of this sector in the economy overall is not very large. The average share of labor input in this sector in Japan s total labor input in was 4.1%. The largest declines in TFP growth in Japan occurred in distribution services and in the rest of the manufacturing sector. The labor input shares of these two sectors were 23.4% and 16.8% respectively. The US and the major EU economies except Italy recorded higher TFP growth in these two sectors. August 21, 2007 Crawford School 9

10 Labor Productivity: Japan-US Comparison Economy overall Source: JEF-JCER (2007). Agriculture, fisheries and forestry Mining Food products Textile products Pulp, paper and wood products Petroleum and chemical products Stone, clay and ceramic products Metals Metal products General machinery Electric machinery Precision machinery Transportation machinery Miscellaneous manufacturing products Electricity, gas and water supply Construction Wholesale and retail Hotels and eating and drinking places Transportation Communication Finance and insurance Real estate Other business services Education Medical services Other services for individuals Japan/US 1995 Japan/US 2002 August 21, 2007 Public Crawford services School 10

11 The Role of ICT Capital and Intangible Assets in TFP Growth In order to explain the productivity gap between the US and other developed countries, economists have focused on the role of ICT capital and intangible assets. ICT Capital Stiroh (2002a), Triplett and Bosworth (2002), and Van Ark et al. (2006) Intangibles Van Ark (2004), McGrattan and Prescott (2005), Corrado, Hulten, and Sichel (2005; 2006) August 21, 2007 Crawford School 11

12 ICT Investment Comparing ICT investment by using EU KLEMS database The definition of ICT assets in EU KLEMS database: computing equipment, communication equipment, and software. August 21, 2007 Crawford School 12

13 Figure 3. Contribution of Capital Input Growth: Japan, the US and the Major EU Economies annual average, % annual average, % of which: Non- ICT capital of which: ICT capital Contribution of capital input growth Japan Germany France UK Italy US Japan Germany France UK Italy US Source: EU KLEMS Database, March August 21, 2007 Crawford School 13

14 Figure 9. Growth of ICT Capital Service Input in the Whole Economy Japan US UK Germany France Italy Source: EU KLEMS Database March _1980 _1981 _1982 _1983 _1984 _1985 _1986 _1987 _1988 _1989 _1990 _1991 _1992 _1993 _1994 _1995 _1996 _1997 _1998 _1999 _2000 _2001 _2002 _2003 _2004 August 21, 2007 Crawford School =100

15 Figure 10. Growth of ICT Capital Service Input in Distributution Industry = Japan US UK Germany France Italy _1980 _1982 _1984 _1986 _1988 _1990 _1992 _1994 _1996 _1998 _2000 _2002 _2004 Source: EU KLEMS Database March 2007 August 21, 2007 Crawford School 15

16 Figure 11. Growth of ICT Capital Service Input in Personal and Social Services = Japan US UK Germany France Italy _1980 _1982 _1984 _1986 _1988 _1990 _1992 _1994 _1996 _1998 _2000 _2002 _2004 Source: EU KLEMS Database March 2007 August 21, 2007 Crawford School 16

17 Intangibles as Complements to ICT Capital The degree of effects of ICT capital on TFP growth is different among firms and among countries (for example the US vs. the UK). Intangible assets may play a complementary role on the effects of ICT capital on TFP growth August 21, 2007 Crawford School 17

18 1. Motivation: Why is intangible investment important for the Japanese economy? (Contd.) We measure intangible investment in Japan and compare it with the results of studies on other countries. We examine the contribution of intangible investment to economic growth in Japan. August 21, 2007 Crawford School 18

19 2. Measurement of intangible investment in Japan We measure intangible investment in Japan following the approach of Corrado, Hulten, and Sichel (2005, 2006). We estimated the three categories of intangible asset investment using the sources listed below. 1. Computerized information Software and databases IO tables, Survey on Selected Service Industries, etc. 2. Innovative property Scientific and nonscientific R&D, mineral exploitation, copyright and license costs, and other product development, design, and research expenses Japan Industrial Productivity (JIP) Database, etc. 3. Economic competencies Brand equity, firm-specific human capital, and organizational structure JIP Database, The General Survey on Wages and Working Hours System, and Survey on Financial Statements of Business Enterprises Using JIP database, we can estimate intangible investment at the sectoral level. August 21, 2007 Crawford School 19

20 2. Measurement of intangible investment in Japan (Contd.) Annual intangible investment in Japan was 50 trillion yen on average from 2000 to Computerized information: the ratio of this investment to GDP increased rapidly until However, it has stagnated since then. Innovative property: innovative property investment (R&D expenses, other product development, etc.) has been the largest among the three categories of intangible investment. The ratio of this investment to GDP was stable from 1998 to Economic competencies: the ratio of this type of investment to GDP increased until However, it started to decrease from 2002 because firms cut training expenses and remuneration for executives as part of restructuring measures. August 21, 2007 Crawford School 20

21 billion yen 60,000 Intangible Investment in Japan 50,000 Economic competencies Innovative property Computerized information 40,000 30,000 20,000 10, August 21, 2007 Crawford School 21

22 6 Intangible investment/gdp 5 4 % Computerized information/gdp Innovative property/gdp Economic competencies/gdp August 21, 2007 Crawford School 22

23 Intangible Investment: Japan, the US and the UK Japan US UK CHS (2006) (billion US dollars) MH (2006) 2004 (billion pounds) (average, billion yen) Computerized information 10, Software 9, Custom software 6,626 Packaged software In-house software 2, Databases 1,075 3 Innovative property 26, Science and engineering R&D 13, Mineral exploration Copyright and license costs 4, Other product development, design, and research expe 8, Economic competencies 13, Brand equity 4, Firm-specifc resouecs 8, Firm-specific human capital 1, Organizational structure 6, Total 50, ) Sources: Japan-authors' calculation, US-Corrado, Hulten and Sichel (2006), UK-Marrano and Haskel (2006). August 21, 2007 Crawford School 23

24 Comparison in Intangible Investment between US, UK and Japan Japan US UK CHS (2006) MH (2006) 2004 Total intangible investment /GDP (%) Computerized information (%) Innovative property (%) Economic competencies (%) Intangible investment/tangible investment August 21, 2007 Crawford School 24

25 Business Investment (percent of business output) Intangible Investment Tangible Investment US Japan Source: CHS (2006). Source: Authors calculation August 21, 2007 Crawford School 25

26 2. Measurement of intangible investment in Japan (Contd.) The ratio of intangible investment to GDP was 9.6%, which is less than the equivalent figures for the US and the UK. While investment in computerized information and innovative property in Japan was not lower than that in the US and the UK, investment in economic competencies (especially firm-specific human capital and organizational change) was much lower than that in the US and the UK. Moreover, the ratio of intangible investment to tangible investment was much lower than that in the US. While in the US, intangible investment has exceeded tangible investment since the mid-1990s, in Japan, intangible investment is still smaller than tangible investment. August 21, 2007 Crawford School 26

27 2. Measurement of intangible investment in Japan (Contd.) We measured intangible investment not only for the whole economy but also separately for the manufacturing sector and the service sector. The share of the manufacturing sector in the intangible investment of the whole economy has declined since The share of the service sector has increased gradually. (Our figure in the next slide does not report investment in primary industry). However, the investment/gross value added ratio in the manufacturing sector is higher than that in the service sector, because the manufacturing sector invested more in innovative property than the service sector. The composition of intangible investment differs substantially in the two sectors. August 21, 2007 Crawford School 27

28 70 The Share of the Manufacturing and Service Sectors in the Intangible Investment of the Whole Economy % Manufacturing Sector Service Sector August 21, 2007 Crawford School 28

29 Intangible Investment in the Manufacturing and Service Sectors Manufacturing (Average ) Service (Average ) Total intangible investment /GDP (%) Computerized information (%) Innovative property (%) Economic competencies (%) Intangible investment/tangible investment August 21, 2007 Crawford School 29

30 2. Measurement of intangible investment in Japan: growth accounting (1) We examine the contribution of intangible assets to economic growth in Japan by following CHS (2006). The growth accounting results are as follows: 1. The contribution of intangible capital accumulation to labor productivity did not change from the 1980s to the 1990s. 2. The slowdown in the growth rate of intangible capital in the 1990s was offset by the increase in the share of intangible capital in total capital. 3. The capital deepening effect was larger in the growth accounting with intangible capital than in the conventional growth accounting. 4. TFP growth is slightly smaller in the growth accounting with intangible capital than in the conventional growth accounting without intangible assets. For the period , the contribution of TFP growth became zero when we consider intangible assets. August 21, 2007 Crawford School 30

31 Growth Accounting without and with Intangible Assets % without intangible assets with intangible assets without intangible assets with intangible assets Contribution of labor input (man-hours) Contribution of tangible capital deepening Contribution of intangible capital deepening Contribution of TFP growth Growth rate of GDP August 21, 2007 Crawford School 31

32 Source of Labor Productivity Growth Japan US Labor productivity (%) Capital deepening (%) Tangibles (%) Intangibles (%) Labor composition (%) 0.33 TFP growth (%) Source:Japan - authors' calculation US - CHS (2006) August 21, 2007 Crawford School 32

33 2. Measurement of intangible investment in Japan: growth accounting (2) The share of the contribution of intangible capital to labor productivity growth in the 1990s was 22%, which is smaller than the share estimated by CHS for the United States. If the contribution of intangible capital to labor productivity growth in Japan were as large as in the United States, then Japanese labour productivity growth in the 1990s would have been 0.2 percentage points higher than it actually was. August 21, 2007 Crawford School 33

34 3. Implications of our study 1. While the ratio of intangible investment to GDP in Japan has risen over the past 20 years, the intangible investment/gdp ratio and the intangible/tangible investment ratio are lower in Japan than the values estimated for the US by CHS(2006). 2. Therefore, the contribution of intangible capital to total labor productivity growth in Japan is substantially smaller than in the US. August 21, 2007 Crawford School 34

35 3. Implications of our study (Contd.) Why is Japan s intangible investment/gdp ratio so low? Tentative answers. (1) The lower share of firm-specific human capital and organizational change: Japanese firms cut training expenses and remuneration for executives as part of restructuring measures. (2) Effects of Japan s financial system, where banks play a central role. Because banks require collateral to provide funds to firms, Japanese firms tend to accumulate tangible assets. August 21, 2007 Crawford School 35

36 4. Discussion The difference in intangible investment between Japan and the other countries reflects differences in data sources and the definition of intangible investment. Here, we focus on the measurement of firm-specific human capital and organizational change because there is a large gap in these expenditures between Japan and the other countries. August 21, 2007 Crawford School 36

37 4. Discussion: on firm-specific human capital CHS (2006) use off-the-job training cost data of the BEA survey. If workers gain non-firm-specific skills from off-the-job training, such accumulation of human capital will be reflected in their wage rates. Since wage increases by age are already taken account as labor quality improvement in standard growth accounting, there is a risk of double counting in the above approach. August 21, 2007 Crawford School 37

38 4. Discussion: on firm-specific human capital (Contd.) According to a survey conducted by Keio University, 63% of workers answered that their skills gained through off-the-job training supported by their employers will be useful even if they change their jobs. We plan to conduct our own survey and ask firms about their on-the-job and off-the-job training and how much of the skills are firmspecific. August 21, 2007 Crawford School 38

39 4. Discussion: on organizational structure Based on Nakamura (2001), CHS (2006) assume that 20% of executives working time can be considered as expenditure on organizational structure and estimate such expenditure by multiplying executive remuneration by 0.2. The data on the remuneration of executives is obtained from the BLS. The gap in expenditure on organizational structure between the US and Japan may reflect differences in the remuneration of executives in the two countries (the average remuneration of CEOs in the US is 14 times greater than in Japan). August 21, 2007 Crawford School 39

40 Average Remuneration of CEOs in major companies in Japan, the US, and Europe (2003) million yen 1,200 1, Japan US Europe Source: The Guideline for the Remuneration of CEOs published by Japan Executives Association Note: Japanese data are on the 100 largest companies. US and European data are on companies with sales of more than 1 trillion yen. August 21, 2007 Crawford School 40

41 4. Discussion: on organizational structure (Contd.) According to Robinson and Shimizu (2006), who surveyed the time use of Japanese CEOs, Japanese CEOs spent only 9% of their working time on strategy development, developing new business, and re-organization. This survey shows that if we follow CHS (2005; 2006), we overestimate investment in organizational structure. As for the estimation of investment in firm-specific resources, we will use surveys in Japan and reexamine our estimates in the near future. August 21, 2007 Crawford School 41