Has the Japanese Economy Turned the Corner? The Role of Services and Intangibles

Transcription

1 Has the Japanese Economy Turned the Corner? The Role of Services and Intangibles Bart van Ark The Conference Board and University of Groningen 22 June 2007 RIETI Policy Symposium Productivity in the Global Economy Innovation in the Service Sector and the Role of Intangible Assets

2 The Long Term Perspective Output and Productivity Growth A Sector Perspective on the Productivity Slowdown How do Intangibles Affect Productivity in Services? How to Strengthen Productivity in Services? Page:2

3 Page:3 The Long Term Perspective

4 GDP per capita growth in Japan has slightly accelerated but not beyond EU or U.S GDP per Capita (2006 US$ - PPP) USA Japan EU-15 Page:4 Source: TCB/GGDC Total Economy Database, January 2007 (updated)

5 Even comparison with major European countries does not show Japan as exceptionally strong GDP per Capita (2006 US$ - PPP) Japan France Germany UK Page:5 Source: TCB/GGDC Total Economy Database, January 2007 (updated)

6 No significant improvement in productivity and per capita income gap relative to United States 100% GDP per Capita and GDP per Hour as % of US Level 90% 80% 70% 60% 50% 40% 30% 20% GDP per capita GDP per hour Page:6 Source: TCB/GGDC Total Economy Database, January 2007 (updated)

7 Productivity gap is key driver of per capita income gap Page:7 Source: TCB/GGDC Total Economy Database, January 2007 (updated)

8 Page:8 Output and Productivity Growth

9 Basic Determinants of Growth Accounting Model Output is key measure of standard of living Output is driven by capital (K) labor (L) intermediate inputs (E, M, S) productivity (LP, MFP) Capital and labor can by divided into Quantity (capital stock and hours worked) Quality (ICT vs. non ICT/age, sex and skill distribution) Output increases that cannot be explained by these inputs are attributed to multifactor productivity (MFP) Page:9

10 EU KLEMS Growth and Productivity Accounts EU KLEMS is analytical research database, based on national accounts and complementary official sources (LFS and production statistics) Long time coverage , with greatest detail for post-1995 Harmonized industry classification, capital and labour input, deflation and industry aggregations (e.g. market economy, market services) Decomposition of capital and labour input: Capital assets in 7 asset types Labour input in 18 categories (3 x skill; 3 x age; gender) Broad coverage of EU countries and comparisons with U.S. and Japan Public database: Page:10

11 4.0 Contribution of labor input to output growth has turned negative since EU15ex excludes Portugal, Luxembourg, Ireland, Sweden and Greece EU15ex USA-SIC Japan EU15ex USA-SIC Japan Page:11 Source: EU KLEMS Hours worked

12 Contribution of non-ict capital has significantly declined in Japan EU15ex USA-SIC Japan EU15ex USA-SIC Japan Page:12 Source: EU KLEMS Hours worked Non-ICT Capital

13 ICT investment in Japan contributed less than in EU and U.S EU15ex USA-SIC Japan EU15ex USA-SIC Japan Page:13 Source: EU KLEMS Hours worked Non-ICT Capital ICT Capital

14 The shift towards high-skilled labor use has somewhat accelerated in Japan EU15ex USA-SIC Japan EU15ex USA-SIC Japan Page:14 Source: EU KLEMS Hours worked ICT Capital Non-ICT Capital Labour Composition

15 The overall contribution of the knowledge economy in Japan has declined The knowledge economy EU15ex USA-SIC Japan EU15ex USA-SIC Japan Page:15 Source: EU KLEMS Hours worked ICT Capital MFP Non-ICT Capital Labour Composition

16 Page:16 A Sector Perspective on the Productivity Slowdown

17 Multi factor productivity growth in U.S. was leading growth driver in most sectors, including services! 10.0 Contributions to Gross Value Added Growth in U.S., (in %) TOTAL MARKET ICT PROD AND SERVICES GOODS OTHER GOODS TRADE AND TRANSPORT FINANCE AND BUSINESS PERSONAL SERVICES Page:17 Hours worked Labour composition ICT capital Non-ICT capital Multi factor productivity

18 In Europe, the growth rates are slower and MFP in finance and business services is strongly negative 8.0 Contributions to Gross Value Added Growth in EU, (in %) TOTAL MARKET ICT PROD AND SERVICES GOODS OTHER GOODS TRADE AND TRANSPORT FINANCE AND BUSINESS PERSONAL SERVICES Page:18 Hours worked Labour composition ICT capital Non-ICT capital Multi factor productivity

19 Slowdown in Japan is across the board, except for ICT and slight MFP growth in finance and business services 10.0 Contributions to Gross Value Added Growth in Japan, (in %) TOTAL MARKET ICT PROD AND SERVICES MANUFAC- TURING OTHER GOODS TRADE AND TRANSPORT FINANCE AND BUSINESS PERSONAL SERVICES Page:19 Hours worked Labour composition ICT capital Non-ICT capital Multi factor productivity

20 Page:20 How do Intangibles Affect Productivity in Services?

21 The multi factor productivity residual is key to understand impact of innovation and intangibles on productivity Measures of Productivity, Input Varables and Sources of Growth output measure Total Output or GDP Energy, input Total Hours Worked Materials & Capital Goods measure Service inputs (Machinery, Structures, ICT) productivity Labour Productivity Total Factor Productivity Capital Productivity measure (= efficiency) sources Firm Motivation competencies and Markets, Institutions and Innovation and that and competencies capabilities Regulations Technological Change impact productivity growth Intangible Investment - education & skills - R&D, patents, licencies - organisational innovations - marketing of new products Page:21

22 ICT (and other technologies) go together with nontechnological innovation NEW SERVICE CONCEPT (DIMENSION 1) Marketing TECH- NOLOGICAL OPTIONS (DIMENSION 4) NEW CLIENT INTERFACE (DIMENSION 2) Distribution Knowledge of the characteristics of existing and competing services (business intelligence) characteristics of actual and potential clients (market intelligence) Organisation development NEW SERVICE DELIVERY SYSTEM (DIMENSION 3) Intangibles Capabilities capabilities, skills & attitude of existing and competing service workers (Human Resource Management) Dialogic Source: den Hertog and Bilderbeek (1999)

23 Unmeasured intangible capital is hidden in MFP a) Physical Capital a1) ICT capital (IT hardware, communications equipment) a2) Other capital (plant, machinery, buildings) b) Human Capital b1) Formal Education b2) Company training c) Knowledge Capital c1) Research and Development c2) Patents c3) Licenses, As brands, long copyrights as intangible c3) Other technological investments innovations, remain not related to b1) to b3) [c4) Software]* unmeasured, its c5) Mineral Exploration c6) Experience productivity effects are hidden in MFP d) Process Capital d1) Engineering design d2) Organisation design d3) Construction and use of data bases d4) Remuneration of innovative ideas e) Customer Capital e1) Marketing of new products Multi Factor Productivity (residual)

24 Factor Inputs (tangible capital) a) Physical Capital a1) ICT capital (IT hardware, communications equipment) a2) Other capital (plant, machinery, buildings) b) Human Capital b1) Formal Education b2) Company training Firm Specific Resources (intangible capital) c) Knowledge Capital c1) Research and Development c2) Patents c3) Licenses, brands, copyrights c3) Other technological innovations, not related to b1) to b3) [c4) Software]* c5) Mineral Exploration c6) Experience d) Process Capital d1) Engineering design d2) Organisation design d3) Construction and use of data bases d4) Remuneration of innovative ideas e) Customer Capital e1) Brands e2) Marketing of new products

25 Why treat intangibles as investment? Inherent measurement difficulties of intangible capital going beyond those of tangible capital as follows: The knowledge-input problem The knowledge-investment problem The quality improvement problem The obsolescence problem (Howell, 1996) But no clearcut distinction between tangibles and intangibles that justify a distinction between capitalizing and expensing Any outlay than is intended to increase future rather than current consumption is treated as a capital investment Page:25

26 Source: Corrado, Hulten and Sichel (2006) In U.S. SOURCES the contribution OF GROWTH of the IN knowledge OUTPUT PER economy HOUR increases due to measurement NFB of intangibles 2.78% 3.09% 25% IT CAP INTANG 27% 11% 14% L QUAL IT CAP L QUAL 19% 8% 11% 50% MFP MFP 35% WITHOUT INTANGIBLES WITH INTANGIBLES

27 The contribution CONTRIBUTION of software OF DIFFERENT and firm specific INTANGIBLES intangible TO ANNUAL sources CHANGE is especially IN LABOR important PRODUCTIVITY 0.84% SOFTWARE 32% 0.43% SCI R&D 10% 28% 12% 19% 9% 30% SOFTWARE SCI R&D N SCI R&D BRAND L QUAL FIRM MFP SPEC N SCI R&D BRAND FIRM SPEC 17% 10% 32% Source: Corrado, Hulten and Sichel (2006)

28 Intangible capital that may affect ICT-MFP relationship No evidence of a direct relationship between ICT and MFP at industry level (Stiroh, 2004; Inklaar, Timmer and van Ark (2007) But ICT is general purpose technology (GPT) so that productivity effects may come with a time lag Need to raise intangible investments (human capital, knowledge, etc.) Organizational innovations important, in particular in services In overregulated environment, firm resources are locked in the firm and deliver lower returns than in competitive markets Page:28

29 More Research on Intangibles is Needed Extend studies to more countries UK: Haskell and Marrano Japan: Miyagawa, Fukao et al. Ongoing work for Finland, France and Netherlands Price and output statistics that explicitly recognize product innovations ( quality change). Uncover the subtleties of interaction between tangibles/intangibles and innovation/productivity growth A stronger link in the data between human capital and worker competencies More detailed study at industry level (mnf/services) Intangibles need more accurately represented in the financial data of the innovators themselves Page:29

30 Page:30 How to Strengthen Productivity in Services?

31 Improve Operational Efficiency by Bringing Firms Closer to Local Best Practice Output POLICY ACTIONS TO IMPROVE BEST PRACTICES Remove local restrictions in labor and product markets Invest in hard infrastructure (transport, etc.) Invest in education (in particular primary & secondary education for low skilled) Programs for small enterprise to raise employment and productivity jointly Raise productivity of supply of government services Local best practice X X X X X X X X X Capital

32 Move out Innovation Frontier by Becoming Part of International Best Practices Output Technological or innovation frontier X X X Local best practice X POLICY ACTIONS TO PROMOTE INNOVATIONS Higher education and scientific research (R&D) Attract foreign physical and human capital A larger market for goods and services Venture capital facilities ICT infrastructure Government as partner or client in innovation projects Capital

33 Management is key to exploit productivity benefits from intangibles TANGIBLE INPUTS INTANGIBLE INPUTS OUTPUT * Machinery and equipment * ICT and software * Materials and natural resources * Human capital * Knowledge capital * Organisational capital * Marketing capital * Profit * Sales growth * Value creation, incl. value from intangibles Page:33

34 Regulatory environment creates incentives for management to exploit intangibles for productivity Government focus should be on supporting competition: help increase intensity of entry and exit make prices-quality relationships transparent put pressure on margins in existing markets allow firms to exploit new markets allows firms to exploit but not abuse scale advantages Reform management is complex: many measures are industry-specific reforms need to be comprehensive & complementary time lags before productivity effects emerge political capital needs to be substantial to deal with vested interests and convince the voter Page:34