intangible investment in japan: measurement and ... seminar fukao.pdf · mining food products...

Intangible Investment in Japan: Measurement and Contribution to

Economic GrowthPrepared 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)

August 21, 2007 Crawford School 2

Contents1. 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 study4. Discussion


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.


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 1970-2002 (we can extend the data up to 2004 using a more aggregated industry classification). The JIP Database can be found at: http://www.rieti.go.jp/jp/database/d05.html.

• The first public-release version of the EU KLEMS database became available online at the EU KLEMS website, http://www.euklems.net/ on March 15.


1980-1995

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0Ja

pan

80-9

5

Ger

man

y 80

-95

Fran

ce 8

0-95

UK

80-

95

Italy

80-

95

US

80-9

5

Ann

ual a

vera

ge,

%Growth Accounting for the Market Sector in Japan, the

US, and the Major EU Economies1995-2004

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Japa

n 95

-04

Ger

man

y 95

-04

Fran

ce 9

5-04

UK

95-

04

Italy

95-

04

US

95-0

4

Ann

ual a

vera

ge,

%

Contribution ofTFP growth

Contribution of capital inputgrowthContribution of labor inputgrowthGross valueadded growth

Source: EU KLEMS Database, March 2007.


Real GDP per Capita of East Asian Countries Basedon PPP of 2000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

year

US

dollar

in 2

000 G

K p

rice

China

Japan

South Korea

Taiwan

USA

France

Alan Heston, Robert Summers and Bettina Aten, Penn Worl d Table Vers ion 6.2, Center for

Internationa l Compari sons of Producti on, Income and Pri ces at the Univers i ty of Pennsy lvani a ,

September 2006.


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 1995.


Other goods producing industries

Source: EU KLEMS Database, March 2007.

Figure 4. TFP Growth in the Market Sector: by Sector and by Country

Electrical machinery, post andcommunication

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Japan

Germ

any

Fra

nce

UK

Italy

US

1980-95

1995-2004

Manufacturing, excluding electricalmachinery

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Japan

Germ

any

Fra

nce

UK

Ital

y

US

1980-95

1995-2004

Other goods-producing industries

-1

-0.5

0

0.5

1

1.5

2

Japan

Germ

any

Fra

nce

UK

Italy

US

1980-95

1995-2004

Finance and business services

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Jap

an

Germ

any

Fra

nce

UK

Italy

US

1980-95

1995-2004

Distribution services

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jap

an

Germ

any

Fra

nce

UK

Ital

y

US

1980-95

1995-2004

Personal and social services

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Jap

an

Germ

any

Fra

nce

UK

Ital

y

US

1980-95

1995-2004


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 1995. 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 1995. 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 1995-2004 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.


0 1 2 3

Economy overall

Agriculture, fisheries and forestryMining

Food productsTextile products

Pulp, paper and wood productsPetroleum and chemical productsStone, clay and ceramic products

MetalsMetal products

General machineryElectric machinery

Precision machineryTransportation machinery

Miscellaneous manufacturing productsElectricity, gas and water supply

ConstructionWholesale and retail

Hotels and eating and drinking placesTransportationCommunication

Finance and insuranceReal estate

Other business servicesEducation

Medical servicesOther services for individuals

Public services

Japan/US 1995Japan/US 2002

Labor Productivity: Japan-US Comparison

Source: JEF-JCER (2007).


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)


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 13Source: EU KLEMS Database, March 2007.

Figure 3. Contribution of Capital Input Growth: Japan, the US and the Major EU Economies

1980-95

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0Jap

an 8

0-95

Germ

any

80-95

Fra

nce 8

0-95

UK 8

0-95

Ital

y 80-95

US 8

0-95

annual

ave

rage

, %

1995-04

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jap

an 9

5-04

Germ

any

95-04

Fra

nce 9

5-04

UK 9

5-04

Ital

y 95-04

US 9

5-04

annual

ave

rage

, %

of which: Non-ICT capital

of which: ICTcapital

Contribution ofcapital inputgrowth


Figure 9. Growth of ICT Capital Service Input in the Whole Economy

0

50

100

150

200

250

300

350

400

450_1

980

_1981

_1982

_1983

_1984

_1985

_1986

_1987

_1988

_1989

_1990

_1991

_1992

_1993

_1994

_1995

_1996

_1997

_1998

_1999

_2000

_2001

_2002

_2003

_2004

1995=100

Japan

US

UK

Germany

France

Italy

Source:EUKLEMSDatabaseMarch


Figure 10. Growth of ICT Capital Service Input in Distributution Industry

0

50

100

150

200

250

300

350

400

450

_198

0

_198

2

_198

4

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6

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8

_199

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6

_199

8

_200

0

_200

2

_200

4

1995=100

Japan

US

UK

Germany

France

Italy

Source: EUKLEMSDatabaseMarch 2007


Figure 11. Growth of ICT Capital Service Input in Personal and Social Services

0

100

200

300

400

500

600

_198

0

_198

2

_198

4

_198

6

_198

8

_199

0

_199

2

_199

4

_199

6

_199

8

_200

0

_200

2

_200

4

1995=100

Japan

US

UK

Germany

France

Italy

Source: EUKLEMSDatabaseMarch 2007


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


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.


2. Measurement of intangible investment in JapanWe 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 informationSoftware and databases → IO tables, Survey on Selected Service Industries, etc.

2. Innovative propertyScientific 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 thesectoral level.


2. Measurement of intangible investment in Japan (Contd.)

• Annual intangible investment in Japan was 50 trillion yen on average from 2000 to 2004.

• Computerized information: the ratio of this investment to GDP increased rapidly until 2000. 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 2004.

• Economic competencies: the ratio of this type of investment to GDP increased until 1990. However, it started to decrease from 2002 because firms cut training expenses and remuneration for executives as part of restructuring measures.


Intangible Investment in Japan

-

10,000

20,000

30,000

40,000

50,000

60,000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

billion yen

Economic competenciesInnovative propertyComputerized information


Intangible investment/GDP

0

1

2

3

4

5

6

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

%

Computerized information/GDP Innovative property/GDPEconomic competencies/GDP


Intangible Investment: Japan, the US and the UKJapan US UK

2000-04(average, billion yen)

CHS (2006)1998-2000

(billion US dollars)

MH (2006)2004

(billion pounds)Computerized information 10,630 154 19.8 Software 9,556 151 19.9

Custom software 6,626 Packaged software 841 In-house software 2,088 12.4

Databases 1,075 3

Innovative property 26,796 425 37.6 Science and engineering R&D 13,522 184 12.4 Mineral exploration 19 18 0.4 Copyright and license costs 4,579 75 2.4 Other product development, design, and research expe 8,676 149 22.4

Economic competencies 13,356 505 58.8 Brand equity 4,982 140 11.1 Firm-specifc resouecs 8,374 365 47.7

Firm-specific human capital 1,426 28.5 Organizational structure 6,948 19.2

Total 50,273 1085 116.2

UK-Marrano and Haskel (2006).1) Sources: Japan-authors' calculation, US-Corrado, Hulten and Sichel (2006),

7.5


Comparison in Intangible Investment between US, UK and Japan

Japan US UK

2000-04CHS (2006)1998-2000

MH (2006)2004

Total intangible investment /GDP (%) 9.6 11.7 10.9

Computerized information (%) 2.0 1.7 1.7

Innovative property (%) 5.1 4.6 3.2

Economic competencies (%) 2.5 5.4 6.0

Intangible investment/tangibleinvestment 0.5 1.2


1980 1985 1990 1995 2000 2005

0

5

10

15

20

25

30

Intangible Investment

Tangible Investment

Business Investment(percent of business output)

US JapanSource: CHS (2006). Source: Authors’ calculation



• 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.



• 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 1990. 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.


The Share of the Manufacturing and Service Sectorsin the Intangible Investment of the Whole Economy

0

10

20

30

40

50

60

70

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

%

Manufacturing Sector Service Sector


Intangible Investment in the Manufacturing and Service SectorsManufacturing

(Average 2000-04)Service

(Average 2000-04)

Total intangible investment /GDP (%) 11.5 11.2

Computerized information (%) 1.8 2.3

Innovative property (%) 7.0 6.0

Economic competencies (%) 2.7 2.8

Intangible investment/tangibleinvestment 0.9 0.5


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 intotal capital.

3. The capital deepening effect was larger in the growth accountingwith 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 1990-2002, the contribution of TFP growth became zero when we consider intangible assets.


Growth Accounting without and with Intangible Assets

-2

-1

0

1

2

3

4

5

without intangible assets with intangible assets without intangible assets with intangible assets

1980-90 1990-2002

%

Contribution of labor input (man-hours) Contribution of tangible capital deepeningContribution of intangible capital deepening Contribution of TFP growthGrowth rate of GDP


Source of Labor Productivity Growth

Japan US1995-2000 1995-2003

Labor productivity (%) 2.20 3.09

Capital deepening (%) 1.93 1.68

Tangibles (%) 1.35 0.85 Intangibles (%) 0.58 0.84

Labor composition (%) 0.33

TFP growth (%) 0.27 1.08

Source：Japan - authors' calculation US - CHS (2006)


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.


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.


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.


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.


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.


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 firm-specific.


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).


Average Remuneration of CEOs in major companies in Japan, the US, and Europe (2003)

0

200

400

600

800

1,000

1,200

Japan US Europe

Source: The Guideline for the Remuneration of CEOs published by Japan Executives Association

million yen

Note: Japanese data are on the 100 largest companies. US and European data are on companies with sales of morethan 1 trillion yen.


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.

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