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
„ 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
The Long Term Perspective
Page:3
GDP per capita growth in Japan has slightly
accelerated but not beyond EU or U.S.
GDP per Capita (2006 US$ - PPP)
45000
40000
35000
30000
25000
20000
15000
10000
1970
1973
1976
1979
1982
USA
Page:4
1985
1988
1991
Japan
1994
1997
EU-15
Source: TCB/GGDC Total Economy Database, January 2007 (updated)
2000
2003
2006
Even comparison with major European countries
does not show Japan as exceptionally strong
GDP per Capita (2006 US$ - PPP)
35000
30000
25000
20000
15000
10000
1970
1973
1976
1979
Japan
Page:5
1982
1985
1988
France
1991
1994
1997
Germany
Source: TCB/GGDC Total Economy Database, January 2007 (updated)
2000
2003
UK
2006
No significant improvement in productivity and per
capita income gap relative to United States
GDP per Capita and GDP per Hour as % of US Level
100%
90%
80%
70%
60%
50%
40%
30%
20%
1970
1973
1976
1979
1982
1985
GDP per capita
Page:6
1988
1991
1994
1997
2000
2003
GDP per hour
Source: TCB/GGDC Total Economy Database, January 2007 (updated)
2006
Productivity gap is key driver of
per capita income gap
Page:7
Source: TCB/GGDC Total Economy Database, January 2007 (updated)
Output and Productivity Growth
Page:8
Basic Determinants of
Growth Accounting Model
„ Output is key measure of standard of living
„ Output is driven by
Š
Š
Š
Š
capital (K)
labor (L)
intermediate inputs (E, M, S)
productivity (LP, MFP)
„ Capital and labor can by divided into
Š Quantity (capital stock and hours worked)
Š 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
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 1970-2004, 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:
Š Capital assets in 7 asset types
Š 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: www.euklems.net
„
Page:10
Contribution of labor input to output growth has turned
negative since 1995
4.0
1980-1995
1995-2004
3.0
2.0
1.0
0.0
EU15ex excludes Portugal, Luxembourg,
Ireland, Sweden and Greece
-1.0
EU15ex
Source: EU
Page:11KLEMS
USA-SIC
Japan
EU15ex
Hours worked
USA-SIC
Japan
Contribution of non-ICT capital has significantly
declined in Japan
4.0
1980-1995
1995-2004
3.0
2.0
1.0
0.0
-1.0
EU15ex
Source: EU
Page:12KLEMS
USA-SIC
Japan
Hours worked
EU15ex
USA-SIC
Non-ICT Capital
Japan
ICT investment in Japan contributed less than
in EU and U.S.
4.0
1980-1995
1995-2004
3.0
2.0
1.0
0.0
-1.0
EU15ex
Source: EU
Page:13KLEMS
USA-SIC
Japan
Hours worked
EU15ex
Non-ICT Capital
USA-SIC
Japan
ICT Capital
The shift towards high-skilled labor use has somewhat
accelerated in Japan
4.0
1980-1995
1995-2004
3.0
2.0
1.0
0.0
-1.0
EU15ex
Source: EU
Page:14KLEMS
USA-SIC
Japan
EU15ex
USA-SIC
Japan
Hours worked
Non-ICT Capital
ICT Capital
Labour Composition
The overall contribution of the knowledge economy in
Japan has declined
4.0
1980-1995
1995-2004
3.0
The
knowledge
economy
2.0
1.0
0.0
-1.0
EU15ex
Source: EU
Page:15KLEMS
USA-SIC
Japan
Hours worked
ICT Capital
MFP
EU15ex
USA-SIC
Japan
Non-ICT Capital
Labour Composition
A Sector Perspective on the
Productivity Slowdown
Page:16
Multi factor productivity growth in U.S. was leading growth
driver in most sectors, including services !
Contributions to Gross Value Added Grow th in U.S., 1995-2004 (in %)
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
TOTAL
MARKET
Page:17
ICT PROD
AND
SERVICES
Hours worked
Non-ICT capital
GOODS
OTHER
GOODS
TRADE AND
TRANSPORT
Labour composition
Multi factor productivity
FINANCE AND
BUSINESS
ICT capital
PERSONAL
SERVICES
In Europe, the growth rates are slower and MFP in finance
and business services is strongly negative
Contributions to Gross Value Added Grow th in EU, 1995-2004 (in %)
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
TOTAL
MARKET
Page:18
ICT PROD AND
SERVICES
Hours worked
Non-ICT capital
GOODS
OTHER
GOODS
TRADE AND
TRANSPORT
Labour composition
Multi factor productivity
FINANCE AND
BUSINESS
ICT capital
PERSONAL
SERVICES
Slowdown in Japan is across the board, except for ICT and
slight MFP growth in finance and business services
Contributions to Gross Value Added Growth in Japan, 1995-2004 (in %)
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
TOTAL
MARKET
Page:19
ICT PROD
AND
SERVICES
MANUFACTURING
OTHER
GOODS
TRADE AND
TRANSPORT
Hours w orked
Labour composition
Non-ICT capital
Multi factor productivity
FINANCE AND
BUSINESS
ICT capital
PERSONAL
SERVICES
How do Intangibles Affect Productivity
in Services?
Page:20
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,
Materials &
Service inputs
input
measure
Total Hours Worked
productivity
measure
Labour Productivity
Total Factor Productivity
(= efficiency)
Capital Productivity
sources
that
impact
productivity
growth
Motivation
and
Firm
competencies
competencies
and
capabilities
Markets, Institutions and
Regulations
Innovation and
Technological Change
Intangible Investment
- education & skills
- R&D, patents, licencies
- organisational innovations
- marketing of new products
Page:21
Capital Goods
(Machinery, Structures, ICT)
characteristics of actual and
potential clients (market intelligence)
uti
o
TECHNOLOGICAL
OPTIONS
(DIMENSION 4)
n
NEW CLIENT
INTERFACE
(DIMENSION 2)
r ib
Marketing
Di
st
NEW SERVICE
CONCEPT
(DIMENSION 1)
n
tio
isa ent
gan m
Or velop
de
Knowledge of the characteristics
of existing and competing
services (business intelligence)
ICT (and other technologies) go together with nontechnological innovation
NEW SERVICE
DELIVERY SYSTEM
(DIMENSION 3)
Intangibles
Capabilities
capabilities, skills & attitude of existing
and competing service workers
(Human Resource Management)
Source: den Hertog and Bilderbeek (1999)
© Dialogic
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
longcopyrights
as intangible
c3) Licenses, As
brands,
c3) Other technological
innovations,
investments
remainnot related to b1) to b3)
[c4) Software]*
unmeasured, its
c5) Mineral Exploration
productivity effects
c6) Experience
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)
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
c)
Firm
Specific
Resources
(intangible
capital)
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
Why treat intangibles as investment?
„ Inherent measurement difficulties of intangible capital
going beyond those of tangible capital as follows:
Š The knowledge-input problem
Š The knowledge-investment problem
Š The quality improvement problem
Š 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
OF GROWTH
OUTPUT PER
HOUR
In U.S.SOURCES
the contribution
of the IN
knowledge
economy
NFB 1995-2003
increases due to measurement
of intangibles
3.09%
2.78%
25%
11%
14%
50%
INTANG
27%
IT CAP
19%
L QUAL
8%
11%
MFP
35%
IT CAP
L QUAL
MFP
WITHOUT
INTANGIBLES
Source: Corrado, Hulten and Sichel (2006)
WITH
INTANGIBLES
CONTRIBUTION
OF DIFFERENT
INTANGIBLES
The contribution
of software
and firm specific
intangible
TO ANNUAL
IN LABOR
PRODUCTIVITY
sourcesCHANGE
is especially
important
0.84%
SOFTWARE 32%
0.43%
28% SOFTWARE
12% SCI R&D
19% N SCI R&D
L QUAL
9%
BRAND
MFP
30% FIRM
MFP
SPEC
1973-1995
Source: Corrado, Hulten and Sichel (2006)
SCI R&D
10%
N SCI R&D
17%
BRAND
10%
FIRM SPEC 32%
1995-2003
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
Š Need to raise intangible investments (human capital,
knowledge, etc.)
Š 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
More Research on Intangibles is Needed
„ Extend studies to more countries
Š UK: Haskell and Marrano
Š Japan: Miyagawa, Fukao et al.
Š 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
How to Strengthen Productivity in
Services?
Page:30
Improve Operational Efficiency by Bringing Firms
Closer to Local Best Practice
POLICY ACTIONS TO IMPROVE BEST PRACTICES
• Remove local restrictions in labor and product markets
Output
• 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
Move out Innovation Frontier by Becoming
Part of International Best Practices
Technological
or innovation frontier
Output
X
X
X
X
Local best practice
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
Management is key to exploit productivity benefits
from intangibles
TANGIBLE INPUTS
* Machinery and
equipment
* ICT and software
* Materials and
natural resources
Page:33
INTANGIBLE INPUTS
* Human capital
* Knowledge capital
* Organisational
capital
* Marketing capital
OUTPUT
* Profit
* Sales growth
* Value creation,
incl. value from
intangibles
Regulatory environment creates incentives for
management to exploit intangibles for productivity
„ Government focus should be on supporting competition:
Š
Š
Š
Š
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
Š allows firms to exploit but not abuse scale advantages
„ Reform management is complex:
Š
Š
Š
Š
Page:34
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