innovation, economic growth, and policy implications · source: japan institute for labour policy...

Innovation, Economic Growth, and Policy Implications

Opinions expressed here are those of the authors and should not be ascribed to the Bank of Japan.

Koji Nakamura Bank of Japan

－ Joint-work with Sohei Kaihatsu (Bank of Japan) and Tomoyuki Yagi (Bank of Japan)

Today’s topic

1. Innovation and economic growth 2. Are we creating new innovation? 3. Are we utilizing new innovation? 4. Policy implications

2

1. INNOVATION AND ECONOMIC GROWTH

3

8

9

10

11

1970 1980 1990 2000 2010CY

USAJapanGermany

logarithmic value

Stylized fact

4

Sources: OECD, “OECD. Stat”; United Nations, “World Population Prospects”.

(1) Population (2) GDP (3) Per capita GDP

18.0

18.5

19.0

19.5

20.0

1970 1980 1990 2000 2010CY

logarithmic value

USAJapanGermany

26

27

28

29

30

31

1970 1980 1990 2000 2010CY

USA

Japan

Germany

logarithmic value (current prices, U.S. dollars)

What theory says…

Malthus: Per capita economic growth is limited by productivity of land, that is, food production capacity. Solow model: Per capita economic growth is exogenously determined by technological progress. Endogenous growth theory: R&D, human capital, and education --with market mechanism-- induce per capita economic growth.

5

Growth-accounting approach

6

Note: The potential growth rate is estimated by the Research and Statistics Department, Bank of Japan. Sources: Cabinet Office; Bank of Japan; Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare; Ministry of Economy, Trade and Industry; Research Institute of Economy, Trade and Industry.

Potential growth rate (Japan)

• Slowdown in TFP and capital stock accumulation are the two main causes of Japan’s long-term economic stagnation.

-2

-1

0

1

2

3

4

5

6

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16CY

y/y % chg.

Number of employed

Labor hours

Capital stock

Total factor productivity

Potential growth rate

Firm-level approach

7

Notes: 1. Calculated results of “firm-level TFP” in manufacturing sector. See Appendix 1-2 for details on calculation. 2. The TFP levels of Japan, the US, and the OECD average indicate value of weighted average by sales volume. 3. Estimated results of kernel density with pooled data of “firm-level TFP” in manufacturing sector in 2007-2009. Figure 2 is drawn to so that the distribution of Japan/US adds up to one. Sources: Thomson Reuters, “Data Stream”; OECD, “STAN database”; Cabinet Office, Government of Japan, “National Accounts of Japan”; IMF, “World Economic Outlook”.

• Top-notch firms lead economic growth. • Japanese firms tend to stay at the average level of TFP and

thereby lag behind U.S. and OECD average.

(1) Distance from “frontier” (2) Distribution of firm-level TFP

-0.4

-0.3

-0.2

-0.1

0.0

0.1

98 99 00 01 02 03 04 05 06 07 08 09CY

USAJapanOECD average

distances from lnTFP of "frontier 5%", CY1998=0

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7

lnTFP

Frequency

Japan

USA

Frontier 5%(CY07-09 average)

2. ARE WE CREATING NEW INNOVATION?

8

Innovation stagnation

• Gordon claims that low productivity growth is caused by slowdown of innovation.

• We do not have any significant innovation to revolutionize our lives these day, such as electricity, internal-combustion engine etc.

9

0

10

20

30

40

50

60

1990

1992

1994

1996

1998

2000

2002CY

%

Germany

Japan

USA

Modern innovation

10

(1) Mobile phone (2) Computer

Sources: World Bank, “World Development Indicators”; Comin and Hobijn (2009); United Nations, “World Population Prospects”.

(3) Internet

• ICT innovation has changed our way of lives. • Thanks to new medical innovation, cancer has become

curable. ICT penetration rate (per 100 people)

0

10

20

30

40

50

60

70

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002CY

%

Germany

Japan

USA

0

20

40

60

80

100

120

140

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014CY

%

EU

Japan

USA

Open source innovation

11

(1) Characteristic of Japan’s R&D

Note: Survey results for Japanese firms. Source: New Energy and Industrial Technology Development Organization, Japan and Japan Open Innovation Council, “Open Innovation White Paper (2016)”.

• Japanese firms stick to their own R&D, and collaborate less with other organizations.

0 20 40 60 80

Commissioned from otherfirms

Cooperation withuniversities and public

research institutions

Cooperation withother firms

In-house development

%

Note: Ratios of funding from overseas/government for corporate sector. Source: Ministry of Education, Culture, Sports, Science and Technology, Japan, “Japanese science and technology indicators (2015)”.

(2) R&D fund providers

0

5

10

15

20

25

Japa

n

USA

Ger

man

y

Fran

ce UK

Chi

na

Kor

ea

Overseas → FirmsGovernment → Firms

%

Entrepreneurship: Less animal spirits?

12

(1) Perceived opportunities (2) Perceived capabilities

(4) Respect for successful entrepreneurs (3) Fear of failure

Notes: 1. Survey for individual attributes of potential entrepreneurs in 73 economies in 2014. 2. Perceived opportunities reflect the percentage of individuals who believe there is occasion to start a venture in the next six months in their immediate environment. Perceived capabilities reflect the percentage of individuals who believe they have the required skills, knowledge and experience to start a new venture. The measure of fear of failure (when it comes to starting own venture) only applies to those who perceive opportunities. Source: Global Entrepreneurship Monitor, “2014 Global Report”.

0

20

40

60

USA UK Germany Belgium Japan

Average of 28 countries

%

0

20

40

60


%


20

30

40

50

60


%


50

60

70

80

90


%


3. ARE WE UTILIZING NEW INNOVATION?

13

Decomposition of Japan’s TFP

14

Note: The figure shows cumulative contributions for TFP from CY1990, which are calculated based on Eq.1, Appendix 4. Sources: OECD, “OECD. Stat”; EU KLEMS.

• Japanese companies do invest in ICT and R&D, but something is weighing down on TFP growth.

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

70

1990 1992 1994 1996 1998 2000 2002 2004 2006CY

chg. of TFP growth, accumulated, % pt.

Residual Time dummyCountry dummy ConstantFDI flow R&D intensityICT intensity ActualEstimated

Problems of Japanese firms

15

• More R&D leads to higher TFP growth for US firms, but not for Japanese firms.

Note: Calculated results of “firm-level TFP” in manufacturing sector in 1998-2009. The data of “ln R&D / ln Y” are averaged from t-3 to t-5. Sources: Thomson Reuters, “Data Stream”; OECD, “STAN database”; Cabinet Office, Government of Japan, “National Accounts of Japan”; IMF, “World Economic Outlook”.

(1) USA (2) Japan R&D and TFP growth

0.75 0.76 0.77 0.78 0.79 0.80

all samples

over 0.00

over 0.05

over 0.10

⊿ ln TFP

ln R&D / ln Y0.65 0.66 0.67 0.68 0.69 0.70

all samples

over 0.00

over 0.05

over 0.10

⊿ ln TFP

ln R&D / ln Y

Entry and exit • Entry of innovative entrepreneurs and exit of unproductive

firms promote macroeconomic growth.

16

(1) Entry/exit and productivity

Note: Averaged data in 1985-2014. Source: Hogen et al. (forthcoming).

(2) Listed year of large firms

Notes: 1. Over 10-billion-USD firms are selected (market capitalization, as of Feb. 2016, finance sector excluded). 2. Nationalities of firms are selected based on locations of headquarters. Source: Bloomberg.

-1

0

1

2

3

4

5

USA Japan

y/y % chg.Surviving firmsEntering firmsExiting firmsLabor productivity (estimated)

2000s

2000s

1990s

1980s

before1980

0

50

100

150

200

250

300

350

USA Japan

number of firms

Since 2000,46 firms in the US and only 6 firms in Japan

have listed stocks.

20

30

40

50

60

70

80

90

100

0 1 2 3 4 5 6 7 8T (year)

Japan

USA

%

Aging companies

17

𝑆𝑆𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑝𝑝𝑢𝑢𝑝𝑝𝑝𝑝𝑢𝑢𝑝𝑝𝑢𝑢𝑢𝑢𝑢𝑢𝑝𝑝𝑝𝑝 𝑝𝑝𝑜𝑜 𝑢𝑢𝑝𝑝𝑙𝑙𝑙𝑙𝑢𝑢 𝑇𝑇𝑇𝑇𝑇𝑇 𝑜𝑜𝑢𝑢𝑢𝑢𝑓𝑓𝑠𝑠

=# 𝑝𝑝𝑜𝑜 𝑐𝑐𝑝𝑝𝑐𝑐𝑝𝑝𝑢𝑢𝑐𝑐𝑢𝑢𝑢𝑢𝑐𝑐𝑐𝑐 𝑢𝑢𝑝𝑝𝑙𝑙𝑙𝑙𝑢𝑢 𝑇𝑇𝑇𝑇𝑇𝑇 𝑜𝑜𝑢𝑢𝑢𝑢𝑓𝑓𝑠𝑠 𝑜𝑜𝑢𝑢𝑝𝑝𝑓𝑓 𝑇𝑇 = 0 𝑝𝑝𝑝𝑝 𝑇𝑇 = 𝑝𝑝

# 𝑝𝑝𝑜𝑜 𝑢𝑢𝑝𝑝𝑙𝑙𝑙𝑙𝑢𝑢 𝑇𝑇𝑇𝑇𝑇𝑇 (ln𝑇𝑇𝑇𝑇𝑇𝑇 < 0) 𝑜𝑜𝑢𝑢𝑢𝑢𝑓𝑓𝑠𝑠 𝑢𝑢𝑝𝑝 𝑇𝑇 = 0 ∙ 100

(2) Survival probability of lower TFP firms

(1) “Firm age” and TFP

Note: Calculated results of “firm-level TFP” in manufacturing sector (pooled data of Japan and the US in 1998-2009). Sources: Thomson Reuters, “Data Stream”; OECD, “STAN database”; Cabinet Office, Government of Japan, “National Accounts of Japan”; IMF, “World Economic Outlook”.

0.00

0.01

0.02

0.03

0.04

0.05

～5 ～15 ～25 25～years old

⊿ lnTFP

• Firms as well as people get older and less active.

Flexible labor market (1)

• Traditional life-time employment and seniority-wage system contributed to lift productivity growth in Japan. They worked well in the “catch-up phase” of economic growth after WWII.

• But now we are facing uncharted territory. The traditional Japanese labor system is now an impediment to new innovation.

18

Flexible labor market (2)

19

(1) Length of service and wage (2) Labor market mobility

Note: As of 2014 (Japan) and 2010 (others). Source: Japan institute for labour policy and training, “Databook of international labour statistics 2016”.

Source: OECD, “OECD. Stat”.

60

80

100

120

140

160

180

～1 1～5 6～9 10～14 15～19 20～29 30～length of service

JapanUKGermanyFranceFinlandNorway

wage (1～5 years of service = 100)

AustraliaAustria

BelgiumCanada

Denmark

Finland

France

Germany

Ireland

Italy

Japan

Netherlands

New Zealand

PortugalSpain

Sweden

Switzerland

United KingdomUnited States

-1.0

-0.5

0.0

0.5

1.0

1.5

0.0 0.5 1.0 1.5 2.0 2.5

TFP growth rate (ave. CY2001-2009), %

average of inflow and outflow to "unemployment pool" / employee (CY2001-2009 average), %

4. POLICY IMPLICATIONS

20

Education

• High level of education is a source of innovation.

• Due to rapid changes in business environment, mid-carrier training programs need to be enhanced.

• We may need to instill animal spirits and provide more grounds for entrepreneurship.

21

Labor market policy

• Easier firing and hiring are key factors for reallocating human resources so as to adapt to new innovation.

• Firing of regular workers is almost impossible in Japan. Financial settlements of firing is a key step. Clear regulatory rules for that are imperative.

22

Income policy

23

• Flexible labor market may need proactive income policy that allow fired workers to get financial assistance and re-training opportunities.

• Innovative society may increase inequality--- “Winner-takes-all” “Bipolar society.” Inequality may lead to social unrest and unstable society.

• More proactive income policy may provide innovative and stable society.

Government expenditure

24

• Government could provide more expenditure for R&D. Publicly-funded innovation could be used for private businesses.

• Public assistance to unproductive companies may ensure job security of workers, but may keep human and capital resources unproductive.

Trade/immigration policy • Increase in trade barrier could hinder diffusion

of technological progress and optimal allocation of human and other resources.

• Social consensus on immigration is crucial.

25

(1) Factors inhibiting business expansion in Japan

(2) Inhibiting factors with regard to the cost of doing business in Japan

Note: Survey results in 2015. Source: Ministry of Economy, Trade and Industry, Japan, “Survey of Trends in Business Activities of Foreign Affiliates 2015”.

20 40 60 80

Strict regulations, permits andlicense system

Difficulty securing personnel

High standard that users demandfrom products and services

Exclusivity and distinctiveness ofthe Japanese market

High cost of doing business

multiple answers, %0 20 40 60 80

Social security costs

Distribution costs

Rent (for office)

Tax liability

Labor costs

multiple answers, %

Monetary policy • Low innovation and

growth correspond to low natural rate. Monetary policy could be constrained by effective lower bound under low-growth environment. Unconventional monetary policy is no longer “unconventional?”

26

Japan’s natural rate of interest

Note: For details on the estimation procedures, see Imakubo et al. (2015) etc. Source: Bank of Japan.

-2

-1

0

1

2

3

4

5

90 92 94 96 98 00 02 04 06 08 10 12 14 16CY

Estimation using HP filter

Estimation using Laubach and Williams's(2003) approachEstimation using Imakubo, Kojima andNakajima's (2015) approach

%

Macroprudential policy

• Low growth prospects discourage investments and induce saving gluts. This could exert downward pressure on profitability of financial sector and induce speculative activity.

• A more careful assessment of flow of funds is needed both domestically and internationally.

27

Appendix 1 Calculation method of firm-level TFP

・ Related studies: Andrews et al. (2015) and Fukao et al. (2006). ・ Period: 1998 - 2009. ・ Samples: listed manufacturing companies of 10 OECD member states. ― Belgium, Germany, Denmark, Estonia, Finland, France, Greece, Italy, Japan, and the United States. ― about 2,900 firms per annum (Japan: about 1,500; USA: about 1,000).

・ Index number method: ― Y (net sales): deflated by industrial GDP deflator ― K (tangible fixed assets): deflated by industrial investment deflator ― L (man-hour): number of employees × hours worked by Industry ― SL (labor cost share): industrial compensation of employees / GDP ― SK (capital cost share): 1-SL ― T: Base year (CY2000), j: industry, i: firm ― Upper bar: averaged data of all samples in each year ― PPP-based values ― Industrial classification： Industry classification benchmark (icb)

28

𝑢𝑢𝑐𝑐 𝑇𝑇𝑇𝑇𝑇𝑇𝑢𝑢,𝑝𝑝 = �ln𝑌𝑌𝑢𝑢,𝑝𝑝 − ln𝑌𝑌𝑝𝑝�� −12 �𝑆𝑆𝑆𝑆𝑗𝑗 ,𝑝𝑝 + 𝑆𝑆𝑆𝑆𝑝𝑝��ln𝑆𝑆𝑢𝑢 ,𝑝𝑝 − ln 𝑆𝑆𝑝𝑝�� −

12 �𝑆𝑆𝑆𝑆𝑗𝑗 ,𝑝𝑝 + 𝑆𝑆𝑆𝑆𝑝𝑝��ln𝑆𝑆𝑢𝑢 ,𝑝𝑝 − ln𝑆𝑆𝑝𝑝��

+ �ln𝑌𝑌𝑝𝑝�� − ln𝑌𝑌𝑇𝑇�� −12

(𝑆𝑆𝑆𝑆𝑝𝑝�� + 𝑆𝑆𝑆𝑆𝑇𝑇��)�ln𝑆𝑆𝑝𝑝�� − ln 𝑆𝑆𝑇𝑇�� −12

(𝑆𝑆𝑆𝑆𝑝𝑝�� + 𝑆𝑆𝑆𝑆𝑇𝑇��)�ln𝑆𝑆𝑝𝑝�� − ln𝑆𝑆𝑇𝑇��

1. Innovation and economic growth

Appendix 2 Calculation method of firm-level TFP (cont.)

・ Sources: [Nominal data] Thomson Reuters, “Data Stream” [Deflator] OECD, “STAN database”; Cabinet Office, Government of Japan, “National Accounts of Japan” [PPP] IMF, “World Economic Outlook” ・ Statistics of firm level TFP (ln TFP): ・ “Frontier 5%” is defined for firms which are located in the 5 percentile in terms of the TFP level of each year.

29

Note: *** denotes significance at 1%.


All samples (pooled from 1998 to 2007)

Frontier 5% Others

Mean 0.13 2.51 0.01 2.50 ***

Std dev. 0.94 0.57 0.75

Difference in means

――

0

1

2

3

4

5

6

7

8

9

OECDaverage

Japan USA Frontier5%

lnTFP (Japan=1)

0 10 20 30 40 50

UK

South Korea

Germany

China

Japan

USA

Business ExecutivesInformed Citizens

%

Appendix 3 Firm-level approach

30

Note: Calculated results of “firm-level TFP” in manufacturing sector. TFP levels of Japan, the US, and the OECD average indicate value of weighted average by sales volume. The figure shows data in 2007-2009. Sources: Thomson Reuters, “Data Stream”; OECD, “STAN database”; Cabinet Office, Government of Japan, “National Accounts of Japan”; IMF, “World Economic Outlook”.

(1) Level of TFP

TFP level of top 5 percentile

(2) Survey Q: What is the country that you consider to be the

leading innovation champion?

Note: Survey for business executives engaged in the management of their firm’s innovation strategy in 23 countries, and informed citizens in 13 countries in 2015. Source: GE, “2016 GE Global Innovation Barometer”.


Appendix 4 Panel estimation of TFP growth

31

・Sample period: 1976 - 2007. ・Countries: 12 OECD member states (unbalanced). ― Australia, Austria, Czech Republic, Estonia, Finland, Germany, Italy, Japan, Netherlands, Slovenia, the United Kingdom, and the United States.

・Fixed effect.

Notes: 1. Due to constraints in data availability, sample periods are shorter than others, and/or some values are used to fill in data of unavailable periods for some countries. 2. Total investment includes fixed assets investment and R&D investment. 3. Standard errors are given in parentheses. * denotes significance at 10%, *** at 1%. 4. Independent variables are averaged using data of the previous three years, and FDI intensity has almon lags (three years). 5. In order to correct for biases due to heteroscedasticity and contemporaneous correlation, we use panel-corrected standard errors. 6. Values of TFP levels in the figure are calculated by using the database of Inklaar and Timmer (2014). Sources: OECD, “OECD. Stat”; EU KLEMS; Inklaar and Timmer (2014).

TFP level and country dummy (Eq. 1)

2. Are we creating new innovation?

Australia

Austria

Czech

EstoniaFinland

GermanyItaly

Japan

Netherlands

Slovenia

UK

USA

y = -6.14 x + 4.47 R² = 0.44

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

0.2 0.4 0.6 0.8 1.0 1.2TFP level (ave. in 1976-2007, US:2005=1)

country dummy

0.172 *** 0.230 ***( 0.045 ) ( 0.078 )

0.155 *** 0.134 ***( 0.060 ) ( 0.034 )

0.050 * 0.114 *( 0.028 ) ( 0.061 )-2.909 *** -4.531 ***( 0.716 ) ( 1.542 )

0.206 0.2563.436 5.111

Adjusted R-squared AIC

a

b

c

Constant

R&D intensity

Yes YesTime dummy

Dependent variable: ⊿TFP

(FDI inflow and outflow / nominal GDP)FDI flow

Manufacturing2

Coeff.Variables Total1

(R&D investment / total investment)

(ICT and software investment / total investment)ICT intensity

0102030405060708090

100

USA Japan

composition ratio, %

Servicerfirms

Userfirms

Appendix 5 ICT utilization

32

(1) Stance on IT investment

(2) Details on IT investment

(3) Place for work (IT engineers)

Notes: 1. G5 includes the US, the UK, France, Germany, and Italy. 2. Survey results in 2000. 3. Fixed investment means maintenance costs (e.g. for maintaining system and software). Strategic investment means development cost (e.g. for developing new system and software). Source: Accenture, “Accenture High Performance IT Program (2005)”.

• The usage of ICT technology is much more important than just introducing it.

Note: Survey results in 2013. Source: JEITA.

Note: Calculated by IPA in 2009. Source: Information-technology promotion agency (IPA), Japan.

0102030405060708090

100

USA Japan


Not very importantNo opinionImportantExtremely important

3. Are we utilizing new innovation?

0102030405060708090

100

Ave. of G5 Japan


Strategicinvestment

Fixedinvestment

Appendix 6 Funding for entrepreneurs

33

(1) Investment value of venture capital

(2) Hardships for entrepreneurs in Japan

Note: As of 2014. Source: OECD, "OECD Science, Technology and Industry Scoreboard 2015“.

Note: Survey results in 2015. Source: Japan Finance Corporation, “Survey on State of New Business Start-ups 2015”.

0.0 0.1 0.2 0.3

Germany

Belgium

UK

Japan

Korea

USA

Seed/start-up/early stage

Later stage

Breakdown not available

per nominal GDP, %

3. Are we utilizing new innovation?

0 10 20 30 40 50

Ensuring employees

Lack of knowledgeon finance, tax, and

law

Acquiring customers

Funding

multiple answers, %

References

• Andrews, D., C. Criscuolo, and P. Gal (2015), “Frontier firms, technology diffusion and public policy: Micro evidence from OECD countries,” OECD productivity working papers, No. 2.

• Comin, D. A. and B. Hobijn (2009), “The CHAT dataset,” National Bureau of Economic Research working paper, No. 15319.

• Fukao, K. and H. U. Kwon (2006), “Why did Japan’s TFP growth slow down in the lost decade? An empirical analysis based on firm-level data of manufacturing firms,” The Japanese Economic Review, Vol. 57 (2), pp. 195-228.

• Hogen, Y, K. Takahashi, and K. Miura, “Large firm dynamics and the granular hypothesis (tentative),” Bank of Japan Working Paper Series, forthcoming.

• Imakubo, K., H. Kojima, and J. Nakajima (2015), “The natural yield curve: its concept and measurement,” Bank of Japan Working Paper Series, 15-E-5.

• Inklaar, R. and M. P. Timmer (2014), “The Relative Price of Services,” Review of Income and Wealth, Vol. 60 (4), pp. 727–746.

• Laubach, T. and J. C. Williams (2003), “Measuring the natural rate of interest,” Review of Economics and Statistics, Vol. 85 (4), pp. 1063-1070.

34

innovation, economic growth, and policy implications · source: japan institute for labour policy...

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