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Why Was Japan Left Behind in the ICT Revolution?

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  • FUKAO Kyoji
  • IKEUCHI Kenta
  • YoungGak KIM
  • KWON Hyeog Ug

Abstract

In this paper, we investigate why information and communication technology (ICT) investment in Japan has stagnated since the 1990s. Given that a notable characteristic of Japan's economy is that small as well as older firms play a much greater role than in other economies, particularly that of the United States, and that previous studies on other countries suggest that larger and younger firms are more likely to adopt new ICT technologies, our analysis mainly focused on firms' size and age. As the first step of our investigation, using firm-level data, we examined whether larger and/or younger firms tend to have a higher ICT intensity. We found that larger firms indeed have a higher ICT intensity. In the case of firm age, there was no simple linear relationship between firm age and ICT intensity. As a next step, we estimated a Cobb-Douglas type production function and tested whether the ICT input coefficient differs across different firm-size groups and firm-age groups. We found that larger firms and younger firms tend to have a higher ICT input coefficient. The other factor that may be responsible for the differences in ICT intensity by firm size and firm age is the constraints on ICT input. To confirm this, we calculated the marginal product of ICT input by firm-size group and by firm-age group using the production function estimates. We found that smaller firms and younger firms tend to have a higher marginal product of ICT input. These findings suggest that smaller firms and younger firms face constraints that prevent them from increasing ICT input. Next, we examined impediments to the full use of ICT by Japanese firms based on our analysis as well as preceding studies by the Japanese government and other Japanese institutions. As factors which may result in smaller firms in Japan facing a higher price for ICT inputs, we pointed out two characteristics of the Japanese economy: the underdeveloped market for business process outsourcing (BPO) and the scarcity of ICT experts. Since access to efficient vendors of ICT services is a key factor for smaller firms' procuring ICT input at a reasonable price and ICT experts in Japan tend to prefer working in large firms, these two factors make ICT input more expensive for smaller firms. On the other hand, as constraints to increasing ICT input for smaller and/or younger firms, we pointed out liquidity constraints and insufficient ICT literacy. We also pointed out a number of other special factors which help to explain why not only the ICT intensity of small firms but also that of all firms in Japan is comparatively low.

Suggested Citation

  • FUKAO Kyoji & IKEUCHI Kenta & YoungGak KIM & KWON Hyeog Ug, 2015. "Why Was Japan Left Behind in the ICT Revolution?," Discussion papers 15043, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:15043
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    References listed on IDEAS

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    1. Timothy Dunne, 1994. "Plant Age and Technology Use in US. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 488-499, Autumn.
    2. Kyoji Fukao & Tsutomu Miyagawa & Kentaro Mukai & Yukio Shinoda & Konomi Tonogi, 2009. "Intangible Investment In Japan: Measurement And Contribution To Economic Growth," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 55(3), pages 717-736, September.
    3. Timothy F. Bresnahan & Erik Brynjolfsson & Lorin M. Hitt, 2002. "Information Technology, Workplace Organization, and the Demand for Skilled Labor: Firm-Level Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 339-376.
    4. Kyoji Fukao & Tsutomu Miyagawa & Hak Kil Pyo & Keun Hee Rhee, 2012. "Estimates of Total Factor Productivity, the Contribution of ICT, and Resource Reallocation Effects in Japan and Korea," Chapters,in: Industrial Productivity in Europe, chapter 9 Edward Elgar Publishing.
    5. Susanto Basu & John G. Fernald & Nicholas Oulton & Sylaja Srinivasan, 2003. "The case of the missing productivity growth: or, does information technology explain why productivity accelerated in the United States but not the United Kingdom?," Working Paper Series WP-03-08, Federal Reserve Bank of Chicago.
    6. Julia I. Lane & John C. Haltiwanger & James Spletzer, 1999. "Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital," American Economic Review, American Economic Association, vol. 89(2), pages 94-98, May.
    7. Anna Giunta & Francesco Trivieri, 2007. "Understanding the determinants of information technology adoption: evidence from Italian manufacturing firms," Applied Economics, Taylor & Francis Journals, vol. 39(10), pages 1325-1334.
    8. Allen,Robert C., 2009. "The British Industrial Revolution in Global Perspective," Cambridge Books, Cambridge University Press, number 9780521868273, October.
    9. Dirk Pilat, 2005. "The ICT Productivity Paradox: Insights from Micro Data," OECD Economic Studies, OECD Publishing, vol. 2004(1), pages 37-65.
    10. B.K. Atrostic & Kazuyuki Motohashi & Sang Nguyen, 2008. "Computer Network Use and Firms' Productivity Performance: The United States vs. Japan," Working Papers 08-30, Center for Economic Studies, U.S. Census Bureau.
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    Cited by:

    1. FUKAO Kyoji & IKEUCHI Kenta & KWON Hyeog Ug & YoungGak KIM & MAKINO Tatsuji & TAKIZAWA Miho, 2015. "Lessons from Japan's Secular Stagnation," Discussion papers 15124, Research Institute of Economy, Trade and Industry (RIETI).

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