innovation, economic growth, and policy implications · source: japan institute for labour policy...
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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
USA UK Germany Belgium Japan
%
Average of 28 countries
20
30
40
50
60
USA UK Germany Belgium Japan
%
Average of 28 countries
50
60
70
80
90
USA UK Germany Belgium Japan
%
Average of 26 countries
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%.
1. Innovation and economic growth
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”.
1. Innovation and economic growth
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
composition ratio, %
Not very importantNo opinionImportantExtremely important
3. Are we utilizing new innovation?
0102030405060708090
100
Ave. of G5 Japan
composition ratio, %
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.
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