IT Revolution’s Implicationsfor the Japanese Economy

Kazuyuki MotohashiRCAST, University of Tokyo & RIETI

http://mo.rcast.u-tokyo.ac.jp/ 　

Outline

1. Slowdown of Japanese Economy in Information Age

2. Macro view of IT and economic growth: Japan-US comparison

3. Firm level view of IT and productivity

4. IT, business strategy and performance

5. Some implications for developing countries, focusing on Thailand

IT and Economic growth: Japan and US

IT Investment/GDP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Japan US

GDP (1990=1)

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Japan US

What is ‘New Economy’?

Information technology revolution Moore’s Law and computer downsizing IT infrastructure and network externality: Internet

US economic resurgence in 90’s Productivity growth and economic growth not incurring

inflation Lowering NAIRU

But not for Japan? True? If so, why?

Comparative Analysis of Japan and USJorgenson and Motohashi (2005)

ALvKvKvKvKv

CwCwIwIwIwIw

LttKssKccKnnK

cccnncttIssIccInnI

lnlnlnlnlnln

lnlnlnlnlnln

,,,,

,,,,,,

Output: Ic: Investment in computers Is: Investment in software It: Investment in communications equipment Cc: Consumption of IT products In, Cn: investment and consumption of non-ITInput: Kc: Capital service flow from computers Ks: Capital service flow from software Kt: Capital service flow from communications equipment Kn: Capital service from non-IT L: Labor service

Total Factor Productivity: A

Result (1): Output Decomposition

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1975-90

1990-95

1995-03

1973-89

1989-95

1995-03

(%)

Non-IT sector

IT sector

GDP

USJ APAN

Result (2): Input Decomposition

-1

0

1

2

3

4

5

1975-90

1990-95

1995-03

1973-89

1989-95

1995-03

(%)

TFP

Labor

non-IT

IT Capital

GDP

USJ APAN

TFP decomposition

0.0

0.5

1.0

1.5

2.0

1975-90

1990-95

1995-03

1973-89

1989-95

1995-03

(%)

IT

Non-IT

TFP

USJ APAN

IT and productivity at macro level

Productivity at IT supplier

Competition Sharp priceDecline of IT

IT investmentsAt user sectors

Productivity atMacro economic level

　

？

IT innovation

Productivity at IT supplier

ICT expenditure by industry (2000)

　

Manufacturing31%

IT services26%

Financialservices

20%

Retail/Wholesale

9%

Trans. &Comm.

2%

Utilities6%

Primaryindustry

1%Other services

3%

Construction2%

IT investment and Productivity:Industry Look

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

IT Expenditure/Sales (90's average)

Lab

or P

rodu

ctiv

ity

Gro

wth

in 1

990'

s

IT and productivity at firm levelMotohashi (2006)

Data: BSBSA (all firms with 50 employees and 30 mil yen capital, for manufacturing and wholesale/retail, about 15,000 samples from 91-2000)IT network use (only in 91, 94 and 97, (2000)) Intranet, CAD/CAM, CALS, EDI, EC Type of business process

Occupation mix: information processing workersInformation related expenses (incl. Computer rental fees, but not investment)

IT network and productivity

Intra Firm Network

-1%

0%

1%

2%

3%

4%

5%

1991-94 1994-97 1997-2000

Manufacturing Wholesale/Retail

Inter Firm Network

-1%

0%

1%

2%

3%

4%

1991-94 1994-97 1997-2000

Manufacturing Wholesale/Retail

Comparison with US(Atrostic, Motohashi and Nguyen 2005)

0%

1%

2%

3%

4%

5%

IT N

etwork

（Japan）

IT N

etwork

（U

S）

Intra-firm N

etwork

(Japan）

Inter-firm N

etwork

(Japan）

Needs to look into ‘black box of firm’

1. US Studies Bresnahan, Brynjolfsson and Hitt 、 QJE2001 IT ＋ HR/Org strategy (flat organization 、 performance based

payment 、 bottom up business practices such as QC circles ）→ productivity

2. Japanese Studies Same kind of approach: FRI(1996) 、 EPA(2001) Not only decentralization but also centralization may work? But organizational rigidity hinders productivity gain from IT inv

estment?

J-US economic system different?

A-type J-Type Implications for IT useCross functionalcoordination

Inactive Active →Comparative disadvantage

in using IT toolsJob description andreponsibility

Clear Unclear →Difficulty in businessprocess reengineering

Decision makingprocess

Top-dowm Bottom-up →Fragmentation of

IT systemKnowledge CreationProcess

Explicit knowledge Tacit knowledge →Ineffective use of

digitalized information

Firm level observation

Aoki, Nonaka-Takeuchi, Kagono et. al

Economic system level observation

• Japan’s Economic Model, particularly life-long employment practice hampers IT based restructuring of firms: CIA by Aoki

• In-house R&D and fragmented innovation system of Japan

Firm’s organizational changes across countries

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Flatorganization

structure

Delegatingresponsibility

Crossfunctional

team

Businesspractice

adjustment toIS

Japan

US

Europe

NIEs

Fragmented IT system

Type of Information System and Effect on Managament

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Reponse to Globalization

Differentiation ofproducts and services

Business ProcessReengineering

Quick Decision Makingin Management

No IS IS by department firm wide IS

Ineffective use of digital information (explicit knowledge)

Organizational IQ Survey, RIETI

Brief Summary

Slowdown of Japanese economy, but IT contribution is not so small as compared to USFrom growth accounting exercise, slowdown comes from labor and non-IT capital contributionsTFP growth also slows down, coming from TFP growth in non-IT sectorFirm level analysis shows productivity premium of IT use is smaller for Japanese firmsPossible factors hampers effective use of IT

Organizational inertia for J-type firms Bottom-up decision making system of Japanese firms

Implications for Developing Countries: Particularly for Thailand

Importance of IT Infrastructure Broadband accessibility Effective use of Wireless technology, even 3G mobile system

Importance of complementary investments (HR, organization etc.) to maximize IT investments

SMEs: HR development, manager’s IT skills Manufacturing: Front loading in product development – 3D CAD

(becoming a part of global supply chain of multinationals)

Japanese model? Importance of tacit knowledge for manufacturing process (vs digit

al revolution and speed in Chinese system) Across ASEAN countries