IT Revolution’s Implications for the Japanese Economy Kazuyuki Motohashi RCAST, University of Tokyo & RIETI

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

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 US Jorgenson and Motohashi (2005) 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-IT Input: 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

Result (2): Input Decomposition

TFP decomposition

IT and productivity at macro level Productivity at IT supplier Competition Sharp price Decline of IT IT investments At user sectors Productivity at Macro economic level ？ IT innovation Productivity at IT supplier

ICT expenditure by industry (2000)

IT investment and Productivity: Industry Look

IT and productivity at firm level Motohashi (2006) Data: BSBSA (all firms with 50 employees and 30 mil yen capital, for manufacturing and wholesale/retail, about 15,000 samples from ) IT network use (only in 91, 94 and 97, (2000)) Intranet, CAD/CAM, CALS, EDI, EC Type of business process Occupation mix: information processing workers Information related expenses (incl. Computer rental fees, but not investment)

IT network and productivity

Comparison with US (Atrostic, Motohashi and Nguyen 2005)

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 investment?

J-US economic system different? 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

Fragmented IT system

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 US From growth accounting exercise, slowdown comes from labor and non-IT capital contributions TFP growth also slows down, coming from TFP growth in non-IT sector Firm level analysis shows productivity premium of IT use is smaller for Japanese firms Possible 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 digital revolution and speed in Chinese system) Across ASEAN countries