Estimates of Total Factor Productivity, the Contribution of ICT, and Resource Reallocation Effects in Japan and Korea

Abstract

The purpose of our study is to identify the sources of economic growth based on a KLEMS model for Japan and Korea. We also identify the growth contribution of ICT assets and resource reallocation effects in the two economies. Both Japan and Korea enjoyed high TFP growth in ICT-producing sectors but suffered low TFP growth in ICT-using sectors. For Japan, we find that the main factor underlying the Lost Decade is the slow-down in TFP growth. We also found that Korea's TFP growth was slow until the Asian financial crisis of 1997-1999 but then accelerated after the crisis. It seems that before the crisis, Korea was following a catch-up process with developed economies that was predominantly input-led and manufacturing-based, as documented by Timmer (1999) and Pyo (2001). However, through the drastic economic reform undertaken during the crisis, Korea seems to have shifted to a new phase of economic growth since the end of the 1990s. TFP growth rates, especially those in manufacturing sectors, have substantially increased in post-crisis Korea. Both in Japan and Korea, productivity in service sectors is much lower than in manufacturing. The reason probably is excessive regulation and a lack of competition in service sectors. And these factors seem to have impeded introduction of ICT in service industries. As for ICT capital accumulation, the ICT investment/GDP ratio of Korea is higher than that of Japan. Especially, the speed of ICT accumulation in the ICT sector in Korea is much faster than that in Japan. Both in Japan and Korea, the largest component in ICT investment is computing equipment.In the case of resource reallocation across sectors, the reallocation effect of capital input was negligible or negative for most periods both in Korea and Japan. After the financial crisis of 1997-99, the resource allocation effect of capital in Korea remained negative, although the size of the negative effect declined. On the other hand, the reallocation effect of labor input was positive for most periods both in Korea and Japan.

Estimates of Intangible Investment by Industry and Productivity Growth in Japan

“…() and Fukao et al . () suggest, there is a significant productivity gap between IT and non‐IT sectors. In addition, even in IT‐intensive service industries, there is a productivity gap between the USA and Japan.…”

“…4 However, the aggregate data does not provide enough information to conduct a productivity analysis. As Jorgenson et al (2005), Inklaar et al (2005) and Fukao et al (2012) suggest, there is a significant productivity gap between IT and non-IT sectors. In addition, even in IT-intensive service industries, there is a productivity gap between the USA and Japan.…”

“…There are already a few studies that focus on intangible investment at the sectoral level. For example, Fukao et al (2009) measure intangible investment in the manufacturing and service sectors. Following their work, Barnes (2010) discusses the measurement of intangible investment at the sectoral level.…”

“…5 1 Many published studies point out productivity gaps between the USA and other industrialized countries since the IT revolution. This literature includes Inklaar et al (2005), Jorgenson and Nomura (2005), Inklaar et al (2007), Van Ark et al (2008) and Fukao et al (2012). 2 Solow (1987) raises the question of why productivity improvement is not observed statistically despite widespread IT use in this period.…”

Measurement and Allocation of Capital Inputs With Taxes: A Sensitivity Analysis for OECD Countries

“…Negative capital reallocation is found for Denmark and Japan, as documented also in Fukao et al . (). Not including taxes mostly results in an estimated reallocation effect biased toward zero, leading to underestimating the extent to which capital moves across industries, driven by larger returns.…”