Intangible Investment in Japan

Prepared for the OECD WORKSHOP ON PRODUCTIVITYOECD Conference Centre, Paris, 5‐6 November 2012

Kyoji FUKAO (Hitotsubashi University and RIETI)YoungGak KIM (Senshu University)

HyeogUg KWON (Nihon University, RIETI)

1

Motivation• Available data on intangible investment at the industry‐and firm‐level is increasing rapidly.

• It is a good time to collect stylized facts on intangible investment, which will contribute to further developments in economic theory on this issue.

• It seems that Japan’s data on intangible investment is relatively advanced in the world. 

• Another notable feature of Japan is that intangible investment has stagnated in recent years. 

• We collect stylized facts on intangible investment in Japan and try to answer some questions, such as why intangible investment in Japan has stagnated and what type of firms invest actively in intangible assets.

2

Structure of This Presentation1. Recent Trends in Macro‐Level Intangible 

Investment in JapanNext, using industry‐level and firm‐level data, we examine the following issues for each category of intangible assets.What industries lead intangible investment?What type of firms invest in intangible assets: large or small, young or old, productive or non‐productive?2.  Innovative Property3.  Economic Competencies4.  Computerized InformationAnalysis is very preliminary. We have not examined the impact of intangible assets on productivity yet.

3

Major Data Sources on Intangible Investment in Japan Industry level: JIP Database 2011: http://www.rieti.go.jp/en/database/JIP2011/index.html• Nominal and real investment flows and real stock data for each category of 

intangible investment for 108 industries, which cover the whole economy, are available for 1985‐2009. The JIP Database Project collaborates with the EU KLEMS Consortium and the World KLEMS Database Project, and KLEMS‐type data are available.

• Estimation procedures are explained in:Miyagawa, T., and S. Hisa (2012) “Estimates of Intangible Investment by Industry and 

Productivity Growth in Japan,” Gakushuin University. Fukao, K., T. Miyagawa, K. Mukai, Y. Shinoda and K. Tonogi (2009) “Intangible 

Investment in Japan: Measurement and Contribution to Economic Growth,” Review of Income and Wealth, Vol. 55, No. 3, pp. 717‐736.

Firm level:Basic Survey of Japanese Business Structure and Activities• The survey is conducted annually since 1994 by the Ministry of Economy, Trade and 

Industry (METI).  The survey covers all firms with at least 50 employees and 30 million yen of paid‐in capital in manufacturing, mining, commerce, and most  service sectors.  

• The data include R&D expenditures, expenditures for advertisement, stock of software investment (package and order‐made, available only from 2006), Off‐JT (opportunity cost is not included, available only from 2009).  4

5

1. Recent Trends in Macro‐Level Intangible Investment in Japan

According to recent studies, the contribution of intangible investment to labor productivity growth in Japan is the lowest among the major developed countries. 

‐1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Austria

Belgium

Czech Repu

blic

Denm

ark

Finland

France

Germ

any

Ireland

Italy

Nethe

rland

s

Sovenia

Spain

Swed

en

Unite

d Kingdo

m

Unite

d States

Japan

TFP

Labor composition

Tangibles

Intangibles

Labor productivity growth

Source:  Corrado et al. (2012) and Miyagawa and Hisa (2012).

Contribution  to the growth  in output per hour: 1995 to 2007 (annual  rate, %)

6Source: JIP Database 2011.

Looking at intangible investment in detail shows that, since around 2000, investment in economic competencies and in computerized information has stagnated particularly.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Total

Innovativeproperty

Economiccompetencies

Computerizedinformation

Intangible  Investment‐GDP Ratio

7

In the 2000s, intangible assets in economic competencies recorded negative growth in Japan.

Source: JIP Database 2011.

‐5%

0%

5%

10%

15%

20%

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Total

Computerizedinformation

Innovativeproperty

Economiccompetencies

Growth Rate of Intangible Assets

In contrast with Japan’s experience, all three categories of intangible assets made a positive contribution to labor productivity growth in the US and European countries (Corrado et al. 2012). 

8

9

2. Innovative Property Investment in Japan

Source: JIP Database 2011.

• Innovative property investment is concentrated in a small number of industries. 

• Four industries (broadcasting, communication equipment, motor vehicle parts and accessories, and pharmaceutical products), which produce 3% of GDP, conduct 25% of Japan’s total innovative property investment. 

• The stagnation in innovative property investment could be due to a decline in the value added share of innovative property intensive industries. 

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0% 20% 40% 60% 80% 100%

Cum

ulat

ive

contr

ibution

to in

nova

tive

pro

pert

y

inve

stm

ent/

GD

P

Cumulative industry value added percentile in GDP

Cumulative Contribution of Industries

to Innovative Property Investment:

2000-08

Using the following identity, we decompose the slowdown of the macro‐level increase in the innovative property investment‐GDP ratio into the inter‐industry effect and the intra‐industry effect.

10

The decline of the value added share of innovative property intensive industries has contributed to the stagnation in investment. 

Did the Value Added Share of Innovative Property Intensive Industries Decline in Japan?

i ii

i

i

i

i

ii

i

iT

iT

ii

i

i

iT

iT

ii

iT

iT

iT

iT

ii

ii

iiT

iiT

YY

YZ

YY

YZ

YY

YZ

YY

YZ

Y

Z

Y

Z

,0

,0

,0

,0

,0

,0

,

,

,0

,0

,

,

,

,

,

,

,0

,0

,

,

where Zt,i denotes innovative property investment by industry i in year t and Yt,i denotes the nominal value added of industry i in year t. 

Period Total effect Inter‐industry effect Intra‐industry effect (percentage points)

1990‐2000 0.69% ‐0.23% 0.92%2000‐2008 0.40% ‐0.60% 1.00%

In Japan’s manufacturing sector, R&D investment is concentrated in large, old and productive firms. But recently, the importance of smaller, young and less‐productive firms has been increasing. 

11

Who Conducts R&D Investment in the Manufacturing Sector?

01

23

Cum

ulat

ive

inte

nsity

ove

r tot

al sa

les o

f the

sect

or (%

)

0 .2 .4 .6 .8 1Cumulative share of sales

1995200020052009

Manufacturing

R&D

LargeSmall

01

23

Cum

ulat

ive

inte

nsity

ove

r tot

al sa

les o

f the

sect

or (%

)

0 .2 .4 .6 .8 1Cumulative share of sales

1995200020052009

Manufacturing

R&D

12

Who Conducts R&D Investment in the Manufacturing Sector – Young or Old Firms?

OldYoung

01

23

Cum

ulat

ive

inte

nsity

ove

r tot

al sa

les o

f the

sect

or (%

)

0 .2 .4 .6 .8 1Cumulative share of sales

1995200020052008

Manufacturing

R&D

13

Who Conducts R&D Investment in the Manufacturing Sector ‐ Productive or Unproductive Firms?

With High TFPWith low TFPNote: The relative TFP level is measured for each industry of the JIP industry classification.  Intangible investment is not treated as a factor input. 

0.2

.4.6

.81

Cum

ulat

ive

inte

nsity

ove

r tot

al sa

les o

f the

sect

or (%

)

0 .2 .4 .6 .8 1Cumulative share of sales

1995200020052009

Non-manufacturing

R&D

14

Who Conducts R&D Investment in the Non‐manufacturing Sector?

OldYoung

As in the case of the manufacturing sector, smaller, young and less‐productive firms have tended to conduct more R&D than other firms in recent years. 

R&D by Small, Young, Less Productive Firms

15

• In the 1990s, the TFP growth of large firms accelerated in both the manufacturing and the non‐manufacturing sector. Small and medium‐sized firms (SMEs) were left behind. 

※工業統計表の甲票と乙票を分析対象にしているため、　　分析期間を1999年までにしている。

TFP Growth by Factory Size (Annual Growth Rate)

0.0 

0.5 

1.0 

1.5 

2.0 

2.5 

3.0 

1980‐1985 1985‐1990 1990‐1995 1995‐1999

Average TFP growth

Top quartile in terms of salesSecond quartile

Third quartile

Bottom quartile

Possible reasons:  decrease in technology spillovers from large firms.

Probably, we can explain the recent increase in R&D by small, young and less productive firms as their response to the decline in spillovers. 

In the case of investment in economic competencies, the investment‐sales ratio is quite similar across industries. 

16

3. Investment in Economic Competencies in Japan

Source: JIP Database 2011.

0%

1%

1%

2%

2%

3%

0% 20% 40% 60% 80% 100%

Cum

ula

tive

contr

ibution t

o inve

stm

ent

in e

conom

ic

com

pete

ncie

s/G

DP

Cumulative industry value added percentile in GDP

Cumulative Contribution of Industries to Investment in

Economic Competencies: 2000-08

In the 2000s, the stock of economic competencies declined in many industries, including most manufacturing industries. However, it increased rapidly in high growth industries such as social insurance and social welfare (non‐profit), information services and internet‐based services.

17Source: JIP Database 2011.

‐20.00%

‐15.00%

‐10.00%

‐5.00%

0.00%

5.00%

10.00%

15.00%

Rice, w

heat produ

ction

Misc

ellaneou

s crop farm

ing

Livestock and sericulture farm

ing

Agricultural services

Forestry

Fisheries

Mining

Livestock prod

ucts

Seafoo

d prod

ucts

Flou

r and

 grain mill produ

cts

Misc

ellane

ous foo

ds and

 related prod

ucts

Prepared

 animal fo

ods and organic fertilizers

Beverages

Tobacco

Textile produ

cts

Lumbe

r and

 woo

d prod

ucts

Furnitu

re and

 fixtures

Pulp, paper, and

 coated an

d glazed

 paper

Paper p

rodu

cts

Printin

g, plate making for p

rintin

g and bo

okbind

ing

Leathe

r and

 leather p

rodu

cts

Rubb

er produ

cts

Chem

ical fertilizers

Basic

 inorganic chem

icals

Basic

 organic chemicals

Organic che

micals

Chem

ical fibe

rsMisc

ellane

ous c

hemical produ

cts

Pharmaceu

tical produ

cts

Petroleum produ

cts

Coal produ

cts

Glass and

 its prod

ucts

Cemen

t and

 its p

rodu

cts

Pottery

Misc

ellaneou

s ceramic, stone

 and

 clay prod

ucts

Pig iro

n and crud

e steel

Misc

ellaneou

s iro

n and steel

Smeltin

g and refin

ing of non

‐ferrou

s metals

Non

‐ferrou

s metal produ

cts

Fabricated

 con

structional and

 architectural m

etal produ

cts

Misc

ellaneou

s fabricated

 metal produ

cts

Gen

eral indu

stry m

achine

rySpecial ind

ustry machinery

Misc

ellane

ous m

achinery

Office an

d service indu

stry machines

Electrical gen

erating, transm

ission, distrib

ution and indu

stria

l app

aratus

Househ

old electric app

liances

Electron

ic data processin

g machines, digita

l and

 analog compu

ter e

quipmen

t and

…Co

mmun

ication eq

uipm

ent

Electron

ic equ

ipmen

t and

 electric

 measurin

g instruments

Semicon

ductor devices and

 integrated

 circuits

Electron

ic parts

Misc

ellaneou

s electrical machinery equ

ipment

Motor veh

icles

Motor veh

icle parts and

 accessorie

sOther transportatio

n eq

uipm

ent

Precision

 machine

ry & equ

ipment

Plastic

 produ

cts

Misc

ellane

ous manufacturin

g indu

strie

sCo

nstructio

nCivil engineerin

gElectricity

Gas, heat sup

ply

Waterworks

Water su

pply fo

r ind

ustrial use

Waste disp

osal

Who

lesale

Retail

Fina

nce

Insurance

Real estate

Railw

ayRo

ad transportatio

nWater transportatio

nAir transpo

rtation

Other transportatio

n and packing

Telegraph an

d teleph

one

Mail

Education (private and no

n‐profit)

Research (p

rivate)

Medical (p

rivate)

Hygien

e (private and no

n‐profit)

Other pub

lic se

rvices

Advertising

Rental of o

ffice equ

ipmen

t and

 goo

dsAu

tomob

ile m

ainten

ance services

Other se

rvices fo

r businesses

Entertainm

ent

Broadcastin

gInform

ation services and

 internet‐based

 services

Publish

ing

Video picture, sou

nd inform

ation, character inform

ation prod

uctio

n and distrib

ution

Eatin

g and drinking

 places

Accommod

ation

Laun

dry, beauty and bath se

rvices

Other services for individu

als

Education (pub

lic)

Research (p

ublic)

Medical (p

ublic)

Hygiene

 (pub

lic)

Social insurance and social welfare (p

ublic)

Public adm

inistratio

nMedical (n

on‐profit)

Social insurance and social welfare (n

on‐profit)

Research (n

on‐profit)

Other (n

on‐profit)

1990‐2000 2000‐08Growth Rate of Economic Competencies by Industry

There is a high cross‐industry correlation between the growth rate in economic competencies and the growth rate of other factor inputs. 

It seems that the reason Japanese firms do not invest in economic competencies is simply that they expect low sales and factor input growth.

18

Investment in Economic Competencies: Industry‐Level Analysis

Source: JIP Database 2011

y = 0.8826x ‐ 0.0259R² = 0.2822

‐20%

‐15%

‐10%

‐5%

0%

5%

10%

‐10% ‐5% 0% 5% 10% 15%

Growth ra

te of e

cono

mic co

mpe

tencies: 2000‐2008

Growth rate of other factor inputs (capital+labor, a divisia index): 2000‐2008

Cross‐industry Relationship between Growth of Economic Competencies and Growth of Other 

Factor Inputs: 2000‐2008

0

10

20

30

40

50

60

1970 1975 1980 1985 1990 1995 2000 2005 2008

Social insurance andsocial welfare (public)

Eating and drinkingplaces

Retail

Miscellaneous foodsand related products

Semiconductor devicesand integrated circuits

Household electricappliances

Finance

Telegraph andtelephone

Motor vehicles

Share of part‐time workers in total workers by sector: 1970‐2008 (in %) 

Source: JIP Database 2011

19

It seems that the decline in the accumulation of economic competencies was partly caused by the harsh restructuring resulting from the long‐term economic stagnation. For example, many firms increased the percentage of part time workers in total workers and did not provide intensive training in the case of part time workers. This change reduced training expenditure substantially. 

In Japan’s non‐manufacturing sector, younger and less productive firms tend to conduct more advertising than other firms.

20

Who Conducts Advertising in the Non‐manufacturing Sector?

Non-manufacturing

Advertising / Sales (%)lnTFP (-1) -1.164 *** -1.066 *** -0.037 * -0.041 **

[0.029] [0.028] [0.020] [0.020]

lnEMP (-1) 0.309 *** 0.325 *** -0.114 *** -0.118 ***

[0.007] [0.007] [0.013] [0.013]

lnAge -0.255 *** -0.292 *** -0.064 *** -0.063 ***

[0.010] [0.010] [0.015] [0.015]

Indutry dummies Yes Yes Yes Yes Yes Yes Yes Yes

Year dummies Yes Yes Yes Yes Yes Yes Yes Yes

Observations 163,264 169,926 168,924 162,321 163,264 169,926 168,924 162,321Adj. R-Squared 0.242 0.241 0.234 0.255 -0.176 -0.17 -0.172 -0.176

OLS Fixed effect estimation

21

Who Conducts Advertising in the Non‐manufacturing Sector?

With low TFP With high TFP

Advertising

In Japan’s non‐manufacturing sector, large and productive firms tend to have a higher off‐JT expenditure/sales ratio.

22

Who Conducts Off‐JT in the Non‐manufacturing Sector?

Note: We used cross‐section data for 2009.

Non-manufacturing

Off-JT expenditure / Sales (%)lnTFP (-1) 0.064 *** 0.067 ***

[0.012] [0.012]lnEMP (-1) 0.011 *** 0.011 ***

[0.002] [0.002]lnAge 0.004 0.001

[0.003] [0.003]Indutry dummies Yes Yes Yes Yes

Observations 5,611 5,885 5,870 5,597Adj. R-Squared 0.08 0.075 0.072 0.083

OLS

Investment in computerized information is more concentrated in certain sectors than in the case of investment in economic competencies, but less concentrated than in the case of innovative property investment. 

Industries such as information services and internet‐based services, finance and insurance,  and telephone and telegraphlead investment in computerized information.

23

4. Investment in Computerized Information in Japan

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0% 20% 40% 60% 80% 100%

Cum

ula

tive

contr

ibution t

o inve

stm

ent

in c

om

pute

rize

d

info

rmat

ion/G

DP

Cumulative industry value added percentile in GDP

Cumulative Contribution of Industries to

Investment in Computerized Information:

2000-08

In Japan, large and productive (reverse causality?) firms tend to have a higher software stock/sales ratio. In the case of the non‐manufacturing sector, younger firms tend to have a higher software stock/sales ratio.

24

Who Conducts Software Investment?

Note: We used pooled data for 2006‐09.

Software stock / Sales (%)lnTFP(-1) 0.624 *** 0.392 *** 0.101 *** 0.172 ***

[0.037] [0.037] [0.038] [0.037]lnEMP(-1) 0.126 *** 0.118 *** 0.169 *** 0.179 ***

[0.004] [0.004] [0.008] [0.008]lnAge 0.007 -0.008 -0.127 *** -0.158 ***

[0.006] [0.006] [0.012] [0.012]

Indutry dummies Yes Yes Yes Yes Yes Yes Yes YesYear dummies Yes Yes Yes Yes Yes Yes Yes YesObservations 34,930 35,751 35,694 34,874 36,032 37,544 37,434 35,927

Adj. R-Squared 0.051 0.072 0.042 0.076 0.078 0.087 0.079 0.093

Manufacturing Non-manufacturingOLS OLS

In the case of the non‐manufacturing sector, younger firms tend to have a higher software stock/sales ratio.

25

Who Conducts Software Investment in the Non‐manufacturing Sector?

Young Old

Nominal Stock of Software

Conclusion• Intangible investment in Japan has stagnated in recent years. 

The stagnation is particularly serious in investment in economic competencies. 

• Using industry and firm‐level data, we examined this trend and also investigated what industries and what type of firms led intangible investment in Japan.

Findings from Industry‐Level Analysis• In the case of innovative property and computerized 

information, intangible investment is concentrated in a small number of industries. Innovative property: broadcasting, communication equipment, motor vehicle parts and accessories, and pharmaceutical products.Computerized information: information services and internet‐based services, finance and insurance, and telephone and telegraph services.

26

Findings from Industry‐Level Analysis (Contd.)

• Our decomposition analysis at the industry level showed that a decline in the value added share of innovative property intensive industries has substantially contributed to the stagnation in investment.

• In the case of economic competencies, the investment‐sales ratio is quite similar across industries. There is a high cross‐industry correlation between the growth rate of economic competencies and the growth rate of other factor inputs. It seems that the reason Japanese firms do not invest in economic competencies is simply that they expect low sales and factor input growth. 

• Many firms increased the percentage of part time workers in total workers and did not provide intensive training in the case of part time workers. This change reduced training expenditure substantially. 

27

Findings from Firm‐Level Analysis• In Japan’s manufacturing sector, R&D investment is 

concentrated in large, old and productive firms. However, recently the importance of smaller, young and less‐productive firms has been increasing. Similarly, in the non‐manufacturing sector, small, young and less‐productive firms have tended to conduct more R&D in recent years. 

• One promising candidate to explain these recent trends probably is that small, young and less‐productive firms have been increasing their R&D in response to the decline in technology spillovers from large firms.

• In the case of the non‐manufacturing sector, younger firms tend to conduct more advertising and have a higher software stock/sales ratio.

• It has been argued that because of low economic growth, high entry and exit cost, the zombie firm problem, etc., the sales share of young firms has been small in Japan. Since young firms are active in several types of intangible investment,  the low share of young firms may have contributed to the stagnation of intangible investment.  28

29

91.1 91.083.1 80.3

90.698.2

75.966.2

59.6

73.6

40.533.3

20.3

57.4 60.5

6.7 3.27.9 12.5

8.91.3

16.226.6

34.2

23.3

56.9

53.7

58.3

33.3 31.0

1.61.6 5.2 3.7

0.2 0.43.6 3.2 5.1 3.1 0.6

8.8

10.0

5.6 4.0

0.6 4.2 3.7 3.4 0.3 0.1 4.3 4.1 1.1 2.0 4.111.3

3.7 4.5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Prim

ary indu

stry

Chem

ical, m

etal and

petroleu

m

Machine

ry

Other m

anufacturin

g

Constructio

n

Electricity

 and

 gas

Who

lesale

Retail

Fina

nce an

d insurance

Real estate

Tran

sportatio

n

Commun

ication

Public services

Other business services

Other hou

seho

ld services

Sales Share by Firm Age Group

Established after2002

Established in1997‐2001

Established in1975‐1996

Established before1974