Benchmarking Industrial Competitiveness by International Comparison of Productivity

MOTOHASHI Kazuyuki Faculty Fellow, RIETI

The results have been compiled for the International Comparison of Productivity in East Asia project that RIETI has undertaken since 2001. International comparative analyses of total factor productivity (TFP) by industry of five countries, namely Japan, China, Korea, Taiwan, and the United States, have shed light on Japan's industrial competitiveness since the 1980s.

The Increasing Convergence of Productivity among East Asian Countries

This project was a RIETI initiative carried out by an international network of researchers based in Japan, the U.S., China, Korea, and Taiwan. It was completed with the cooperation of some of the world's leading researchers on productivity, including Dr. Masahiro Kuroda (President, Economic and Social Research Institute [ESRI], Cabinet Office) and Professor Dale Jorgenson (Harvard University). Based on common industrial classification (33 sectors), the project developed datasets relating to input-output tables and labor input as well as capital stock, and compared the TFP of the five countries. Regarding labor input and capital stock, the aggregation of their respective aggregation by type (labor input by sex, age group, and educational attainment; capital input by capital goods) were measured in order to grasp the improvement in quality. Moreover, what makes this project unique is that it estimates TFP growth as well as TFP level. By comparing productivity levels, it is possible to make comparisons between the level of Japan's industrial competitiveness and that of other countries. (For details, see the "International Comparison of Productivity among Asian Countries" [ICPA] project.)

Table 1 shows the results of this project's macro-level estimates. Although the studied time period varies by country, the table outlines the productivity level of each country for the beginning and end of its respective periods (where Japan = 1), as well as the average annual productivity growth rate for the entire period. For example, China's TFP level was 50% of Japan's in 1982 but had risen to 66% by 2000, and its average productivity growth rate for the entire period was 2.04%. The higher productivity growth rates relative to Japan's 0.42% observed in China, Korea, and Taiwan reveal that these countries are catching up to Japan in terms of productivity level. Meanwhile, relative to the U.S., which had a productivity level 4% higher than Japan's from the outset, their margin of difference had expanded to 8% in the 20 years. Contributing to this outcome was the decline in Japan's productivity growth rate from the 1990s, while on the other hand the U.S. saw its growth rate accelerate from the late 1990s.

Table 1: Results of Macro-level Comparison of Productivity

Japan's High Productivity in the Electronics Industry

Since it is not possible to introduce all the specific results for the five countries and 33 industries here, this section will describe the situation surrounding the electronics industry, which has been drawing much interest in connection with East Asia. Korean and Taiwanese companies are performing remarkably well in this sector, and Chinese companies are also said to be building momentum. How are these trends reflected in the TFP level? The results of the productivity level estimates for Japan and the other three East Asian countries are shown below. The graph presents the TFP index of each country set to Japan's 1995 TFP level of 1.

Relative TFPs in Electronics Industry

In 1985 and 2000, the countries' relative levels of productivity were as follows (where Japan = 100%): China 53%→68%, Korea 61%→80%, and Taiwan 63%→74%. As the figurers indicate, these countries are progressively catching up to Japan. Furthermore, while Korea's productivity level was lower than Taiwan's from a macro-level perspective, Korea's productivity level for the electronics industry overtook Taiwan's in the late 1990s. These productivity levels and trends reflect the circumstances related to innovation and productivity in the electronics industry of each country. Although Korea, Taiwan, and China are progressively catching up to Japan, Japan's productivity has also risen and Japan has not yet been overtaken. It is said that Japanese companies are struggling with certain electronic parts, including semiconductor integrated circuits and liquid crystal panels. However, if the electronics industry is considered as a whole, Japanese companies are not seeing significant losses in terms of their technical solidity or superiority.

Japan's Low Productivity Level in Non-Manufacturing Industry

When Japan's competitiveness by industry is benchmarked against other countries by productivity, it is generally found that Japan enjoys a significant competitive edge in the manufacturing industry. In particular, Japan has a high productivity level in assembly industries including electronics, transport machinery, and precision machinery. On the other hand, Japan's productivity is declining in non-manufacturing industries including construction, finance and insurance, and electricity. Thus, the dual structure of the Japanese economy, characterized by the coexistence of an export industry with a high productivity level and a non-manufacturing industry with low domestic demand, was also confirmed in this project. As for underlying causes, it can be inferred that insufficient advancement of regulatory reform in non-manufacturing industry is contributing to this outcome. Since the late 1990s, regulatory reforms have been undertaken in industries such as electricity and gas, telecommunications, and retailing, and their effects on productivity are being monitored. According to an OECD study however, Japan still has a very high level of regulation when compared with other OECD countries. Regarding macro-level productivity, it is important to introduce an adequate mechanism of competition and thereby strive to improve productivity in the public service sector too, including medical services and education.

From the perspectives of improving productivity and strengthening competitiveness in non-manufacturing industry, it is also important to promote service innovation through the effective utilization of information technology (IT). In the 1990s, it was non-manufacturing industries such as the retailing and banking industries that led the acceleration of U.S. productivity. In the retailing industry, Wal-Mart's supply chain system is well known. With respect to consumer goods, Wal-Mart and P&G are establishing a producer-retailer partnership system for the sharing of point-of-sale (POS) information. Examples of such large-scale partnerships that transcend the keiretsu are not found in Japan, but Japan does have many leading edge examples of IT use from which to learn. In addition, the seeds of service innovation utilizing IT are growing rapidly, including the increasing efficiency of distribution and upgrading of services through radio frequency identification (RFID), expansion of Internet transactions in the banking and securities sectors, and infrastructure development including the spread of electronic money. It can be said that the development of a competitive environment through regulatory reform, as well as efforts to promote innovation utilizing IT, hold the key to improving the productivity of Japan's non-manufacturing industry.

December 26, 2006

December 26, 2006