Productivity of Japanese Firms in the 1990s

Faculty Fellow, RIETI

Studies on the productivity of Japanese firms have been drawing considerable attention in recent years. In 2002, Fumio Hayashi, a Professor at the University of Tokyo, and Edward C. Prescott, a winner of the 2004 Nobel Prize in Economic Sciences, published an influential paper arguing that the stagnation of the Japanese economy in the 1990s was attributable to the slow growth of total factor productivity (TFP). Accordingly, a number of studies started to address the issues of productivity of Japanese economy.

The recent development of large-scale firm-level data in Japan enables us to examine changes in productivity at the firm level as well as at the macro/industry level. Firm-level studies have revealed new facts that could not be found at macro- or industry-level studies. In this paper, I will introduce some of the latest findings on the productivity of Japanese firms in the 1990s (see note 1).

Foreign-owned firms in Japan and globalized Japanese firms tend to demonstrate high productivity

On the whole, foreign-owned firms operating in Japan demonstrate higher productivity than Japanese domestic firms. This fact has been identified by RIETI Faculty Fellow Kyoji Fukao, also a Professor at Hitotsubashi University, through a series of studies (see note 2). It has been also confirmed that disparity in productivity between foreign-owned and domestic firms existed even after controlled for various factors such as industry-specific effects and firm size.

Shedding light on such high productivity of foreign-owned firms has significant implications for future discussions on foreign direct investment (FDI) in Japan. For instance, when foreign-owned firms with high productivity enter the Japanese market, it is expected that new technologies and business models will accompany with FDI and subsequently proliferate among Japanese firms. Also, the entry and survival of high-productive firms boost the productivity growth of the entire economy. It is noteworthy that the productivity of foreign-owned firms exceeds that of domestic firms even in such a country as Japan where the level of technology is substantially high.

Some new facts have been reported concerning the relationship between firms' entry into international markets and its productivity. My findings in joint research with Keio University Professor Fukunari Kimura confirmed that firms exporting to and/or conducting FDI are more productive than firms operating domestically (Kimura and Kiyota 2006). It has been believed that firms' exporting and FDI activities are attributable to whether or not firms belong to exporting industry. Our finding, however, shows that productivity is an important determinant for exports and FDI even after we controlled for the industry-specific factors. This finding suggests the benefits being derived from the globalization of firm activities. It also implies the difficulty of designing "industrial policy" because of the firm heterogeneity in an industry.

Foreign-owned firms, R&D-intensive firms, and large firms show high productivity growth

Even in the midst of the period of prolonged economic stagnation known as the "lost decade" of Japan, quite a few firms posted high productivity growth amid the intense economic difficulty. These firms exhibit three characteristics. First, they are foreign-owned firms. Second, they were actively engaged in research and development (R&D) (see note 3). Third, they were large firms.

The third characteristic indicates that the speed of productivity growth of small- and medium-sized enterprises (SMEs) declined in the 1990s, suggesting that the economic situation in the 90s was totally different from that of the preceding two decades; the productivity of SMEs was growing along with that of large firms from the 70s through the 80s. Since a little has been known about the slowdown of productivity growth of SMEs in the 90s, this fact is a very important observation that provides critical input to thinking on the Japanese economy in the lost decade.

Firms with low productivity do not necessarily exit the market

The exit of less productive firms is closely related to industry- and macro-level productivity growth; when firms with low productivity exit and those with relatively high productivity stay on the market, productivity growth for the whole economy will increase. It has been believed that such a mechanism, often referred to as the "Natural Selection Mechanism" of the competitive market pressures, works without any questions.

Focusing on this mechanism, a study group led by Kiyohiko G. Nishimura, a former Professor at the University of Tokyo now serving as a member of the Bank of Japan Policy Board, and Keio University Professor Takanobu Nakajima, identified and examined the characteristics of firms exiting from the market (Nishimura, Nakajima and Kiyota, 2005). Findings from their research show that the exit of high-productivity firms occurred in and around 1997: the year in which Japan's financial sector was facing serious problems. It might have been the case that "forbearance lending," (banks' continued lending to failing borrowers out of reluctance to dispose of bad loans), enabled otherwise bankrupt firms to survive. If this hypothesis holds true, the reconstruction of the financial sector will lead to productivity improvement for the entire economy.

These studies suggest that productivity research on an individual firm level provides information that is not only academically important but also crucial to policymaking. Needless to say, no studies can be done without steady efforts to compile reliable statistics on firms. I do hope to see the enhancement of the accuracy of statistics, the continuation of surveys, and the further progress of productivity research.

March 28, 2006
  1. See "Productivity of Japanese Firms in the 1990s: Facts Confirmed by Empirical Research on an Individual Firm Level" (in Japanese), Kozo Kiyota, Mita-gakkai zasshi [Mita Journal of Economics] (forthcoming) for more details about the arguments presented in this column.
  2. See Fukao, Ito and Kwon (2005), for instance.
  3. See Kiyota (2006), for instance, concerning the relationship between R&D and productivity.

Fukao, Kyoji, Keiko Ito, and Hyeog Ug Kwon (2005) "Do Out-In M&As Bring Higher TFP to Japan? An Empirical Analysis Based on Micro-Data on Japanese Manufacturing Firms," Journal of the Japanese and International Economies, 19(2): 272-301.

Kimura, Fukunari and Kozo Kiyota (2006) "Exports, FDI, and Productivity of Firm: Dynamic Evidence from Japanese Firms," forthcoming in Review of World Economics (Weltwirtschaftliches Archiv).

Kiyota, Kozo (2006) "Reconsidering the Effects of Intranational and International R&D Spillovers: Firm-level Evidence from Japan," RIETI Discussion Paper Series, No.06-E-001.

Nishimura, Kiyohiko G., Takanobu Nakajima, and Kozo Kiyota (2005) "Does the Natural Selection Mechanism Still Work in Severe Recessions? - Examination of the Japanese Economy in the 1990s," Journal of Economic Behavior and Organization, 58(1): 53-78.

March 28, 2006

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