Product Innovation and Economic Growth

Author Name YOSHIKAWA Hiroshi  (The University of Tokyo, Faculty Fellow, RIETI) /ANDO Koichi  (Development Bank of Japan Inc.) /MIYAKAWA Shuko  (Research Assistant, RIETI)
Creation Date/NO. January 2010 10-J-006
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Tackling issues relating to low fertility and aging population is widely acknowledged as the most important challenge for the Japanese economy and society in the twenty-first century. There is a general consensus that given these issues of low fertility and aging population, innovation that is technological progress in a broader sense, should be the engine for economic growth. Technological progress is typically measured by growth accounting, that is, total factor productivity (TFP). However, this paper analyzes the role of product innovation from a different point of view. First, we explain how different product innovation is from TFP. Next, we examine the IT sector and verify the contribution of IT to macro economic growth.

The contribution of IT on the supply side of the economy as measured by TFP is certainly important but it does not provide the whole picture in regard to the contribution of IT to economic growth. This paper also attempts to confirm that IT acting as an intermediate good enables the creation of new goods that will boost final demand. Looking at it from the point of demand saturation or creation, the key to economic growth is in how to find or produce goods and services for which there is a high demand.