Product Innovation and Economic Growth, Part III: Test of innovation without TFP improvement

Author Name YOSHIKAWA Hiroshi  (Faculty Fellow, RIETI) /ANDO Koichi  (Chuo University) /MIYAGAWA Shuko  (University of Tokyo)
Creation Date/NO. May 2013 13-J-033
Research Project Issues Faced by Japan's Economy and Economic Policy Part II: Population decrease, sustained growth, economic welfare
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Technological progress, especially product innovation, plays an important role in generating economic growth under the conditions of low fertility and an aging population. Technological progress is typically measured by total factor productivity (TFP) and much research is done internationally. The standard empirical research of information technology's (IT) effect over TFP is meaningful, but is not enough to capture the role of product innovation for economic growth.

In this paper, adding to Part I and Part II, the relationship between product innovation and TFP is theoretically discussed more deeply, and innovation without TFP improvement is tested. Innovation causes economic growth both with and without TFP improvement. The latter case is deeply related to product innovation, which leads to new products. In this paper, using firm-level data, growth without TFP improvement is found in more than a few industries. As a case study, the sale of automobiles made by low-level technology in emerging countries is an example of demand creation done by market finding.