Why Was Japan Left Behind in the ICT Revolution?

Author Name FUKAO Kyoji (Faculty Fellow, RIETI) / IKEUCHI Kenta (National Institute of Science and Technology Policy) / YoungGak KIM (Senshu University) / KWON Hyeog Ug (Faculty Fellow, RIETI)
Creation Date/NO. April 2015 15-E-043
Research Project East Asian Industrial Productivity
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In this paper, we investigate why information and communication technology (ICT) investment in Japan has stagnated since the 1990s. Given that a notable characteristic of Japan's economy is that small as well as older firms play a much greater role than in other economies, particularly that of the United States, and that previous studies on other countries suggest that larger and younger firms are more likely to adopt new ICT technologies, our analysis mainly focused on firms' size and age.

As the first step of our investigation, using firm-level data, we examined whether larger and/or younger firms tend to have a higher ICT intensity. We found that larger firms indeed have a higher ICT intensity. In the case of firm age, there was no simple linear relationship between firm age and ICT intensity. As a next step, we estimated a Cobb-Douglas type production function and tested whether the ICT input coefficient differs across different firm-size groups and firm-age groups. We found that larger firms and younger firms tend to have a higher ICT input coefficient. The other factor that may be responsible for the differences in ICT intensity by firm size and firm age is the constraints on ICT input. To confirm this, we calculated the marginal product of ICT input by firm-size group and by firm-age group using the production function estimates. We found that smaller firms and younger firms tend to have a higher marginal product of ICT input. These findings suggest that smaller firms and younger firms face constraints that prevent them from increasing ICT input.

Next, we examined impediments to the full use of ICT by Japanese firms based on our analysis as well as preceding studies by the Japanese government and other Japanese institutions. As factors which may result in smaller firms in Japan facing a higher price for ICT inputs, we pointed out two characteristics of the Japanese economy: the underdeveloped market for business process outsourcing (BPO) and the scarcity of ICT experts. Since access to efficient vendors of ICT services is a key factor for smaller firms' procuring ICT input at a reasonable price and ICT experts in Japan tend to prefer working in large firms, these two factors make ICT input more expensive for smaller firms. On the other hand, as constraints to increasing ICT input for smaller and/or younger firms, we pointed out liquidity constraints and insufficient ICT literacy. We also pointed out a number of other special factors which help to explain why not only the ICT intensity of small firms but also that of all firms in Japan is comparatively low.

Published: Fukao, Kyoji, Kenta Ikeuchi, YoungGak Kim, and Hyeog U. Kwon, 2016. "Why was Japan left behind in the ICT revolution?" Telecommunications Policy, Vol. 40(5), pp. 432-449