What drives total factor productivity growth for Japanese manufacturing industry?

This paper investigates the sources of Solow residual growth in the Japanese manufacturing sector to estimate productivity growth for the sector by simultaneously considering embodied technical progress, spillover effects, trade effects, after controlling returns to scale, imperfect competition, and underutilization of factor inputs.

  Estimation results show technologies embodied in human capital, physical capital and IT capital have all positively significant coefficients, suggesting the existence of considerable embodied technical progress for the Japanese manufacturing industry. Furthermore, embodied technical progress renders the impacts of physical and R&D capital on productivity growth to be insignificant. The insignificance of R&D implies that their impacts are realized only after they are embodied into other capitals. The results also show the existence of inter-industry externality originating from IT investments of the total manufacturing industry. Regarding globalization, openness has negative significant influence on productivity growth, whereas exports do not have any significant influence.

  When the sample is divided into the durable and the non-durable manufacturing sectors, most of the above findings from the total sample estimation still hold, especially for the durable manufacturing sector. However, the sector-wise estimation also reveals some interesting heterogeneity between the sectors. 

  This study suggests that embodied technological progress is a significant component of productivity growth for the Japanese manufacturing industry, especially for the durable manufacturing sector. This suggests recent decline in productivity growth, which is generally considered as one of main reasons for the sluggish Japanese economy and is related to a decrease in both human capital and the vintage of physical capital. Therefore, an industry should enhance their investment in human resources and new frontier-technology embodied machinery to raise its technological level.

   However, the impact of investments on IT and R&D capital is likely to be underestimated at the industry-level due to their external economies, resulting in under-investment than at the optimal level. In this regard, it is imperative for the government to encourage investments in these capitals to enhance productivity growth by providing incentives. Also, the importance of IT capital should be emphasized because its transmission mechanism on productivity growth is multifaceted through direct effects, vintage effects and external effects. This provides some explanation regarding why IT is estimated to have a strong influence on the Solow residual growth for the Japanese economy in previous literature.