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Author Name: Seth Josolowitz
Description:
Productivity growth drives long-term economic growth and rising living standards in a modern economy. Information and communications technology (ICT) has been a key driver of both total factor productivity (TFP) and labor productivity growth since the 1990s. Japan, which has consistently had the lowest labor productivity in the G7, has not seen significant levels of ICT-driven productivity growth in its non-manufacturing sectors despite investing heavily in ICT hardware. This paper explores the reasons for Japan’s failure to reap productivity gains from its ICT investments. I claim Japanese firms have failed to invest in organizational capital and new business practices to maximize the potential of ICT. A preponderance of very small firms with elderly managers have left large swaths of the economy with minimal ICT investment. Part of the failure to update business practices stems from labor market rigidity which reduces the labor input savings from ICT systems and inefficient capital markets which protect inefficient incumbent firms. Furthermore, the low rate of firm entry and exit, coupled with a lack of foreign direct investment, hinders the adoption of new ideas and the reallocation of capital and labor.
Reference: Josolowitz, S. . (2021). Work Smart: Information Technology and Productivity in Japan. United States Of America: Ohio State University.