Corporate Governance May be the “Missing Link” for Japanese TFP

Given (a) evidence that productivity in Japan is very strongly influenced by investment-specific technology (Fink, 2015), and (b) evidence that services sectors in the non-IT sector were “left behind” while manufacturing and IT sectors were able to capitalise on the technology boom, it makes sense to focus efforts on structural reform in the services sector.

Still, as Fukao, Miyagawa and Hisa demonstrated in their 2012 paper,increasing intangible capital alone has proven no indicator of rising TFP in the services sector.  This may explain why policies designed to promote growth via intangible investment in services sector in the early 2000’s were misplaced.

So what are the policy alternatives?  Fink (2016) gives us some key policy ingredients:

1. As argued in TFP paper 2, incentives designed both at once to decrease “dead weight capital” as well as to increase investment in innovative capital (a subset of intangible investment) are more appropriate.
2. Given productivity in the services sector in particular is sensitive to deregulation (in a way manufacturing is not), policy incentives to achieve better asset allocation need to be consistent with deregulation, even though deregulation alone has its limits.
If so, what is the determining factor?  Corporate governance.

Corporate governance is one major determinant of capital allocation in a market-determined economy, and where “good governance” results in good capital allocation, the hypothesis is that TFP should recover. Further empirical analysis on characteristics of “good corporate governance” could complement existing analysis on productivity. Where able to obtain empirical data on “good corporate governance” we might engage in similar econometric analysis to test this hypothesis empirically.
Development of trackable metrics at firm and industry level would be desirable. Perhaps it is time to resuscitate and enhance the “Deregulation White Paper” (規制緩和白書)with a ガバナンス白書series (with data, please).

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