The cost of Japan’s missed ICT revolution

Prof. Kyoji Fukao

Japan did not reap the benefits of the information, computer and technology revolution as did the US at the dawn of the new millennium. Why that is so is the focus of ongoing research by Professor Kyoji Fukao, Director of the Institute of Economic Research at Hitotsubashi University.

According to Prof. Fukao, productivity growth in the US soared in the mid-1990s and early 2000s as a result of advancements in information, computer and technology (ICT) that were refined and widely adopted by firms in the retail, wholesale, transportation and manufacturing trades. In comparison Japan’s economy suffered a significant slowdown after 1991. This he attributes to comparative underinvestment by Japanese firms in ICT.

For example, the US invested 4 times more than Japan on ICT as a percentage of GDP during the peak IT bubble years in distribution services.

ICT Investment - Distribution Services

The main cause for the difference, he says, is that US firms see new technologies as a means to innovate. Japanese firms on the other hand perceive them as labor saving techniques that are potentially disruptive to harmony in the workplace.

On closer inspection, the professor found that large US firms often outsource their ICT needs to independent third-party vendors while Japanese companies prefer to build their own ICT divisions. Acting for the Ministry of Education, Trade and Industry (METI), Prof. Fukao interviewed large Japanese companies. He asked them why they didn’t outsource their ICT to third parties. They replied that outsourcing is not allowed under their current employment policies. Rather than lay off workers, firms build ICT vendor-affiliates staffed with employees transferred from other divisions. The new ICT divisions in turn support the old ways of doing business.

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Rather than adopt world-class software solutions, they seek to preserve information flows and existing systems within the group. Keith Perhac, an internet marketing consultant who spent 6 years as a ‘salaryman’ working with firms like Toyota, Sharp and NTT, calls this the ‘not made or invented here syndrome’. Dismissive of off-the-shelf solutions, vendors waste time and money building order-made software that cannot easily be used by other firms because each firm has their own way of doing things. Best practice isn’t applied as in the US, where the most productive independent vendors win market share and efficiently supply ICT services to an entire industry.

Prof. Fukao says that outsourced markets in Japan for business processes such as accounting & payroll, bookkeeping, tax and so forth are underserved in comparison to those in the US. He points to a METI report which found the outsourced market for accounting & payroll services in Japan to be 1/10th the size of that in the US. “There are too few good ICT vendors in Japan,” he notes, arguing that big ICT vendors feel no need to compete when supplying services to firms outside their group.

Small to medium sized companies (SMEs) are particularly affected. Unlike their bigger counterparts, SMEs can’t afford their own in-house ICT teams. When they can, they have difficulty recruiting IT professionals who prefer to work at large companies. A study conducted by NISTEP, a think tank operated under METI, found that the majority of graduates from Japan’s leading tech universities worked at large companies and had never changed jobs. The majority of leading US tech graduates on the other hand had changed jobs at least once. Many had worked for small companies or dreamed of starting their own.

While Japan succeeds at maintaining an enviable unemployment rate, it does so at a high price. The professor calculates Japan’s missed ICT revolution costs the nation as much as .73% annually in lost GDP growth. Faced with a stagnant economy, increasing global competition and downward pull on growth from a declining population, one questions if the trade-offs are worth it.

Prof. Kyoji Fukao

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