Paper by Tsutomu Miyagawa on the role of intangibles in the public sector focusing on a preliminary study in Japan. Presented in the 9th World Conference on Intellectual Capital for Communities, World Bank, Paris, June 6th and 7th 2013

1. Intellectual Capital for Communities
in the Knowledge Economy
Emerging Worlds, Growing Intangibles
The Role of Intangibles in the Public Sector
-A Preliminary Study in Japan-
Tsutomu Miyagawa
(Gakushuin Univeristy)
6th and 7th of June, 2013
World Conference on Intellectual Capital for Communities
- 9th Edition - 1

2. 1. An Overview of Studies on
Intangibles
• The information and communication technology
(ICT) revolution --that began in the 1990s--
accelerated economic growth in the United States.
However, despite aggressive ICT investment,
other advanced countries did not experience the
same accelerated growth.
• The Economic Report of the President in the US in
2007 stated: “Only when they made intangible
investments to complement their ICT investments
did productivity growth really take off.”
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3. 1. An Overview of Studies on
Intangibles
• Corrado, Hulten, and Sichel (“CHS”, 2005, 2009)
estimated aggregate intangible investment in the
US.
• Following CHS, many economists estimated
aggregate intangible investment in advanced
countries (e.g., Marrano, Haskel, and Wallis, 2009,
for the UK; Fukao et al., 2009, for Japan;
Delbecque and Bounfour, 2011, for France and
Germany; Pyo, Chun, and Rhee, 2011, for Korea,
Corrado, Hulten, Jona-Lasinio, and Iommi, 2012
for EU countries).
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4. 2. Intangible Investment in Japan
• Our estimate of total annual spending on
intangible assets in Japan for the period 2001-2008
was about 44 trillion yen on average. Annual
capital spending on intangibles was about 39
trillion yen in the same period.
• Intangible investment in the ICT sector was 18
trillion yen (2001-08) which was greater than that
in the non-ICT sector, because software
investment in the ICT sector was twice of that in
the non-ICT sector
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5. 5
Estimated spending on intangible assets in Japan
(billions ofJPY)
Total Market Economy Manufacturing Service ICTsector Non-ICTsector
1991-2000 Computerized information 5,572 4,986 1,530 3,445 3,242 1,744
(5,572) (4,986) (1,530) (3,445) (3,242) (1,744)
Innovative property 17,978 17,651 12,166 5,435 10,231 7,421
(17,761) (17,434) (12,166) (5,218) (10,014) (7,421)
Economic competencies 14,176 12,652 3,831 8,592 6,380 6,272
(10,296) (9,031) (2,615) (6,233) (4,413) (4,618)
Total 37,726 35,289 17,527 17,472 19,853 15,437
(33,628) (31,440) (16,311) (14,885) (17,696) (13,677)
2001-2008 Computerized information 9,319 8,227 2,654 5,546 5,551 2,676
(9,379) (8,227) (2,654) (5,546) (5,551) (2,676)
Innovative property 19,931 19,181 11,996 7,158 11,881 7,300
(19,518) (18,869) (11,996) (6,829) (11,569) (7,300)
Economic competencies 14,627 13,041 3,791 9,038 6,966 6,076
(10,118) (8,858) (2,497) (6,191) (4,607) (4,251)
Total 43,877 40,449 18,441 21,742 24,398 16,052
(38,955) (35,938) (17,147) (18,566) (18,401) (13,975)
* Capital spending on intangibles is shown in parentheses.

6. 2. Intangible Investment in Japan
• The total capital investment/GVA ratio in Japan
was 8.9% for the period from 2001 to 2008.
• The intangible investment/GVA ratio in the
manufacturing sector was higher than that in the
service sector, as already shown in Fukao et al.
(2009).
• When we compare ratios of intangible
investment/GVA between the ICT and the non-
ICT sectors, the ratio in the ICT sector is much
higher than that in the non-ICT sector.
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7. 7
Intangible investment/GVA ratio in Japan
1981-1990 1991-2000 2001-2008 1981-2008
Total economy
CI 0.75% 1.35% 2.16% 1.34%
IP 3.23% 4.09% 4.46% 3.87%
EC 2.12% 2.35% 2.30% 2.25%
Total 6.10% 7.79% 8.92% 7.46%
Manufacturing
CI 0.64% 1.55% 2.76% 1.53%
IP 8.31% 11.41% 12.05% 10.43%
EC 2.04% 2.43% 2.51% 2.31%
Total 10.99% 15.40% 17.32% 14.26%
Service
CI 0.77% 1.32% 1.95% 1.28%
IP 1.25% 1.78% 2.25% 1.71%
EC 2.20% 2.39% 2.30% 2.30%
Total 4.23% 5.49% 6.51% 5.29%
IT sector
CI 1.09% 1.83% 3.11% 2.06%
IP 4.59% 5.65% 6.49% 5.65%
EC 2.42% 2.49% 2.58% 2.50%
Total 8.10% 9.97% 12.19% 10.21%
Non-IT sector
CI 0.40% 0.77% 1.27% 0.81%
IP 2.64% 3.25% 3.46% 3.13%
EC 1.74% 2.03% 2.02% 1.94%
Total 4.77% 6.05% 6.75% 5.88%
*CI: computerized information, IP: innovative property, EC: economic competencies

8. 3. Comparison with Other Countries
• Among large advanced countries, the US’s ratio of
intangible investment to GDP is the highest.
• Although Japan’s intangible investment itself is not low, its
contribution to labor productivity growth is the lowest in
the advanced countries.
• The reason for the low contribution of intangibles in Japan
is low accumulation in intangibles in the 2000s (1.3%). In
particular, the accumulation in firm specific human
resources turned to be negative in the 2000s due to the
harsh restructuring.
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9. 9

10. 10
Decomposition of labor productivity growth（1995ー2007）
（％）
Labor
productivity
growth
Capital
deepening
Labor
composition
TFP growth
Tangible
assets
Intangible
assets
France 1.9 1.0 0.4 0.6 0.4 0.4
Germany 1.7 1.0 0.7 0.3 0.0 0.7
Italy 0.6 0.7 0.5 0.2 0.2 -0.4
Japan 2.1 0.9 0.7 0.2 0.8 0.5
Netherlands 2.3 0.9 0.4 0.5 0.7 2.8
UK 2.9 1.5 0.8 0.7 0.4 1.1
US 2.7 1.7 0.8 0.9 0.2 0.8
Source:Corrado, et, al. (2012) and Miyagawa and Hisa (2013)

11. 4. The Role of Intangibles in the Public Sector
• The previous studies on intangibles have focused
on the market economy.
• Intangibles in the public sector have different
roles from those in the market economy.
• Two roles of intangibles--
(1)Efficiency (productivity) improvement in its own
sector
(2)External effects (contribution of productivity
improvement at the aggregate economy)
・Intangibles in the public sector: (2)>(1)
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12. 4. The Role of Intangibles in the Public Sector
• Based on our estimates on intangibles by industry, I
measure intangible investment in the public sector. (Data is
available at
http://www.rieti.go.jp/en/database/JIP2012/index.html#04-
6.)
• The public sector includes sectors in education, health and
social work, and research institutions in the government
and non-profit organizations.
• I focus on expenditures in software, R&D and
improvement in human resources.
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13. 4. The Role of Intangibles in the Public Sector
• Intangible investment in the public sector showed an
upward trend until 2002. However, it declined after 2003
due to the huge budget deficits in the Japanese
government.
• The amount of intangible investment was 1.6 trillions of
JPY in 2008. It was only 4% of intangible investment in
the market economy.
• Although R&D expenditures have increased, expenditures
in software and improvement in human resources have
recently declined.
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16. 4. The Role of Intangibles in the Public Sector
• I check correlations between intangible investment in the
public sector and productivity growth to examine the role
of intangibles.
• Negative correlation between intangible investment in the
public sector and TFP growth (3 year moving average) in
the market sector.
• Positive correlation between intangible investment in the
public sector and TFP growth in the ICT sector after the
ICT revolution → While intangible investment in the
public sector does not contribute to TFP growth in the
market sector, it is likely to affect TFP growth in the ICT
sector.
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17. 17

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19. 19

20. 4. The Role of Intangibles in the Public Sector
• Negative correlation between intangible investment in the
public sector and TFP growth in the public sector after
1995.
• However, when I exclude TFP growth in 1995 (2.2%) and
1996 (2.1%), I find a strong and positive correlation
between intangible investment and productivity growth
(correlation coefficient is 0.56).
• We expect that the recent decline in intangible investment
in the public sector will delay the improvement of
efficiency in this sector.
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22. 5. Future Research Agenda
1. Aggregate level: Measuring social rate of return
on intangibles in the public sector as in the
studies measuring the social rate on public
infrastructure.
2. Micro level: Examining the contribution of
intangibles to productivity improvement in
hospital, school, and public institutions (Bloom,
Propper, Seiler and Van Reenen (2010), NBER
WP 16032, Lee, McCullough, and Town (2012),
NBER WP 18025)
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23. Thank you for your attention!
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