FIGURE 1 GDP growth ratio.

FIGURE 1 GDP growth ratio.

SOURCE: K. Motohashi, Empirical Analysis of IT Innovation: Has IT Changed Long-term Japanese Economic Performance? Toyokeizai, 2005.

productivity did decline to some degree in the 1990s and that this decline was greater than one would expect even in years of low economic growth.

The natural question concerns why productivity declined in the 1990s and several experts have proposed answers. One possible cause is the misallocation of resources, or “unnatural selection”4; efficient firms exited while inefficient firms, or “zombies,” remained with the help of government and the banks, which wanted to prevent bankruptcies. Peck, Levin, and Goto (1988) show that this has happened in the past.

Another popular explanation, held mostly by management theorists, business people, and policy makers, is the reduced technological capability of the Japanese firms.5 They contend that still-high R&D expenditures in the 1990s seem not to have produced the new products and processes that would have generated profits. The large market share once held by technology-intensive Japanese industries


See Peek and Rosengren (2005) and Nishimura et al. (2003).


See, for instance, Porter and Sakakibara (2004).

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