The Return to Information Technology Investments in Japan

ABSTRACT

Recently, the need for increased investment in information technology (IT) has become thesubject of policy debate concerning the measures necessary to revive Japan's faltering economy.In the United States, however, despite extremely high levels of IT investment, the economicimpact of this investment has been questioned by several bodies of research about the so-called'IT Productivity Paradox'. Also, the differing institutions of the US and Japanese economiessuggest that the impact of IT in the two countries may differ. This paper thus evaluates theeconomic impact of IT - specifically the return to IT investments - in an econometric analysisof 228 large Japanese companies.

The paper first outlines a theoretic framework describing the conditions under which increasedinvestment in IT leads to improved economic performance. As a necessary condition for ITinvestment to contribute to economic growth, its marginal product must be positive. Thisalone, however, is not sufficient to warrant preferential investment in IT capital. For this, werequire that IT generate excess returns, or that its return be greater than those accruing to othertypes of capital investment.

This paper employs a straightforward multivariate regression analysis to investigate whether theabove conditions are satisfied in Japan, yielding mixed results. In the manufacturing sector,both conditions appear to be satisfied: the estimated marginal return to IT is not only positive,but about 10% larger than the return accruing to other types of capital. The implication of thisfinding is that preferential investment in IT would lead to higher economic growth andimproved productivity growth in Japan. The results from the service sector, however, arecontradictory : the return to IT is not statistically different from zero, as in the US ITProductivity Paradox.

Introduction

Conclusion