Japan's Productivity Challenge

Japan invests a greater percentage of its GDP in research & development than other countries but sees little or no resulting increases in productivity, that's the message of a recent Mckinsey study entitled The Future of Japan.

R&D Investment (% of GDP) vs. Productivity, Global Comparison, 2013

Source: Mckinsey Global Institute: The Future of Japan, March 2015

This underscores a major challenge facing the country as it attempts to increase its growth rate, particularly as it is under pressure to generate more from its labor and capital resources as demographic trends reduce the size of the labor force.

In Mckinsey's analysis, low productivity stems from dififculties that entrepreneurs and businesses face in commercializing new ideas. Japan lacks an entrepreneurial culture similar to other countries: 3.7% of the labor force are classified as entrepreneurs, compared with 12.7% in the United States.

In part, this stems from difficulties in securing early-stage funding and barriers put in place by more dominant market firms. Also, larger companies doing R&D very rarely share their ideas and seek cross-partnerships.

This problem is something that Abenomics distinctly needs to tackle. It's a good sign that the government has eased monetary policy but capital needs to be channeled in the right direction to drive the economy and reforms are needed in high-potential industries to see benefits from Japan's R&D culture. Given recent weakness in industrial investment, it seems there is still a lot for Shinzo Abe to do.

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