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Policy Research Institute

Table of Contents : Current Issues

Vol. 112 : Firm Dynamics and Macroeconomy


Summary of Articles: Current Issues

The Determinants of Quantitative and Qualitative Employment Growth in Start-up Firms – A Comparison between R&D-oriented and Other Start-ups in Japan

By Hiroyuki Okamuro (Professor at Graduate School of Economics, Hitotsubashi University)
By Masatoshi Kato (Assistant Professor at School of Economics, Kwansei Gakuin University)

(Abstract)

We empirically examine the determinants of employment growth and changes in workforce composition in Japanese start-up firms based on a unique panel dataset. Numerous studies have been conducted so far on the determinants of firm growth and job creation, but still little is known about R&D-oriented start-ups. Moreover, it is important to investigate also the qualitative change in employment of start-up firms, i.e. the change in the ratio of regular workforce, on which few studies have been done to date. Thus, we compare the determinants of quantitative and qualitative changes in employment between R&D-oriented and other start-ups. Our regression analysis shows that, although the human capital of founders do not have any impact on employment growth, their work experiences have a significant and positive impact on the increase in the ratio of regular workforce, and that public subsidies on R&D-oriented firms at start-up not only support employment growth, but also relative expansion of regular employment.

Key words: start-up, employment growth, regular workforce, R&D (Research and Development), public subsidies

JEL Classification: J21, L25, L26

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Quantitative Policy Analysis of Innovation Activities – Application to Dynamic Structural Estimation

By Hiroshi Ohashi (Professor of Economics, the University of Tokyo)
By Daiya Isogawa (Ph.D. Student at Graduate School of Economics, the University of Tokyo)

(Abstract)

This paper estimates a dynamic oligopoly model of product innovation to evaluate an equilibrium effect of public policy on firms' innovation activities. The model considers a multi-agent Markov-Perfect Nash Equilibrium, allowing for firms' dynamic decision making on innovation activities and entry and exit. The estimation results obtained by using Japanese firm-level data on product innovation identify net positive spillovers among firms' dynamic innovation activities. Simulation exercises based on the obtained estimates indicate that, while the existing subsidies indeed encourage firms' innovation activities, they are far from optimal.

Key words: product innovation, spillovers, Dynamic oligopoly model, Markov perfect equilibrium, subsidies, innovation survey

JEL classification: C73, L13, O31, O38

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Product Switching in Japanese Firms – An Empirical Analysis based upon “Census of Manufactures”

By Atsushi Kawakami (Associate Professor at Global Exchange Office for Research and Education, Gakushuin University )
By Tsutomu Miyagawa (Professor at the Faculty of Economics, Gakushuin University)

(Abstract)

Here we conduct an empirical study, following the study of Bernard, Redding and Schott (2010), about product switching in Japanese firms based upon the commodity and corporate level database compiled from the“Census of Manufactures.”First, we compare firms producing multiple-products with those producing only a single product and estimate that the former performance excels the latter. And our analysis using the data aggregated in the industrial level shows that the companies in competitive market switch their products more frequently. On the other hand, estimation on firm-level data shows that firms increasing number of products improve firm performance including employment, while those that reduce the number of products face the deterioration of productivity as the decrease in output exceeds the scale of employment reduction.

Key words: entry, exit, multiple-products, product switching, labor productivity, TFP, Propensity Score Matching Model

JEL classification: L11, L21, L25, L60

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The Funding through Capital Markets and Firm Behavior: Decision-making on IPOs, SEOs and Bond Issues and the Post-funding Investments and R&D Activities

By Kaoru Hosono (Principal Economist, Policy Research Institute, Ministry of Finance, and Visiting Researcher at Gakushuin University Research Institute for Economics and Management)
By Miho Takizawa (Associate Professor at the Faculty of Economics, Toyo University)
By Kenji Uchimoto (Researcher,Policy Research Institute, Ministry of Finance)
By Keishi Hachisuka (Researcher,Policy Research Institute, Ministry of Finance)

(Abstract)

Using a dataset of Japanese firms from the latter half of the 1990s to 2010, we conduct an analysis of the determinants of the funding through initial public offerings (IPOs) by non-listed companies, and the funding through seasoned equity offerings (SEOs) and bond issues by listed companies, as well as the post-funding firm behavior. Our analysis of IPOs shows that the firms with high profitability and soundness are more likely to conduct IPOs, and that the firms that have undertaken IPOs have significantly increased their capital investment and research and development (R&D) activities compared with those that have not. Our results suggest that firms conduct IPOs not only with a view to capitalizing on share mispricing but also to funding their capital investments and R&D activities.

Our analysis of SEOs and bond issues by listed companies shows that firms with a high book-to-market ratio and high leverage issue more equities than bonds and loans, while those with a high sales growth rate and a high default probability issue more bonds than equities and loans. Our results of equity issues are consistent with the market timing (mispricing) hypothesis as well as the existent theoretical hypothesis of capital structure (the tradeoff and the pecking order hypotheses), while our results of bond issues are consistent with a bank’s holdup hypothesis, but our results do not support a hypothesis that stresses the role of bank’s renegotiation. Finally, our analysis of the post-funding investment behavior by listed companies shows that bond issues significantly increase firms’ capital investments, while the effects of SEOs on capital investments and R&D activities are either insignificant or significant with a limited scale.

Key words: Initial Public Offerings (IPOs), Seasoned Equity Offerings (SEOs), bond Issues, capital Investment, Research and Development (R&D)

JEL classification: G31, G32, E22

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External Finance Constraints and the Timing of Large-scale Investment (Investment Spike)

By Kaoru Hosono (Principal Economist, Policy Research Institute, Ministry of Finance, and Visiting Researcher at Gakushuin University Research Institute for Economics and Management)
By Masaki Hotei (Economist, Policy Research Institute, Ministry of Finance)
By Chie Umezaki (Former Researcher, Policy Research Institute, Ministry of Finance)

(Abstract)

Is the timing of firms’ large-scale investment (investment spike) influenced by external finance constraints? We use the firm-level quarterly data including the one of unlisted firms, and estimate the investment hazard rate, i.e., the probability of undertaking a new investment spike today as the function of the time since the last spike, and examine how external finance constraints influence the hazard rate. Our results show that the firms falling into the industries heavily dependent on external finance, those falling into the industries with low tangible fixed asset ratios, and those firms with a large outstanding debt balance compared with cash flow, have lower hazard rates than other firms. This suggests that external finance constraints delay the timing of investment spikes. Also, the estimated hazard rate is an increasing function of time, which is consistent with the theoretical prediction.

Our results suggest that a policy of alleviating companies’ external finance constraints will be helpful if fiscal and monetary policies are to be quickly effective.

Key words: external finance constraints, investment spike

JEL classification: G31, E22

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Intangible Investment by industry and Japan’s Economic Growth

By Tsutomu Miyagawa (Professor at the Faculty of Economics, Gakushuin University)
By Shoichi Hisa (Associate Professor at the Faculty of International Liberal Arts, Yokohama City University)

(Abstract)

We measure intangible investment by industry in Japan based upon the JIP (Japan Industrial Productivity) database and other primary statistics. Expenditures in intangible in Japan amounted to around 43trillion yen, accounting for around 9% of the GDP in the 2000s. The ratio of intangible investment to gross value added in the IT sector is higher than that in the non-IT sector. The total intangible capital stock in 2008 was worth 136 trillion yen, but the growth rate of intangible capital turned negative in some of the industries in the 2000s as they underwent a drastic restructuring process. Growth accounting including intangible assets shows that the intangible assets in the IT sector, which has led the Japanese economic growth, are contributing to the growth of the economy. Our results above suggest that we should not unnecessarily cling to the economic policy based on existing industry classification but draw up growth promoting policies based upon a new industry classification.

Key words: investments in intangibles, IT sector, growth accounting, Solow residual

JEL classification: E01, E22, O31, O32

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Misallocation and Establishment Dynamics

By Kaoru Hosono (Principal Economist, Policy Research Institute, Ministry of Finance, and Visiting Researcher at Gakushuin University Research Institute for Economics and Management)
By Miho Takizawa (Associate Professor at the Faculty of Economics, Toyo University)

(Abstract)

Inefficient allocation of resources distorts the sizes and the entry and exit behaviors of firms and business establishments, and as a result, lowers the Total Factor Productivity (TFP) of the aggregate economy. Using a rich dataset of Japanese establishments falling into manufacturing industries, we gauge the distortions (i.e., wedges) on capital and output at business establishment level, and estimate their impacts on the size distribution, entry and exit behaviors of establishments and the TFP of the entire manufacturing sector. We also analyze the factors of the wedges. Our main findings are as follows:

First, if capital and labor were to be reallocated in Japan to equalize marginal products to the extent observed in the United States, TFP in the manufacturing sector would increase by 7.7% in Japan. The efficiency of resource allocation has been worsened for the past three decades.

Second, the efficient size distribution of establishments that would be realized without any distortions would be more dispersed than the actual one. Moreover, without distortions, the largest establishments (top 0.01% to top 20%) should have a larger share, while the smallest establishments (bottom 20%) should have a smaller share.

Third, the larger the distortions on capital and output of a certain industry are, the lower the rate of establishments that enter into and exit out of that industry, while within the same industry the larger the distortions on capital and output in a certain establishment are, the more likely it is that it exits out of that industry.

Lastly, as to the factors of the distortions, we find that the higher the probability of facing borrowing constraints is for a certain industry, the larger the distortions on capital of those establishments that fall into that industry is, and that the higher the productivity of a certain establishment is, the larger the distortion on its output is.

Our results suggest that there is big room for raising aggregate productivity by improving the efficiency of resource allocation, but in order to realize that, it is effective to improve the capital allocation role of the financial system, and at the same time, to reexamine the policies based upon the size of business establishments, and to get rid of the constraints on establishments with high productivity, or to reduce the subsidies for establishments with low productivity.

Key words: misallocation, Aggregate Total Factor Productivity (TFP), establishment dynamics, size distribution

JEL classification: O47, E44

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A New Estimation of Japan’s Income Taxation Base

By Shigeki Morinobu (Professor, Chuo Law School, Chuo University)
By Atsushi Nakamoto (Visiting Researcher, Policy Research Institute, Ministry of Finance)

(Abstract)

Here we conduct a macroeconomic estimation of the trend of income taxation base by making use of the 93SNA, while overcoming some problems detected in estimations in the preceding researches. If we take a look at the trend after the year of 1997 estimated in Morinobu, Maekawa (2001), although the tax base increased around the middle of the 2000s following the reforms of income deduction, the tax base showed a declining tendency in the long run in principle due to the increase in the cost of social security caused by aging society. The expansion of tax base will be our big challenge in the future tax system reforms if we want to intensify the function of redistribution of income tax.

In particular, we should facilitate the shift from income deduction to tax credit as well as refundable tax credit, which is a main trend in tax reforms in other advanced countries. Especially, it is important to revise the spousal deduction system that lacks neutrality and is in disfavor of women advancing into society, and also revise the deduction for public pension. 

Key words: income taxation, income deduction, taxation base, tax reform, spousal deduction, deduction for public pension

JEL classification: E62, H24

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Any article in the Review reflects the writer's own opinion, and has nothing to do with any statement issued by the Ministry of Finance or the Policy Research Institute.