Overcoming Economic Stagnation in Japan: The Importance of Total Factor Productivity and the Potential Contribution of Foreign Direct Investment

Abstract

The 1990s have been a decade of minimal growth for the Japanese economy. Examining this record from a growth accounting perspective, this paper argues that a major factor underlying Japan's disappointing growth performance in recent years has been a marked slow-down in total factor productivity (TFP) growth. It is suggested that, given present population trends and low returns on capital, any sustained increase in overall economic growth will require an acceleration in TFP growth. In this context, foreign direct investment (FDI) can potentially make an important contribution by increasing the degree of competition in the economy and, if foreign firms are more productive than domestic ones, by raising average TFP levels in Japanese industry.

Keywords: Japan, foreign direct investment, total factor productivity, growth

JEL Classification: F20, F21, F23, F43, D24, O4