The Effect of Resource Reallocation within Business Groups on Macroeconomic Total Factor Productivity (Japanese)

Under Japanese employment practices, characterized by lifetime employment and seniority-based wages, the underdeveloped labor market for mid-career hiring and the difficulty of firing workers, especially regular employees in large firms, likely hinder the redistribution of labor across firms or between corporate groups. With employment essentially guaranteed for regular workers at large firms and labor mobility low, the intra-firm labor market plays a crucial role in Japan, and there is a strong possibility that human resource portfolios are reallocated, and that capital is lent or borrowed within corporate groups. Some of the inter-firm reallocation effects need to be viewed as results of business group decision-making rather than as a market selection mechanism. In this paper, by adding business-group factors to the approach of analyzing productivity dynamics suggested by Foster, Haltiwanger, and Krizan (2001), we decompose total factor productivity (TFP) growth into the within effects and the resource reallocation effects of independent firms and business group firms using microdata of the Basic Survey of Japanese Business Structure and Activities, conducted by the Ministry of Economy, Trade and Industry (METI), and measure the relative importance of these effects. We find that in the 2000-2010 period, business-group firms made the largest contribution to TFP growth. Specifically, reflecting large firms’ internationalization and relocation of production overseas, the revision of Japan’s Commercial Code, and deregulation of the worker dispatch business during this period, the within effects of business group firms, intra-group reallocation effects, and resource allocation effects due to changes in the market share of business groups through acquisitions accounted for the majority of the increase in TFP. On the other hand, in the 2010-2018 period, independent firms made the largest contribution to TFP growth, but overall growth was slower than in the 2000-2010 period. The main reasons for the slowdown were a substantial decrease in the resource reallocation effect of changes in the industry share of business groups whose ownership structure had changed, as well as a substantial decrease in the within effects of group firms and the reallocation effect within business groups. Selection through market competition is functioning among single firms, including small and medium-sized firms with low employment security. In contrast, reallocation between business groups and between independent firms and business groups has been very sluggish. In corporate groups, labor can be reallocated while guaranteeing employment through mergers and acquisitions.