Japan experienced slower labor productivity growth compared to the United States after 1990. Research shows this was largely due to Japan's slow ICT capital deepening and lower total factor productivity (TFP) growth. While non-ICT capital deepening and improvements in labor quality were faster in Japan than in the US, ICT capital deepening lagged significantly behind. Source here.

This trend held across all sectors of the Japanese economy. However, the lag was most pronounced in distribution services and manufacturing (excluding electrical machinery). As these sectors drive much of the ICT-led productivity growth in the US, the failure of Japan to keep pace is concerning. Indeed, TFP growth rates in these sectors greatly outpaced Japan's after 1990. 

Simply put, Japan failed to accumulate sufficient ICT capital stock to drive an ICT revolution domestically. While economies like the US, UK and Germany dramatically increased their ICT investments as a percentage of value added in distribution services from the mid-1990s, Japan barely budged.

Firm-level data suggests smaller and older firms play a substantial role in explaining Japan's ICT gap. Smaller firms spend considerably less on ICT hardware, software and services. And counterintuitively, younger firms actually invest less in ICT as a percentage of value added. 

Econometric analysis reveals that smaller firms face higher ICT input prices, likely due to underdeveloped IT outsourcing, consulting and workforce markets. Consequently, smaller firms adopt less ICT-intensive production technologies. However, these firms also see higher marginal returns from ICT capital accumulation. Thus, lowering ICT input prices could spur significant productivity gains.

Similarly, younger firms exhibit greater productivity from ICT usage but appear unable to ratchet up investment to optimal levels. This highlights the need for greater availability of venture capital and intangible asset lending to unlock the growth potential of Japan's younger, technologically savvy firms.  

The comparisons also underscore how shifts in industrial composition over time can affect productivity. Older, established Japanese firms still account for the majority of output across most industries. With fewer new firms entering markets, the benefits of ICT diffusion remain concentrated in slower growing incumbents.

Here are some ways you as foreigners could adapt to and support Japan's digital transformation:

1. Learn Japanese language and culture: Having Japanese language skills and understanding cultural context will help foreigners contribute insights while being sensitive to local needs.
2. Specialize in high-demand digital skills: Develop expertise in AI, cybersecurity, UX design, big data analytics, etc. where global talent shortages exist. Bridge technical knowledge from abroad.
3. Help Japanese firms with global best practices: Share lessons around agile workflows, digital governance, user-centric design, cross-border collaboration tools and more.
4. Partner with Japanese startups: Join Japan's emerging startups to provide complementary skill sets spanning technology, creativity and international experience.
5. Advocate for inclusive reforms: Push Japanese policymakers and companies to break down insular tendencies and create opportunities for foreign residents including through immigration reforms.
6. Champion digital transformation: Become proactive advocates for accelerating Japan's DX progress in your workplaces and local communities.

With the right strategic approach focused on mutual understanding and tangible value-add through specialized digital capabilities, you as foreigners can successfully integrate and multiply their social impact in Japan's digital transformation. Do you have any stories to share about transitioning Japan through Digital Transformation?