Working Paper: NBER ID: w16156
Authors: Ashish Arora; Lee G. Branstetter; Matej Drev
Abstract: This paper documents a shift in the nature of innovation in the information technology (IT) industry. Using comprehensive data on all IT patents granted by the USPTO from 1980-2002, we find strong evidence of a change in IT innovation that is systematic, substantial, and increasingly dependent on software. This change in the nature of IT innovation has had differential effects on the performance of the IT industries in the United States and Japan. Using a broad unbalanced panel of US and Japanese publicly listed IT firms in the period 1983-1999, we show that (a) Japanese IT innovation relies less on software advances than US IT innovation, (b) the innovation performance of Japanese IT firms is increasingly lagging behind that of their US counterparts, particularly in IT sectors that are more software intensive, and (c) that US IT firms are increasingly outperforming their Japanese counterparts, particularly in more software intensive sectors. The findings of this paper thus provide a fresh explanation for the relative decline of the Japanese IT industry in the 1990s. Finally, we provide suggestive evidence consistent with the hypothesis that human resource constraints played a role in preventing Japanese firms from adapting to the shift in the nature of innovation in IT.
Keywords: software innovation; IT industry; Japan; Silicon Valley; patents
JEL Codes: O31; O32; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dependence on software (C88) | Performance outcomes (L25) |
| Software intensity (C88) | Innovation performance (O36) |
| Human resource constraints (O15) | Ability to innovate effectively (O35) |
| Japanese IT innovation relies less on software advances (L63) | Innovation performance (O36) |
| Innovation performance of Japanese IT firms lagging behind US firms (L15) | Software intensity (C88) |