The purpose of our study is to identify the sources of economic growth based on a KLEMS model for Japan and Korea. We also identify the growth contribution of ICT assets and resource reallocation effects in the two economies. Both Japan and Korea enjoyed high TFP growth in ICT-producing sectors but suffered low TFP growth in ICT-using sectors. For Japan, we find that the main factor underlying the Lost Decade is the slow-down in TFP growth. We also found that Korea's TFP growth was slow until the Asian financial crisis of 1997-1999 but then accelerated after the crisis. It seems that before the crisis, Korea was following a catch-up process with developed economies that was predominantly input-led and manufacturing-based, as documented by Timmer (1999) and Pyo (2001). However, through the drastic economic reform undertaken during the crisis, Korea seems to have shifted to a new phase of economic growth since the end of the 1990s. TFP growth rates, especially those in manufacturing sectors, have substantially increased in post-crisis Korea. Both in Japan and Korea, productivity in service sectors is much lower than in manufacturing. The reason probably is excessive regulation and a lack of competition in service sectors. And these factors seem to have impeded introduction of ICT in service industries. As for ICT capital accumulation, the ICT investment/GDP ratio of Korea is higher than that of Japan. Especially, the speed of ICT accumulation in the ICT sector in Korea is much faster than that in Japan. Both in Japan and Korea, the largest component in ICT investment is computing equipment.In the case of resource reallocation across sectors, the reallocation effect of capital input was negligible or negative for most periods both in Korea and Japan. After the financial crisis of 1997-99, the resource allocation effect of capital in Korea remained negative, although the size of the negative effect declined. On the other hand, the reallocation effect of labor input was positive for most periods both in Korea and Japan.

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Using the Japan Industrial Productivity (JIP) and the Korea Industrial Productivity (KIP) databases and other primary statistics in Japan and Korea, we estimate intangible investment in Japan and Korea at the industry-level. Comparing our estimates from two-country data, we find that the growth in intangible investment in Korea has exceeded that in Japan in the past 30 years. Intangible investment/gross value added (GVA) ratios in the machinery industries in Japan are higher than in Korea, because Japanese machinery industries are research and development (R&D) intensive. On the other hand, ratios in some service industries in Korea are higher than in Japan, because Korean service industries are information and communications technology (ICT)-intensive. When we conduct growth accounting analysis with intangibles, we find that the contribution of intangible investment to economic growth after 1995 in Japan decreased significantly. In addition, the contribution of intangibles to productivity growth in Japan after 1995 is lower than not only Korea but also the European Union (EU) countries and the United States. The lack of synergy effects between ICT and intangibles in Japan may be the cause of low productivity growth in the 2000s.

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Relative TFP, Decomposition of TFP growth, Perpetual Inventory Method, D24, E22, O47,