Total Factor Productivity in Japanese Information Service Industries: Firm-Level Analysis

We examine factors determining productivity of firms’ information service activities, using most comprehensive data of information service industries in Japan. We focus on the degree of modularization and resulting outsourcing, economies/diseconomies of scale in software development, and firms’ organizational changes. Outsourcing has persistent negative effects on total factor productivity, suggesting not only productivity-enhancing modularization is not fully utilized but also productivity-hindering remnants of traditional main-contractor-subcontractor relations still prevail in information service industries. We also find diseconomies of scale in software development, suggesting less efficient communication among development team members. Finally, we find a substantial cost on firms’ organizational changes on productivity.