ESRI Discussion Paper Series No.397 The Role of Public Intangibles on Externalities of Social Infrastructure in Japan: Empirical Studies Using the Japanese Regional KLEMS Type Database

Using the updated datasets on social infrastructure and regional productivity, we reexamine the contributions of social infrastructure on productivity improvements. Our study adds two new ideas to the previous studies on social infrastructure: 1) we consider the complementary role of intangibles to externalities of social infrastructure, and 2) we include a new measure -the spillover effects considering transaction volumes between two prefectures -—in our analysis. To conduct our study, we use three datasets: 1) the updated dataset of social infrastructure published by the Cabinet Office, Government of Japan, 2) the 2021 version of the Regional Japan Industrial Productivity Database, which measures intangibles at the prefectural level, and 3) the inter-regional Input-Output Tables, which are used for the measurement of our unique spillover effects. Using these datasets, we find that the ratio of intangibles to tangibles in the public sector in rural areas has not increased compared to those in the private sector and the public sector in the urban areas. In the estimation results based on the production function including social infrastructure and public intangibles, we do not find positive and significant externalities of social infrastructure. However, the coordination of social infrastructure with intangibles by industry contributes to the productivity improvements. In addition, we find positive and significant effects of social infrastructure in rural areas. We also find positive and significant contributions of social infrastructure for restorations from large earthquakes such as Great East-Japan Earthquake and Kumamoto Earthquake. Our results on intangibles and social infrastructure are consistent with our experiences during the COVID-19 pandemic, when the responses of the government to this pandemic were slow due to the lack of digitalization. Our study shows that we need to accumulate intangibles not only in the private sector but also in the public sector.