TFP growth plays a key role in expansion of Japanese economy until the 1980s and stagnation in the 1990s. As the 'engine of TFP growth,' endogenous growth theory emphasizes R&D activities and knowledge spillovers. This paper evaluates how important they are to observed TFP growth. From the data of Japanese 16 industries during 1968-96, the estimation results show that own R&D of industries and 'pure' knowledge spillovers account for around 60% of TFP growth. Moreover, they become more important in 1990s compared to other externalities from R&D, such as productivity improvement caused by input of higher quality.
