[Special Feature: Thinking about Graduate Education] Osamu Murata: The Correlation between Graduate Education and Corporate Performance—Looking Toward the Future

2022/10/05

Japan's labor productivity per hour ranked 21st among the 36 OECD member countries according to 2021 data, a ranking that has remained almost unchanged since the beginning of the 21st century. The main factor behind the stagnation of Japan's labor productivity is that the accumulation of so-called intangible assets has lagged behind other developed countries*1. Among these factors, low investment in human capital is cited*2.

The size of a country's economic activity is basically measured by GDP, and the production of GDP requires labor and physical capital such as machinery and equipment as factors of production. However, in a knowledge-intensive society where technological progress and innovation are emphasized, human capital comes to play an important role in addition to these two. Particularly in Japan, graduate-level education is considered indispensable for the cultivation of highly skilled professionals.

With this awareness of the issues, this article aims to examine the relationship between graduate education and corporate performance in Japan based on data. Section 1 provides an overview of the current state of graduate education in Japan and other developed countries, and Section 2 observes the relationship between graduate education and labor productivity based on data. In Section 3, I will discuss the relationship between graduate education and corporate performance based on the data and content of the "Survey Report on Matching Corporate Human Resource Needs and Graduate Education" (hereinafter referred to as the Kansai Productivity Center Report) of the Kansai Productivity Center, which I authored*3.

This section provides an overview of graduate education in Japan, particularly the current status of master's programs and the ratio of graduate school graduates among corporate executives*4. First, Figure 1 illustrates the trends in the number of enrollees in graduate master's programs from FY1981 to FY2019 by field. As can be seen from Figure 1, the number of master's program enrollees continued to increase from FY1981, reaching a peak of 82,310 in FY2010, before decreasing to 72,574 in FY2019. By field, the number of enrollees in the natural sciences follows a similar trend to the overall movement, but the number of enrollees in the humanities and social sciences reached a peak of 15,838 in 2001 and has continued to decline since then.

Next, Figure 2 depicts the number of master's degree recipients per million population in the humanities and social sciences, natural sciences, and other fields in Japan, the United States, Germany, and the United Kingdom in FY2017. This figure shows that the number of master's degree recipients per million population in Japan is low in all fields. In particular, in the humanities and social sciences, the value is extremely low at approximately 9.9% of the U.S., approximately 12% of Germany, and approximately 6% of the U.K. Furthermore, even in the total of all fields, the number of master's degree recipients is low, at approximately 23% of the U.S., approximately 22% of Germany, and 15% of the U.K.*5.

As shown in Figure 2, the number of master's degree recipients per million population in Japan is lower than in Western countries, but there is an even more significant fact that the ratio of graduate school graduates among corporate executives and managers is low. Based on data from the 2017 Employment Status Survey, the ratio of graduate school graduates among executives and managers of Japanese companies and other organizations is 11.5%*6. On the other hand, it is reported that as of 1997, the ratio of graduate school graduates among managers of listed companies in the U.S. was 61.6% for HR directors, 45.6% for sales directors, and 43.9% for accounting directors*7. Thus, in proportion to the fact that the number of graduate degree recipients in Japan is low, the ratio of graduate school graduates among executives and managers of companies and other organizations is also considered to be low.

Now, let us look at the relationship between the ratio of graduate school graduates among executives and managers and labor productivity. First, Figure 3 shows the relationship between the ratio of graduate school graduates and labor productivity per hour based on OECD data*8. As can be seen from Figure 3, for OECD member countries, there is a positive correlation between the ratio of graduate school graduates and labor productivity per hour, suggesting that graduate education increases labor productivity.

To verify this using Japanese data, Table 1 shows the wage premium for graduate education by industry. As can be seen from Table 1, it can be inferred that graduate education increases labor productivity and leads to higher wages in Japan as well*9.

In this section, we will examine the relationship between graduate education and corporate performance based on micro-data from the Kansai Productivity Center Report.

First, let us touch upon the basic information of the corporate questionnaire in the Kansai Productivity Center Report. The number of companies that responded to the questionnaire was 105 in total, consisting of 103 member companies of the Kansai Productivity Center and two companies under the umbrella of the Japan Productivity Center. In terms of employee size, large-scale companies accounted for 82.9% (87 companies) and medium-scale companies for 17.1% (18 companies). By capital, companies with 10 billion yen or more accounted for 55.2% (58 companies), companies with 1 billion yen or more but less than 10 billion yen for 16.2% (17 companies), and companies with less than 1 billion yen for 28.6% (30 companies). By industry, construction accounted for 4.8% (5 companies), manufacturing for 54.3% (57 companies), electricity and gas for 1.0% (1 company), information and communications for 2.9% (3 companies), transport for 8.6% (9 companies), wholesale and retail for 10.5% (11 companies), finance and insurance for 6.7% (7 companies), services for 9.5% (10 companies), and others for 1.9% (2 companies).

The survey also asked about the final educational background of the presidents of the target companies. Approximately 77% were university graduates, approximately 14% had completed a master's program, approximately 4% had completed a Doctoral Programs, and approximately 5% were others. Graduate school graduates, combining master's and Doctoral Programs, accounted for approximately 18% of the total.

As mentioned in Section 2, it has been pointed out that the ratio of graduate school graduates among executives and managers of Japanese companies is lower than in the U.S. and other countries. To examine whether this fact affects corporate performance, Figure 4 shows the relationship between the final educational background of the presidents of the surveyed companies and corporate performance. As can be seen from Figure 4, the operating profit margin on sales for companies where the president's final educational background is a graduate degree is approximately 8.76%, while for companies where the president is an undergraduate graduate (university graduate, etc.), it is approximately 7.72%. Furthermore, in terms of operating profit per employee, companies where the president has a graduate degree earned 4.773 million yen, while companies where the president is an undergraduate graduate earned 3.811 million yen. The results show that the operating profit per employee for companies with a president who is a graduate school graduate is approximately 962,000 yen (25.2%) higher than in cases where the president is not.

Furthermore, an interesting fact has emerged regarding the relationship with the president's final educational background. It became clear that in the recruitment of employees over the past five years, the recruitment ratio of graduate school graduates differs depending on the president's final educational background. This is shown in Table 2.

As can be seen from Table 2, companies where the president's final educational background is a master's or doctorate recruit approximately 1.5 times as many human resources with master's or doctoral degrees as companies where the president's final educational background is a bachelor's degree (university graduate, etc.).

Similar to the OECD member countries seen in Figure 3, Figure 5 examines whether a positive correlation between the ratio of graduate school graduates and labor productivity can be seen in the data from the Kansai Productivity Center Report.

Figure 5 illustrates the ratio of graduate school graduates among full-time employees and the operating profit per full-time employee.

As can be seen from Figure 5, there is a positive correlation between the ratio of graduate school graduates and operating profit per full-time employee. This indicates that a relationship similar to the relationship between the ratio of graduate school graduates and labor productivity in OECD member countries seen in Figure 3 is also observed in Japanese companies.

As far as the data of companies under the Kansai Productivity Center is concerned, Figure 4 shows that the fact that a company's president is a graduate school graduate improves corporate performance in terms of profit margin on sales and operating profit per employee. Furthermore, Figure 5 shows that the ratio of graduate school graduates improves corporate performance in terms of operating profit per employee.

In this article, I provided an overview of the current state of graduate education in Japan and examined the relationship between graduate education and labor productivity based on OECD data and measured values of wage premiums. Furthermore, I looked at the relationship between graduate education and corporate performance based on data from the Kansai Productivity Center Report. It became clear that the relationship between graduate education and labor productivity suggested by OECD data is also supported by the micro-data of the Kansai Productivity Center. First, similar to the data for OECD member countries, a positive relationship was observed between the ratio of graduate school graduates and corporate performance. In addition, a positive relationship was found between the final educational background of the top management and corporate performance, whether measured by profit margin on sales or operating profit per employee. As seen in Section 2, the ratio of graduate school graduates among executives and managers in Japan is extremely low compared to Western countries. Although the data from the Kansai Productivity Center Report shown in this article is limited with a small sample size, it can be said to suggest the possibility that the top management being a graduate school graduate improves corporate performance. In other words, the recruitment status of graduate school graduates is considered to be closely linked to corporate performance. Furthermore, although not mentioned in the Kansai Productivity Center Report, what Japanese companies and industries need are human resources who can bring about innovation, and research results from economic growth theory are making it clear that human resources with higher levels of education will be needed more than ever before. In order for Japanese companies and industries to increase labor productivity and for the Japanese economy to develop sustainably in the future, it is considered essential to increase the ratio of graduate school graduates in companies and industries.

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