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Can Japan innovate?

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Japan has a long history of importing new ideas from the rest of the world.  These ideas are imported, adapted and then adopted as their own -- to such a point that Japanese are often not aware of the origin of their own "unique" culture. 


China has been the origin of many of these imported new things like rice, Buddhism, Confucianism, language pictograms and even ink painting.  But there are many other sources like the Portugese which gave the Japan the rifle, their word for thank you (arigato=obligado in Portugese) and tempura (fried fish and vegetables).

Innovation -- the transformation of knowledge and ideas into commercially successful products -- has been the key factor in the rise in the world's living standards since the Industrial Revolution.  Innovation has also been an important driver of Japan's economic growth.  But as with most things, Japan is a special case.

During the period of Japan's rapid post-war development, from the 1960s until the early 1990s, Japan was an incremental innovator.  It mainly imitated and improved products and processes that had been developed by other countries.  This took place in large scale operations in companies, and within closed networks of companies, where seniority-based promotion, lifetime employment and in-house training were the norm.  Companies also establlished their own research institutes.  It was a system that worked, but no system works forever.  

The early 1990s saw the start of Japan's financial crisis.  It also saw the beginning of a new innovation game.  Basic research began to be outsourced to universities and external research organisation with specialised expertise.  Start-up companies started to play an increasingly important role in risky investment.  Company-specific knowledge and experience became less important.  With technological progress and globalization, this was replaced by more specialised, module-based and open-network knowedge development.

The Japanese government and business sector recognised that they needed to shift from catching up with the rest of the world towards developing their own fundamental product innovation through creativity.  And despite economic stagnation, R&D spending rose substantially in the 1990s.  Japan spends more on R&D (3.2% of GDP) than either the US (2.6%) or the EU(2.0%).  And this is led by the business sector which accounts for some three-quarters of total R&D expenditures.  Public sector R&D expenditure and the number of researchers have been growing more strongly than the OECD average, while expenditure on higher education is also above the OECD average.

In short, Japan's investment into inputs for innovation have been very high.  But, what the results?  This seems to have had some positive results as Japan's share of world exports of some high-tech manufacturing products did rise.  Overall, however, the return on investment in R&D seems weak.  Competitiveness declined in other industries like portable computers, semiconductors, telecommunications equipment and bio-industry.

Most indicators of Japan's production of scientific research are weak.  And although it produces many patents, many of these are "sleeping patents", that is, they are never commericalised.  Japan is also weak in terms of linkages between R&D sectors and international co-operation in R&D.  Its backward service sector is not conducive to the development of knowledge intensive services, and its inefficient financial sector is weak in the area of venture capital.   

More fundamentally, Japan has been slow to adjust its corporate system and industrial structure to this new environment.  The concept of management of technology, including closer interaction between R&D and marketing, is weak in most large Japanese firms.  Most large Japanese enterprises remain bureaucratic and hierarchical, and lack the dynanism and agility of their western counterparts.

The answers to most of Japan's innovation challenges are the same as the answers to many of Japan's problems:

--  Open the economy and society to the rest of the world through trade liberalisation, and financial sector and regulatory reform.  This would not only allow more products that consumers want, it would also allow new ideas and knowledge to enter and stimulate local innovation.  Further, it would allow skilled foreign workers to enter (a key to the US innovation success) and encourage international R&D linkages.   

--  De-compartmentalise the society in which everyone currently has a grade, a category, etc.  In the innovation area, this would facilitate mobility, better ties and knowledge transfers between the business sector and research organisations. 

--  Make the society truly democratic and meritocratic by rewarding talent not seniority, by allowing the young to speak up and not be crushed by eliminating hierarchies, and above all by giving real opportunities to the country's silent asset, the women of Japan.  All of this might also help develop a risk-taking culture.

--  Aim for academic excellence in education.  While Japan achieves excellent education results, Japan ranks low in terms of doctoral graduates and the share of science students.  The government and business sector bureaucratic systems (especially the seniority system) do not provide an incentive to go to the top in education.

But Japan does not need advice from me or international consultants on how to innovate.  In Toyota, the world's biggest auto-maker, they already have a model of innovation, which is also a leader in new environment-friendly technologies.  The "Toyota Way" has four components which should be a source of innovation for us all: (i) long-term thinking as a basis for management decisions; (ii) a process for problem-solving; (iii) adding value to the organisation by developing its people; and (iv) recognizing that continuously solving root problems drives organisational learning.

Toyota is also a brave and courageous company.  At a time when many French companies are outsourcing to eastern Europe and North Africa, Toyota established a production plant in France, the land of strikes and protests.   

Another source of inspiration for innovation is Japan's younger generation which is a powerful motor for innovation in the area of computer and video games, an area where Japan is a real market leader.

And there is no time like the present financial crisis to tap this younger generation.  Because what do Disney, McDonalds, Burger King, Procter and Gamble, Johnson and Johnson, and Microsoft all have in common.  They all started in a recession or depression.  Bright and unemployed people can be the world's greatest source of innovation.


Upgrading Japan's innovation system to sustain economic growth, by Randall S. Jones and Tadashi Yokoyama, Economics Department Working Paper No.527, OECD.  www.oecd.org