MAR, 2007
Japan as a knowledge economy
- Assessment and lessons -
In Dar es Salaam
Tsutomu Shibata
Senior Adviser, World Bank Institute
tshibata@worldbank.org
Why focus on knowledge Economy
now?
•A “knowledge revolution”! Speed-up in
creation and dissemination of knowledge.
•More opportunities for leapfrogging,
but also raising risks that all countries may
fall behind unless they take advantage of the
new era.
•Many definitions of the “Knowledge
Economy” focus only on IT and high
technology sectors
2
The Four Pillars of the Knowledge
Economy
Economic and
Institutional
Regime
Information
Infrastructure
Education
Innovation
3
WBI Knowledge for Development
Outline
Japan, Moving Toward a More Advanced
Knowledge Economy
Volume 1: Assessment and Lessons
Volume 2: Advanced Knowledge Creating
Companies (Hitotsubashi ICS)
4
Volume II (Industries &Firms)

Chapter 1.

Chapter 2.

Chapter 3.

Chapter 4.

Chapter 5.

Chapter 6.

Chapter 7.
The New Dynamism of the Knowledge-Creating
Company (Prof. Takeuchi)
Knowledge Creation in the Convenience Store Industry:
Seven-Eleven Japan (Prof. Ikujiro Nonaka)
Learning and the Self-Renewing, Network
Organization:Toyota and Lexus Dealers (Prof. Emi Osono)
Strategic Management of Knowledge-Based Competence:
Sharp Corporation (Prof. Ichijo)
Invisible Dimensions of Differentiation: Japanese Electronics
Companies (Prof. Kusunoki)
Inter-Organizational Knowledge Creation at Shimano
(Prof. Takeuchi)
Creating the Dynamics of Hard-to-Imitate Innovation
(Prof. Takeuchi)
5
Why Japan?
Why Japan now?
1.
2.
3.
The tremendous speed and resilience
Japanese industries had shown in catching up
with the industrial world and overcoming the oil
and Yen shocks.
Japan still has many strong leaders in some
industries due to the advanced manufacturing
process despite the overall decline of its
competitiveness.
Imbalance between these strong
industries/companies and weak industries.
7
Japan’s Competitiveness
IMD Ranking
1989
1
1993
1
2002
30
2006
17

Is this right evaluation?
8
Japan’s Competitiveness
Ranking
1989 1
1993 1

profit ratio*
6.1%
2.7%
ROE
8.5%
1.7%
*Operational profit ratio for 691 firms
9
Knowledge Assessment methodology (KAM)
Score Card: Japan and U.S.
10
11
12
13
14
年
15
16
Japan’s National Innovation
System
Technology Imported*



Final products => ‘reverse engineering’
Components => at first imported for
knockdown, then substituted by domestic
production
Licensing
*Model for Japan/Korea/Taiwan
(VS FDI model : Singapore/Thai/Malaysia)
18
The Role of Government
Education: (the school system +
willingness to learn)
 Infrastructure: including commercial
code, patent, and other legal systems.
 Research: national research institutes,
and universities
 Subsidies and tax concession
 Gov fund in R&D—not large (20% -2000,
US 28%)

19
The Business System in the past

Friendly shareholders and internally-promoted
managers.
 Pursuit


of long-run goals.
Long-term employment with internal training
and rotation.
Long-term assembler-supplier relationship
 Sharing

of information, joint R&D.
Flexibility in rearranging workshops and the
nurture of workers’ broad skills.
 Easier
introduction of new technologies.
20
Changing Business Environment
Weakening of stable shareholders
 Occurrence of hostile M&As
 Occurrence of bankruptcy and worker
dismissal
 Loss of production skills, caused by the
overseas shift of production

21
Changing Economic Situations




End of catch-up
Strict enforcement of intellectual property rights
by foreign companies
=> Difficulty in acquiring overseas technologies
IT Revolution/Globalization
Declining rate of new business establishment
 5.8% (1975-78) to 3.1% (1999-2001)
 Now, lower than the exit rate (4.5%)
22
Need to Advance Science-Based
Industries

Development is pursued with
innovations based on sciences
 Industrializing
the outcome of scientific
research
 Applying sciences to solve bottlenecks in
R&D and production
23
Important Features of ScienceBased Industries




Science linkages (Increasing citation of
scientific papers in US patents)
Diversity and change in the Boundary of the
Firm (cannot perform R&D alone)
 University-industry collaborations
 Inter-firm alliances
Intellectual Property Rights (returns for
inventors )
Widespread use of the technology across
industries
24
University-Industry (UI) Collaboration

Encouragement of UI joint research




Tax concessions granted to company R&D for UI
Universities facilities for UI joint research / startups’ rent
Encouragement of university spin-offs



New startups: 11 in 1995 to 600 in 2005
(much less than in US)
Patent fees are reduced for university inventions
Technology licensing offices (TLOs) were established
to promote patenting and licensing


No. increased (national universities): 1139 in 1990 => 4029 in
2000
42 TLOs as of July 2006
Deregulation on professors’ assuming company
directorship

280 professors (of national universities) allowed to become
directors or auditors of companies (as of 9/2003)
25
National University Corporation Law




In 2004, all national universities became semiindependent organizations.
Financially, still dependent on the government.
More freedom in decision-making
More incentive for UI collaborations
 University
can own patents
 Possibilities of hiring specialists for patenting, licensing,
spinning off, etc.
 More incentive for collecting private funds for research.
26
Intellectual Property Reform




Basic Law on IP, 2002
IP Policy Headquarters in the Cabinet
Promotion of use of patent
 Only 27% of patents are currently used
Stronger enforcement of patents
 Plan to establish a special court for patent
litigation
27
Promotion of Startups

The Law for Facilitating the Creation of New
Business, 1999
 Subsidies
and guarantees for SMEs to start new
businesses and to develop and commercialize new
technologies.



Tax advantages (‘the Angel Tax’)
Reduction of minimum capital for a new stock
company: 1 million yen => 1 yen
Stock options as a compensation scheme
28
Increasing High-Tech Startups

Increase in biotechnology startups
 60

in 1998 => 387 in 2003
Increase in IPOs
 About
100 such IPOs in 2003 in three markets
29
Issues of new firms --Recruitment

Two main barriers
 Financing
(Many VC were established)
 Recruitment of staff

Difficulty in recruitment is deep-rooted because
of the Japanese employment system
 Many
talents are in big firms
 Long-term worker-company attachment
 Still, a number of conspicuous cases have started to
appear
30
Japan’s Education System
Overview of Japan’s Education System



90% completion of
K12 since mid 1970s.
70% of secondary
education graduates
go to higher education.
Strong in engineering
and technology
education/research.



Extraordinary low
drop-out rate of univ’
Negligence of
academic
achievement
Establishment of
professional school
system (law,
business) as new
trials.
32
Traditional career development in LT
employment



Universities had
critical influences on
the initial entrance to
labor market.
Personnel divisions
control career path
Different labor
markets for large
enterprises and for
SMEs.


Stress on ‘trainability’
(general skill) at
recruitment, and on
company specific
skills, tacit skills, OJT,
Seniority, etc.
Strong
knowledge/skill
infrastructure based
on the national
language.
33
Changing environment (1)

Deterioration of
knowledge infrastructure
supported by entrance
exam system.
 Over supply of HE
since 1990—end of
exam hells.
 Reduction of school
curriculum aiming for
fostering creativity.

Restructuring of
Japanese industry
 Outward FDI of
manufacturing
 Higher end products
and Designs still
remain in Japan, but
uncertain in the long
run.
34
Changing environment (2)


Changes in East Asia.
 Chinese growth.
 Stronger market power
of English speaking
countries in the
knowledge industries
including education.
Increasing reliance on
service sector in
industrialized countries.

Changed preference of
young workers.
 Lost trust in the
sustainability of big
companies.
 Increasing :



Job changes in the
initial career stage
Popularity of foreign
affiliated enterprises
outsourcing and
freelancers
35
CONCLUSION
Economic Regime-Related Lessons and
Implications
 Better supervision of the financial sector
and more accurate disclosure of NPLs.
 More transparency and less crossshareholding would have facilitated countermeasures, including changing managers
accountable for bad performance.
 Reduction of public works in rural areas and
of agricultural subsidies for more balanced
and flexible budgets.
37
Labor-Related Lessons and
Recommendations
Higher mobility and flexibility in the labor
market based on more lifetime learning and
re-entry, especially for women.
 Increase of value-added per worker through
innovation is crucial.
 Greater availability of daycare at a
reasonable cost, flexible work hours, and
liberal leave policies to encourage more
female work-force to be in the market.

38
IT-Related Lessons and Implications
IT investment must be accompanied by
proper changes in organization and work
practice.
 Speed, selection, concentration, and
collaboration are core for IT strategy.
 To achieve speed, firms must concentrate
on core competencies.

39
Human-Resource-Related Lessons
and Implications
Literacy and general education were key
factors in the early development of Japan.
 Capacity development can be
enhanced by company-provided
training and voluntary initiatives by
workers.
 Globalization and the IT revolution require
continuous adjustment in the business
skills and educational/training systems.

40
Innovation-Related Lessons and
Recommendations



R&D funding by the gov’ needs to be prioritized
and well-coordinated among ministries. The US
National Institutes of Health can be a model.
Closer collaboration between universities and
industries is needed in patent licensing and joint
research.
Creation of a support system for entrepreneurs,
consultants, accountants, and lawyers familiar
with advanced technology and IPR should be
encouraged.
41