Japan , Moving toward a More Advanced Knowledge Economy - Lessons for developing countries-

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Japan , Moving toward a More Advanced Knowledge
Economy- Lessons for developing countries-
May 30, 2006

• At Tokyo ABCDE
• Tsutomu Shibata
• Senior Adviser, World Bank Institute
• tshibata_at_worldbank.org

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Why focus on knowledge Economy now?

• A knowledge revolution! Reflected in the
  speed-up in creation and dissemination of
  knowledge.
• Opening up opportunities for leapfrogging, but
  also raising risks that developing countries may
  fall behind
• All countries need to develop explicit strategies
  to take advantage of this new knowledge to avoid
  being left behind.
• There are many definitions of the Knowledge
  Economymost focus only on information technology
  and high technology sectors

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A broader definition of Knowledge Economy

• An economy that creates, acquires, adapts, and
  uses knowledge effectively for its economic and
  social development.

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The Four Pillars of the Knowledge Economy
Economic and Institutional Regime
Education
Information Infrastructure
Innovation
WBI Knowledge for Development
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Knowledge Assessment methodology (KAM) Score
Card Japan and U.S.
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Knowledge Assessment methodology (KAM)

• Based on the four Knowledge economy pillars.
• 80 structural/qualitative variables.
• 128 countries.
• Benchmarks performance for two points in time
  1995 and most recent year.
• Basic (simplified) scorecard for 14 key
  variables.
• Aggregate knowledge economy index (KEI), ranging
  from 0 (weakest) to 10 (strongest).
• www1.worldbank.org/gdln/kam.htm

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Outline

• Japan, Moving Toward a More Advanced Knowledge
  Eonomy
• Volume 1 Assessment and Lessons
• Volume 2 Advanced Knowledge Creating
  Companies (Hitotsubashi ICS)

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Volume I 4 Pillars

• Chapter 1 Introduction (Tsutomu Shibata ,WB )
• Chapter 2 Japans Development and Growth Process
  (Prof. Miyajima, Waseda)
• Chapter 3 The Competitiveness of Japanese
  Industries and Firms (Prof. Takeuchi,
  Hitotsubashi)
• Chapter 4 Elements of a New Economic and
  Institutional Regime for an Advanced Knowledge
  Economy (Tatsuji Hayakawa, WB)
• Chapter 5 Information Infrastructure (Mr. Nezu,
  Fujitsu Soken )
• Chapter 6 The IT Revolutions Implications for
  the Japanese Economy (Prof. Motohashi, University
  of Tokyo)
• Chapter 7 Education, Training, and Human
  Resources Meeting Skill Requirements (Prof.
  Yonezawa, Univ Evaluation Research, National
  Institute for Academic Degrees, and Ms. Kosugi,
  the Japan Institute for Labor Policy and
  Training)
• Chapter 8 National Innovation System Reforms to
  Promote Science-Based Industries (Prof. Odagiri,
  Hitotsubashi)
• Chapter 9 Moving Toward a More Advanced
  Knowledge Economy Lessons and Implications
  (Tsutomu Shibata WB )

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Volume II (Industries Firms)

• Chapter 1. The New Dynamism of the
  Knowledge-Creating Company (Prof. Takeuchi)
• Chapter 2. Knowledge Creation in the Convenience
  Store Industry Seven-Eleven Japan (Prof.
  Ikujiro Nonaka)
• Chapter 3. Learning and the Self-Renewing,
  Network OrganizationToyota and Lexus Dealers
  (Prof. Emi Osono)
• Chapter 4. Strategic Management of
  Knowledge-Based Competence Sharp Corporation
  (Prof. Kazuo Ichijo)
• Chapter 5. Invisible Dimensions of
  Differentiation Japanese Electronics
  Companies (Prof. Ken Kusunoki)
• Chapter 6. Inter-Organizational Knowledge
  Creation at Shimano (Prof. Takeuchi)
• Chapter 7. Creating the Dynamics of
  Hard-to-Imitate Innovation (Prof. Takeuchi)

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Why Japan?

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Why Japan now?

• 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/companie
  s and weak industries.

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Japans Competitiveness

• IMD Ranking
• 1989 1
• 1993 1
• 2004 23
• 2005 21
• 2006 17
• Is this right evaluation?

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Japans Competitiveness

• Ranking profit ratio ROE
• 1989 1 6.1 8.5
• 1993 1 2.7 1.7
• Operational profit ratio for 691 firms

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Shares of World GDP - Constant US (1960 - 2002)

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High income OECD ex. US Japan
35
Sub-Saharan Africa
30
United States
25
High Income Non-OECD
(Black)
20
Japan
Middle East North Africa
15
(Light Blue)
South Asia
Europe Central Asia
(Grey)
10
Latin American Caribbean
East Asia Pacific
5
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
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?
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Japans National Innovation System
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Technology Imported

• Final products gt reverse engineering
• Components gt at first imported for knockdown,
  then substituted by domestic production
• Equipment and tools gt often remodeled
• Licensing
• Model for Japan/Korea/Taiwan (VS Thai/Malaysia)

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The Role of Government

• Education (the school system willingness to
  learn)
• Infrastructure e.g., transportation and
  communication, also commercial code, patent, and
  other legal systems.
• Research national research institutes, and
  universities
• Protection against foreign competitors (NO FDI)
• Subsidies and tax concession
• Gov fund in RDnot large (20 -2000, US 28)

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The Japanese Business System

• 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 RD.
• Flexibility in rearranging workshops and the
  nurture of workers broad skills.
• Easier introduction of new technologies.

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Changing Business Environment

• Weakening of stable shareholders
• Occurrence of hostile MAs
• Occurrence of bankruptcy and worker dismissal
• IT revolution
• Loss of production skills, caused by the overseas
  shift of production

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Changing Economic Situations

• End of catch-up
• Strict enforcement of intellectual property
  rights by foreign companies
• gt Difficulty in acquiring overseas technologies
• Depressed demand since 1990
• Globalization
• Prolonged Financial Sector problems
• Declining rate of new business establishment
• 5.8 (1975-78) to 3.1 (1999-2001)
• Now, lower than the exit rate (4.5)

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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 RD and
  production

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Important Features of Science-Based Industries

• Science linkages (Increasing citation of
  scientific papers in US patents)
• Intellectual property rights (returns for
  inventors )
• Diversity and change in the Boundary of the Firm
  (cannot perform RD alone)
• University-industry collaborations
• Inter-firm alliances
• Widespread use of the technology across industries

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University-Industry (UI) Collaboration

• Encouragement of UI joint research
• No. increased (national universities) 1139 in
  1990 gt 4029 in 2000
• Tax concessions granted to company RD for UI
• Universities facilities for UI joint research /
  startups rent
• Encouragement of university spin-offs
• New startups 11 in 1995 to 135 in 2002 (now
  600, much less than in US)
• Patent fees are reduced for university inventions
• Technology licensing offices (TLOs) were
  established to promote patenting and licensing
• 36 TLOs as of end 2003
• Deregulation on professors assuming company
  directorship
• 280 professors (of national universities) allowed
  to become directors or auditors of companies (as
  of 9/03)

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National University Corporation Law

• In 2004, all national universities became
  semi-independent 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.

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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
• The Japanese Bayh-Dole Act, 1999
• Inventions out of RD projects funded by the
  government gt Researchers can now own the
  patents.
• With reduced patent fees and help of TLOs, more
  commercial application of inventions are hoped.

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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 gt 1 yen
• Stock options as a compensation scheme

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Issues of Recruitment

• Two main barriers to start new firms
• 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

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Japans Education/Job Trainings System
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Overview of Japans Education System

• Historical negligence of academic achievement at
  the output level (Diploma Disease.)
• Postgraduate education popular in natural
  sciences and engineering, not in social sciences,
  business, law study.
• Establishment of professional school system (law,
  business) as new trials.

• 90 completion of K12 since mid 1970s.
• 70 of secondary education graduates go to higher
  education.
• Large private higher education and hierarchy
  based on selectivity.
• Strong in engineering and technology.
• Extraordinary low drop-out rate of higher edu.

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Traditional career development in LT employment

• University names had critical influences on the
  initial entrance to labor market.
• Personnel division controls human resource
  allocation and career mobility within firms.
• Segmented career mobility for different career
  groups.
• Different labor markets for large enterprises and
  for SMEs.

• Stress on trainability (general skill) at
  recruitment, and strong tradition of company
  specific skills, tacit skills, OJT, Seniority,
  etc.
• Company-led private life.
• Strong knowledge/skill infrastructure based on
  the national language.

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Inconsistency between Macro and Micro Perspectives

• On a macro perspective, it clearly demands strong
  education/training system.
• Global competition in average academic
  achievement.
• World leaders and qualified professionals
• English education in early stage.

• On a micro perspective, it demands stable and
  protected life.
• Low incentives for study in schools.
• Excess supply of education.
• Good education background no longer assures life
  time employment.
• Preference of freelance position rather than
  full-time position.

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CONCLUSION(General)
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• Economic Regime-Related Lessons and Implications
• Corporate governance matters. Shareholders,
  rating agencies, and bond/equity analysts are
  important.
• Inward FDI must accompany substantial efforts to
  develop the capacity to absorb it.

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• 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 for an aging and
  decreasing population.
• 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.

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• 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.
• Firms with complementary core competencies can
  profit from collaborating to achieve innovation
  quicker than doing everything in-house.

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• Human-Resource-Related Lessons and Implications
• Education/training systems must facilitate
  changing jobs without disadvantages, and also
  re-entry into the labor market.
• Globalization and the IT revolution require
  continuous adjustment in the business skills and
  educational/training systems.
• Provision of quality assurance, selected
  subsidies channeled to individuals, and student
  loan can increase access to better life-long
  education /training.

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• Innovation-Related Lessons and Recommendations
• Closer collaboration between universities and
  industries is needed in patent licensing and
  commissioned/ joint research.
• A special court for patent litigation is useful.
• Venture business should be promoted with
  appropriate incentives including an "angel tax
  system" (favorable tax treatment for investors.)
• Creation of a support system for entrepreneurs,
  consultants, accountants, and lawyers familiar
  with advanced technology and IPR should be
  encouraged.