The use of ICT should allow the rest of the economy (distribution, services and non-ICT manufacturing) to increase its productivity and achieve, for example, a 2% increase in production from an increase in production. 1% of inputs. Unfortunately, Japan’s non-ICT sectors have not benefited from this increase in productivity.
During the country’s “economic miracle” after World War II, in the analogue age, technological innovation was driven by giant, capital-intensive, vertically integrated companies. They relied only on themselves and longtime allies in corporate conglomerates – known as the keiretsu – to create separate products. Businesses have shaped themselves to comply with this technological regime.
We now live in a digital world, where the forefront of innovation are often newer, entrepreneurial and knowledge-intensive companies. It’s a world where giants regularly partner with others, including newcomers, in a process called “open innovation”. Pfizer’s COVID-19 vaccine was developed by a small German biotechnology company founded in 2008 called BioNTech. Amazon’s Alexa and Google’s Android and Chrome are all products developed through open innovation.
In Japan, 70% of corporate giants still think they have to do everything in-house. However, with 10 percent of the cost of building a car involving software – and with that amount steadily increasing over time – automakers can no longer go it alone.
Having repeatedly failed to develop a collision avoidance system, Honda ultimately bought the technology from Bosch, only to deal with outrage from the company’s research and development veterans who insist that the use of in-house parts was at the heart of Honda’s soul.
The champions of the analog era have been so successful that they have an ingrained mindset that companies struggle to change, even when they try hard. These companies do not hire or promote recruits who want to revamp business models. About 82 percent of senior executives in large Japanese companies have never worked in another company.
In Germany, this share is 28 percent and in the United States, only 19 percent.
The difficulty of teaching an old dog new tricks isn’t unique to Japan, but what sets it apart is the difficulty new businesses face in supplanting old business leaders. Not a single new manufacturer has entered the upper ranks of electronics since 1946, when Sony and Casio were born.
In contrast, eight of the top 21 electronics manufacturers in the United States did not exist in 1970. Among the wealthy countries, Japan has the second lowest rate of new firm entries and exits of old firms.
In the digital age, bigger isn’t necessarily better. In 1981, 71% of all research and business development in the United States was performed by companies with 25,000 or more employees and only 4% by those with less than 1,000. In 2014, the share of Giant companies halved to just 36 percent, while the share of under 1,000 people rose to 20 percent.
Japan is resisting this trend. In 2015, only 7% of its research and development activities were carried out by companies with fewer than 500 employees, compared to 17% in the United States and 33% in France and the United Kingdom. One reason is that Tokyo directs nearly 90 percent of government funding for research and development to large incumbents – the highest ratio in the OECD.
Prime Minister Yoshihide Suga announced a program to increase digitization, including the establishment of a new digitization agency. This is a good first step, but unfortunately limited to intra-government functions and citizen relations with government. To be useful to the Japanese economy, it must be extended to businesses.
If Japan is to revive itself, it must recognize that, to paraphrase the famous American auto ad, “it’s not your father’s economy.” Its champions of the analog era are slowing the Japanese economy.
Richard Katz is Senior Fellow at the Carnegie Council for Ethics in International Affairs. This article is based on his upcoming book, Gazelles or elephants: the competition for the economic future of Japan and is part of a series of East Asia Forum (www.eastasiaforum.org) at the Crawford School at ANU College of Asia and the Pacific.