Japan as a knowledge economy - Assessment and lessons for developing countries-

May, 2006
Japan as a knowledge economy
- Assessment and lessons for
developing countriesJJ/WBGSP Scaling Up African Conference
In Nairobi, Kenya
Tsutomu Shibata
Senior Adviser, World Bank Institute
tshibata@worldbank.org
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.
•Many definitions of the “Knowledge Economy”:most
focus only on IT and high technology sectors
2
A broader definition of Knowledge
Economy:
“An economy that creates, acquires,
adapts, and uses knowledge effectively
for its economic and social
development.”
3
The Four Pillars of the Knowledge
Economy
Economic and
Institutional
Regime
Information
Infrastructure
Education
Job Training
Innovation
4
WBI Knowledge for Development
5
KAM Score Card: Japan and Kenya
6
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
7
Outline
Japan, Moving Toward a More Advanced
Knowledge Eonomy
Volume 1: Assessment and Lessons
Volume 2: Advanced Knowledge Creating
Companies (Hitotsubashi ICS)
8
Volume I : 4 Pillars









Chapter 1: Introduction (Tsutomu Shibata ,WB )
Chapter 2: Japan’s 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 Revolution’s 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 )
9
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. Kazuo Ichijo)
Invisible Dimensions of Differentiation: Japanese Electronics
Companies (Prof. Ken Kusunoki)
Inter-Organizational Knowledge Creation at Shimano
(Prof. Takeuchi)
Creating the Dynamics of Hard-to-Imitate Innovation
(Prof. Takeuchi)
10
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.
12
Japan’s Competitiveness
IMD Ranking
1989
1
1993
1
2004
23
2005
21

Is this right evaluation?
13
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
14
%
Shares of World GDP - Constant US$ (1960 - 2002)
40
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
(Light Blue)
South Asia
Europe & Central Asia
(Grey)
15
10
Latin American & Caribbean
East Asia & Pacific
5
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
15
16
17
18
19
年
20
21
Japan’s National Innovation
System
Technology Imported*




Final products => ‘reverse engineering’
Components => at first imported for
knockdown, then substituted by domestic
production
Equipment and tools => often remodeled
Licensing
*Model for Japan/Korea/Taiwan (VS Thai/Malaysia)
23
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 R&D—not large (20% -2000, US
28%)
24
The Traditional 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 R&D.
Flexibility in rearranging workshops and the
nurture of workers’ broad skills.
 Easier
introduction of new technologies.
25
Changing Business Environment





Weakening of stable shareholders
Occurrence of hostile M&As
Occurrence of bankruptcy and worker dismissal
IT Revolution
Loss of production skills, caused by the
overseas shift of production
26
Changing Economic Situations





End of catch-up
Strict enforcement of intellectual property rights
by foreign companies
=> Difficulty in acquiring overseas technologies
Depressed demand since 1990
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%)
27
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
28
Important Features of ScienceBased 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 R&D alone)
 University-industry
 Inter-firm alliances

collaborations
Widespread use of the technology across
industries
29
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 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


No. increased (national universities): 1139 in 1990 => 4029 in
2000
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)
30
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
31
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
32
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
33
Japan’s Education/Job
Training Systems
Overview of Japan’s Education System




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
education/research.




Extraordinary low dropout rate of higher edu.
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.
35
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.
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.
Strong knowledge/skill
infrastructure based on
the national language.
36
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 fulltime position.
Emergency of aging society.
37
CONCLUSION
Economic Regime-Related Lessons and
Implications



Better supervision of the financial sector and more
accurate disclosure of NPLs.
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.
39
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.

40
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 inhouse.
41
Human-Resource-Related Lessons
and Implications
Literacy and general education are key
factors for development.
 Capacity development can be enhanced
by company-provided training and
voluntary initiatives by workers.
 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.

42
Innovation-Related Lessons and Recommendations






Domestic R&D and education are crucial to make imported
technologies applicable to manufacturing processes.
A proper competitive environment to promote R&D is needed to use
imported technology fully.
R&D funding by the gov’ needs to be prioritized and wellcoordinated among ministries. The US National Institutes of Health
can be a model.
Closer collaboration between universities and industries is needed
in patent licensing and commissioned/ joint research.
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.
43