In Japan, do differences in technological innovation systems fundamentally determine the long-term performance of the national economy?

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kipling2448 | (Level 3) Educator Emeritus

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Japan has long prided itself on its centralized system of establishing policy for the direction in which it wants its economy to move.  Unlike the United States, where the concept of industrial policy is antithetical to many free market enthusiasts, Japan deliberately, in the post-World War II era, developed a system wherein its central government, industrial sector, universities, and financial services industry all cooperated to advance national policy.  And it worked for many years.  The Japanese economy, from the ashes of the war, rapidly grew to become one of the largest in the world.  Key to the growth of its high-technology sector was what is called its “technology innovation system,” which brings together those myriad assets in the interests of the country as a whole.  The “rugged individualism” that characterized many Americans’ image of themselves was at variance with the Japanese model of top-down management starting with that nation’s notoriously powerful bureaucracies.

While the Japanese enjoyed incredibly high rates of economic growth for several decades, however, that very system of almost incestuous relationships between various sectors of the economy would ultimately prove its “Achilles heel.”  The Japanese model of industrial policy – which is largely interchangeable conceptually with the concept of “technology innovation systems” – helped its electronics and automobile sectors become among the most formidable in the world.  But failure of the Japanese government to effectively regulate its industrial sectors while encouraging (actually, mandating) cooperative relationships, for instance, between lending institutions and manufacturers, proved disastrous. By the early 1990s, asset bubbles caused in no small part by questionable banking practices like the routine provision of loans irrespective of the stability of the enterprise for which the money was intended caused the Japanese economy to collapse.  It would more than 20 years before the Japanese would begin to climb out of that hole, and some argue that recent signs of hope will prove ephemeral. 

So, when discussing technology innovation systems, one can view their viability two ways. First, as an extension of traditional industrial policies in which the government encourages or mandates relationships among various sectors and components of the economy.  Second, such systems can be viewed as the logical approach to minimizing inefficient business practices by ensuring coordination among each sector of the broader enterprise, beginning with fundamental research and development and extending through manufacturing and maintenance.  Again, the Japanese national economy has emphasized this approach since its modern inception.  And, it’s not a bad system as long as its monitored and regulated to prevent business decisions that reflect relationships more than they do sound policy and practices.  The Japanese had failed here, and are still paying the price.  The United States, as noted, has traditionally eschewed such centralized economic planning, but sometimes at the expense of the broader national interest.  In other words, the national interest is not necessarily compatible with the interests of individual corporations, which act in their self-interest. 

The key part of the phrase “technology innovation system” is the last part: “system.”  Japan has certainly not lacked for innovative approaches to technology, although its contributions tended to be exaggerated relative to those of its main competitor for many years, the United States.  It was the “system,” however, that gave the Japanese economy its characteristics, and that has defined that country’s economy for over sixty years.