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TRANSFORMING THE SOCIO ECONOMY WITH DIGITAL INNOVATION This page intentionally left blank TRANSFORMING THE SOCIO ECONOMY WITH DIGITAL INNOVATION CHIHIRO WATANABE Professor Emeritus, Tokyo Institute of Technology, Meguro, Tokyo, Japan Research Professor, University of Jyväskylä, Jyväskylä, Finland Guest Research Scholar, International Institute for Systems Analysis (IIASA), Laxenburg, Austria YUJI TOU Associate Professor, Tokyo Institute of Technology, Meguro, Tokyo, Japan PEKKA NEITTAANMÄKI Professor, University of Jyväskylä, Jyväskylä, Finland Elsevier Radarweg 29, PO Box 211, 1000 AE Amsterdam, Netherlands The Boulevard, Langford Lane, Kidlington, Oxford OX5 1GB, United Kingdom 50 Hampshire Street, 5th Floor, Cambridge, MA 02139, United States Copyright © 2021 Elsevier Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from the publisher. Details on how to seek permission, further information about the Publisher’s permissions policies and our arrangements with organizations such as the Copyright Clearance Center and the Copyright Licensing Agency, can be found at our website: www.elsevier.com/permissions. This book and the individual contributions contained in it are protected under copyright by the Publisher (other than as may be noted herein). Notices Knowledge and best practice in this field are constantly changing. As new research and experience broaden our understanding, changes in research methods, professional practices, or medical treatment may become necessary. Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility. To the fullest extent of the law, neither the Publisher nor the authors, contributors, or editors, assume any liability for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions, or ideas contained in the material herein. Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-0-323-88465-5 For information on all Elsevier publications visit our website at https://www.elsevier.com/books-and-journals Publisher: Brian Romer Editorial Project Manager: Grace Lander Production Project Manager: Sreejith Viswanathan Cover Designer: Miles Hitchen Typeset by TNQ Technologies Contents About the authors ix Preface xi Acknowledgments xiii 1. Introduction 1 1.1 Rapid increase in digitalized innovation 1 1.2 Structural decline in productivity 3 1.3 The dilemma of digitalized innovation and productivity decline 8 1.4 Two-sided nature of information and communication technology 9 1.5 Uncaptured GDP 10 1.6 Spin-off coevolution 10 1.7 Activation of self-propagating function 11 1.8 Soft innovation resources 11 1.9 Neo open innovation 12 References 14 2. The productivity paradox and the limitations of GDP in measuring the digital economy 19 2.1 The increasing significance of the measurement mismatch in the digital economy 20 2.2 From “computer-initiated” to “internet-initiated” productivity paradox 24 2.3 New spin-off business strategies in the transition to an Internet of Things society 25 2.4 Limitations of GDP data for measuring the digital economy 28 2.5 Conclusion 30 References 31 3. Increasing dependence on uncaptured GDP and ways to measure it 37 3.1 Structural sources of productivity decline in the digital economy 38 3.2 The two-sided nature of information and communication technology 40 3.3 Shift from monetary to nonmonetary consumption 44 3.4 Emergence of uncaptured GDP and its measurement 50 3.5 Conclusion 57 References 60 v vi Contents 4. The emergence of soft innovation resources 63 4.1 The new stream of the digital economy and beyond 65 4.2 Remarkable disruptive business models from which new innovations emerge 76 4.3 Soft innovation resources 114 4.4 Assessment of soft innovation resources 120 4.5 Conclusion 126 References 128 5. Neo open innovation in the digital economy 135 5.1 R&D-driven growth in an Internet of Things society 135 5.2 Bipolarization of information and communication technologyedriven development 136 5.3 R&D expansion versus declining productivity 139 5.4 Neo open innovation 141 5.5 Conclusion 158 References 161 6. The transformation of R&D into neo open innovation 165 6.1 A new concept of R&D in neo open innovation 165 6.2 The fusion of technology management and financial management 175 6.3 Investor surplus to leverage stakeholder capitalization 181 6.4 Orchestrating technofinancing systems 187 6.5 Conclusion 193 References 196 Further reading 199 7. Operationalizing uncaptured GDP with neo open innovation 201 7.1 New research directions for future neo open innovation 201 7.2 Conceptualizing and operationalizing the transformation process 203 7.3 Tracking input return journeys as outcomes via digital transformation 207 7.4 A novel R&D concept that embeds a growth characteristic during an R&D process 211 7.5 Conclusion 213 References 216 Further reading 217 Contents vii 8. Conclusion 219 Appendix I 223 Appendix II 253 Appendix III 279 Glossary 297 Index 299 This page intentionally left blank About the authors Chihiro Watanabe graduated from the University of Tokyo, Japan, and is currently a professor emeritus at the Tokyo Institute of Technology, Japan, a research professor at the University of Jyväskylä, Finland, and a guest research scholar at the International Institute for Applied Systems Analysis (IIASA), Austria ([email protected]). Yuji Tou graduated from, and is currently a specially appointed associate professor at, the Tokyo Institute of Technology, Japan, and is a research officer of the Economic and Social Research Institute of the Cabinet Office, Japan ([email protected]). Pekka Neittaanmäki graduated from the University of Jyväskylä, Finland, and is currently a professor in the Faculty of Information Technology, University of Jyväskylä, and a UNESCO Chair on Digital Platforms for Transforming Economies, Finland (pekka.neittaanmaki@jyu.fi). ix This page intentionally left blank Preface As Don Tapscott demonstrated in his 1995 book, The Digital Economy, the Internet has dramatically changed how we conduct business and lead our daily lives. The further advancement of digital innovation, including the cloud, mobile services, and artificial intelligence, has accelerated this change significantly and provided new services alongside unprecedented welfare. However, running counter to these gains, productivity in industrialized countries has been faced with an apparent decline, a situation that raises the specter of a possible productivity paradox in the digital economy. Due to this paradox, the limitations of gross domestic product (GDP) statistics in measuring the development of the digital economy have become an important subject. This mismatch is an old problem rooted in the dynamics of product innovation. Because the mismatch brought about by information and communication technology (ICT) is extremely strong, finding a solution to this issue has become crucial for the digital economy. With these features of the digital economy as a basis, this book high- lights the significance of increasing dependence on what is known as uncaptured GDP by postulating that the Internet promotes free culture. The consumption within this culture, in turn, provides utility and happiness to people, but the value of this consumption cannot be captured through GDP data, which solely measure revenue. This added value is defined as uncaptured GDP. The increasing dependence on uncaptured GDP has also been intensi- fied by a shift in people’s preferences from economic functionality to suprafunctionality beyond economic value, which encompasses social, cul- tural, and emotional values. This shift then induces the further advancement of ICT initiated by the Internet. Therefore, a new coevolution has emerged among the development of the Internet, increasing dependence on uncaptured GDP, and a shift in people’s preferences. By analyzing the dynamism of this coevolution, a possible solution to the critical issue of how to measure uncaptured GDP in the digital economy can be obtained. This book attempts to do so through an intensive empirical analysis of national, industrial, and individual behaviors. This study includes an empirical analysis of the development trajectory of 500 global ICT firms in the digital economy. The analysis shows that xi xii Preface under the circumstances listed above, research and development (R&D)- intensive global ICT firms have been confronting the conflict between the increase in R&D investment (which is indispensable for success in the digital economy) and a decline in productivity. Further analysis revealed that aiming to avoid this dilemma, these firms have been attempting to activate the latent self-propagating function indigenous to ICT, because this can be activated through network exter- nalities. Once activated, the self-propagating function induces the devel- opment of new