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JAPAN Moving Toward a More Advanced Knowledge Economy WBI Development Studies VOLUME 1 37261 v 1 Public Disclosure Authorized JAPAN Moving Toward a More Advanced Knowledge Economy Public Disclosure Authorized Assessment and Lessons Public Disclosure Authorized Edited by Tsutomu Shibata Public Disclosure Authorized WBI DEVELOPMENT STUDIES Japan, Moving Toward a More Advanced Knowledge Economy Volume 1: Assessment and Lessons Edited by Tsutomu Shibata The World Bank Washington, D.C. © 2006 The International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/the World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN 0-8213-6672-6 Library of Congress cataloging-in-publication data has been applied for. Contents Foreword by Frannie A. Léautier vi Authors’ Contact Information viii Acknowledgmentsx Glossary xi 1 Introduction1 Tsutomu Shibata 2 Japan’s Development and Growth Process 11 Hideaki Miyajima 3 The Competitiveness of Japanese Industries and Firms 35 Hirotaka Takeuchi 4 Elements of a New Economic and Institutional Regime for an Advanced Knowledge Economy 49 Tatsuji Hayakawa 5 Information Infrastructure 67 Risaburo Nezu 6 The IT Revolution’s Implications for the Japanese Economy 89 Kazuyuki Motohashi 7 Education, Training, and Human Resources: Meeting Skill Requirements 105 Akiyoshi Yonezawa and Reiko Kosugi 8 National Innovation System: Reforms to Promote Science-Based Industries 127 Hiroyuki Odagiri 9 Moving Toward a More Advanced Knowledge Economy: Lessons and Implications 147 Tsutomu Shibata Figures 1.1. World Export Share of Manufactures (Japan and U.S.)2 1.2. Japan’s Trade Specialization Index (vis-`a-vis the U.S.)2 1.3. Japan’s Trade Specialization Index (vis-`a-vis East Asia and Pacific)3 1.4. Market Penetration in the Car Market: Sales of U.S. Brands and Japanese Brands in the U.S. and Japan4 1.5. Japan, Normalization Group: All9 1.6. United States, Normalization Group: All9 2.1. GDP per Worker: Growth Rate and in Comparison to Frontier 12 2.2. Investment Ratio in the 20th Century (percent of GDP) 14 2.3. Corporate Performance in 20th Century Japan 18 3.1. Japanese Business Environment: Diamond Framework 41 3.2. SECI Process of Knowledge Spiral 46 iii iv Contents 4.1. Growth and Inflation, 1970–2003 50 4.2. The Unemployment Rate, 1983–2004 55 5.1. Comparison of Prices Between Dial-Up and ADSL 72 5.2. Semiconductor Share in the World Market 79 6.1. IT Investment as a Percentage of Nominal GDP, Japan and United States, 1980–2000 90 6.2. Organizational Change and IT Adoption 96 6.3. Organizational IQ of Japanese Firms Relative to U.S. Firms 99 7.1. Expenditure to Tertiary Education Institutions as Percentage of GDP and Share of Household Expenditure in Tertiary Education Expenditure in OECD Countries 109 7.2. Salary Increase of Master Course Graduates 117 7.3. Share of Education and Training Cost in Total Personnel Cost 120 7.4. Human Resource Management Policies of Japanese Enterprises 121 8.1. Trend of Innovation Activity in Japan, 1952–2002 128 8.2. Trends in R&D/GDP (%) and Technology Export/Import Ratio 129 Tables 2.1. Composition of GDE Growth, 1956–95 (percent annually) 13 2.2. Features by Period 13 2.3. Contributors to GDP Growth Rates, 1960–97 (percent annually) 15 2.4. International Comparison of Major Indicators 22 2.5. Labor Productivity and Wage Cost (1973–80) 23 3.1. The Activist Japanese Government Model 37 3.2. Basic Patterns for Creating Knowledge 45 3.3. The SECI Spiral 46 4.1. Where Japan Stands in 2005 51 4.2. Funding Patterns, Level of Claims Data (percentage distribution) 52 4.3. Stock Market and Banking System 52 4.4. Japanese Financial System Structure, End-March 2003 53 4.5. Incidence of Long-Term (12 Months and Over) Unemployment Rate 55 4.6. Labor Force Participation Rate 58 4.7. Exports, Imports, and FDI, 1999–2003 61 5.1 Japan’s Sogo-Denki, by Revenue, 2004 (in billions of yen) 81 5.2. The Value Chain 82 6.1. IT’s Contribution to Growth in Japan and the United States, 1973–2003 (percent annually) 91 6.2. Distribution of IT Expenditure by Industry, Japan, 2000 (percent) 93 6.3. Effect of Information Network Use on TFP Growth, Japan, 1997–2000 (percent annually) 94 6.4 U.S. Firms versus Japanese Firms 98 7.1. Institutions and Students in Higher Education, Japan (2004) 107 7.2. The Percentage of Students Receiving Masters Degrees Who Got Full-Time Jobs First Exceeded the Percentage for Those Receiving Undergraduate Degrees in 1999 110 7.3. Employment Status of Young Workers (20–24-Year-Olds) in Japan 118 Contents v 7.4. Early Job Leave of University Graduates (within three years) 121 8.1. International Comparison of Innovation Activities: 1991 (Upper Row) and 2001 (Lower Row) 131 8.2. Number of University Students 134 Boxes 1.1. Competitiveness Rankings3 2.1. An Industrial Policy Success: Machine Tools 20 5.1. Telecom Terminology 68 5.2. Mobile Telecom Providers in Japan 69 5.3. ADSL, ISDN and Other Telecom Acronyms 72 5.4. ISDN: An Almost Forgotten Story 73 6.1. Modular Architecture 101 7.1. Quality Control: Knowledge Created and Shared for Product Improvement 114 7.2. Employment Practices and Occupational Capacity Development 115 7.3. General Implications for Developing Countries 124 8.1. Responses to Market Opportunities 132 8.2. R&D Activities of Ministries 137 Foreword Knowledge has long been recognized as a key source of economic growth and a valuable asset that can be leveraged, especially now in an era of increasing global- ization. As a result of deeper integration among economies and fueled by the revo- lutionary advances in information technology (IT), the supply of and demand for knowledge and its application have led to significant challenges as well as oppor- tunities for both developing and developed countries. To create and sustain an effective knowledge economy, countries and companies worldwide must become more knowledge-competitive. This book analyzes Japan as a knowledge economy, with a view to providing lessons for the developing world. Japan’s rapid economic recovery after World War II, assisted by imported tech- nology, was indeed remarkable. In the mid-1960s, it was the second largest World Bank borrower, while only two decades later it was the second largest contributor. Already in the mid-1960s, Japan’s GDP was beginning to catch up with some of the European economies. In the 1970s and 1980s, Japan was held up as a model of economic growth for developing countries; and in the 1980s, companies in the industrial countries real- ized that they could also learn a great deal from Japanese firms. Some analysts even believed that Japan would dominate the world economy in most major industries because of its advanced production system. Then, in the 1990s, a long period of eco- nomic stagnation, especially relative to the resurgence of IT companies in the United States, led many to dismiss Japan as an important source of ideas. These polar opposite perceptions, however, do not reflect the real Japanese economy past or present. The earlier positive assessments ignored the existence of a substantial number of uncompetitive industries, while the more recent dismissals ignore some highly competitive companies and industries. This book provides a more balanced account. In particular, it assesses Japan's status as a knowledge- based economy, applying the “four-pillar” analysis developed by the World Bank Institute (WBI), and highlights the success of several knowledge-advanced Japan- ese companies. In mid-2006, the Japanese economy appears to be emerging from a lengthy stag- nation. Japan has been a source of global best practices in both manufacturing processes and management; and although many of its characteristic large-firm management approaches may seem ill-suited to the evolving global economy, oth- ers have been adapted and continue to be on the cutting edge. On a macro level, Japan has become the world's second largest economy and has a very high level of social equity. At the same time, Japan is facing many challenges as it moves into a more advanced position in the global knowledge economy, including the need for a more flexible labor market, and the provision of risk capital, safety nets, and lifelong learning.
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