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

JJ/WBGSP Scaling Up African Conference

In Nairobi, Kenya

Tsutomu Shibata

Senior Adviser, World Bank Institutetshibata@worldbank.org

May, 2006

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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

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A broader definition of Knowledge Economy:

“An economy that creates, acquires, adapts, and uses knowledge effectively

for its economic and social development.”

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Education

Job Training

InnovationInformation

Infrastructure

The Four Pillars of the Knowledge Economy

Interconnected

Interdependent

Interconnected

Interdependent

Economic and Institutional

Regime

WBI Knowledge for Development

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KAM Score Card: Japan and Kenya

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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

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Outline

Japan, Moving Toward a More Advanced Knowledge Eonomy

Volume 1: Assessment and Lessons Volume 2: Advanced Knowledge Creating

Companies (Hitotsubashi ICS)

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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 Econo

my (Prof. Motohashi, University of Tokyo) Chapter 7: Education, Training, and Human Resources: Meeting Ski

ll 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 )

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Volume II (Industries &Firms)

Chapter 1. The New Dynamism of the Knowledge-Creating Company (Prof. Takeuchi)

Chapter 2. Knowledge Creation in the Convenience Store Industry:Seven-Eleven Japan (Prof. Ikujiro Nonaka)

Chapter 3. Learning and the Self-Renewing, Network Organization:Toyota and Lexus Dealers (Prof. Emi Oson

o) Chapter 4. Strategic Management of Knowledge-Based

Competence: Sharp Corporation (Prof. Kazuo Ichijo)

Chapter 5. Invisible Dimensions of Differentiation: Japanese Electronics Companies (Prof. Ken Kusunoki)

Chapter 6. Inter-Organizational Knowledge Creation at Shimano (Prof. Takeuchi)

Chapter 7. Creating the Dynamics of Hard-to-Imitate Innovation (Prof. Takeuchi)

Why Japan?

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Why Japan now?

1. The tremendous speed and resilience Japanese industries had shown in catching up with the industrial world and overcoming the oil and Yen shocks.

2. Japan still has many strong leaders in some industries due to the advanced manufacturing process despite the overall decline of its competitiveness.

3. Imbalance between these strong industries/companies and weak industries.

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Japan’s Competitiveness

IMD Ranking

1989 1

1993 1

2004 23

2005 21

Is this right evaluation?

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Japan’s Competitiveness

Ranking profit ratio* ROE

1989 1 6.1% 8.5%

1993 1 2.7% 1.7%

*Operational profit ratio for 691 firms

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Shares of World GDP - Constant US$ (1960 - 2002)

0

5

10

15

20

25

30

35

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1960 1965 1970 1975 1980 1985 1990 1995 2000

%

East Asia & Pacific

High income: OECD ex. US & Japan

Japan

United States

Sub-Saharan Africa

Middle East & North Africa(Light Blue)

Latin American & Caribbean

Europe & Central Asia South Asia(Grey)

High Income: Non-OECD(Black)

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17

18

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20

年

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Japan’s National Innovation System

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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)

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The Role of Government Education: (the school system + willingness to l

earn) Infrastructure: e.g., transportation and commun

ication, 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 2

8%)

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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.

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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

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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%)

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Need to Advance Science-Based Industries

Development is pursued with innovations based on sciences Industrializing the outcome of scientific

researchApplying sciences to solve bottlenecks in

R&D and production

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Important Features of Science-Based 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 collaborations Inter-firm alliances

Widespread use of the technology across industries

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University-Industry (UI) Collaboration Encouragement of UI joint research

No. increased (national universities): 1139 in 1990 => 4029 in 2000

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 t

o promote patenting and licensing 36 TLOs as of end 2003

Deregulation on professors’ assuming company directorship 280 professors (of national universities) allowed to become direct

ors or auditors of companies (as of 9/03)

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Promotion of Startups

The Law for Facilitating the Creation of New Business, 1999 Subsidies and guarantees for SMEs to start new b

usinesses and to develop and commercialize new technologies.

Tax advantages (‘the Angel Tax’) Reduction of minimum capital for a new stock c

ompany: 1 million yen => 1 yen Stock options as a compensation scheme

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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

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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

Japan’s Education/Job Training Systems

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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 drop-out 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.

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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.

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Inconsistency between Macro and Micro Perspectives On a macro perspective, i

t clearly demands strong education/training system. Global competition in avera

ge academic achievement. World leaders and qualified

professionals English education in early s

tage.

On a micro perspective, it demands stable and protected life. Low incentives for study in

schools. Excess supply of educatio

n. Good education backgrou

nd no longer assures life time employment.

Preference of freelance position rather than full-time position.

Emergency of aging society.

CONCLUSION

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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.

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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.

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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 in-house.

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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.

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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 well-coordinated 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.