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National Innovation Strategies in a Global Economy
Japan-U.S. Competition in Advanced Information Technologies
by John Ratliff
Do national systems of production tend to converge toward a single model of optimal efficiency as part of the process of the globalization of capitalism? Or is economic behavior deeply embedded in social behavior manifested in historically determined institutions and practices? The latter perspective argues that successful competition and innovation are based on the effective mobilization of the social and cultural resources in existing local and national institutions and practices. This requires that national systems of innovation—the matrix of institutions and practices that facilitate innovation of new products––be made a priority.
National systems of innovation differ from one another. In addition, their relative innovative capabilities differ industry by industry as a function of the distinctive technological profiles of each industrial sector. No single society provides the optimal mode of innovative competitiveness in every industry. Advanced industrial economies like those of Japan and the U.S. demonstrate different relative innovative capabilities in different sectors.
A profile of the Japanese national innovation system, based on Japan-U.S. competition in advanced information and communications technologies in the 1980s and 1990s, offers a good example of the importance of matching an industry’s technological characteristics to a given national regime of innovation. While Japanese economic behavior proved tremendously successful in a variety of industries in the 1970s and 1980s, most notably automobiles and consumer electronics, Japanese firms were unable to replicate this success in PC and Internet-related technologies.
Many see events of the last decade as evidence of general, irreversible Japanese decline and American resurgence, but American leadership or success may prove sectorally specific. In fact, Japanese companies are now attempting to adapt the Japanese system of innovation, leveraging its strengths and minimizing its weaknesses, to play a leading role in innovation in the convergence of the Internet and mobile telecommunications into the mobile Internet. Japanese success in this area is an expression of the creative adaptation of national institutions of innovation. Government support of the distinctive strengths of national regimes of innovation has also played an important role.
Japanese Developmental Capitalism
Throughout the 1970s and 1980s, the global advance of the Japanese industrial juggernaut seemed virtually unstoppable. Japan’s world competitive status in steel and shipbuilding was followed by its tremendous move forward in automobile markets in the U.S. and elsewhere in the wake of the early 1970s energy crisis. But most impressive were the Japanese takeover of the American consumer electronics market and their domination of world markets in such key consumer durables as televisions, video cassette recorders, and audio systems by the early 1980s. Finally, by the late 1980s, Japanese semiconductor manufacturers succeeded in creating a virtual Japanese monopoly of the world DRAM memory chip market.
Chalmers Johnson and others explained Japanese economic success by emphasizing the historical experience of the development of Japanese capitalism.1 Confronted in the mid-nineteenth century with an established world capitalist order dominated by industrialized military powers like the U.S. and Britain, Japanese economic development was disciplined by the perceived necessity to catch up. Economy, state, and society were organized around a central, coordinated effort to maximize economic growth through the development of high levels of competitiveness in increasingly high value-added industries.
By the end of the 1980s, there was a general expectation on both sides of the Pacific that the Japanese system was in the process of moving relatively smoothly from technological follower to technological leader. In particular, the prowess of Japanese firms in consumer electronics and semiconductors was generally expected to be repeated in the emerging advanced information and communication technologies––above all, computing.2
But by the mid-1990s, it was becoming clear that Japanese firms were demonstrably less successful in the most dynamic—and high-value-added—areas of the PC industry than they had been in consumer electronics. While Japanese companies established strong international competitiveness in commoditized PC components, such as DRAM memory chips and flat panel displays, in the key components that defined the PC and related product architectures, most notably the microprocessor and operating systems for personal computers and networks, they were not able to pose a serious challenge to companies such as Microsoft and Intel. A number of Japanese commentators noted that the Japanese economy had "missed the boat" in key high technologies; this sense was deepened by American leadership in the Internet and related communications technologies.3 This shift in perspectives was sealed by the decisive emergence of the Windows OS-Intel microprocessor PC standard as hegemonic even in the Japanese domestic PC market, coupled with the emergence of the Internet as the defacto standard for the global information infrastructure.4
As Japan appeared to lose global competitiveness, the assumption that Japan was converging toward a single model of efficiency shifted to fit the new empirical reality. As the U.S. again assumed the leadership position, it was argued that Japanese dominance had all along been temporary, a function of a "certain set of discrete circumstances," including "being in the follower-ship stage, enjoying a positive international environment characterized in part by stable and predictable technological change, and having the ability to legally reverse-engineer foreign products."5
A more accurate reading of the shifting course of events in the last thirty years is a recognition that Japanese successes of the 1960s, 1970s, and 1980s were industry and technology specific, as were the U.S. triumphs of the 1990s. In other words, different national economic systems and systems of innovation have provided optimal conditions for different technologies.
The Japanese National System of Innovation
The ability of a particular society to demonstrate an effective response to the technological challenges of a given industry has been called "societal strategic advantage." Biggart and Orru6 and Lazonick7 see competitiveness in a given industry as dependent on the fit between the demands of the technology and "the structures of knowledge, organization and capability inherited from the past."8 While societies able to compete at the top level in high-technology industries will, of necessity, have many factors in common, the precise level of competitiveness in a given technology depends on a number of discrete variables specific to its requirements.
What happens when we apply this model to Japanese competition with the U.S. in high-technology industries? The successes and failures in consumer electronics and personal computers exhibit a pattern of relative competencies of the Japanese national innovative system. A critical re-examination of the Japanese system of innovation reveals a number of interrelated factors that have inhibited competitiveness in PC and Internet-related technologies. There are three key issues that emerge.
1. Difficulties in standards-based markets
The Japanese strategy of “innovation through learning” has traditionally targeted mature industries where overall industry standards had already been defined by their early developers. Japanese manufacturers were thus able to operate with the existing industry standard as a given. They were then free to engineer multiple products within the single standard, with incremental improvements in product appearance, function, quality, and providing a range of features.9
This strategy has not worked well in the PC industry, however, where the most successful firms have been able to develop and control defacto standards in key components of product architecture, most notably the microprocessor in hardware and the operating system in software. In technologies characterized by open, proprietary, defacto standards, the firm that controls the standard is able to collect rents, and, more importantly, control the direction of technological development. Success in standards-based industries also requires that the standard-setter engage in complex and tension-filled ongoing interaction with those firms that adopt the standard to facilitate rapid and effective innovation. This involves organizational structures and strategies that allow great flexibility in managing a complicated global network of partnership, cooperation, and competition. These are skills associated with Silicon Valley firms, not Japanese keiretsu (literally “affiliated chains,” keiretsu are corporate alliances that typically include a bank, a trading company, and several manufacturers).
2. Fit of technology with domestic market
Japanese firms have succeeded when able to use the domestic Japanese market as a springboard to international competitiveness. In the case of consumer electronics and automobiles, postwar growth in the domestic market was extremely rapid. Moreover, the preferences and practices of Japanese and foreign consumers of cars and televisions tended to be very similar, with Japanese consumers often in the vanguard. Products like Sony’s Walkman were test-marketed in Japan, then went on to become global standards. The situation was quite different in the personal computer industry, where U.S. domestic market characteristics were a better fit with requirements for rapid development. The complexity of the Japanese writing system, based on thousands of kanji (Chinese characters), retarded the growth of the PC market in Japan and encouraged the development of Japanese proprietary personal computer standards. By the mid-1990s, when more powerful PCs made a full kanji system possible, NEC, Fujitsu and other Japanese computer makers had already been locked out of the global market. In addition, Intel and Microsoft were successful internationally (including, ultimately, in the Japanese domestic PC market) because the rapid growth and open standards characteristic of the domestic American market provided a firm base for global competitiveness.
3. Applicability of the Japanese "lean" production model
Where efficient use of factor inputs was the key to success, Japanese firms have done well. The Japanese lean production system was an outgrowth of longstanding constraints on energy and space. A manufacturing system with all redundancies removed was best achieved by keiretsu-style organization that coordinated the entire production process within a single organization. This approach continues to work well in industries where making efficient use of space and energy––consumer electronics and automobiles, respectively––are key considerations.10
Space and energy consumption have not typically been key constraints in the PC industry, where continuing declines in the price of the major inputs––computer power and memory––have encouraged a dynamic, future-oriented approach that builds in redundant capacity. Time, then, becomes the scarce resource. Economies of speed organize production, encouraging a modular firm structure in which relatively small startup firms, focusing on a limited set of core competencies, are involved in constantly shifting alliances and collaborations. This, the classic Silicon Valley firm structure, has been outstanding in providing success in standards-based markets. Where issues of energy and space conservation were not central, Japanese firms have been less competitive.
Viability in the Absence of Normalization
In many ways, Japan’s situation today is analogous to that of the U.S. at the beginning of the 1980s, when Japan was seen as the exemplar. The U.S. was struggling with a lack of competitiveness in key industries and a more general crisis of confidence in the economic order. This resulted in myriad calls for the U.S. to adopt the institutions and practices of Japan to become more competitive. Responding to the challenge of the East Asian economies was a benchmark for the U.S. in its "comeback" in the 1990s. Certain practices and concepts, such as the just-in-time delivery system, were adopted by American firms to their needs. Other Japanese institutions, such as the quality circle, were tried and discarded. But most importantly, the success of the U.S. response to the Japanese challenge of the 1980s involved the leveraging of indigenous institutions and practices to make the best use of new technological challenges, rather than a fundamental convergence toward the then-hegemonic Japanese model.
Typically, this occurred as new industries emerged, with technological profiles that better suited American innovative strengths. Often weaknesses in one technology became strengths in another. A salient example is Japanese domination of the DRAM memory market in the early 1980s. The failure of American firms in DRAM actually moved these companies to focus on other "higher margin, design-intensive chips," most notably the microprocessor. This allowed American innovative potentials to come to the fore as the PC market boomed in the U.S.11
In the absence of convergence as a realistic, or even desirable alternative, Japanese firms are trying to follow a similar path: modifying the existing system of innovation while searching for new opportunities in emergent industries that better fit the profile of Japanese innovative prowess.
Wireless Internet: Japanese Opportunity for Viability?
In a way similar to U.S. firms in the 1980s, Japanese firms are searching for the opportunity to pioneer an approach in a new high-technology industry that capitalizes on the salient characteristics of their system, while making adjustments in response to shortcomings made evident by recent competitive failures. Wireless telecommunications, especially as it converges with the Internet and goes broadband, has many of the characteristics that might allow a significant comeback for Japanese high-technology innovation.
Japan still maintains competitiveness in areas where integrality is important. Space-saving miniaturized gadgets (for which component engineers have to compete for space inside) are an important segment under this category. Fuel efficiencies, cost efficiencies, and environmental friendliness by way of material conservation are other targets. It is no accident that Japanese firms have succeeded in mobile telecommunications that require almost all of the above. The future for Japanese production belongs to systems that can be efficient in scarce resources, such as energy and material use, battery life, and space, while abundantly applying cheaper inputs, most notably computer power.
Despite recent setbacks and confusion, the convergence of mobile telephony and the Internet could signal another shift in relative national competencies in advanced information technologies. The emergence of the mobile Internet should change the nature of the Internet economy, making the PC platform less important and attracting many new users to the Internet. Mobile-Internet convergence is producing a situation where new technological appropriations and relationships can be forged.
NTT DoCoMo’s I-Mode
In 1999 NTT DoCoMo, the wireless subsidiary of Nippon Telephone and Telegraph, Japan’s former public telephone provider, now privatized, rolled out i-mode, a modest, low-band mobile Internet service. DoCoMo designed i-mode as a packet-switched network, alongside its existing digital cellular network, which allowed a constant connection with the Internet. By mid-2001, after a little more than two years of operation, this service had attracted over 10,000,000 subscribers who used their handsets for e-mail and retrieving information and even engaging in various forms of e-commerce.12
Domestic market conditions in Japan have profoundly aided rapid development of wireless Internet. Paradoxically, NTT DoCoMo’s success with i-mode has been made possible by cultural, economic and regulatory factors that conspired to inhibit the spread of the PC in Japanese society and to keep the cost of PC-based Internet service abnormally high. DoCoMo was thus able to introduce mobile Internet services into a "green field" situation of affluent, technologically sophisticated consumers who had very little experience with e-mail or Web surfing on their PCs.
DoCoMo, as a subsidiary of giant NTT, has the advantages of being part of the NTT keiretsu while at the same time being able to differentiate itself organizationally and in terms of management strategy. NTT DoCoMo was able to transcend limitations of Japanese organizational structure through an open management style that brought in new perspectives, a business model focused on value formation through joint ventures, and a global strategy of building international partnerships based on the i-mode standards. In each case, aspects of Western business practices were adapted to the existing system in ways that matched but did not copy Western results.
NTT DoCoMo has developed a global strategy of creating a set of partnerships with telecommunications firms overseas to make the i-mode standard a branded technology on a global scale. DoCoMo is interested in globalizing its i-mode platform and billing technologies, allowing it to spread out future development costs and derive economies of scale in handset and infrastructure development. DoCoMo’s strategy is to become more like Microsoft, gaining profitability through domination of software standards, rather than through aggressive global acquisitions, the strategy of a more traditional telecommunications giant like Vodafone.
In many ways, mobile Internet is a technological space that enhances Japanese innovative capabilities while responding to difficulties manifest in PC/Internet industries. DoCoMo’s strategy can be seen as an explicit expression of Japanese strengths and an attempt to overcome limitations. The early success of i-mode and other mobile Internet services are an expression of domestic market and social conditions that would appear to set the stage for global competitiveness in mobile Internet in ways similar to automobiles and consumer electronics in Japan and the PC in the U.S. Mobile Internet also represents good fit with "lean manufacturing" competencies in efficient use of space and energy inputs, central issues in handset design. Japanese handset makers like NEC and Matsushita are able to leverage capabilities developed in consumer electronics to be more competitive. Finally, NTT DoCoMo has developed an international strategy that prioritizes standards-setting, both for i-mode and emerging 3G technologies for the mobile Internet.
While ultimate success is by no means guaranteed, NTT DoCoMo’s i-mode success represents an intriguing example of possible resurgence of a major Japanese firm in global high technology in ways that conform with the institutional structure of Japanese development.
National economies still operate within confines set by institutional relationships and practices, which are grounded in their particular history of development and relationship to the world system. Ironically, this can be most clearly seen in successful innovation in high technology, an area most affected by globalization. As Biggart and Guillen point out: "Whereas previous approaches viewed differences in social organization as obstacles or constraints, we regard them as the very engine of development...
Development is about finding a place in the global economy, not about convergence or the suppression of difference."13 Both the United States and Japan have experienced profound difficulties in developing top
levels of competitiveness in the other’s area of greatest strength. This is an expression of those aspects of each country’s political economy most deeply rooted in cultural and historical factors that defy easy transfer, and impart a set of strengths and weaknesses to national production capacity that can be changed or copied only with the greatest difficulty.
There is a set of policy implications that flow from this analysis. First, despite the advent of a global economy, distinctive national differences still matter. Second, while both production and markets are globalizing, national competitiveness requires the leveraging of distinctive capabilities grounded in social structure and culture. Third, both public and private strategies have to identify and enhance strengths based on distinctive national characteristics, while avoiding the temptation to compete in sectors where other nations have distinctive advantages. Fourth, globalizing phenomena are always experienced locally, and successful strategies must reflect continuing national differences in social, cultural, and economic organization that will manifest themselves in varying competitive capacities in different industries.
1.Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975 (Stanford: Stanford University Press, 1982); and Meridith Woo-Cumings, "Introduction: Chalmers Johnson and the Politics of Nationalism and Development," in The Developmental State, ed. Meredith Woo-Cumings (Ithaca: Cornell University Press, 1999),1-31.
2. Marie Anchordoguy, Computers Inc.: Japan’s Challenge to IBM (Cambridge, MA.: Council on East Asian Studies, 1989); Michael Cusumano, Japan’s Software Factories: A Challenge to U.S. Management (New York: Oxford University Press, 1991); Edward A. Feigenbaum and Pamela McCorduck, Fifth Generation: Artificial Intelligence and Japan’s Computer Challenge to The World (New York: Addison-Wesley, 1983); Kenneth Flamm, Creating the Computer: Government, Industry and High Technology (Washington, D.C.: Brookings Institute, 1988); Tom Forester, Silicon Samurai: How Japan Conquered the World’s IT Industry (Cambridge, MA.: Blackwell Business, 1993).
3. Ishiguro Kazunori, Chokosoku tsushin nettowaku
4. Michael Borrus and John Zysman, "Wintelism and the Changing Terms of Global Competition: Prototype of the Future?" Berkeley Roundtable on International Economics, Working Paper 96B (February, 1997), URL: http://brie.berkeley.edu/pubs/pubs/wp/wp966.html; Scott Callon, Divided Sun: MITI and the Breakdown of Japanese High-Tech Industrial Policy, 1975-1993 (Stanford: Stanford University Press, 1995); Charles H. Ferguson and Charles R. Morris, Computer Wars: The Fall of IBM and the Future of Global Technology (New York: Times Books, 1993); Joel West and Jason Dedrick, The Rise and Fall of the PC-98 Regime: How Architectural Revolution Toppled the Dominant PC Standard in Japan (Irvine, CA: Center for Research on Information Technologies and Organization (CRITO), 1997).
5. Anchordoguy, 38.
6. Nicole Woolsey Biggart and Marco Orru, "Societal Strategic Advantage: Institutional Structure and Path Dependence in the Automotive and Electronics Industries of East Asia," in State, Market and Organizational Forms, eds. A Bugra and B. Usdiken (Berlin: Walter de Gruyter, 1997), 201-39.
7.William Lazonick, Business Organization and the Myth of the Market Economy (Cambridge, UK: Cambridge University Press, 1991).
8. Nicole Woolsey Biggart and Mauro F. Guillen. "Developing Difference: Social Organization and the Rise of the Auto Industries of South Korea, Taiwan, Spain and Argentina," American Sociological Review, 64:5 (October 1999): 722-747.
9. John Zysman and Laura D’Andrea Tyson, "Developmental Strategies and Production Innovation in Japan," in Politics and Productivity: The Real Story of Why Japan Works, eds. Chalmers Johnson, Laura D’Andrea Tyson and John Zysman (New York: Ballinger.1989), 61-87.
10. Kokuryo Jiro, "From Closed Network to Open Network: Transformation of the Japanese Economy in the Information Age" JIPDEC Information Quarterly 105 (1996): 36-54.
11. Thomas Cottrell, "Standards and the Arrested Development of Japan’s Microcomputer Software Industry," in The International Computer Software Industry: A Comparative Study of Industry Evolution and Structure, ed. David C. Mowry (New York: Oxford University Press, 1996), 130-164.
12. John Ratliff, "NTT DoCoMo and its I-mode Success: Origins and Implications," California Management Review 44:3 (Spring 2002): 1-17.
13. Biggart and Guillen, 743.