Japan's Successful High-Tech Industrial Policy

Future articles in this series will look at not only technology-related developments and public/private sector initiatives, but also at the dynamics of financing the development of such technologies. The next article in the series will focus on the software industry, to be followed, in coming months, by reports on Japan's semiconductor and telecommunications policies.

by Louis Ross

The Japanese still consider the world to be quite Hobbesian, and want to ensure that Japan's corporations can maintain their competitive nature indefinitely. In Japan, the ability to compete and produce is considered not only the key to economic development and growth, but also the foundation that safeguards the nation's security.

After establishing such heavy industries as steel and automobiles, thereby laying the framework of Japan's explosive economic growth, the government began strongly supporting companies engaged in high-technology. The goal was development of a domestic capability to produce highly competitive electronic goods for export. This transition from labor-intensive industries to technology-intensive industries was the next step in the ladder of national development .

The national government helped Japanese high-tech industries to become more advanced, both by funding them and by assisting in the acquisition of foreign technologies. By cartelizing industries, and protecting the domestic market from outside competition until Japanese firms were prepared to compete, the government successfully built Japanese high-tech firms into the global powerhouses they are today. It is no surprise that very strong ties remain between corporations and various government and quasi-government entities. The traditional strategy has changed very little.

Building on success
For Japanese companies, the 1985 Plaza Accord initiated a great offshore expansion. The strong yen forced Japanese companies to develop foreign production bases in order to maintain competitiveness. Local sourcing and procurement outside of Japan has reduced costs, put the product closer to the consumer, and served to disarm several political time bombs related to Japan's ballooning trade surplus.

The effort to entrench themselves in overseas markets, especially in North America, spurred Japanese electronics firms to become more international. The sudden increase in the value of the yen several years ago triggered a similar investment effect by Japanese firms throughout Asia. The difference between these two waves of offshore investment, however, is very significant.

The North American markets were highly developed, and had in place an infrastructure that could support the immediate sales of Japanese products (plus a "foreign user-friendly" legal system that could be utilized to promote Japanese interests). Asia, however, still represents a frontier in many respects, although its potential market size could easily outstrip its North American counterpart in the next century.

Asia is currently experiencing a type of growth that is impossible to nurture in the West. Asian countries share many things in common with Japan (though the obvious historical, war-related hostilities often create artificial "mindset" barriers). Unlike the West, also, most Asian nations support government/private sector coordinated efforts for economic development, many of which have been extremely successful. They also have become enmeshed in the vast Japanese overseas network of multinationals. Japan has become the engine of technological growth for the region.

As a group, Japanese high-technology companies are the most competitive in the world. The move offshore has demanded even more coordination between government and private industry. The exodus offshore today is grounded in the belief that foreign markets and access to foreign technology are critical in developing competence in high-tech industries.

The sun that never "divided"
Throughout the evolution and adjustments of the past 50 years, the close relationship between government and industry in Japan has changed very little. Next to the automobile industry, high-technology industries remain the most strategically important industries.

It is important to realize, from a Western perspective, that the Japanese government does not "force" itself upon industry. Rather, industry believes, with few exceptions, that proper support is an obligation of government. What would be considered government interference in the US, with all its derogatory connotations, is just "business as usual" in Japan. The development and nurturing of Japan's high-technology sector has long been a national goal.

The genesis of this goal of developing a globally competitive electronics industry can be traced back to the last century when, following the Meiji Restoration (1868), Japan was opened to the West. The prime motivating factor for Japan then was not profit, but fear that the more-advanced foreign technology might be used against Japan. The naval bombardment of the Choshu Clan by British, French, and Dutch warships prior to the fall of the Shogunate Government, and the intimidating presence of US Commodore Perry's "Black Ships," showed Japan just how vulnerable it was to Western nations. The experience of other Asian nations (China, in particular, which suffered dearly for its inability to protect itself), along with the embarrassment of being forced to accept the "unequal treaties" imposed upon Japan by the Western powers (including the United States) set the stage for Japan's quest to ensure its survival and national security.

Professor Richard Samuels of MIT suggests that Japan became a "technological superpower" by emphasizing the development of "autonomous technology" (jishu gijutsu), or "indigenization" (kokusanka). In no other country has government-initiated industrial policy been as effective and as well-coordinated as in Japan. Belying the title of a recently popular book, the sun in Japan is not, and never has been, "divided." Public and private sectors still work closely in order to achieve national objectives with regard to Japan's competitiveness in high technology.

Attempts by foreign observers to downplay the importance of a national industrial policy and cooperative efforts seriously discount the success of past projects (including the spin-off technologies related to such research efforts, and the production-technology competencies developed as a result). One reason for downplaying these successes is, perhaps, that from a Western perspective, government "interference" in private industry matters has traditionally been given derogatory labels (such as "corporate welfare" and the like).

Economic security and national security have traditionally been strictly separated in the US. Efforts to develop industrial policy were either attacked by political ideologues, or failed miserably. The protection of the American economy's ability to independently sustain itself was not thought of as a strategic concern by the government.

Semetech, the US semiconductor manufacturing consortium, for example, is heavily dependent on Japanese and foreign assistance. The American effort to establish self-sufficiency in flat-panel displays failed miserably. And US Memories, an American effort to collectively pool resources so as to reestablish the US as the major producer of DRAMs and ensure a domestic supply of memory chips, received little government support.

The proof, now, is in the pudding. Economies much smaller than the US , with few or no resources (except financial and technical) - Japan, South Korea, Taiwan, Singapore - have come to not only challenge American dominance, but have even created solid leads in key technologies. Could the high-technology industries in these economies have achieved such competitive power without government support? The common sense answer is no.

New Japanese initiatives
The renewed emphasis by Japan to devote even larger shares of its national budget to government-supported high-technology projects seriously erodes the arguments made by those who claim that government assistance either was not present, or did not produce successful results. In a recent plan that received quick government approval, Japan's Council for Science and Technology (CST), for example, intends to spend JPY17 trillion on research and development (R&D) over a five year-period (through the year 2000).

The plan, in response to Japan's new Science and Technology Basic Law, enacted in November 1995, specifies government support of R&D that will "increase the level of basic research, and transfer the results of this research to industry." Outdated facilities will be improved, government and university researchers will be encouraged to engage in private sector activities, and the diffusion of technology-related information will be enhanced.

These R&D funding initiatives have already created new projects launched from six science-based Japanese government ministries and agencies. With such strong support, Japanese electronics companies stand well-positioned to utilize their expertise in production technology to market the world's most advanced microprocessor, memory, and display technologies.

In nearly every key area involving "digitization" - including digital encoding, high-density recording, and high-density packaging - Japanese firms either possess world-class technology, or are pioneers in the field. Japanese companies also lead in such areas as flat panel displays, flash memory, video compression chips, batteries, and optical discs. Government support will even assist a Japanese consortium effort to develop a cheaper and higher-performing microprocessor (MPU), with the goal of challenging the dominate position held by Intel.

With their strong competitive position in so many high-technology sectors, Japanese companies stand very well positioned to develop entirely new consumer markets based on digital technologies. Japanese companies have already produced impressive results in set-top Internet boxes, DVDs(Digital Versatile Disce), and VICS (car navigation systems). The potential market for such devices in Japan alone is staggering, and Japanese companies seem likely to dominate these areas. Japanese companies have taken the lead in setting the global product standards for DVD (a rarity that last occurred when JVC developed the standards for the VHS format). According to Nomura Research Institute, the potential global market for DVD hardware alone will be nearly JPY1.5 trillion within five years.

With all of the new high-technology government initiatives coupled with the current aggressiveness of the Japanese electronics industry in pioneering new markets and committing to making the switch from analog to digital, Japanese firms will engage in an interesting clash with American firms. The results of that battle will determine who will dominate the PC industry and the Internet.

An important point to keep in mind when measuring commitment on both sides of the Pacific, and the potential for American or Japanese firms to dominate world markets, is that in one country being competitive is simply a matter of profit, while in the other it is considered a matter of national security.