The NIS elements in the case of Japan, as identified by Freeman (1988), are: central government and the role of MITI; firms (keiretsu) and social and educational innovations.

Innovation in Japan has been strongly supported by central government institutions and, in particular, the Ministry of International Trade and Industry. This is done through a strong commitment to the following issues:

1. Long-term strategic goals

The industrial and economic miracle of Japan was carefully designed and directed. The devastated by the World War II Japan accomplished a quick economic recovery, became a technology exporting country and these days is at the forefront of most generic technologies. All this was done on the basis of national consensus in which central government plaid a leading role. Japan started as a big importer of technology through various mechanisms of technology transfer while simultaneously developing the basis for self-reliance, which Japanese define as "the ability to absorb all needed technologies" (Hayashi, 1990, p. ix). The long-term view was to make Japan a technologically advanced country and a leader in some carefully selected technologies. This was achieved in the 1980s. The slowdown of the economic development in the mid 1990s and the recent problems related with the Asian financial crisis pose new challenges to which the central government and the country will have to respond.

2. Promotion of generic technologies, especially communications and IT

The "invisible hand of MITI" (Freeman, 1988) shaped the long-term economic future of Japan, but it also made judgements on which particular technologies would be important in the years to come. The national strategic options and long-term sectoral priorities were determined on the basis of perceived international trends. The advice coming from engineers prevailed in the formulation of long-term policies. A special priority amongst generic technologies was given to communications and information technologies (IT). Although most other OECD countries also promoted IT, the scale of resources and commitment from the Japanese public and private sectors were exceptional.

The flexibility within Japanese companies, the dedication to quality of product design and development, the horizontal linkages and information flows between firms and sectors allowed Japan to make extraordinary use of the enormous potential offered by information technology.



Overground cabling is standard in earthquake prone areas

3. Technology forecasting

Technology forecasting and targeting is one of the responsibilities of MITI, which it performs in collaboration with the Science and Technology Agency. Japan places a lot of effort to identify the upcoming technological trends by drawing on interactive surveys and discussions involving scientists, engineers, policy makers and people from industry about likely future technological developments. For example, Japan is the only country, which has been consistent in using the Delphi forecasting technique for more than 30 years. The method requires experts not only to forecast future scientific discoveries and technological solutions to existing and future problems but also to reach agreement as to what and when is going to happen (which is often quite expensive if not impossible exercise).

4. Capacity to mobilise very large resources in pursuit of strategic priorities

Research, development and innovation are seen as a strategic priority by the Japanese central government as well as by industry. Japan ranks second amongst the OECD countries, both in absolute R&D expenditure and in R&D expenditure as a proportion of GDP (see Table 1). The country has spent close to US$83 billion (or 2.83% of its GDP) on R&D in 1996. The contribution of the business sector was a massive 2% (compared to less than 0.8% for Australia), which was third highest in OECD after Sweden and Korea.

Table 1. Gross expenditure on R&D (GERD) and GERD as a proportion of GDP: international comparisons

		GERD (est. 1996 US$m)	GERD/GDP	GERD/GDP rank
1	United States (1997)	202,486	2.64	6
2	Japan (1996)	82,817	2.83	2
3	Germany (1997)	42,683	2.39	7
4	China (1996)	33,469	0.49	24
5	France (1997)	27,972	2.26	8
6	United Kingdom (1996)	21,088	1.94	11
7	Korea (1996)	17,252	2.79	3
8	Italy (1997)	12,186	1.05	20
9	Canada (1997)	11,013	1.64	14
10	India (19920	7,928	0.74	23
11	Netherlands (1996)	6,787	2.09	9
12	Australia (1996)	6,487	1.68	13
13	Sweden (1995)	6,008	3.59	1
14	Spain (1997)	5,346	0.89	22
15	Chinese Taipei (1996)	5,020	1.84	12
16	Switzerland (1996)	4,946	2.74	4
17	Belgium (1995)	3,392	1.59	15
18	Finland (1997)	2,828	2.73	5
19	Austria (1997)	2,700	1.52	17
20	Denmark (1997)	2,456	2.02	10
21	Norway (1997)	1,721	1.56	16
22	Ireland (1995)	868	1.39	18
23	Singapore (1994)	667	1.25	19
24	New Zealand (1995)	601	0.97	21
	Average (24 economies)		1.86
	Average (20 OECD only)		1.97

Source: Science and Technology Budget Statement, 1999-2000, Department of Industry, Science and Resources, Commonwealth of Australia, Canberra.

Although the massive investment in innovation comes from the private sector, MITI also provides support for small and medium enterprises directly and through its regional centres. The Japanese government has put tax incentives in place for increased testing and research expenditure to promote R&D investments. According to Takenaka (1991), their levels are below that in the USA with the crucial factor being efficiency. As a consequence private investments are maintained high because they help expand technological barriers, rather than as a quantitative expansion response to a favourable investment climate.

The characteristic features of Japanese large corporations, industry associations and large industrial groups and their contributions to the Japanese technological miracle can be seen in a number of directions:

1. Close links with central government

The existence of an ‘intermediate zone’ (Okimoto, 1989) between industry and central government facilitated the implementation of the strategic technological goals developed at the policy level. The closed links between corporations and the State resemble a fraternity type of organisation in which it is common for senior bureaucrats to take crucial positions in business. The strategic visions developed by MITI and other government organisations are used as a guiding map for future industrial developments by industry associations and large industrial groups (in the form of zaibatsu and keiretsu).


Sony building in Osaka
2. Reverse engineering and many incremental innovations

Japan started its technological journey of becoming a world technological leader from a catch-up position. Since the advances in microelectronics in the 1960s, the international technological competition became extremely important and Japan was committed to this new way of doing business. Technological developments were geared initially towards reverse engineering, later towards incremental improvements of already existing products. Although Japanese firms rarely had radical product innovations, they had a firm orientation towards foreign markets. This resulted, for example, in a very high number of domestic and foreign patents. As a consequence, Japan developed a very strong R&D potential, which soon became a major international factor. A number of recent studies (e.g. Marinova, 1999) have shown that nowadays Japan holds by far the larger number of foreign patents in the US or Europe. Moreover, most of these patents are at a commercialisation stage and on the current or emerging technological trajectories.

The monorail in Osaka

The concept behind Japan’s technological development, as explained by Hayashi (1990) is that in R&D (i.e. research and development), the R can be expressed as a total of Ds. As a consequence, the Japanese miracle can be characterised as a sum of numerous incremental innovations, which have made an immense contribution to the world’s R&D.


Mira - example of the small Japanese car
3. Improved quality

Thorough product design and aims for customer satisfaction are the main factors behind the constant quality improvements of the Japanese products. Mobile phones, for example, are small, light and convenient to use. They also come in a wide variety of colours and offer the most advanced communication features. The perception about Japanese products changed dramatically through the last decades from being cheap but of satisfactory quality in the 1960s to expensive and of superb quality since the 1980s.


Telephones for sale in a Japanese shop
4. R&D departments closely linked with production and marketing (horizontal links)

The horizontal links between departments is an important factor contributing to innovation which by itself is a multifaceted process requiring strong cooperation. Companies often have the practice of rotating engineers from the R&D department to the shop floor and back again (Hayashi, 1990) which not only gives them additional knowledge but also familiarises them with other employees and their problems.

5. Formation of large conglomerates (keiretsu)

As Freeman (1988) points out, the formation of large industrial conglomerates and vertical integration of companies is something, which is not unique to the Japanese model of competition. The Japanese society and enterprises, however, are organised around quasi-family relationships as distinct to the market forces approach. These keiretsu are a vital element in Japan’s NIS as it allowed for large strategic investments with long-term objectives. It also facilitated the access of the world markets through holistic marketing strategies, networking and avoiding the diseconomies of competition.

The beginning of any technological development is in the minds of people. The way Japanese think, what ideas they have, how prepared they are to transform these ideas into blueprints, prototypes, scientific discoveries or working technologies are strongly influenced by social attitudes towards learning. Thus education provides the seeds for understanding technology and the desire to create, improve, change or invent. There is the other side of the coin as well: educated people feel comfortable with and demand new technologies. In addition to very high level of general education, the following factors have contributed to the Japanese success:

1. High number of people with higher level of education, particularly in science and engineering

New technologies require new skilled and specialised workers, engineers, scientists, technicians and managers and the Japanese educational system provides this through a system of numerous public and private universities. A very high proportion of Japanese (probably, the highest in the world) complete higher level of education and a significant share of them study science and engineering. Japan also sends many students to study abroad (including Australia) for higher education and PhD studies, however, was able to keep a low brain-drain level.


Osaka University
2. High quality industrial training at enterprise level

The on-site training was extremely important at the initial stage of industrialisation of the country when there were few engineers and many unskilled workers. The apprentice system developed to bridge the gap became firmly incorporated into modern factories. In addition to what the masters can offer to their apprentices, companies have established formal training courses and skill formation centres. They also allow for the training of engineers on the basis of general education, which is quite unique for Japan. The on-site training is considered by companies to be the most important element in the formation of technical skills.

3. Broken barriers between "blue-collar" and "white-collar" work

Traditionally employment in a Japanese company is for life. This reflects a both way commitment from employers and employees, which has traditionally resulted in very low level of unemployment and very high productivity rates. The educational changes provided the foundation for a remarkable social change, which broke the barriers between ‘blue-collar’ and ‘white-collar’ work. The abolition of distance between these types of employment started earlier in Japan than in any other industrialised country and resulted in little difference in social status or income.

Although still being one of the world’s strongest economies, the light of the Japanese miracle started to fade in the early 1990s. The country began to experience problems with which its national system of innovation was not prepared to deal, such as environmental pollution, degradation of the coastal zone, ageing population and growth centred industrial sector.