Innovation and Emergence of New Industries: Is the Silicon Valley Model the Only Way?
Professor, Faculty of Economics and Business Administration, IZO, University of Frankfurt. Associate Researcher Fondation France-Japon de l’EHESS
Japan seems to have lost its competitiveness in innovation. Its poor performance in the Global Entrepreneurship Monitor (a recognized industry measure) is offered as evidence of its obvious inability to give birth to new industries and has led to a growing pessimism about Japan’s competitiveness in the future. The American “Silicon Valley model of innovation” with a more “entrepreneurial regime” is held up as the standard which Japan should emulate. And indeed, Japan’s policy makers have responded by creating a framework which is more “entrepreneurial” and supportive to start-ups: via a more mobile workforce, via a more developed venture capital market, via stricter intellectual property rights and via more active universities.
However, a closer examination of Japanese firms reveals that Japan does possess considerable innovation capabilities. The sectors flourishing in Japan - service robots, games and embedded software - are different from those typically tracked - such as software and biotech - but are nonetheless highly innovative. Furthermore, in the medium-high tech sectors, Japan even outpaces the U.S.
So why has Japan’s innovative capacity been overlooked? Perhaps this is related to the definition of innovation which is driven primarily by the Silicon Valley model. Let us pose three important questions: What are the new industries that are relevant to innovation? Is there an ideal firm size for innovation? And, what advantages does the Silicon Valley model indeed have and not have?
Starting with the first question: What industries are relevant to innovation? Too often, public attention has focused on only two new industries, software and biotech, both of which emerged in the U.S. However, these industries represent a very small share in international trade and patenting and their being deemed ‘the’ future industries appears to have more to do with the human tendency to pay attention to “radical” new innovation (whatever the details may in fact be). No consideration is given to whether this is indeed the case or whether a good absorptive capacity to make use of innovations made in the U.S. is sufficient. There are many indicators that show that Japanese firms possess this capacity.
In terms of size, there appears to be an increasing consensus that innovation can only be triggered by small firms. Political initiatives around the world accept this as fact. However, Japan’s case demonstrates that innovation patterns are diverse: Different technologies require different set of actors and different types of institutions. For instance, large firms are important players in Japan’s new and very successful service robot industry while in the game software sector, which is also highly competitive, long-term employment and a low occupational diversity are characteristics which distinguish this innovative sector from those in the U.S.
And this brings us to our last question: the advantages of the Silicon Valley model. It seems to be superior in industries, in which innovation relies on start ups. Often, these industries are associated with “destructive industries”, or industries that are less in need of current knowledge bases. However, the Silicon Valley model also has disadvantages, and they exist in exactly those fields where the Japanese innovation system has distinct advantages. The Japanese system outperforms the Silicon Valley model in all complex and coordinative intensive technologies such as service robots and games. In these sectors, it is large firms and long-term employment that enable the production of highly complex products such as role playing games.
History matters. And this also holds true for innovation. Every nation possesses a very unique and individualized match between its historical and institutional context on the one hand and technologies in which it excels on the other hand. This is why a variety of innovation systems have emerged in the past and endowed nations with distinct competitive advantages. In light of this, innovation policy that builds upon these insights is more innovative than policy designs simply just oriented to the Silicon Valley model. Once and for all, this would be far better for innovation than herding behavior.
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