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Emerging Patterns of

Innovation: Sources of Japan’s

Technological Edge

Fumio Kodama (1995)

Table of Contents

Introduction ................................................................................................................................................... 1

Manufacturing: From producing to knowledge creation .............................................................................. 2

Business diversification: From spin-off to tickle-up process ........................................................................ 3

R&D Competition: From dominant-design to inter-industry competition.................................................... 5

Product development: From pipeline to demand articulation ....................................................................... 5

Innovation Patterns: From breakthrough to technology fusion ..................................................................... 6

Societal Diffusion: From technical evolution to institutional co-evolution .................................................. 7

Appendix ....................................................................................................................................................... 7

Introduction

The conspiracy that the Japanese were blamed for was nothing more that the spontaneous creation of new

institutions by the newcomers. The German expansion in late 19th century was owing to superiority of

methods that integrated technology and institutions. Japan has undergone a techno-paradigm shift, on

following accounts (summarized in Table 1):

Manufacturing: R&D expenses becoming greater than equipment expenses in most Japanese

manufacturing. They are shifting from production to knowledge creation. The view of company

moves from information processing to being a living organization

Business diversification: Breadth of research in Japan has increased more than the depth. Japan

has adopted the co-development of product and process (or production) technologies. The

diversification in high-technology happened from low-end applications to more sophisticated

application, rather than from one low-end to another (called ‘trickle-up’ diversification). The firm

first masters the technology, and then does capital investment. Tickle-up process helps to extend

firm’s core competencies outside its conventional domain.

R&D competition: Shift from dominant-design to surf-riding approach signifying diverging

patterns (predatory patterns) rather than converging patterns of technological evolution. Also the

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competition is framed as inter-industry (hidden enemies), rather than inter-firm. This calls for

horizontal coordination between R&D, technology development and marketing.

Product development: The most important capability in hi-tech industry is to be able to convert

demand from a vague set of distant wants into well-defined products, a process called demand

articulation. This involves translating market data into a product concepts, and then decomposing

it into development projects.

Innovation patterns: The view of innovation is shifting from breakthrough-led to fusion-led. This

fusion is possible through joint-operations amongst different industries, brings about gradual

growth to those industries, promoted through industrial, rather than defense policies, and requires

synergies between different functions.

Societal diffusion: Diffusion in high-tech industry happens through institutional evolution rather

than through technical adjustment process; it is epidemic in nature, where institutions and

technologies co-evolve.

Manufacturing: From producing to knowledge creation

In Japanese companies, R&D investment has increased steadily to as high as 80% more than capital

investment. They have moved from goods-producing organizations to knowledge-creating organizations

that produce continuous innovation. This can be attributed to soft automation (factory robots), and

adoption of flexible manufacturing systems. Between 1985 and 1987, on average, Japanese large

companies spent 29% more on R&D than on plant and equipment.

The change from capital heavy to R&D heavy investment has happened through three distinct phases: 1)

technology import (1961-1975), technology development for economic growth (1975-1985), and

transition towards knowledge creation (1985 onwards).

Technology importation: R&D for digestion

In 1964, MITI surveyed that on average Japanese industry requires 28% of R&D investment to digest the

imported technology. Government played an important role in regulating technology import. Priority was

given to import of intermediate goods, at the cost of consumer products. MITI released a list of 33 desired

technologies in 1950, mostly including heavy and chemical industry. Government’s role was to avoid

excessive competition among Japanese firms and realize economies of scale. By setting minimum

production quantity, government gave away licenses to companies. For each license in heavy industry,

Japan created new companies, each time with partnership with a different foreign major. However, this

led to fragmentation of the industry. Government has a major role to play in heavy and chemical

industries, not so much in hi-tech industries.

During the period from 1960 to 1970, R&D expenditures were closely correlated to technology import

payment, showing firms’ efforts to absorb incoming technology. Starting 70s, the movement happened

towards domestic use and export.

R&D for economic growth from 1975 to 1985

The relations between R&D and economic growth is as follows: new technologies produced by R&D

induce new requirements for capital investment; increased capacity brought about by capital investment

leads to increase in production; increases in production provoke growth of the entire economy; high

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economic growth makes increases in R&D expenditure possible (p.31). Analysis shows that the multiplier

effect of R&D investment on economic growth has grown since the period from 1975.

R&D in the transition period following 1985

Both fabrication companies and material companies saw an increase in R&D to capital expense during the

period starting 1985, though more in fabrication than in material.

Flexible Manufacturing Systems (FMS)

An FMS is a computer-controlled group of semi-independent workstations that are linked by automated

material handling systems. This enabled small batch production for a diversified product range. It shifted

mass production to small range of batches and products. Trends such as precision in mechanical

technology, electronics and microprocessors, greater demand for quality, and advent of robotics

popularized adoption of FMS. This further was prompted by intense competition. Performance of FMS as

compared to mass-production is measures in terms of process accuracy, quality control, maintenance, and

skill requirement.

Relieved from a focus on internal processes, the workers shifted their attention to building assets like

systems and softwares for making better programmed and better managed equipments.

Managing the knowledge creating company

The firms are no longer machines for ‘information process’, but are knowledge creating. Managers in

Japanese firms adopt slogans, symbols, cartoons and metaphors for their businesses, to ensure that

employees share a common vision of the firm. Symbolism and figurative language are important means to

articulate and spread tacit knowledge. This helps build clear relationships between business conception,

corporate organization and technology strategy in Japanese companies. For example, NEC Corporation

adopts the C&C (Computers and Communication) symbol and tree and sun metaphor as corporate

identity; Toshiba Corporation adopts E&E (Energy and Electronics); Matsushita adopts the tap-water

metaphor as supply of electronics to customers; Sony focused on beating Kodak while developing digital

photography technology on a motto of ‘finest sound and picture’; Sharp Corporation adopts decentralized

R&D and multi-divisional tasks forces to work closely with customers; Sumitomo Electric Industries

adopts the strategy of diversification through innovation and uses ‘bamboo garden’ metaphor.

Japanese companies use logos and figurative languages widely. They have a very high horizontal

coordination between operating units based on knowledge sharing rather than skill specialization; as

compared to western model of hierarchical coordination. Methods used include: kanban system, and

figurative language, rather than specifics.

However, Japanese need a culture of Innovation, and not just process automation and more efficiency.

Business diversification: From spin-off to tickle-up process According to classic view on diversification, a technology is first developed for high-end purpose and

then extended to less technologically demanding low-end goods that can be produced at mass production.

Japanese on the other hand, have invested in co-development of products and process technologies. Here

a localized technical knowledge is first applied to a less demanding low-end market, and after mastering

the technology and production experience, it is taken to high-end of the market. This ‘trickle-up’ means

movement of technology from consumer-end to high-end.

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In Japan, mature industries are diversifying upstream, thereby offsetting decreased exports of finished

product with increased exports of manufacturing machinery and equipment. Trickle-up strategy is owing

to unique characteristics of the technology involved. Examples include: 1) LCD was invented by RCA in

1967, and later Sharp developed the technology for usage in calculators, and later into other sophisticated

devices to become a world leader towards 90s; 2) in carbon fiber, Japan’s Toray extended the technology

from golf clubs to airframes, after it was developed by Union Carbide in 1959, to become world’s largest

maker of carbon fiber. Again technology trajectory and market demand shaped the trickle up

diversification; and 3) again in Amino Acids, trickle-up happened as a result of unique developmental

patterns of bioscience.

In trends of diversification, based on R&D expended outside a firm’s principle product fields, textile

industry was the most and motor vehicles industry was the least diversified in Japan during 80s. It is seen

that diversification is a survival strategy for mature industries. The firms following upstream

diversification were textiles, pulp and paper products, and shipbuilding in order to maintain their

international competitiveness; those following downstream diversification include petroleum and coal

products, iron and steel, nonferrous metals, and precision equipment, as a result of wide application sin

fast growing fields. Drugs and medicines diversified both upstream and downstream, and chemical

products diversify horizontally (owing to undirected nature of research).

A drastic growth in an industry can be fostered only by downstream diversification, through the trickle-up

process, as a component supplier gradually finds wider applications in downstream product areas. This

pattern is unique for high-tech industry, including electronics, precision, and pharmaceuticals. This

pattern in accentuated by the industry having a clear research direction. Management in Japan can

implement a product lifecycle from development to commercialization in electronics, but not in

chemicals, and hence have experienced greater success in such industries than in chemicals.

Japanese companies don’t seem the follow the strategy of abandoning a matured technology, instead

upstream diversification helps keep their competitive edge. Upstream diversification is negatively related

to exports growth.

Managing trickle-up diversification

Trickle-up is defined as ‘a localized technical change produced by a component supplier will gradually

find wider applications in its downstream product areas’ (p.95).

Japanese are good at managing technical risk in a conservative, well-organized manner. A trickle-up

strategy helps in several ways: 1) divides technical and market risk into small elements, with short

product lifecycles and faster feedback; 2) pays attention to production process; 3) helps in continued

scanning of technology, and 4) promotes internal diversification.

Four typologies of business strategies exist:

Market-focused strategy (broad defined market, but move into any technology to serve the

market, e.g. Sumitomo as supplier of communication cable)

Technology-focused strategy (build expertise in select core technologies, e.g. NEC Corporation

with a focus on personal computer)

Product-focus strategy (focus on discrete products with functional attributes defined from end-

customer perspective, can be sold to wide range of users, e.g. Sony Corporation delivering

complex products to sophisticated customers)

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Customer-relationship focused (deal with few customers in a monopolized market, e.g. Tokyo

Electric Power Company)

The trickle-up process depicts preference Japanese managers have of incremental engineering

improvements over radical breakthroughs to stimulate corporate growth. The view innovation process as a

spiral. It starts with a market opportunity or technical invention, and move outwards through

development, production, design and new process-technology.

R&D Competition: From dominant-design to inter-industry competition A dominant design enforces standardization so that production or other complementary economies can be

sought. Effective competition takes place on the basis of cost and scale, as well as product performance.

However, recent advent hi-tech firms have been more of diverging pattern than converging pattern. As

shown in the hi-tech industry, competition is no longer between firms, but is between industries.

The concept of dominant-design appears less applicable to the hi-tech industry owing to its rapid pace of

change. This shows that firms follow a divergent pattern, instead of convergent pattern. Unlike US, where

Corning Glass Works dominated the optical fiber technology, in Japan the leadership shifted from

industry to industry, as the level of technology sophistication and marker demand changed. Innovation

cycle, a process of research, development, production and distribution, shifted from one industry to

another. There is a one-to-one correspondence between technological approach and industry sector.

Dynamics of R&D program can be studied by looking at a given sector’s R&D expenditure outside its

principal product field. The hi-tech patterns of R&D lie somewhere between science-based and dominant-

design based patterns. A model of competency-destroying discontinuities is more appropriate to describe

the dynamics of hi-tech industry. In such scenarios, corporate decision on investment cannot be made on

financial rate of return projections. They must be made on the principle of surf-riding. Here the R&D

program is not frozen well after it has entered the development stage, leaving flexibility with the firm.

Japanese approach of product management has overlapping phases, instead of sequential development.

There are central research labs (CRL), where basic and advanced development is conducted; divisional

labs (DL) where product development and process technology take places; and factory engineering lab

(FEL) where manufacturing specification and process is ironed out. In case of Toshiba’s parallel

sequencing system, CRL develops a fundamental technology, DL brings technology into pre-stage of

mass manufacturing, and FEL establishes mass manufacturing systems. For example, in case of DRAM,

CRL is responsible for 256M, DL for 64M, and FEL for 16M DRAM.

As in the case of trickle-up process, technological diversification is not only a good defensive strategy,

but also a way to spot innovations worthy of investment. NEC has a well defined core technology

program that focuses on computation and communication, and that drives it investment in new

technology.

Product development: From pipeline to demand articulation Pipeline progression refer to movement of a product through the stages of basic research, applied

research, exploratory development, engineering, and manufacturing. Here a new technology dominates

and customer needs are taken for granted. Japanese are highly responsive to market, not in a classic

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market research way but by getting a product out faster, learn from mistakes and improve quickly. Hi-tech

development is characterized by long phases of incremental improvements, punctuated by radical

technical changes emerging from fundamental research. There is importance of identifying ‘virtual

markets’ based upon socio-economic changes.

Demand articulation converts a vague set of wants into well-defined products, through phases of: 1)

market data integrated into product concepts, and 2) product concepts decomposed into development

projects. Potential demand is driven from a ‘virtual market’. This leads to conception of ‘national systems

of demand articulation’. The fact that technology is still considered exotic is not a deterrent.

One example of integrating market data into product concept is ‘Japanese language word processor’; and

that of decomposition into projects is ‘home-use video tape recorder’. Both cases demonstrate the

necessity of managers taking a long-term view of product development; dependent on technology levels

of related industries; and requires brisk competition between different companies.

As for the Integrated Circuits, the first level of demand articulation was done by US Defense, that led to

Texas Instruments and Fairchild Semiconductors to invent ICs, and later the development moved to Japan

where MITI formed a VLSI association in 1976 to further build capabilities on manufacturing equipment

and materials for ICs. Japanese companies become leaders in supply of production equipment. The

national level systems of demand articulation are hierarchical and bipolar in nature. Further, a public

goods innovation prefers a pipeline model, while a private goods innovation prefers a demand articulation

process. Japan is a case of Collective Demand Articulation.

Several Japanese companies helped US inventions commercialized by helping in demand articulation

based on local virtual customers. The case of 3M- Toyota and Sun- Fujitsu is instructive.

Innovation Patterns: From breakthrough to technology fusion Technology changes in one sector of the industry is increasingly dependent upon progress of other

sectors. The importance on inventors, and lone inventors is over emphasized in our history. Japan’s

model of innovation is built on fusion of existing technologies rather than creation of newer ones, for e.g.

Japanese created mechatronics in 1975, fusing advents in mechanical, material, and electronics

engineering; or optoelectronics which came from fusion of glass technology with cable and electronic

devices. Numerically controlled machines is an example of this technology.

Innovation in Japan has mostly happened through industry level collaborations. Modern technologies are

characterized by their complementarities, cumulative impact and inter-industry relationships. Japanese

keiretsu provide conducive environment for cross-industry R&D. Technology fusions led to gradual

growth of innovation across participating industries, and it very much depends upon how companies

define R&D. Breakthrough innovations are mostly driven by defense requirements, while technology

fusions are driven by market/ industry demands.

The cross-industry R&D required for technology fusion must meet the requirement of reciprocity and

sustainability; and it is unlikely to be achieved through M&As. Participating companies must bring forth

their core competencies to develop fusion technologies, and build on asset complementarity.

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Societal Diffusion: From technical evolution to institutional co-evolution The diffusion of innovation has to be looked from a techo-economic paradigm change. While

technological change is more rapid, there is often an inertia with change in social institutions. Hence it

calls for co-evolution of technology and social institutions. Building on the concept of ‘network

externalities’, in fact a more important dimension of technological diffusion is institutional and not

technical.

The cases of diffusion of fax machines and CAT scanner demonstrate the importance of institutional

changes, or changes of laws (revision of Public Telecommunication Law), to enable rapid diffusion of

these technologies. Further, the size of adopting companies does matter in the adoption rate.

Appendix

Table 1: Six dimensions of techno-paradigm shift in Japan (p.12)

Dimension From To

Manufacturing Producing Knowledge creation

Business diversification Spin-off Trickle-up process

R&D competition Dominant design Inter-industry competition

Product development Pipeline Demand articulation

Innovation patterns Breakthrough Technology diffusion

Societal diffusion Technical evolution Institutional co-evolution