Technology Spillovers and Economic Vitality: An Analysis of Institutional Flexibility in Japan with Comparisons to the USA

In Japan technology spillovers have been less successful in the 1990s than they were in the 1980s. One apparent reason for this is a decline in institutional flexibility - the ability of organizations to absorb technology, transform human capital and adapt to changing global conditions. Information and communication technology (ICT) has become embedded in US business practice, but Japanese firms have yet to absorb ICT or respond to human capital needs. This lack of flexibility has had a significant negative impact on the vitality of the Japanese economy. Section 2 of this paper will demonstrate recent changes in Japan's institutional flexibility by contrasting technology spillovers of the 1970s and 80s with those of the 1990s, linking this institutional flexibility with R&D diversification and showing the negative impact on Total Factor Productivity and GDP. This analysis was performed using data compiled by the Tokyo Institute of Technology as well as data from recent surveys conducted by a number of Japanese government offices and agencies. Section 2 will also discuss Japan's 'dual economy' by looking at key differences between Small and Medium-sized (SMEs) and Large Enterprises (LEs) in terms of labor rigidity and ICT penetration. These differences are one aspect of institutional flexibility. Section 3 starts by comparing the economic growth rates in Japan and the USA in the second part of the 1980s and the first part of the 1990s. A comparison of labor, capital, material and Total Factor Productivity indicates a decline in flexibility in Japan and an increase in flexibility in the USA. Additionally, this reversal can be seen in technology, labor and capital substitution. Section 4 discusses key changes in the US and Japanese organizational environments as they converge on different digital platforms and implications for their respective institutions. Key questions are raised regarding often over-simplified fundamental changes purported in the USA. In this regard, the truly 'innovative' nature of SMEs in the USA is questioned as institutional rigidity in this sector grows. Section 5 summarizes final implications of this analysis and directs future work towards questions arising from this study