How Japan can trigger its next burst of innovation

The recent green light in Congress for fast-tracking the Trans-Pacific Partnership marks an opportunity to put a forgotten economic heavyweight back in focus. As the world’s third-largest economy, Japan is a key partner in a trade deal accounting for 36.3 percent of global GDP and 31.9 percent of global trade, with a potential multiplier effect across the partnership and beyond; the more vibrant Japan is, the bigger the multiplier.

Unfortunately Japan appears to have lost its capacity to innovate and grow in recent years. In fact, it is easy to write off Japan, were it not for signs suggesting that would be premature; consider the Thomson Reuters Top 100 Global Innovators picked each year based on four solidly quantifiable criteria. The country that bags the prize for the most companies on the list is, indeed, the one you may have been tempted to write off. With 39 companies out of the top 100, Japan beat the United States for the top spot.

American consumers who are old enough will have wistful memories of Japan’s high tech and highly functional creativity. Think of the Sony Walkman, Super Mario Bros, Toto toilets, or, even, instant Ramen. All that seems like a distant memory. Post-Trans-Pacific Partnership, it is natural to ask: is Japan ready to get back in the limelight? Why haven’t its 39 innovative companies re-established Japan’s vibrancy? Where might it be going wrong? A combination of structural factors might explain the Japanese puzzle.

The first factor is associated with the singular challenge that everyone speaks of when tut-tutting about Japan: with a median age of 46 and a quarter of the population over 65, it has the world’s oldest population. This means not only lower productivity and growing social welfare costs, but also a deficit in creativity, risk-taking and a necessary dose of youthful defiance of the status quo.

A second factor weighs on Japanese enterprises and is an outcome of two decades of recession. A hierarchical legacy combined with recession-driven austerity has resulted in a narrow focus on innovation investments that can be justified to senior management. Filing patents — which helps explain Japan’s topping the Thomson Reuters list — has displaced blue-sky research, tinkering or gathering global market insights. The heavily regulated environment discourages the entrepreneurially-minded, market-facing players and venture investors; Japanese venture capitalists invested a little over $1 billion in 2014, as compared to $48 billion in the United States.

A third factor is, simply, geography, which has shaped both Japan’s history and outlook. An island nation with scarce resources and the world’s tenth-largest population (a density about the same as India’s), the Japanese have put their inventiveness to work at solving for their own, somewhat unique, situation. Solutions are optimized for Japan but not easily portable elsewhere, a condition often described as Japan’s “Galapagos Syndrome.” Despite its inventions and early lead in numerous technologies, the inability to adapt them for other regions has prevented Japanese innovations from penetrating wider markets.  Of course, there were notable exceptions — from the likes of Toyota, Honda, Nissan and Sony — that went global, but a much larger body of Japanese innovations have failed to exit the island.

Japan’s insularity also preserves several anachronisms, further separating it from international contexts. A fine example is the persistence of the fax machine — a favorite in an aging society that emphasizes handwritten notes. It is considered essential to 87.5 percent of businesses surveyed by the Internet Fax Research Institute.

The renewed focus post-Trans-Pacific Partnership presents an opportunity to revitalize Japan’s problem-solving tradition and take it to a global market. This tradition builds on a consistent principle of creating advantage from adversity. With constraints that span post-war geopolitics, resources, demography and culture, Japan exemplifies that old aphorism of necessity being the mother of invention. Reliance on oil imports gave rise to innovations in fuel-efficiency; cold, unheated homes meant innovations in heated toilet seats and other comforts; the restrained formalism of social interactions led to innovative escapism and easily portable fantasy — from anime, manga and video games to Hello Kitty paraphernalia.

With this principle in mind, consider three “adversity platforms” for Japan unlock its inventiveness:

1. Elderly Japan

Japan has to solve its own acute problem, but given the direction of almost all advanced societies, aging represents a universal challenge. Any solution will require innovating across social, policy and technological dimensions. It is necessary to create incentives and structures that encourage a higher birth rate, integrating more women and the elderly into the workforce, and sensible immigration policies. A “third arrow” of Prime Minister Shinzo Abe’s policies for jump-starting Japan aims in this direction.

A complementary approach involves enhancing productivity and services through automation. Japan is already at the cutting-edge on many aspects of robotics and automation. The Galapagos Syndrome may help it become an early incubator for solutions with universal applications. Already Abe intends to more than quadruple the nation’s robotics industry to 2.4 trillion yen ($19 billion) by 2020 as part of a state-led push for a “robot revolution.” In addition, Japan is developing an innovation cluster, including talent (e.g. at Tokyo’s JSK Robotics Laboratory), increased venture funding and corporate investment (e.g. Google’s acquisition of Schaft Inc.), in cutting-edge robotics.

2. Sustainably Japan

Japan imported 94 percent of its energy in 2012. It is the world’s largest importer of coal and liquefied natural gas. It is also the world’s fifth-largest emitter of carbon dioxide. Energy-efficiency, sustainability and limiting environmental impact are essential challenges for the resource-poor country. A pioneer in innovating in energy security — its 54 nuclear reactors used to cover a third of its electricity needs — Japan still suffers from the aftershocks of the March 2011 Fukushima Daiichi nuclear reactor disaster.

With its nuclear program stalled, Japan has fallen way behind its targets: Carbon emissions from Japan’s electricity industry were 39 percent higher than it was before Fukushima, with greenhouse-gas emissions second highest on record in the year that ended in March 2014. The Japanese government has backtracked on its sustainability targets; the recently announced target of cutting greenhouse gas emissions to 18 percent less than 1990 levels are a giant step down from bolder pledges in the past.

There are several opportunities for re-establishing Japanese leadership in this area. One is to innovate in reducing the high cost of renewable energy in Japan relative to the falling prices elsewhere. The second is to consider options for more ambitious target-setting and getting to the targets. Consider, for example, scenarios outlined by research from the Institute for Global Environmental Strategies and WRI’s Open Climate Network, which offers ideas for reducing Japan’s emissions 25-30 percent below 1990 levels by 2030 through additional investments in renewable energy and energy efficiency.

3. Neighborly Japan

While Asia promises to be the world’s most dynamic region — by 2050, half the world’s output is expected to be from Asia — it is also a region stymied by poor infrastructure and poor processes. While China has led in mobilizing to close these gaps, Japan has receded in importance. This is a missed opportunity since consumers in emerging Asian markets are admirers of both Japan and Japanese products.

So much of the patenting in Japan that placed it on the top of the Thomson Reuters list is in industries essential to infrastructure development and process innovations.  In addition, Japan recently created a $110 billion fund to help with Asian infrastructure. In addition to financial commitments, it is important to build commercial and political relationships. Abe is already making moves — a strong personal bond with Indian prime minister Narendra Modi, the Trans-Pacific Partnership, the recent summit with the fast-growing “Mekong Five” countries —  which will be key to its influence in transforming the region.

So, don’t write-off Japan as yet. The Thomson Reuters list suggests that inventive problem-solving is valued in Japan. It is a country that can simultaneously invent a splint that hardens into a strong but supple cast when exposed to LED light or a phone that allows you to pay for online purchases simply by staring into the screen or endless examples of chindogu, the Japanese word for strangely practical and utterly eccentric inventions.  Japan’s challenge is to make its inventions useful in a global marketplace.

Japan is expected to experience a 2 percent GDP boost from the Trans-Pacific Partnership. The boost will be even higher if Japan successfully taps into its intrinsic problem-solving capacity. With its unique ability to create advantage out of adversity, Japan may, once again, return as a force that matters on the global stage.

This article is published in collaboration with The Washington Post. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Bhaskar Chakravorti is senior associate dean of International Business & Finance at Tufts University’s the Fletcher School. He’s also the founding director of the Institute for Business in the Global Context and author of The Slow Pace of Fast Change. Formerly a partner at McKinsey, he taught innovation at Harvard Business School.

Image: A boy walks on Media Stairs at a business district in Tokyo. REUTERS/Kim Kyung-Hoon.