Comparative advantage is not a static concept.  A country’s comparative advantage can be affected by changes in the demand and/or price of its export and import competing products.  But comparative advantage can also be affected by improvements in the technological and knowledge base of a country, and in particular a country’s capacity to innovate.
In the post-war period, Japan could advance quickly by borrowing technology, knowledge and institutions from advanced countries.  Its comparative advantage quickly advanced from low-skilled to high skilled manufacturing.  Now, like most advanced countries, Japan is sitting on the global frontier.  Continued economic progress depends on making innovation the heart of its comparative advantage.

But what is innovation?  Are countries doing well in innovation?  And what can we do to improve innovation performance?  These are some of the issues raised by the OECD in its new “Innovation Strategy”.

The OECD defines innovation as the introduction of a new or significantly improved product, process or method.  But to transform invention into innovation successfully requires a range of complementary activities, including organizational changes, firm-level training, testing, marketing and design.

Science continues to be an essential ingredient of innovation, as the example of the Internet and Human Genome project demonstrate.  Most basic research is still done in public sector research institutions or higher education establishments.  Science-patent linkage data show that the role of science in innovation continues to increase, notably in sectors like pharmaceuticals and semi-conductors.   

However, innovation today encompasses much more than R&D.  Increasingly firms in services and manufacturing create value through a wide range of complementary technological and non-technological changes and innovations.

Innovation rarely occurs in isolation.  It is a highly interactive process of collaboration across a growing and diverse network of stakeholder, institutions and users.  Through partnerships, firms seek to stay abreast of developments, expand their market reach, gain access to a larger base of ideas and technology, and get new goods and services on to the market before their competitors.  Firms source external knowledge through partnerships, alliances and joint ventures with external parties or through the acquisition of knowledge.  Universities often act as bridges between businesses, governments and countries.

In most countries, collaboration with foreign partners is at least as important as domestic cooperation, a sign of the formation of global networks of innovation.  Interestingly, Japan, China and Korea score very low on international cooperation.

How are OECD countries doing in the innovation race?  From 1995-2006, innovation was the main driver of economic growth in countries like Austria, Finland, Sweden, UK and US.  China is now emerging as a major player in global innovation.  It share of total global R&D expenditure is now not very behind Japan, and its share of global scientific publications is now more than double that of Japan.  

But there are many dimensions of innovation, and some countries do well on some criteria, and less well on others.  It simply goes to show that countries have much to learn from each other in improving their innovation performance.

The OECD has come up with a number of policy principles for improving innovation, including:

. Empowering people to innovate -- people generate the ideas and knowledge that drive innovation, education and training systems need to adapt, enabling consumers to participate in innovation, facilitate migration and international study.  

. Unleashing innovations – fostering an entrepreneurial culture through open markets and competitive business environment (notably by removing regulatory barriers to innovation), enhance access to finance.

. Creating and applying knowledge – foster strong and effective public research, intellectual property rights, investment in IT infrastructure like broadband, unleash innovation in the private sector

As the Economist magazine reports, a host of medium-sized Japanese electronics firms have developed dominant positions in many areas of technology, essentially through strong innovation.  For example, around 75% of motors for hard-disk drives in computers come from a firm called Nidec; 90% of the micro-motors used to adjust the rear-view mirror in every car are made by Mabuchi. Often the products are components, materials or equipment used to make other equipment: TEL makes 80% of the etchers used in making an LCD panel; Covalent produces 60% of the containers that hold silicon wafers as they are turned into computer chips.

But overall Japan does not rank high in today’s 21st century innovation context.  There is little mobility of labour within the economy and internationally.  Large enterprises are very bureaucratic.  Foreign students are not being harnessed as a force for innovation.  Foreign direct investment in Japan is miniscule, and as mentioned above international collaboration is very low.  There is very little cooperation between local enterprises and universities.  The share of patents with foreign co-inventors is extremely low.

Starting a business is too complicated.  Very little venture capital is available.  The services sector is overregulated and inefficient.  The share of trademarks registered by the service sector is very low.       

Japan needs to become more innovative to cope with its current debt crisis and its ageing population.  The world also needs an innovative Japan to help find innovative solutions to climate change, infectious diseases, food security and water depletion.  The performance of its medium sized firms shows what it can do.  Over to you, Japan!



References:

OECD Innovation Strategy

www.oecd.org/innovation/strategy  

The Economist, INVISIBLE BUT INDISPENSABLE, Nov 5th 2009

http://www.economist.com/displayStory.cfm?story_id=14793432&source=hptextfeature