section 2 challenges for japan’s innovation creation 1

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Section 2 Challenges for Japan’s Innovation Creation

1．International evaluation of Japan’s innovation capability In the 2016-2017 version of the annual report on global competitiveness published by the World

Economic Forum (WEF), Japan is ranked eighth in terms of innovation, down from fifth place in the 2015-2016 version. While Japan is ranked high in terms of “company spending on R&D,” “availability of scientists and engineers” and “PCT (Patent Cooperation Treaty) patent applications,” it is ranked low in terms of “capacity for innovation” and “university-industry collaboration in R&D” compared with other top 10 countries (Table II-3-2-1-1).

As for the reason for the low ranking in terms of “capacity for innovation,” the effects of the revision of the report that was applied to the 2013-2014 version and later in order to evaluate the possession of capacity for innovation instead of in-house R&D capacity have been pointed out. It has also been pointed out that Japanese business managers may have lowered their evaluation of Japan’s capacity for innovation or that the falling ranking may reflect Japan’s weakness in terms of the capacity to connect R&D results to social values and in terms of open innovation.253

Challenges faced by Japan in creating innovations are: (A) slow response to changes in the environment related to acquisition of customer value, (B) closedness in R&D investment, (C) companies’ short-termism, (D) low mobility of human and financial resources, and (E) isolation from the global network. To resolve these challenges and create innovations, it is seen as important to promote open innovation. However, the proportion of companies which conduct R&D only internally is 61%, and there is an analysis that shows that open innovation activity has not increased compared with 10 years ago in more than half of Japanese companies.254 This is reflected in the low ranking of Japan in terms of “university-industry collaboration in R&D” as shown in Figure II-3-2-1.

253 “Regarding Analysis of the Current Status of Innovation Ranking in the Global Competitiveness Report

of the World Economic Forum” (Cabinet Office, 2017) and “What are the Factors Contributing to the Decline in Global Competitiveness (Yano, 2016), Mizuho Research Institute.

254 “Regarding Activities to Promote Innovations” (Subcommittee on Research and Development and Innovation, Committee on Industrial Science and Technology Policy, Industrial Structure Council, Ministry of Economy, Trade and Industry, 2016).

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Table II-3-2-1-1 WEF Innovation Ranking 2016-2017 edition

Innovation ranking Capacity for innovationQuality of scientificresearch institutes

Company Spending onR&D

University-Industry-collaboration in R&D

Gov't procurement ofadvanced technology

products

Availability ofscientists and

engineersPCT patents

Switzerland 1 1 1 1 1 28 14 3

Israel 2 4 3 3 3 9 8 5

Finland 3 6 8 7 2 26 1 4

US 4 2 5 2 4 11 2 10

Germany 5 5 11 5 8 6 16 7

Sweden 6 3 7 6 12 23 20 2

Netherlands 7 10 4 14 5 21 21 9

Japan 8 21 13 4 18 16 3 1

Singapore 9 20 10 15 7 4 9 13

Denmark 10 18 16 16 14 53 37 8 Notes: The term “patent applications filed under the PCT system” refers to patent applications filed under the Patent Cooperation Treaty. Source: WEF "The Global Competitiveness Report" (2016-2017).

2．Three challenges for the realization of an industrial society that creates innovations Following the First Industrial Revolution, in which mankind acquired a power source through the

invention of the steam engine, the Second Industrial Revolution, in which the power source shifted to electricity and motors and the Third Industrial Revolution, in which automation proceeded due to the invention and development of computers, we are witnessing the arrival of the Fourth Industrial Revolution, in which artificial intelligence thinks for itself based on massive amounts of data and enables us to take optimal action. The Fourth Industrial Revolution makes it possible to (A) freely conduct all sorts of business transactions and exchange all sorts of information in the form of data through networks (IoT), (B) analyze a large amount of collected data and use the results to create new value (big data), (C) have machines do self-learning and make more advanced judgments than those that can be made by humans (artificial intelligence (AI)), and (D) automate diverse and complex processes (robotics). While these technological innovations have enabled the realization of a kind of society that was previously thought to be impossible to create, the industrial and employment structures could also change drastically.

These technological breakthroughs have made it possible to (A) shift from mass production and one-size-fits-all services to customized production and services tailored to individuals’ needs (e.g. tailor-made medicine, instant made-to-order tailoring and education adapted to individuals’ level of understanding), (B) match assets that remain unused in society with individuals’ needs (e.g. sharing-economy services such as those provided by Uber and Airbnb), (C) support or substitute humans’ roles and cognitive and learning functions (e.g. autonomous driving and the use of drones for construction management and the distribution of goods), and (D) drastically improve the efficiency of an entire supply chain through the creation of new services, a shift from products and goods to services, and sharing of data. In other words, technologies related to the Fourth Industrial Revolution constitute common technological infrastructure for innovations in all industries. They make it possible to meet new needs by being connected with technological innovations and business models in various fields.

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As a result of interconnection between various things, new value added is created, causing things that were previously independent from or opposed to each other to be fused and change. As a result, it is expected that cyberspace and physical space will be fused at a high level to realize Society 5.0, a human-centric ultra-smart society in which people can lead a comfortable and vibrant high-quality life.

Figure II-3-2-2-1 Connected Industries

Source: METI.

In order to connect the Fourth Industrial Revolution, a revolution triggered by technological innovations, to Society 5.0, an ultimate vision of a future society, it is necessary to change how industries work. At a German technology fair (CeBIT) held in March 2017, Japan communicated to the world the Connected Industries concept as a vision of industries that the country is aiming to create. Under this concept, which is described in Figure II-3-2-2-1, Japanese industries will create new value added and resolve social challenges through connected relationships between data, technologies, people, organizations and various other things.

From the viewpoint of trade policy, there are three major challenges for the realization of such a new industrial society. First, it is necessary to constantly improve individual personnel’s capabilities and skills amid the Fourth Industrial Revolution and establish a system for human resource investment at the individual, company and social levels. Second, it is important to conduct activities to realize open innovation in order to enhance the innovation creation capability by promoting exchange between individuals, between companies and between industries. Third, in order to attract human resources and companies with more advanced knowledge and experiences to Japan, it is necessary to further promote the acceptance of human resources with advanced skills and an increase in inward foreign direct investment as a domestic internationalization initiative. Below, we will discuss each of the challenges.

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(1) Current status of human resource investment and challenges At a time when various changes, including technological innovations and social changes, are

expected to occur, it is naturally necessary to make significant changes in terms of human resources and employment in order to respond to those changes.

The following is an example of the vision of the future that Japan should aim for. First, at the individual level, in this era of a 100-year lifetime, individuals must acquire value as

professionals by continuing to update their capabilities and skills in accordance with changes in the source of value added. As a precondition for doing so, it is important to possess career ownership, which refers to the ability to continue to design one’s own career while adapting oneself to changes in the market environment and the life stage.

Meanwhile, at the company level, companies need to attract human resources with diverse capabilities and skills and center their activities around a system to create value added on a project-by-project basis based on the recognition that the core of competitiveness has shifted to human resources as a source of knowledge. To do so, it is important to incorporate flexible and diverse working styles that are not constrained by location, time, contract type and other factors in accordance with the needs for human resources, clarify the contents of jobs and thoroughly pursue the evaluation and treatment of workers that is commensurate with the contents of their jobs and the results achieved by them.

Moreover, society as a whole needs to establish a nation-wide eco-system to acquire, develop and allocate human resources in an optimal manner. As the era in which companies provided most of worker education and security is passing away, it is necessary to reform social systems, including social security systems, in order to minimize negative effects of the Fourth Industrial Revolution and globalization.

Measures necessary to create and develop human resources adapted to the changes of the times will be described in Part III. In this section, we will take a look at the current status of human resource investment, challenges, and the overall strategy.

(A) Fundamental enhancement of human resource investment and development

In the previous paragraph, it became clear that although Japanese global companies have a high level of productivity, they have problems with pricing power. To improve profitability, it is necessary not only to focus on productivity growth but also to pay attention to and enhance pricing power. We also pointed out that reversing the decline in investment in human resource development into growth will improve profitability.

From companies’ point of view, it is expected that human capital investment, including investment in securing and educating workers, will create innovations and will lead to profitability improvement through productivity growth and enhancement of pricing power.

When we consider how to secure and educate workers, identifying and making clear the requirements for workers (capabilities and skills) necessary under the Fourth Industrial Revolution will be a policy pillar.

Regarding IT and data-handling skills, which are particularly important, the shortage of IT-skilled workers is forecast to become more and more serious, according to the Findings of the Study of Recent Trends and Future Estimates Concerning IT Human Resources, which was conducted on commission from the Ministry of Economy, Trade and Industry. In 2030, there will be a shortage of

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around 590,000 IT-skilled workers under the median scenario, with the maximum shortage of around 790,000 workers assumed under the high scenario (Figure II-3-2-2-2).

Figure II-3-2-2-2 Assumption of shortage of IT human resources

Notes: This estimation is calculated based on three types of scenarios, i.e., low, median and high scenarios, according to the future perspectives of market expansions, on the presumption that the low scenario sets a market growth rate of about 1%, the high scenario of about 2%-4% (further perspectives based on the results of a questionnaire survey), and the median scenario of the middle level of the high and low scenarios, i.e., about 1.5%-2.5%. Moreover, the estimation brought about three types of results by scenario regarding the cases where no change in labor productivity is seen and where labor productivity annually increases by 1% and by 3%. Source: Excerpts from the findings of the 2016 Study of Recent Trends and Future Estimates Concerning IT Human Resources (Mizuho Information and Research Institute, Inc.), commissioned by METI.

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Figure II-3-2-2-3 Estimated shortage of workers with advanced IT skills

Source: Excerpts from the findings of the 2016 Study of Recent Trends and Future Estimates Concerning IT Human Resources (Mizuho Information and Research Institute, Inc.), commissioned by METI.

In addition, as experts in the fields of artificial intelligence, big data, robotics and IoT are

important under the Fourth Industrial Revolution, it is estimated that by 2020, there will be a shortage of around 50,000 workers with advanced IT skills in these fields (Figure II-3-2-2-3).

On the other hand, in the same survey, it became clear that although the importance of customer-oriented advanced IT investment (or IT utilization) that aims to improve business performance and customer satisfaction by taking advantage of new technologies (hereinafter referred to as “aggressive IT investment”) is widely recognized, only around half of the respondents replied that they were actually making aggressive IT investment. More than 80% replied that there was a “severe shortage” or “some shortage” of workers capable of promoting aggressive IT investment, underscoring the severity of the shortage of such workers.

In order to secure and train workers capable of promoting forward-looking IT investment, it is important for companies to improve the skills of IT-skilled workers. However, IT-skilled workers in Japan appear to have a very low level of satisfaction with respect to their companies’ education and training systems and self-improvement support systems compared with workers in other countries (Figure II-3-2-2-4). In addition, many workers replied that they have a low level of satisfaction with respect to salary/compensation (Figure II-3-2-2-5).

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Figure II-3-2-2-4 Level of satisfaction with respect to companies’ education and training systems and self-improvement support systems

Source: Excerpts from the findings of the 2016 Study of Recent Trends and Future Estimates Concerning IT Human Resources (Mizuho Information and Research Institute, Inc.), commissioned by METI. Figure II-3-2-2-5 Level of satisfaction with respect to salary/compensation

Source: Excerpts from the findings of the 2016 Study of Recent Trends and Future Estimates Concerning IT Human Resources (Mizuho Information and Research Institute, Inc.), commissioned by METI.

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(B) Realization of flexible and diverse working styles Under the Fourth Industrial Revolution, how to secure and develop human resources in terms of

quality and quantity is the key issue. In this situation, it is important to make clear the contents of jobs, evolve the conventional Japanese-style employment system, characterized by lifetime employment, the absence of prescribed limits on types of job that may be assigned to employees, and emphasis on seniority, membership-type employment into a system that can strengthen competencies necessary for performing the jobs, place emphasis not only on evaluation based on working hours and employment longevity but also results-based evaluation, and promote flexible working styles not constrained by time, location, and contract type. It is also important to develop an environment that makes it easier for workers to switch jobs.

(2) Current status of open innovation and challenges According to Henry Chesbrough,255 in order for companies to create innovations, active use of

cooperation with universities and other companies including foreign ones is effective. In Japan, the inflow of financial and human resources from abroad is small, so it is important to promote open innovation activities to create value added through cooperation between various players, including companies, universities and ventures and to realize “Connected Industries,” which creates new value added through connected relationships between various things, while increasing the inflow of those resources. Here, regarding Japan’s research exchange with other countries in particular, we will conduct a comparison with China, where international joint research activities have been rapidly increasing in recent years.

Figure II-3-2-2-6 International networks of researchers (related to co-authored papers)

* Scales of the circles for countries show the number of scientific papers released by researchers in the countries, including papers contained in academic journals and papers released at international

255 Chesbrough is an assistant professor at the Harvard Business School. He proposed the open innovation

concept.

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conferences. * Numbers shown between countries represent the number of internationally co-authored papers, while lines connecting the countries become thicker as the number of co-authored papers becomes larger. Source: Compiled by the National Institute of Science and Technology Policy based on the Scopus database of Elsevier B.V. Excerpts from references of the Miraiwo Keninsuru Daigakuin Kyoiku Kaikaku compiled by the Central Council for Education.

(A) Challenges related to Japanese researchers’ international networks Between 2003 and 2013, the number of internationally co-authored papers increased steeply

worldwide (Figure II-3-2-2-6). The growth in the number of co-authored papers involving Japanese researchers was relatively small. In contrast, in the case of China, both the total number of scientific papers and the number of co-authored papers increased sharply, and in the case of other advanced countries, such as Germany and the United Kingdom, the growth was also relatively strong. Compared with these countries, Japan is lagging behind.

Regarding international joint patents, China’s joint patents with the United States and Europe have increased steeply, while Japan’s joint patents have decreased (Figure II-3-2-2-7). The numbers of Japan’s joint patents with Europe and the United States declined from 353 and 227 in 2000 to 204 and 208 in 2014, respectively. On the other hand, the numbers of China’s joint patents with Europe and the United States increased more than ten-fold, from 40 and 24 in 2000 to 442 and 308 in 2014, respectively. In terms of the number of international patents as well, Japan is the only country for which the number has declined, compared with Europe, the United States and China.

In 2008, China surpassed Japan in terms of the number of joint patents with the world as well as with the United States and Europe, and the number for China is already around twice as high as the number for Japan. In contrast, whereas other advanced countries recorded growth compared with 1999, Japan registered a decline (Figure II-3-2-2-8).

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Figure II-3-2-2-7 Number of international patent applications and number of joint patent applications among them in 2000 and 2014

Notes: This figure shows the number of international applications filed with the European Patent Office. Source: OECD Stat.

(B) Growth in China’s international joint research and the reasons One reason why China’s joint research activities have grown rapidly is the presence of Chinese

students studying abroad. Some Chinese students who studied in the United States and other countries engage in joint research activities with their host countries after returning to China. This has presumably contributed to the rapid growth in China’s joint research activities.256

256 The New Argonauts: Regional Advantage in a Global Economy (AnnaLee Saxenian).

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Figure II-3-2-2-8 Number of joint patents with other countries (number of filed applications)

Notes: This figure shows the number of international applications filed with the European Patent Office. Source: OECD Stat.

Indeed, Figure II-3-2-2-9 looks like indicating a correlation between the rapid growth in China’s

joint research activities and the increase in the number of Chinese students studying abroad. This figure shows the changes in the numbers of Japanese and Chinese students studying in the United States and the numbers of joint patents with the United States between 2000 and 2014.

This shows that in Japan’s case, the number of students studying in the United States and the number of joint patents followed a similar downtrend between 2000 and 2010. In China’s case, on the other hand, the number of joint patents increased in line with the rapid rise in the number of students studying in the United States.

In the graphs in the lower row, the horizontal axis represents the numbers of Chinese and Japanese students studying in the United States and the vertical axis represents the numbers of Chinese and Japanese joint patents with the United States. These graphs show that between 2000 and 2014, the number of joint patents declined in line with the fall in the number of students studying in the United States in Japan’s case. Conversely, in China’s case, both the number of students and the number of joint patents rose between 2000 and 2014. Moreover, the proportion of Chinese students who returned to China after studying abroad rose steeply, from 29.5% in 2005 to 79.4% in 2016. Although it is difficult to generalize because an increase in exchange of people other than students may be a contributing factor, we may presume at least that there is a certain degree of correlation between the number of students studying abroad and the number of joint patents.

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Figure II-3-2-2-9 Changes in the number of Japanese and Chinese students studying in the United States and the number of joint patents with the United States

Source: OECD Stat, Institute of International Education “Open Doors”.

(3) Current status of domestic internationalization and challenges If Japan is to further promote innovations, it is important for Japanese universities and companies

to actively engage in exchange activity not only within Japan but also abroad by promoting human resource investment (explained in Section 1) and domestic internationalization (acceptance of highly skilled foreign professionals and an increase in inward foreign direct investment), as was mentioned earlier. Here, we will discuss inward foreign direct investment after discussing the current status and challenges of inflow of highly skilled foreign professionals.

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Figure II-3-2-2-10 Changes in the number of Chinese students leaving China for study in the United States and those returning to China

Source: China Statistical Yearbook 2016.

(A) Current status of acceptance of highly skilled foreign professionals and challenges

First, regarding highly skilled professionals, around 8,700 researchers have moved out of Japan over the past 15 years, providing a significant contrast to the inflow of around 10,000 researchers into the United States and China (Figure II-3-2-2-11). One reason for this is considered to be foreign workers’ negative view of the Japanese workplace. According to the evaluation of Japan by current and former foreign students in the country, while around 83% regarded Japan as an attractive place to live in, around 51% expressed a negative view of working in Japan (Figure II-3-2-2-12).

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Figure II-3-2-2-11 Number of researchers that moved in or out of Japan between 1999 and 2013.

Source: OECD, “Science, Technology and Industry Scoreboard 2015 JAPAN HIGHLIGHTS”.

Figure II-3-2-2-12 Evaluation of Japan’s attractiveness as a living and working place by current and former foreign students in Japan

Source: Questionnaire survey targeting current and former foreign students in Japan conducted by the Japan Association for Promotion of Internationalization.

Many foreign workers said they wanted Japan to make improvements with respect to the

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clarification of the career path, the reduction of the period required for promotion and evaluation based on capabilities and results, so it is important to make improvements on these points (Figure II-3-2-2-13).

Figure II-3-2-2-13 Efforts that Japanese companies should engage in to make overseas human resources continue their careers in Japan

* Multiple responses available (Up to three choices for appropriate respondents) * Companies with less than 300 employees are assumed to be SMEs, while those with 300 or more employees are assumed to be large enterprises. Source: Questionnaire survey for foreign human resources conducted as part of this survey.

(B) Current status of inward foreign direct investment and challenges With respect to inward foreign direct investment, the value of inward foreign direct investments

in Japan has stayed at a very low level compared with the levels in other advanced countries, as was mentioned in Chapter 2, Section 2. On the other hand, Japan’s attraction as a destination for research and development investment has been rapidly growing in recent years (Figure II-3-2-2-14). Among the reasons for this are Japan’s well-developed infrastructure and its attractiveness as a market (Figure II-3-2-2-15).

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Figure II-3-2-2-14 Most attractive Asian countries and regions as a destination for investment by type of business bases from overseas companies

Source: Excerpts from the 2016 Obei Asia no Gaikokukigyo no Tainichitoshi Kanshindo Chosa, PricewaterhouseCoopers Aarata LLC.

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Figure II-3-2-2-15 Attractiveness of Japan in developing business (total)

Source: Excerpt from the Survey of Trends in Business Activities of Foreign Affiliates (Results for 2010, 2015).

Meanwhile, Japan’s attractiveness in other aspects remain low. The reason cited for this by the largest proportion of respondents by far is the high cost of doing business in Japan. Between 2010 and 2015 alone, the business cost rose several percentage points, and it is clear that the high cost is impeding direct investment by foreign companies (Figure II-3-2-2-16). The breakdown of the business cost shows that the three main components are personnel cost, tax burden and office rent. In order to increase inward foreign direct investment, it is important to correct problems impeding the conduct of business by foreign companies (Figure II-3-2-2-17).

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Figure II-3-2-2-16 Factors impeding business development in Japan by foreign companies (total)


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Figure II-3-2-2-17 Factors impeding business (business activities) in Japan in terms of costs


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Figure II-3-2-2-18 Factors impeding business in terms of securing Japanese human resources


In terms of employment of workers, communication problems and the high level of salaries are factors impeding the employment of both foreign and Japanese workers at foreign companies operating in Japan. Among other problems cited by those companies are a lack of labor market mobility with respect to the employment of Japanese workers and the difficulty of obtaining residency status with respect to foreign workers (Figures II-3-2-2-18 and II-3-2-2-19).

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Figure II-3-2-2-19 Factors impeding business in terms of employment of foreign workers


section 2 challenges for japan’s innovation creation 1

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