Summary of This Book

The aim of this book was to clarify the historical flow of Japan’s economic development, focusing on the changing nature of innovation. In doing so, I set forth three questions to be resolved. Parts I, II, and III provided answers to these questions.

Part I explored the question “Why was it possible for Japan’s economy to attain a growth path so early?” Outside Europe and the United States, the Japanese economy’s takeoff was the earliest among the late developers; the contributing factor was breakthrough innovation originating domestically.

The first half of Part I discusses Zen’emon Konoike, Takatoshi Mitsui, and Genzaemon Nakai, all active during the Edo period. At that time, Japan was cut off from the rest of the world by its isolationist policy, and innovation in Japan can thus be seen as “world” innovation. In this sense, the Edo period innovators can be regarded as breakthrough innovators who accomplished “world firsts.”

In the second half of Part I, we looked at six innovative entrepreneurs: Hikojiro Nakamigawa, a salaried manager; Yataro Iwasaki, Yanosuke Iwasaki, Zenjiro Yasuda, and Soichiro Asano, owner-managers; and Eiichi Shibusawa, an investor-manager. Their business innovations were essentially incremental. However, the unique system created by the combination of these innovations, consisting of mutually facilitative collaboration among the salaried, owner, and investor managers, served as the driving force that made Japan the first to accomplish industrialization among late developers. Thus, these entrepreneurs collectively realized breakthrough innovation of global historical significance, which led to the “first industrialization among late starter nations.”

With sporadic cases of breakthrough innovation during the Edo period as preconditions, and with the series of comprehensive breakthrough innovations between the opening of ports at the end of the Edo era and the post Russo-Japanese War years as direct impetus, Japan accomplished the first successful industrialization among late developers.

Part II examined the question: “How was it possible for the Japanese economy, once on a growth path, to achieve such high growth over a long period of time, a feat rarely seen in world history?” The answer: “As a result of incremental innovation and led by domestic demand, Japan achieved relatively high growth over a long period.”

Unlike the case of other East Asian countries and regions, the Japanese economy continued to experience relatively high growth driven by domestic demand from the 1910s through the 1980s. Expanding domestic demand was driven by an ongoing consumer revolution accompanied by the Westernization of lifestyles and active capital investment in the private sector. The activities of Ichizo Kobayashi, Saburosuke Suzuki II, Kiichiro Toyoda, Yoshisuke Aikawa, Sazo Idemitsu, Konosuke Matsushita, Masaru Ibuka, Akio Morita, Soichiro Honda, and Takeo Fujisawa, discussed in Part II, were closely related to the consumer revolution. Meanwhile, the activities of Yasuzaemon Matsunaga, Shitagau Noguchi, Yataro Nishiyama, and Toshio Doko, were deeply tied to the promotion of capital investment in the private sector.

Overall, these leaders produced incremental innovation symbolized by the word “kaizen” or “improvement.” A series of innovative entrepreneurial actions enhanced the organizational capacity of Japanese companies and enabled the relatively high growth of the Japanese economy over the long term.

Part III examined the question “Why did Japan’s long period of relatively high economic growth come to an abrupt end with the burst of the economic bubble in the early 1990s, and why has the Japanese economy continued to stall to this day?” The answer can be stated as “Japanese companies were caught between two types of innovation.”

First, breakthrough innovations deriving from the ICT revolution ushered in the era of “first mover advantage.” The strategy of “latecomer advantage” based on incremental innovation that had been the strength of Japanese firms, lost its effectiveness in the era of “first mover advantage.” First movers establish the de facto industry standard and capture most of the profits.

Second, “disruptive innovation,” described by Christensen in his work “The Innovator’s Dilemma,” explains a series of recent phenomena, such as the rapid commoditization of value-added products (price destruction) and the so-called Galapagosization of Japanese products. Japanese companies are struggling, caught between breakthrough innovation originating in developed countries and disruptive innovation originating in less developed countries and regions. This is the answer to the question presented in Part III.

Ways to Revive Innovation

Japanese companies must confront breakthrough innovation from developed countries and disruptive innovation from less developed countries and regions. They must adopt an appropriate growth strategy, carrying out a “two-front operation” to simultaneously capture the expanding low-end market and the highly profitable high-end market.

Japan’s location in East Asia is extremely favorable for the country to implement such a “two-front operation.” East Asia has the potential to contribute to the growth strategies of Japanese companies in in two ways: (a) it can expand market size, particularly for low-end products, and (b) it can serve as a development and production base for the high-end market. The geographical proximity of Japan, Korea, China, and Taiwan lowers the cost of moving managerial resources, including human resources. It also enables competitiveness of the entire supply chain through optimal locations in each country and region. If Japan utilizes these conditions, its companies can take advantage of the East Asian economy’s buoyancy and return to the growth path.

Even today, Japanese companies face two frontiers: (1) emerging markets that are continuously growing, and (2) the domestic market, undergoing structural change. Therefore, Japanese companies can still grow if they adopt appropriate strategies to penetrate emerging markets or more deeply cultivate the domestic market (for example, by combining the manufacturing and service industries; by creating an alliance between agriculture, commerce, and manufacturing industries; and engaging in urban planning that is focused on healthcare and welfare). Achieving this would also help create new jobs in Japan.

To revive Japan’s economy, individual companies must clarify their growth strategies and align shareholder interest (higher share prices) with employee interest (better compensation) over the medium to long term. If appropriate investments that result in corporate growth can simultaneously result in higher share prices and better compensation, shareholder interest and employee interest will no longer be at odds. Some believe that it is difficult for companies to pursue growth strategies in Japan whose population has already peaked. However, it is possible for companies to pursue growth strategies if they target the global market or if they deepen their cultivation of the domestic market in response to structural changes in Japan.

Aligning shareholder interest and employee interests over the medium to long term means rebuilding Japanese-style management, but not through a simple return to its original state. While maintaining long-term employment, thus ensuring a sense of security for employees, it is also necessary to undertake a fundamental revision of the seniority system by introducing a meritocracy to motivate workers. Japanese-style management must be transformed from “old-style Japanese management,” in which long-term employment and seniority coexisted, to “new-style Japanese management,” emphasizing long-term employment but not seniority. When manager-centric companies adopt the “new Japanese-style management” and make appropriate investments based on a long-term vision that develops a growth strategy cultivating the two frontiers, the Japanese economy will make a true comeback.

To that end, the urgent task is to overcome the “investment restraint mechanism” that has led to a dysfunctional Japanese-style management system. To restore the vitality of Japanese companies, to recreate an environment in Japan that is conducive to a series of “disruptive innovations,” and to realize breakthrough innovation that will enable Japan to gain “first mover advantage,” it is essential to establish a “new Japanese-style management” and overcome the “investment restraint mechanism.” Kazuo Inamori, Toshifumi Suzuki, Tadashi Yanai, and Masayoshi Son, were exceptionally innovative individuals who avoided the “investment restraint mechanism” trap even in the post-bubble years since the 1990s, and who continued to implement sound growth strategies. When entrepreneurs like them cease to be the “exceptional” cases, the revival of innovation in Japan will have been accomplished.