Economic Survey of Japan 2006: Upgrading Japan’s innovation system to sustain economic growth


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The following OECD assessment and recommendations summarise Chapter 5 of the Economic Survey of Japan 2006 published on 20 July 2006.


Boosting the return on investment in innovation requires upgrading the education system…

Improving the overall quality of the education system is essential to accelerate productivity growth through the generation and diffusion of innovation. In recent years, the performance of Japanese students on international standardised tests has declined despite increasing expenditures on private institutes for after-school tutoring. Giving more autonomy to local governments and individual schools in hiring teachers, setting wages and determining the curriculum could enhance competition and help reverse declining levels of performance. Reforming the entrance examination systems for secondary schools and universities would also encourage more diversity in the curriculum. Improving quality at the tertiary education level by strengthening competition is also essential. This could be accomplished by allowing more flexibility in the management of universities, enhancing transparency in evaluating performance and further reducing regulations, including those that prevent foreign universities from entering Japan, while ensuring high quality education.   

…strengthening competition, particularly in the service sector…

One aspect of improving the return on investment in innovation is to promote the use of existing technology, particularly in the service sector, where average labour productivity fell from 88% of the US average in 1993 to 84% in 2003. One key to encouraging the diffusion of technology is regulatory reform to strengthen competition, particularly in network industries. In order to ensure pro-active ex ante regulation, a necessary condition for introducing competition in markets dominated by strong incumbents, the establishment of sectoral regulators independent of the government should be considered if the current approach through the government ministries does not work sufficiently well. The Special Zones for Structural Reform introduced in 2003 also have the potential to be effective in removing unnecessary regulations, which requires focusing on nation-wide reform rather than simply on regional development. This focus could be re-enforced by strengthening organisational links between the offices for special zones and regulatory reform. In addition, reforms allowed in the zones should be generalised nation-wide in a limited time period, avoiding unduly long periods of evaluation.

Productivity in the Japanese services sector is relatively low compared to the United States
US = 100 using PPP exchange rates

Source: OECD STAN Database and OECD Outlook 78 Database.

…increasing links between government, business and academic research through greater labour mobility…

In addition to education and regulatory reform, it is important to upgrade innovation-specific policies. One priority should be to strengthen links between research institutes in government, academia and business sectors. This requires greater mobility of researchers, given that the average number of job changes by researchers during their career is less than one in Japan. Increasing the portability of pensions and reforming the system of retirement allowances at public research institutes would reduce disincentives that discourage job changes. Moreover, expanding the use of open competition in hiring, performance-based pay, fair and transparent evaluation systems and fixed-term contracts, and providing more information on job opportunities, would also encourage mobility.

…and improving national R&D policy

The third Science and Technology Basic Plan, which covers the period FY 2006 10, contains a number of positive changes from the preceding plans. However, there remain a number of areas for improvement as well as concerns about the programmes of the Ministry of Economy, Trade and Industry (METI) to promote new industries:

  • Focus on increasing efficiency in R&D spending rather than on meeting a specific spending level, which risks encouraging wasteful investment. The third Plan states that government R&D investment should be 1% of GDP each year between FY 2006 and FY 2010.
  • Avoid mixing national innovation policies with measures aimed at promoting balanced regional development.
  • Increase further the share of competitive grants in the allocation of public R&D funds to enhance the efficiency of spending. In FY 2005, competitive grants accounted for only 13% of the total. 
  • Maintain flexibility in allocating public R&D funds, thereby limiting the risks of government failure inherent in concentrating R&D in the sectors identified as priority areas. For example, the third Basic Plan identifies four priority areas and four promotion areas. 
  • Attach greater importance to the non-manufacturing sector in the allocation of public R&D funds.
  • Focus support for R&D on new start-ups rather than on existing companies as is now the case.
  • Expand the work of the Council on Science and Technology Policy beyond purely scientific issues to include measures to improve framework conditions for innovation.
  • Strengthen international links. According to data on patents, foreign ownership of domestic inventions in Japan and domestic ownership of foreign inventions are both the lowest in the OECD area.

R&D efficiency in the manufacturing sector has fallen in recent years

Note: R&D efficiency in each fiscal year is calculated as (cumulative operating profit per company over the preceding five years)/(cumulative research expenditure per company used in-house over the period five to nine years prior to the given fiscal year). For example, the R&D efficiency rate in FY 2003 is the cumulative profits between FY 1999 2003 divided by R&D expenditures between FY 1994 98.
Source: Cabinet Office (2005a), Annual Report on the Japanese Economy and Public Finance 2005.

How to obtain this publication                                                                                     

The Policy Brief (pdf format) can be downloaded. It contains the OECD assesment and recommendations but not all of the charts included on the above pages.

The complete edition of the Economic Survey of Japan 2006 is available from:


Additional information                                                                                                  

For further information please contat the Japan Desk at the OECD Economics Department at The OECD Secretariat's report was prepared by Randall Jones, Tadashi Yokoyama and Taesik Yoon under the supervision of Willi Leibfritz.


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Upgrading Japan's innovation system to sustain economic growth


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