Increasing productivity growth through innovation is a key to raising living standards. Although R&D
intensity in Japan is the third highest in the OECD area, the benefits do not appear to have been
commensurate with the level of investment. The innovation system, which developed during the catchingup
process, is largely input-driven and focused on incremental innovation based on closed and stable
corporate and employment systems. However, this approach is less appropriate in the current global
environment that favours risk-taking and a more open system relying on external linkages. To improve the
innovation system, a broad-based strategy is needed, including a reform of framework conditions in the
product and labour markets to strengthen competition and mobility, enhance international R&D links and
improve the environment for venture business. Education and public research should be upgraded through
stronger competition. The effectiveness of science and technology policy should be increased by
strengthening its link to economic framework policies.
This Working Paper relates to the 2006 OECD Economic Survey of Japan
(www.oecd.org/eco/surveys/japan).
