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Can Japan catch up with the United States in information technology? The mere suggestion sounds preposterous, given the current climate of American triumphalism and Japanese gloom. Yet we should recall that not too long ago the U.S. and Japan were both declaring Japan’s victory in the high-technology supremacy. We know what happened next: The U.S. mounted a comeback — not just a minor reversal of fortune, but a stunning resurgence that ushered in the IT era. Could Japan possibly turn the tables once again?

The Japanese government appears to believe that it could — at least if we are to believe the IT Strategy Council’s December 2000 report. The council boldly aimed to achieve global leadership in the IT sector by 2005. Yes, that’s global leadership, as in knocking the U.S. out of first place. The council’s scheme sounds especially outmoded because it puts the government at the helm. The government would provide the leadership, make the key investments, and coordinate private-sector activity. It sounds almost like Japanese industrial policy all over again. But we know that a government can’t launch an IT revolution. The U.S. leads the world because the government stepped aside and left entrepreneurs to rule in the free market.

Well, not exactly. Researchers at the Berkeley Roundtable on the International Economy have demonstrated how the U.S. government laid the foundation for America’s IT boom. The government established the research base that led to the commercial Internet — but that was just the beginning. Very early on the government provided a launch market for the electronics sector through defense spending, and funded basic research.

Moreover, the government played a subtle yet critical role in the shift toward the “Wintel” technological paradigm — named after Microsoft Windows and Intel — even though no one realized it at the time. U.S. antitrust policy prevented large vertically integrated firms like IBM and AT&T from dominating the electronics sector, allowing smaller specialist firms to flourish.

This began a process of breaking up the electronics value chain; that is, large assembly firms lost some of their control over technology and manufacturing, ceding power to software producers like Microsoft and components suppliers like Intel. Meanwhile, the government’s deregulation of telecommunications and finance created a new tier of large and sophisticated users that propelled the Internet explosion.

The shift toward the Wintel paradigm played to America’s advantage. The core technology shifted toward areas of U.S. strength, from memory chips to microprocessors and from hardware to software. And the U.S. benefited from being the locus of innovation because it was able to set new global technical standards and U.S. firms interacted with each other in local networks of innovation such as Silicon Valley.

Meanwhile, Japan confronted the opposite situation: The technological paradigm shifted away from its areas of strength, and the institutions that had served it so well in the past now became liabilities. Japan’s low labor mobility, lack of entrepreneurship and lack of venture-capital financing impeded its adjustment to a new era in which innovation and applications are more important than manufacturing systems.

The lesson for Japan is not that the government should abandon its IT strategy or that the private sector should simply emulate American practice. Rather the Japanese government and the private sector must regroup to leverage their strengths and to jettison their weaknesses.

Japan begins with very different endowments from the U.S. It has a stronger central government capable of channeling investment and closer ties between government and industry. This implies that Japan has considerable advantages in its ability to build up the IT infrastructure, coordinate R&D, and harmonize technical standards.

At the same time, however, the Japanese electronics sector remains controlled by vertically integrated manufacturers, and lacks powerful firms elsewhere along the value chain. The telecommunications sector remains dominated by a former monopoly, NTT, and the financial sector has yet to emerge from a decade-long crisis. And the Japanese education system and the general public have been slow to embrace the IT revolution. This suggests that Japan has considerable weaknesses in terms of overall demand, applications and user-driven innovation.

To its credit, the Japanese government has transcended old-style industrial policy. The IT Strategy Council’s plan focuses primarily on building up the telecommunications infrastructure, aiming to connect 30 million households via digital subscriber lines or other high-speed links and 10 million via ultra high-speed fiber optic cables by 2005. The government has already achieved substantial progress on this front, as deregulation has spurred aggressive competition and driven a sharp drop in prices for DSL lines.

But the government’s scheme also seeks to expand electronic commerce by 10-fold from 2000 to 2003, and to extend Internet usage to 60 percent of the population by 2005. To achieve this, it recommended further liberalization of telecommunications markets, improvements in the legal apparatus supporting electronic commerce, promotion of electronic government and measures to expand IT literacy.

So if Japan cannot replicate the U.S. route to IT success, then it will have to invent its own solution. In this sense, NTT’s mobile subsidiary, DoCoMo, presents a fascinating case study. NTT DoCoMo has had spectacular success with its mobile Internet i-mode service, boasting 32 million subscribers, and leading the world into third-generation wireless in October 2001. DoCoMo’s strategy brazenly defies the Wintel logic. It has prospered in a relatively insulated market with an assured position, and DoCoMo itself — rather than the users — has driven innovation. The government has supported DoCoMo by facilitating the coordination of technical standards, sponsoring research and development, subsidizing infrastructure investment and allocating spectrum to DoCoMo for free. Ironically, the government has also helped out DoCoMo by moving so slowly to liberalize the telecommunications sector. Individuals had to pay so much to connect to the Internet through land-based telephone lines that they were better off doing their Web surfing on their mobile phone.

Moreover, DoCoMo’s i-mode system is closed in two senses: It relies on a proprietary technical standard (its own packet-switching technology) and it controls the on-screen menu. DoCoMo has achieved remarkable success with this strategy, but it has already begun to adjust its business model. It has announced plans to publicize the standards for inclusion in the i-mode menu, set up a third-party organization to certify Internet services not listed on the i-mode menu and to collect fees for these services, and eventually to open the i-mode network to Internet service providers.

Meanwhile, DoCoMo has been encountering some growing pains. It has suffered major financial losses as some of its aggressive overseas investments — including a partial stake in AT&T Wireless — have taken a severe blow in the stock markets. And it has failed to date to attract a mass market for its new 3G service. Japan’s fate also depends in part on the future evolution of technology, especially the new communication networks. Will these new networks favor American firms, as seems most likely right now, or will they favor Japanese companies? This in turn hinges on four questions. First, how will land-based broadband integrate with mobile data networks? The U.S. leads in land-based networks, but Japan has the edge in mobile systems. So what happens as the two increasingly merge in the broadband era? Will the new communication architecture be a variant of Japan’s DoCoMo system that rests on short messaging, or a new system that might extend America Online chat room and instant messaging technology into a broadband universe?

Second, who will drive innovation: the users or the providers? In the first phase of the Internet, an open end-to-end architecture allowed leading-edge users to define the architecture, and that favored the U.S. In the future however, providers might drive innovation rather than users, and that could favor Japan.

Third, will the network of the future rely on open or closed standards? The Internet employs an open standard, but DoCoMo has demonstrated the possibility of a successful closed standard.

Fourth, what will the next-generation network look like? Will it be a patchwork of private systems on the model of the current Internet, or a more centralized and unified network bringing fiberoptic cable to the home? Once again, the former would favor the U.S., while the latter could favor Japan. Japan will have a tough time winning the IT race, but it will probably narrow the gap within the next decade. And that would be good news for Japan’s economy more broadly, because Japan has yet to fully reap the benefits of the IT revolution.

Japan’s lag in the IT sector did not cause its economic crisis. The government must take the blame there, with some costly errors in macroeconomic policy combined with a breakdown in financial regulation. But the economic crisis has taken its toll on the IT sector, dampening demand and constraining investment. And that helped the U.S. build a lead in the IT race that will be hard to surmount.

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