Having observed trends in Japanese industries for a half century, I have never felt deeper concern about their future than at present. Many of Japan’s leading enterprises that once dominated the global market are now suffering huge losses and lagging in performance behind competitors in South Korea, China and Taiwan.

Some put the blame on the strong yen and the persistence of deflation, but today’s reality is that China has become the world’s largest producer of automobiles, steel, TVs and personal computers, while Japanese firms have been outpaced by South Korean and Taiwanese rivals as suppliers of innovative products such as smartphones, 3D-TVs and their components.

Industrial growth depends to a great extent on the development of new technologies and products. Regrettably, Japanese companies are lagging behind their rivals in such efforts. The root cause of this lies in their declining capabilities for research and development.

A report by the Organization for Economic Cooperation and Development shows the stagnation of Japan’s R&D spending, while China, South Korea and Taiwan are rapidly expanding theirs. Japan’s R&D expenditures rose a mere 4.9 percent from ¥16.3 trillion in 2000 to ¥17.1 trillion in 2010, compared with China’s 7.9-fold growth from 89.6 billion yuan to 706.2 billion yuan, South Korea’s 3.2-fold increase from 13.8 trillion won to 43.9 trillion won and Taiwan’s 41 percent gain from T$281 billion to T$395 billion.

The United States, the world’s largest R&D country, showed a 50 percent increase from $268.1 billion to $401.6 billion.

As for the ratio of R&D spending to GDP, which indicates governments’ emphasis on R&D as a national policy, Japan registered 3.57 percent in 2010, exceeding the 2.9 percent of the U.S. (2009 figure) as well as the 2 percent of the European Union. But South Korea is ahead of Japan with 3.74 percent, thanks to a recent surge in R&D outlays. South Korea also has increased the “basic research” share of its R&D spending to 18.2 percent — almost on par with the U.S. rate of 19.0 percent (2009). Japan’s rate stands at 14.7 percent.

Some Japanese industrialists, who view South Korea’s technology as merely an imitation of Japan’s, consider Japan still ahead in most industrial technologies. But the situation is fast changing.

China’s ratio of R&D spending to GDP is still low at 1.77 percent, but its number of patent applications is rising rapidly. Japan recorded the largest number with 462,000 applications in 2000 followed by the U.S. with 418,000. But the Japanese total has fallen from 530,000 in 2005 to 460,000, whereas applications by China have shown a three-fold increase from 98,000 to 307,000. It appears to be a matter of time before China to passes Japan.

In the natural sciences, the number of research papers published by Japanese researchers fell 10.4 percent from 77,000 in 2005 to 69,000 in 2010, while the figure for China went up 89.1 percent from 65,000 to 121,000. China is stepping up efforts to raise its technology standards based on its pursuit of “scientific development” under its 12th Five-Year Plan.

According to the ratings filed by the International Institute for Management Development in Switzerland, Japan’s international competitive power held the world’s top spot at the outset of the 1990s, but has dropped to 27th place. Complacent Japanese firms began to neglect R&D efforts in the latter half of the 1980s as business performance soared. The burst of the asset bubble in the early 1990s further discouraged R&D. The government neglected to take effective steps to promote R&D as its fiscal health deteriorated.

It is too early to give up hope. Japanese companies and research institutes still have the potential to beef up their R&D capabilities under the following conditions:

First, efforts should be made to promote market-inspired innovation. Japanese business managers and engineers have tended to believe that sales will naturally increase as long as they make good products, but now they must strive to “make products that will sell well.” There is no need to add on excessive product features that consumers do not want.

Second, efforts should be made to expand basic research. The government, in particular, needs to support development in this sector. The frontiers of basic research are wide open in such fields as information-related technologies, new materials, biochemistry, regenerative medicine, energies and environment. Promoting basic research will expand the possibilities of market-inspired innovation.

Third, Japan needs to accelerate research exchanges with the rest of the world. It is necessary for this country to attract innovative enterprises and research institutes as well as highly capable researchers. Such action will inspire new ideas and achievements.

The Liberal Democratic Party, which returned to power this month, is trying to achieve economic growth with a further easing of monetary policy. This effort alone won’t lead to economic recovery.

Only by accelerating structural reforms and rebuilding Japan’s innovative capabilities through the cultivation of human resources, better research environments and increased R&D spending will Japan get back on the growth track.

Shinji Fukukawa, formerly vice minister of the Ministry of International Trade and Industry (now the Ministry of Economy, Trade and Industry) and president of Dentsu Research Institute, is senior adviser for the Global Industrial and Social Progress Research Institute in Tokyo.

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