Industrial Policy, Innovation Policy, and Japanese Competitiveness

Abstract

Japan faces significant challenges in encouraging innovation and entrepreneurship. Attempts to formally model past industrial policy interventions uniformly uncover little, if any, positive impact on productivity, growth, or welfare. The evidence indicates that most resource flows went to large, politically influential “backward” sectors, suggesting that political economy considerations may be central to the apparent ineffectiveness of Japanese industrial policy. Rather than traditional industrial or science and technology policy, financial and labor market reforms appear more promis ing. As a group, Japan’s industrial firms are competitive relative to their foreign counterparts. Japan falls behind in the heavily regu lated service sector. The problems are due less to a lack of industrial policy than to an excess of regulation. Japan may have more to gain through restructuring the lagging service sector than by expending resources in pursuit of marginal gains in the industrial sector.