10 Japanese Technology Policy and Innovation Systems in Historical and Contemporary Perspective

Japan’s approach to technology policy and innovation has evolved dramatically over the past century and a half, shaped by shifting domestic priorities and global economic forces. From the Meiji era’s rapid industrialization and technology adoption to the post-World War II “economic miracle” guided by state-led industrial policy, Japan built a reputation as a technological powerhouse. This chapter traces that historical evolution – highlighting key government institutions such as the Ministry of International Trade and Industry (MITI, later reorganized as METI), national R&D programs, and technology transfer strategies – and then examines Japan’s present-day innovation system. The contemporary landscape is characterized by sophisticated public-private partnerships, targeted sectoral strategies in areas like semiconductors, robotics, and green technology, and ongoing institutional reforms to meet new challenges. Throughout, we integrate scholarly analyses and comparative insights, contrasting Japan’s innovation system with those of South Korea, Germany, and the United States to illuminate common patterns and distinctive approaches. The goal is to provide MBA-level readers with a comprehensive understanding of how Japan’s industrial strategy and innovation system developed historically and how it functions today, in a scholarly yet accessible manner.

10.1 Historical Evolution of Japanese Technology Policy

Meiji Restoration and Early Industrialization (1868–1912)

Japan’s concerted drive toward technological modernization began with the Meiji Restoration in 1868, as the new leadership recognized technology as vital for national strength. Under the Meiji government, regional domains and the central state launched programs to import and assimilate foreign know-how, focusing on industries critical to military and economic power. The government actively invested in and owned modern enterprises in strategic sectors (such as shipbuilding, armaments, mining, and textiles) during their start-up phase. Dozens of foreign experts (oyatoi gaikokujin) were hired to train Japanese workers and introduce Western industrial techniques, but they were typically dismissed once domestic engineers absorbed the necessary expertise. By the early 1880s, the state began privatizing these enterprises, selling them to burgeoning Japanese entrepreneurs. Many of the sold enterprises grew into the zaibatsu conglomerates (e.g. Mitsui, Mitsubishi), which would later dominate Japan’s industrial landscape. The Meiji government also established engineering faculties at imperial universities and technical institutes to cultivate a homegrown cadre of engineers and scientists, laying the human capital foundation for innovation.

This period was marked by an extraordinary absorptive capacity – Japan’s ability to learn from advanced nations – and a national consensus on the imperative of catching up with the West. Extensive technology transfer strategies were employed: licensing of foreign technologies, joint ventures with Western firms, and study abroad programs for students and officials. For example, Japanese firms formed partnerships with multinationals like Western Electric and General Electric in the early 20th century, gaining access to new techniques. By the end of the Meiji era (1912), Japan had quickly developed key industries and infrastructure, emerging as the leading industrial nation in Asia. This early state-directed model set the pattern: leveraging foreign technology through deliberate policy while investing in domestic capability – a strategy that would be echoed in later eras of Japan’s development.

Wartime Mobilization and Postwar Foundations (1930s–1950s)

In the 1930s and during World War II, Japan’s government role in the economy intensified, foreshadowing postwar policies. The state expanded its planning, cartelization, and control measures to mobilize resources for war. A bureaucratic structure for industrial planning was established in the 1930s under the Ministry of Commerce and Industry (MCI), the direct predecessor of the postwar MITI. By cutting off foreign firms and capital in the late 1930s, Japan not only protected domestic industries but also gained experience in collaborative technology development programs among government, military, and private firms. The war effort forced Japan to accelerate investments in science and technology (for instance, in aircraft and materials) in an environment of isolation, which stimulated domestic innovation but also led to technological gaps compared to the Allies. These wartime industrial and R&D mobilization experiences were a “mixed but mainly positive legacy” for post-1945 innovation. Japan emerged from WWII devastated but with an institutional memory of state-led coordination of industry and technology – a capability that would soon be repurposed for economic reconstruction.

After the war, during the U.S. Occupation (1945–1952), Japan initially faced strict controls and a push towards a free-market orientation. Under the economic advice of U.S. envoy Joseph Dodge in 1949, Japan adopted fiscal austerity and stabilized the yen, while abolishing wartime controls on prices and production to transition to a market economy. However, Japanese policymakers quickly saw the need to promote new industries to drive growth, especially as low-wage countries could undercut some of Japan’s traditional industries. Direct controlled allocation was no longer viable under the new liberalized regime, so the government devised new tools of industrial policy compatible with a market system. In 1949, the powerful Ministry of International Trade and Industry (MITI) was established (absorbing the old MCI) to coordinate industrial development. MITI worked closely with the Economic Planning Agency and other ministries to guide the economy. New public finance institutions like the Japan Development Bank (1951) and the Export-Import Bank (1950) were created to provide subsidized credit to priority industries. Through the 1950s, Japan’s technology policy largely centered on importing foreign technology while protecting infant industries. MITI tightly controlled foreign exchange and foreign investment: Japanese firms were encouraged (and sometimes required) to license advanced technologies from abroad rather than allow foreign companies to set up local production. This approach ensured technology transfer on Japan’s terms – for example, Japanese transistor producers like Sony licensed transistor technology from Western Electric in the 1950s after navigating MITI’s approval. Such policies allowed Japan to access cutting-edge innovations while nurturing domestic firms behind tariff and quota barriers.

High-Growth Era and MITI-Led Industrial Policy (1955–1980s)

From the mid-1950s through the 1970s, Japan experienced rapid economic growth (averaging 8–10% GDP growth annually in the 1960s) often attributed to the close collaboration between an activist state and competitive private firms – the archetype of the “developmental state.” MITI was at the center of this system, orchestrating what Chalmers Johnson famously called “the Japanese miracle” of industrial policy (Johnson, 1982). MITI’s mandate was broad: it identified strategic industries, allocated foreign currency for importing technology, set quotas, coordinated cartels and industry consolidations, and established public research programs. In the 1950s, policy focused on building heavy industries and infrastructure (steel, shipbuilding, electric power) and strengthening the manufacturing base. By the 1960s and 70s, as Japan caught up in those sectors, MITI increasingly shifted attention to advanced technologies such as electronics, automobiles, petrochemicals, and eventually computers and semiconductors.

A hallmark of this era was the launch of national R&D programs and research consortia to foster indigenous innovation in high-tech fields. Rather than relying indefinitely on imported know-how, Japanese policymakers recognized by the late 1970s that original innovation had to be the next phase. In 1979, MITI’s strategic vision document “Vision for Industrial Policy in the 1980s” proclaimed that Japan must evolve from “reaping technologies developed in the West” to **“sowing and cultivating” its own technologies as a “technology-intensive nation”. This turning point was reflected in initiatives like the Very Large Scale Integration (VLSI) Project (1976–1979) – a government-funded R&D consortium bringing together five major electronics companies to develop cutting-edge semiconductor technology. The VLSI project, guided by MITI’s Electrotechnical Laboratory, successfully advanced Japan’s microchip fabrication capabilities (e.g. process technologies for memory chips). The payoff was evident by the mid-1980s: Japanese firms captured a large share of the global semiconductor market, outcompeting U.S. firms in memory chips. Similar consortia and national projects followed, such as the Fifth Generation Computer Project (launched 1982) targeting AI and computer architecture, and the Biotechnology programs in the 1980s. These programs often involved cost-sharing between government and industry, with results shared across participating firms – an approach that reduced duplication and spread risk.

Another important strategy was deliberate technology transfer and adaptation: Japanese firms would often import foreign patents and designs under license and then incrementally improve on them – a process of “learn and improve.” Throughout the 1960s and 70s, MITI facilitated hundreds of technology licensing agreements. It also controlled access of foreign companies to the Japanese market: for instance, foreign direct investment (FDI) was tightly restricted and often only allowed via joint ventures, ensuring domestic partners could learn from foreign entrants. This asymmetric market access – easy access for Japanese firms abroad but restricted access for foreign firms in Japan – helped domestic industries climb the quality ladder while shielding them until they were internationally competitive. Though controversial internationally, these policies were effective in the catch-up phase and were emulated by other East Asian economies like South Korea a decade later.

By the 1980s, Japan had become a world leader in numerous high-tech and industrial sectors – automobiles, consumer electronics, semiconductors, machine tools, and more – prompting scholars to speak of “techno-nationalism.” The country consistently spent around 2–3% of GDP on R&D during this period, one of the highest rates in the world, reflecting strong private-sector R&D investments supported by public policy. The fruits of this innovation system were seen in metrics like patent filings and high-technology exports. However, it’s important to note that MITI’s guidance was not the sole determinant of success; Japanese corporate culture (long-term investment horizons, incremental innovation on factory floors, quality management) and a well-educated workforce were equally critical. There is debate in the literature about how much influence MITI truly had versus market forces. While Johnson (1982) credited MITI heavily, others like Okimoto (1989) and Samuels (1987) argued that Japanese industrial policy worked best when it aligned with private sector initiatives and that firms often succeeded despite some failed MITI interventions. Overall, the high-growth era established the template of an innovation system with the government as facilitator and coordinator, and industries as dynamic implementers.

Transition and Reform (1990s–2000s)

The early 1990s brought a period of reckoning for Japan’s technology policy and innovation system. The collapse of the late-1980s asset bubble plunged Japan into economic stagnation, exposing structural weaknesses. Productivity growth slowed, and Japan faced rising competition from newly industrialized economies. In response, Japanese policymakers and business leaders began to call for a transition from the catch-up model to a more original innovation model, echoing the earlier MITI vision. A key recognition was that various institutional arrangements that powered postwar growth were now inhibiting innovation. In 1993, a MITI subcommittee’s Interim Proposal explicitly argued that Japan’s corporate systems, lifetime employment practices, financial system (main-bank centered), and heavy regulation were ill-suited for a new era of innovation-driven growth. The report advocated wide-ranging deregulation and institutional reforms – reducing bureaucratic red tape, encouraging new firm entry, and reforming corporate governance – to unleash more entrepreneurial activity. This was a marked shift from traditional industrial policy: rather than guiding established industries, the focus turned to enabling new industries and ventures.

Institutionally, MITI itself underwent transformation. In 2001, MITI was reorganized and expanded into the Ministry of Economy, Trade and Industry (METI). This change was more than cosmetic; it symbolized that industrial policy was no longer about picking specific industries (“vertical” bureaus), but about broader economic competitiveness and structural issues (“horizontal” functions). In fact, the reorganization reduced the size and clout of the old industry-specific bureaus. The traditional Japanese approach of tight government-business alignment persisted, but it shifted toward new areas: promoting information technology, start-up financing, and encouraging high-tech SMEs. During the 1990s and 2000s, the government introduced policies to foster regional innovation clusters and venture businesses (e.g. the Technopolis program and later Industrial Cluster projects). Japan also reformed its science and technology governance by creating the Council for Science and Technology Policy (CSTP) in 2001 under the Cabinet Office to set national R&D priorities at the highest level. National universities were reorganized as independent agencies in 2004, giving them more autonomy and incentives to collaborate with industry. A Japanese version of the Bayh-Dole Act was enacted in 1999, allowing researchers funded by public money to patent their inventions and easing technology transfer from academia to industry. These reforms aimed to break the mold of a closed innovation system dominated by large corporations and to create a more dynamic, venture-friendly ecosystem.

Despite reforms, challenges persisted into the 2000s. Japan’s private R&D spending remained high (around 3% of GDP), but innovation efficiency was perceived to decline – productivity grew slowly and few disruptive innovations or new global firms emerged compared to the earlier era. Scholars and analysts noted a “lost decade(s)” effect on innovation: risk-aversion in corporate culture, weak links between universities and companies, and an underdeveloped venture capital sector hindered the translation of R&D into new growth engines. By the 2010s, Japan’s government acknowledged these issues and incrementally adjusted policies to revitalize innovation while addressing pressing societal problems (like demographic aging and energy sustainability). The stage was set for a more mission-oriented and inclusive innovation policy framework in contemporary times.

10.2 Japan’s Present-Day Innovation System

Public-Private Partnerships and Institutional Landscape

In the 2020s, Japan’s innovation system features a dense network of public-private partnerships and formal programs that link government agencies, academia, large corporations, and start-ups. The legacy of MITI/METI’s close ties with industry continues, but with new emphases. METI remains the key ministry for industrial and technology policy, working alongside the Council for Science, Technology and Innovation (CSTI) in the Cabinet Office, which formulates national science and technology basic plans. Public R&D funding bodies play crucial roles: for example, the Japan Science and Technology Agency (JST) and New Energy and Industrial Technology Development Organization (NEDO) fund a wide array of research projects in both academia and industry. These agencies often serve as nodes connecting universities and companies, administering competitive grants that encourage collaboration. Japan’s Science and Technology Basic Plans, updated every five years, set strategic priorities for government R&D spending. The 5th Basic Plan (2016–2020) introduced the concept of Society 5.0, envisioning a future “super-smart” society that integrates cyberspace and physical space to solve social issues. Under this vision, the government has promoted cross-sector integration of digital technologies (AI, IoT, big data) to address challenges like aging and rural depopulation. Such high-level visions guide funding and regulatory support in emerging fields.

One notable feature of the current system is mission-oriented R&D programs that explicitly seek breakthrough innovations. For instance, the Moonshot Research and Development Program (launched in 2020) is a bold initiative managed by JST aiming for “disruptive innovation” by 2050. It sets ambitious goals (the “Moonshot Goals”) such as radically enhancing human capabilities (e.g., AI robots that learn and co-exist with humans, ultra-early disease prediction, even climate control technologies). These Moonshot goals reflect a willingness to pursue high-risk, high-impact research by mobilizing teams across universities, startups, and corporations, with government funding and coordination. Another program, the Cross-ministerial Strategic Innovation Promotion Program (SIP), brings multiple ministries together to fund applied research in areas like automated driving, materials, and cybersecurity (this is overseen by CSTI to break silos among ministries). Through SIP, for example, the government has funded consortia developing automated vehicle technologies, involving car manufacturers, ICT firms, and universities in partnership.

At the same time, Japan has been working to strengthen its innovation ecosystem for start-ups and SMEs as part of institutional reform. Historically, Japanese innovation was dominated by large firms (the keiretsu and multinational corporations) with SMEs playing a minor role in R&D. Indeed, small and medium enterprises account for only about 6% of total R&D expenditure in Japan – a strikingly low share that points to weak SME contribution to innovation. The government recognizes this imbalance and has introduced measures to support startups, such as tax incentives, relaxed regulations, and the creation of start-up incubators. For example, personal guarantee requirements for business loans – which traditionally forced entrepreneurs to put up personal assets and thus discouraged risk-taking – are being eased to improve financing for startups. Efforts are also underway to grow Japan’s venture capital market (still small relative to GDP) and to encourage more mergers and acquisitions so that new ventures can scale up. These changes represent an ongoing cultural shift towards embracing entrepreneurship, something long pointed out as a weakness in Japan’s innovation system.

Structurally, Japan’s innovation system today can be described as a hybrid of top-down strategic guidance and bottom-up entrepreneurial initiatives. The government no longer dictates winners in the way it did in the 1960s; instead, it seeks to “enable more robust innovations from the private sector” by providing supportive policies and infrastructure. There is a conscious move away from the classic industrial policy of narrowly targeting sectors, towards broader frameworks like improving the digital environment, funding basic research, and integrating innovation with social goals (e.g. healthcare, smart cities). Still, in times of national priority, the government is willing to coordinate large-scale initiatives, as seen recently in the semiconductor industry revival.

Sectoral Strategies in Focus

Semiconductors: Maintaining a domestic capability in semiconductors has re-emerged as a strategic priority for Japan in the face of global chip shortages and techno-security concerns. After having dominated the semiconductor memory market in the 1980s, Japan’s share declined in the 1990s and 2000s as South Korea, Taiwan, and the U.S. took the lead in various chip segments. Acknowledging this, METI in recent years spearheaded a Semiconductor Revitalization Strategy (2021), which combines substantial public funding with partnerships to bring cutting-edge chip manufacturing back to Japan. A flagship effort is the launch of Rapidus Corporation in 2022 – a new consortium of major Japanese companies (Toyota, Sony, NTT, etc.) backed by METI – to develop next-generation 2-nanometer chip fabrication domestically. The government has committed billions of dollars (JPY 330 billion or more) in subsidies and R&D support to Rapidus and related projects. In collaboration with IBM for technology and with support from research institutions, Rapidus aims to start mass production of advanced semiconductors by the late 2020s. Additionally, Japan has attracted foreign investment such as TSMC (Taiwan Semiconductor Manufacturing Co.) building a fab in Kumamoto with government incentives, to ensure access to advanced logic chip production. This public-private approach – essentially a modern incarnation of consortium-led innovation – echoes the earlier VLSI project, but now with international collaboration. The rationale is not only economic but also to secure supply chains (a lesson from recent geopolitical tensions). Japan’s strategy also includes joining global research alliances (for example, Rapidus participating in the EU’s IMEC research program), emphasizing that leadership in semiconductors will require international networks in addition to domestic effort. Early signs show progress: Japan installed its first state-of-the-art extreme ultraviolet (EUV) lithography machine in 2024 to enable advanced chip fabrication, marking a concrete step toward regaining technological edge.

Robotics and AI: Japan has long been a world leader in robotics, and this continues to be a cornerstone of its innovation policy, especially as the country faces severe demographic aging and labor shortages. The government released a New Robot Strategy in 2015 (for 2016–2020) aimed at boosting robot utilization in sectors with low productivity such as agriculture, infrastructure maintenance, and nursing care. By 2020, Japan was manufacturing 47% of the world’s industrial robots, underscoring its dominance in this field. Building on that, in 2019 METI launched the Robotics for Social Transformation Promotion Plan, which directs robotics R&D toward solving social issues and achieving a sustainable society. For example, given the shortage of caregivers for the elderly, METI has funded projects to develop caregiver robots and AI-driven nursing support, aiming to have smart robots assist or augment human workers in elder care. This not only addresses a social need but also creates a market for advanced service robots. The robotics strategy is a prime example of a sectoral public-private partnership: the government sets goals and provides funding and policy support (such as safety standards, pilot programs in hospitals or farms), while companies like FANUC, SoftBank Robotics, and multiple startups develop and deploy new robot technologies. Moreover, Japan’s prowess in AI is often pursued in tandem with robotics – for instance, developing AI algorithms that allow robots to learn and adapt (one of the Moonshot goals is explicitly about autonomous AI robots by 2050). Compared to the U.S., Japan’s AI strategy is less about consumer internet applications and more about integrating AI into manufacturing and physical systems, aligning with its strengths in hardware. The country also collaborates internationally on robotics and AI standards, seeking to shape global norms in areas like robot safety, interoperability, and ethics.

Green Technology and Energy: As a resource-scarce nation committed to the Paris Agreement, Japan has made green innovation a strategic priority. In 2020, the government set a goal of achieving carbon neutrality by 2050, and soon after released the Green Growth Strategy Towards 2050. This strategy identifies 14 promising technology areas for decarbonization and growth – including offshore wind, hydrogen and fuel ammonia, next-generation batteries, EVs, carbon recycling, and more. Each area has an action plan combining industrial policy tools (such as subsidies, regulatory reforms, and standards) with energy policy measures (like grid upgrades or carbon pricing). For example, Japan is heavily promoting hydrogen energy: subsidizing R&D in hydrogen production, storage and fuel cells, and setting targets for hydrogen usage in power generation and transportation. Similarly, in offshore wind, the government has created an auction and incentive system to develop large-scale wind farms, aiming not only to increase renewable energy but also to nurture a domestic supply chain for wind turbine technology. Public research institutes and NEDO fund cutting-edge projects in areas like next-gen solar cells, carbon capture, and sustainable materials. Notably, the strategy emphasizes public-private cooperation: companies are encouraged to invest in these green tech domains with the assurance of policy support, while government funding helps de-risk the early stages of innovation. Achieving carbon neutrality also ties into innovation in nuclear technology (Japan is exploring new reactor designs and even nuclear fusion research) and in energy efficiency solutions like smart grids. The scale of the challenge is immense – renewables still account for only about 22% of Japan’s electricity as of mid-2020s – hence innovation is seen as crucial to hit the 2050 target. The government has introduced a carbon pricing framework and is planning an emissions trading system, which are meant to incentivize private sector innovation in low-carbon solutions by putting a clearer economic value on decarbonization. Green tech innovation in Japan thus illustrates how modern industrial policy is intertwined with social and environmental objectives.

Other Sectors: Beyond these headline areas, Japan continues to pursue sectoral innovation strategies in fields like biotechnology and pharmaceuticals (especially evident during global health crises, where Japan has aimed to strengthen vaccine and drug development capacity), advanced materials (leveraging strong materials science research in universities and companies), and digital industries. Under the banner of Society 5.0, digital transformation of government and industry has accelerated – for instance, initiatives in FinTech, GovTech, and smart city pilots – though Japan recognizes it lags in some digital economy areas relative to the U.S. and China. Furthermore, space and aerospace are emerging focuses, with Japan’s space agency (JAXA) partnering with private startups on satellite constellations and lunar exploration, indicating an expanding innovation frontier.

Figure 1: R&D Intensity in Selected Countries (2022). Japan continues to invest heavily in research and development – about 3.4% of its GDP as of 2022 – a rate that is among the highest in the world, surpassed only by a few innovation-driven economies. For comparison, South Korea invests over 5% of GDP in R&D, the United States about 3.6%, and Germany about 3.1%. These figures reflect Japan’s enduring commitment to innovation, even as other nations also ramp up R&D spending. Notably, Japan’s high R&D intensity is driven predominantly by private sector spending, which accounts for roughly 78% of the nation’s R&D performance. This is a higher business share than in the U.S. or Europe, underscoring that large Japanese firms remain the principal engines of R&D. The government’s role, therefore, is often to catalyze and complement corporate R&D – through grants, tax incentives, and facilitating collaboration – rather than to outspend the private sector. While Japan’s R&D/GDP ratio signals a strong national innovation effort, the effectiveness of this spending is a subject of scrutiny, as discussed later in this chapter.

Institutional Reforms and Current Challenges

Despite the extensive efforts to bolster Japan’s innovation system, several structural challenges and ongoing reforms characterize the present landscape. A foremost challenge is enhancing innovation diffusion and productivity, particularly among smaller firms and across the services sector. The OECD observes that while Japan’s public support for R&D is high, the diffusion of innovation to the broader economy needs improvement. Many Japanese SMEs lag in adopting advanced technologies and practices, contributing to a wide productivity gap between large exporters and the rest of the economy. To tackle this, policies are focusing on “digital transformation” of SMEs, better linkage between startups and established companies, and promoting open innovation platforms. The concept of “Society 5.0” itself is partly about encouraging traditional industries (from agriculture to retail) to innovate by integrating digital tools, thereby raising overall productivity and creating new markets.

Another area of reform is the financing and support of high-risk ventures. As mentioned, Japan historically underperforms in entrepreneurial activity – often attributed to cultural aversion to failure and structural hurdles. The government’s recent initiatives to remove the requirement of personal asset guarantees for startup loans, and to establish public-private venture funds, aim to lower the entry barrier for entrepreneurs. In addition, Japan has been internationalizing its innovation environment: relaxing immigration rules for highly skilled tech talent, encouraging English-language programs at universities and incubators, and seeking to attract R&D centers of foreign companies. These steps are meant to inject diversity and global connectivity into Japan’s innovation ecosystem, which has sometimes been criticized as too insular.

The academic sector’s role in innovation is also evolving. Japanese universities, while strong in scientific research output, have not traditionally been as engaged in commercialization as their American counterparts. Reforms since the 2000s granted universities more autonomy to collaborate with industry and profit from patents. We now see a rise in university spin-off companies (though still fewer than in the U.S.), and large companies investing in university labs or setting up joint research centers on campus. The challenge remains to better align academic research with industrial needs without stifling basic science. To this end, competitive funding schemes (like JST’s CREST program for team-based research in select fields) encourage projects that bridge basic and applied research. There is also emphasis on human capital development for innovation: promoting STEM education, interdisciplinary programs (e.g., combining engineering and business training), and programs to send young researchers abroad for experience. These human capital investments are crucial as Japan’s population ages and shrinks; nurturing the next generation of innovators is a policy priority.

Finally, a candid look at Japan’s innovation system must address the outcomes and ongoing issues. While Japan remains a global leader in established manufacturing industries and retains world-class engineering capabilities, it has seen fewer “game-changing” new companies or platforms in the past two decades. For instance, Japan did not produce the analogues of Google, Apple, or Amazon in the digital revolution, and its biotechnology sector has been eclipsed by the U.S. in drug discovery. Japanese firms have lost market share in some electronics segments (e.g., mobile phones) and were late to the fray in some new sectors like software and Internet services. This has raised the question: is Japan getting sufficient return on its large R&D investments? Analysts point out issues such as rigid corporate management, insufficient diversity in R&D teams, and slow decision-making as factors that can hamstring innovation in large firms. In response, some large companies are adopting more agile R&D management practices and open innovation approaches (for example, Toyota’s investments in artificial intelligence startups globally, or Panasonic’s open labs). The government, on its part, continues to fine-tune policy – for example, introducing refundable R&D tax credits to benefit unprofitable startups (addressing a prior issue where only established firms could fully utilize R&D tax incentives). Japan’s self-reflection on these issues is ongoing; the country’s capability for incremental innovation is unquestioned, but it aspires to enable more radical innovation and new business creation. The coming years will show whether the reforms and new programs can indeed rejuvenate Japan’s innovation dynamism.

10.3 Comparative Insights: Japan, South Korea, Germany, and the United States

Japan’s technology policy and innovation system can be better understood in a global context by comparing it with other major innovation economies. Each of these countries – South Korea, Germany, and the United States – has distinct institutional setups and historical trajectories, yet they share some common challenges with Japan as well.

South Korea: South Korea’s innovation path in many ways mirrors Japan’s postwar developmental state model, with a time lag of a couple decades. Like Japan, Korea relied on state-led industrialization, nurturing giant conglomerates (chaebols, analogous to Japan’s keiretsu) that could absorb foreign technology and compete globally. During the 1970s and 80s, Korea’s government picked winners (steel, shipbuilding, electronics, etc.) much as MITI did, and directed credit and R&D support to those sectors. As a result, Korea also achieved a dramatic economic rise and today is among the top R&D spenders globally (over 5% of GDP as of 2022, the highest after Israel). Both Japan and Korea are characterized by a high share of R&D conducted by large enterprises (Samsung, LG, Hyundai in Korea; Toyota, Hitachi, etc. in Japan). In recent years, both countries have confronted the need to transition from catch-up innovation to true innovation leadership. Korea, like Japan, is trying to foster a startup culture and reduce over-reliance on a few corporate champions. One difference is that Korea’s government has been somewhat more aggressive in promoting entrepreneurship in the 2010s, with initiatives like a $3+ billion Startup Fund of Funds and regulatory sandboxes for new technologies. Culturally, Korea’s younger generation may be increasingly open to startups, perhaps more so than Japan’s, but both societies value stability which can temper risk-taking. Another commonality is demographic challenge: both face aging populations, which puts pressure on productivity and innovation to sustain growth. In terms of policy shifts, Korea and Japan have both moved to a more “supportive” innovation policy approach and away from heavy-handed intervention by the 21st century. However, Korea’s government still directly invests in certain strategic technologies (like 5G, AI, batteries) in a mission-oriented way, and its chaebols are deeply involved in national strategy (e.g., Samsung’s pivotal role in semiconductor R&D). In comparison, Japan’s approach may involve a broader set of actors (including more international collaboration), reflecting its more mature economy and the lessons learned from past successes and failures of industrial policy.

Germany: Germany provides a useful contrast as an innovation leader in a continental European context. Germany and Japan share some similarities: both have strong manufacturing bases known for engineering excellence, both spend about 3% of GDP on R&D, and both have many world-class firms in automotive, machinery, and chemicals. However, the institutional architecture of their innovation systems differs. Germany has a decentralized, network-oriented innovation system often dubbed the “Mittelstand model” (Mittelstand refers to small and medium-sized enterprises, which in Germany are often highly innovative and export-oriented). Germany’s innovation is supported by a robust infrastructure of public research institutes, notably the Fraunhofer Institutes for applied research and the Max Planck Institutes for basic science. Fraunhofer institutes, in particular, bridge academia and industry by conducting mission-driven research funded roughly half by industry contracts and half by public funds. This model diffuses technology to a wide base of firms and has been credited with helping German SMEs innovate and remain globally competitive. In contrast, Japan historically did not develop an analogous network of independent applied research institutes to serve SMEs; instead, large companies built in-house R&D and the government’s role was more to coordinate or subsidize consortia. Today, Japan is trying to emulate some of the networking approaches – for example, creating cluster programs where universities, tech SMEs, and large firms collaborate in regions (like the Tsukuba science city or Kansai life-science cluster). Another difference is in vocational training and education: Germany’s dual education system and skilled trades have supported incremental innovation on factory floors, whereas Japan’s lifetime employment system fostered firm-specific skills; each has strengths, but Germany’s system arguably allows more mobility of skilled technicians across firms, aiding knowledge diffusion. Policy-wise, Germany has been somewhat less direct in industrial targeting in recent decades (apart from the Energiewende in energy or Industry 4.0 in manufacturing digitalization). Germany’s government tends to use broad innovation incentives (R&D tax incentives introduced more recently, grants through competitive programs, etc.) and rely on industry associations and consensus-building in setting technology standards. In the late 2010s, Germany also increased focus on digital innovation (recognizing it lagged the U.S. in digital platforms) and on green tech (with aggressive climate targets). Both Germany and Japan, as high-wage advanced economies, face the challenge of staying at the innovation frontier to maintain competitiveness. It is telling that both have strong automotive sectors now undergoing transformation (to electric and autonomous vehicles) – a sector where policy is critical. Japan’s approach (through METI’s guidance and support for auto industry R&D in batteries, hydrogen, etc.) and Germany’s approach (via EU regulations, public charging infrastructure investment, and automakers’ own initiatives) are different in tactics but converge in recognizing the state’s role in enabling the transition.

United States: The U.S. innovation system is often characterized as more market-driven and decentralized than Japan’s, with a historically limited role for industrial policy – at least until recently. The U.S. federal government’s primary role in innovation has been through funding basic research (via agencies like NSF, NIH, DoE) and mission-oriented R&D in defense and space (via DARPA, NASA) rather than coordinating specific industries in civilian markets. This led to breakthroughs like the internet, GPS, and biotech drugs largely through public science funding and military procurement, which the private sector later commercialized. In contrast, Japan’s state support was more squarely focused on commercial industries from the outset (steel, autos, etc.). One advantage of the U.S. system has been a very strong university research sector and the venture capital (VC) ecosystem that turns research into high-growth startups – something that Japan has admired and seeks to emulate. Silicon Valley is a product of this dynamic: a mix of top universities, government R&D (e.g., early internet, semiconductor research funding), and an open entrepreneurial culture backed by VC funding. Japan, by comparison, had few startup success stories and only nascent venture funding until the 2010s. Culturally, American business tolerates failure more readily, which encourages experimentation; Japan has been working to cultivate a similar tolerance for risk in entrepreneurship. Corporate structure is another difference: U.S. firms can be quick to restructure or spin off new ventures, whereas Japanese firms traditionally kept R&D internal and careers were more static – though this is changing.

Interestingly, the divergence is not absolute: the U.S. government has practiced forms of industrial policy, especially in high-tech. In the 1980s, SEMATECH (a government-backed semiconductor consortium) was a response to Japanese competition. And in the 2020s, the U.S. has enacted the CHIPS and Science Act (2022), a major subsidy program for domestic semiconductor manufacturing, as well as the Inflation Reduction Act (2022) which includes large incentives for clean energy industries – both signaling a shift towards the kind of strategic industry support that Japan and others have used. Thus, one could argue that the U.S. is learning from Japan’s and its own past successes to more explicitly link government funding with industrial outcomes in critical sectors. On the flip side, Japan’s innovation system has incorporated some U.S.-style elements: for example, Japan’s Moonshot program is somewhat akin to DARPA’s high-risk, high-reward projects, and the increased use of competitive grants mimics the U.S. approach to funding science.

In terms of performance, the U.S. remains the global leader in many innovation metrics (Nobel prizes, top tech companies, etc.), thanks to its robust ecosystem of talent and capital. Japan, while not at the very leading edge in areas like software or biotech, remains highly advanced in manufacturing and certain technologies (robotics, materials, automotive engineering). Both countries face the need to adapt their innovation systems to new realities: the U.S. grapples with issues of inequality and ensuring broad-based STEM education, while Japan grapples with demographic limits and reinvigorating risk-taking. Ultimately, Japan’s experience underscores to other countries the importance of continual adaptation of innovation policy. As noted in a recent comparative study, even historically top-down systems like Japan and Korea have had to evolve to become more flexible and supportive rather than directive. The U.S. and Germany, traditionally more hands-off in industrial targeting, are also recalibrating the balance between markets and state in the face of technological competition and societal needs.

10.4 Conclusion

Japan’s journey in technology policy and innovation offers a rich case study in how a nation can leap from technological backwardness to the frontier, and then struggle with the mantle of leadership. Historically, Japan’s success was built on astute technology absorption and strong institutional coordination, with the Meiji era establishing the norm of importing and improving foreign innovations, and the postwar MITI era demonstrating how targeted policy can accelerate industrial catch-up. Over time, the tools and focus of policy shifted – from heavy industries to high-tech fields, from import substitution to original R&D, and from picking winners to cultivating an innovation ecosystem. Today, Japan’s innovation system stands at a crossroads: it boasts world-class talents, companies, and a high baseline of R&D investment, yet it also faces internal and external pressures to reinvent itself. The aging society, the rise of digital and green transformations, and intensifying international tech competition all demand that Japan find new ways to generate and harness innovation for economic and social benefit.

The contemporary strategy, as detailed in this chapter, involves a mix of mission-oriented programs (Moonshot, Society 5.0, Green Growth, etc.) and structural reforms (regulatory easing, startup support, university-industry linkages). Japan is, in effect, attempting to marry its traditional strengths in coordinated, long-term planning with a new agility that encourages bottom-up innovation. The comparative perspectives with South Korea, Germany, and the U.S. highlight that there is no perfect model – each country must balance state and market, nurture both large and small firms, and align innovation with national priorities. Japan’s case illustrates the value of a proactive state in building innovation capacity (as seen in its historical rise), but also the importance of flexibility and openness (as current reforms aim for).

For MBA students of industrial strategy and economic development, Japan offers lessons on the dynamic interplay between government policy, corporate strategy, and innovation outcomes. One lesson is the significance of institutions: dedicated agencies like MITI/METI, when used wisely, can steer an economy, but they must evolve with the times or risk stifling the very innovation they seek to promote. Another lesson is the role of national vision – from the Meiji mantra of “rich nation, strong army” to today’s Society 5.0, Japan has often used clear visions to mobilize public and private actors toward common goals. Finally, Japan’s experience emphasizes that innovation systems are deeply rooted in a country’s social context (culture, demographics, education). The efforts to change course in the 1990s–2000s show how difficult, yet necessary, it is to reform ingrained practices to respond to new economic realities.

As Japan moves forward, it does so with a keen awareness of its past: the historical narrative of technology policy is well understood by today’s policymakers, who frequently reference both the successes and failures of the postwar period. In a way, Japan is now engaged in a second great transformation – not one of catching up to foreign powers, but of reimagining its innovation system to remain a vibrant, leading economy in the 21st century. The outcome of this transformation will not only shape Japan’s future prosperity but will also provide valuable insights for other nations seeking to sustain innovation-driven growth in an ever-changing world. The Japanese case, with its rich history and current reinvention, thus remains a fundamental reference point in discussions of innovation systems and industrial strategy.

References

Johnson, C. (1982). MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975. Stanford University Press.

National Research Council. (1997). Maximizing U.S. Interests in Science and Technology Relations with Japan. Washington, DC: National Academies Press.

Okazaki, T. (2017). “Industrial Policy in Japan: 70-Year History since World War II.” RIETI.

OECD. (2024). OECD Economic Surveys: Japan 2024 – Highlights.

Atkinson, R., et al. (2025). “Understanding and Comparing National Innovation Systems: The U.S., Korea, China, Japan, and Taiwan.” ITIF Report.

METI (2020). Green Growth Strategy Towards 2050 Carbon Neutrality.

JST (2020). Moonshot R&D Program Goals.

EU-Japan Centre (2024). “Robotics” – Market & Policy Update.

# Japanese Technology Policy and Innovation Systems in Historical and Contemporary Perspective Japan’s approach to technology policy and innovation has evolved dramatically over the past century and a half, shaped by shifting domestic priorities and global economic forces. From the Meiji era’s rapid industrialization and technology adoption to the post-World War II “economic miracle” guided by state-led industrial policy, Japan built a reputation as a technological powerhouse. This chapter traces that historical evolution – highlighting key government institutions such as the Ministry of International Trade and Industry (MITI, later reorganized as METI), national R\&D programs, and technology transfer strategies – and then examines Japan’s present-day innovation system. The contemporary landscape is characterized by sophisticated public-private partnerships, targeted sectoral strategies in areas like semiconductors, robotics, and green technology, and ongoing institutional reforms to meet new challenges. Throughout, we integrate scholarly analyses and comparative insights, contrasting Japan’s innovation system with those of South Korea, Germany, and the United States to illuminate common patterns and distinctive approaches. The goal is to provide MBA-level readers with a comprehensive understanding of how Japan’s industrial strategy and innovation system developed historically and how it functions today, in a scholarly yet accessible manner. ## Historical Evolution of Japanese Technology Policy ### Meiji Restoration and Early Industrialization (1868–1912) Japan’s concerted drive toward technological modernization began with the Meiji Restoration in 1868, as the new leadership recognized technology as vital for national strength. Under the Meiji government, regional domains and the central state launched programs to **import and assimilate foreign know-how**, focusing on industries critical to military and economic power. The government actively **invested in and owned modern enterprises** in strategic sectors (such as shipbuilding, armaments, mining, and textiles) during their start-up phase. Dozens of **foreign experts (oyatoi gaikokujin)** were hired to train Japanese workers and introduce Western industrial techniques, but they were typically dismissed once domestic engineers absorbed the necessary expertise. By the early 1880s, the state began **privatizing these enterprises**, selling them to burgeoning Japanese entrepreneurs. Many of the sold enterprises grew into the *zaibatsu* conglomerates (e.g. Mitsui, Mitsubishi), which would later dominate Japan’s industrial landscape. The Meiji government also established **engineering faculties at imperial universities** and technical institutes to cultivate a homegrown cadre of engineers and scientists, laying the human capital foundation for innovation. This period was marked by an extraordinary **absorptive capacity** – Japan’s ability to learn from advanced nations – and a national consensus on the imperative of catching up with the West. Extensive *technology transfer strategies* were employed: **licensing of foreign technologies, joint ventures with Western firms, and study abroad programs** for students and officials. For example, Japanese firms formed partnerships with multinationals like Western Electric and General Electric in the early 20th century, gaining access to new techniques. By the end of the Meiji era (1912), Japan had quickly developed key industries and infrastructure, emerging as the leading industrial nation in Asia. This early state-directed model set the pattern: leveraging foreign technology through deliberate policy while investing in domestic capability – a strategy that would be echoed in later eras of Japan’s development. ### Wartime Mobilization and Postwar Foundations (1930s–1950s) In the 1930s and during World War II, Japan’s government role in the economy intensified, foreshadowing postwar policies. The state expanded its **planning, cartelization, and control measures** to mobilize resources for war. A bureaucratic structure for industrial planning was established in the 1930s under the Ministry of Commerce and Industry (MCI), the direct predecessor of the postwar MITI. By cutting off foreign firms and capital in the late 1930s, Japan not only protected domestic industries but also **gained experience in collaborative technology development programs** among government, military, and private firms. The war effort forced Japan to accelerate investments in science and technology (for instance, in aircraft and materials) in an environment of isolation, which stimulated domestic innovation but also led to technological gaps compared to the Allies. These wartime industrial and R\&D mobilization experiences were a **“mixed but mainly positive legacy”** for post-1945 innovation. Japan emerged from WWII devastated but with an institutional memory of state-led coordination of industry and technology – a capability that would soon be repurposed for economic reconstruction. After the war, during the U.S. Occupation (1945–1952), Japan initially faced strict controls and a push towards a free-market orientation. Under the economic advice of U.S. envoy Joseph Dodge in 1949, Japan adopted fiscal austerity and stabilized the yen, while abolishing wartime controls on prices and production to transition to a market economy. However, Japanese policymakers quickly saw the need to **promote new industries** to drive growth, especially as low-wage countries could undercut some of Japan’s traditional industries. Direct controlled allocation was no longer viable under the new liberalized regime, so the government devised **new tools of industrial policy** compatible with a market system. In 1949, the powerful Ministry of International Trade and Industry (MITI) was established (absorbing the old MCI) to coordinate industrial development. MITI worked closely with the Economic Planning Agency and other ministries to guide the economy. New public finance institutions like the **Japan Development Bank (1951)** and the Export-Import Bank (1950) were created to provide subsidized credit to priority industries. Through the 1950s, Japan’s technology policy largely centered on **importing foreign technology while protecting infant industries**. MITI tightly controlled foreign exchange and foreign investment: Japanese firms were encouraged (and sometimes required) to license advanced technologies from abroad rather than allow foreign companies to set up local production. This approach ensured technology transfer on Japan’s terms – for example, Japanese transistor producers like Sony licensed transistor technology from Western Electric in the 1950s after navigating MITI’s approval. Such policies allowed Japan to access cutting-edge innovations while nurturing domestic firms behind tariff and quota barriers. ### High-Growth Era and MITI-Led Industrial Policy (1955–1980s) From the mid-1950s through the 1970s, Japan experienced rapid economic growth (averaging 8–10% GDP growth annually in the 1960s) often attributed to the close collaboration between an activist state and competitive private firms – the archetype of the **“developmental state.”** MITI was at the center of this system, orchestrating what Chalmers Johnson famously called **“the Japanese miracle”** of industrial policy (Johnson, 1982). MITI’s mandate was broad: it identified strategic industries, allocated foreign currency for importing technology, set quotas, coordinated cartels and industry consolidations, and established public research programs. In the 1950s, policy focused on **building heavy industries and infrastructure** (steel, shipbuilding, electric power) and **strengthening the manufacturing base**. By the 1960s and 70s, as Japan caught up in those sectors, MITI increasingly shifted attention to **advanced technologies** such as electronics, automobiles, petrochemicals, and eventually computers and semiconductors. A hallmark of this era was the launch of **national R\&D programs and research consortia** to foster indigenous innovation in high-tech fields. Rather than relying indefinitely on imported know-how, Japanese policymakers recognized by the late 1970s that original innovation had to be the next phase. In 1979, MITI’s strategic vision document *“Vision for Industrial Policy in the 1980s”* proclaimed that Japan must evolve from “reaping technologies developed in the West” to \*\*“sowing and cultivating” its own technologies as a **“technology-intensive nation”**. This turning point was reflected in initiatives like the **Very Large Scale Integration (VLSI) Project (1976–1979)** – a government-funded R\&D consortium bringing together five major electronics companies to develop cutting-edge semiconductor technology. The VLSI project, guided by MITI’s Electrotechnical Laboratory, successfully advanced Japan’s microchip fabrication capabilities (e.g. process technologies for memory chips). The payoff was evident by the mid-1980s: Japanese firms captured a large share of the global semiconductor market, outcompeting U.S. firms in memory chips. Similar **consortia and national projects** followed, such as the **Fifth Generation Computer Project (launched 1982)** targeting AI and computer architecture, and the **Biotechnology programs** in the 1980s. These programs often involved cost-sharing between government and industry, with results shared across participating firms – an approach that reduced duplication and spread risk. Another important strategy was deliberate **technology transfer and adaptation**: Japanese firms would often import foreign patents and designs under license and then incrementally improve on them – a process of “learn and improve.” Throughout the 1960s and 70s, MITI facilitated hundreds of technology licensing agreements. It also controlled access of foreign companies to the Japanese market: for instance, foreign direct investment (FDI) was tightly restricted and often only allowed via joint ventures, ensuring domestic partners could learn from foreign entrants. This **asymmetric market access** – easy access for Japanese firms abroad but restricted access for foreign firms in Japan – helped domestic industries climb the quality ladder while shielding them until they were internationally competitive. Though controversial internationally, these policies were effective in the catch-up phase and were emulated by other East Asian economies like South Korea a decade later. By the 1980s, Japan had become a world leader in numerous high-tech and industrial sectors – automobiles, consumer electronics, semiconductors, machine tools, and more – prompting scholars to speak of *“techno-nationalism.”* The country consistently spent around **2–3% of GDP on R\&D** during this period, one of the highest rates in the world, reflecting strong private-sector R\&D investments supported by public policy. The fruits of this innovation system were seen in metrics like patent filings and high-technology exports. However, it’s important to note that MITI’s guidance was not the sole determinant of success; Japanese corporate culture (long-term investment horizons, incremental innovation on factory floors, quality management) and a well-educated workforce were equally critical. There is debate in the literature about *how much influence* MITI truly had versus market forces. While Johnson (1982) credited MITI heavily, others like Okimoto (1989) and Samuels (1987) argued that Japanese industrial policy worked best when it aligned with private sector initiatives and that firms often succeeded *despite* some failed MITI interventions. Overall, the high-growth era established the template of an innovation system with **the government as facilitator and coordinator**, and industries as dynamic implementers. ### Transition and Reform (1990s–2000s) The early 1990s brought a period of reckoning for Japan’s technology policy and innovation system. The collapse of the late-1980s asset bubble plunged Japan into economic stagnation, exposing structural weaknesses. Productivity growth slowed, and Japan faced rising competition from newly industrialized economies. In response, Japanese policymakers and business leaders began to call for a **transition from the catch-up model to a more original innovation model**, echoing the earlier MITI vision. A key recognition was that various **institutional arrangements that powered postwar growth were now inhibiting innovation**. In 1993, a MITI subcommittee’s *Interim Proposal* explicitly argued that Japan’s corporate systems, lifetime employment practices, financial system (main-bank centered), and heavy regulation were **ill-suited for a new era of innovation-driven growth**. The report advocated wide-ranging **deregulation and institutional reforms** – reducing bureaucratic red tape, encouraging new firm entry, and reforming corporate governance – to unleash more entrepreneurial activity. This was a marked shift from traditional industrial policy: rather than *guiding* established industries, the focus turned to *enabling* new industries and ventures. Institutionally, MITI itself underwent transformation. In 2001, MITI was reorganized and expanded into the **Ministry of Economy, Trade and Industry (METI)**. This change was more than cosmetic; it symbolized that industrial policy was no longer about **picking specific industries (“vertical” bureaus)**, but about broader economic competitiveness and structural issues (“horizontal” functions). In fact, the reorganization reduced the size and clout of the old industry-specific bureaus. The traditional Japanese approach of tight government-business alignment persisted, but it shifted toward new areas: promoting information technology, start-up financing, and encouraging high-tech SMEs. During the 1990s and 2000s, the government introduced policies to foster regional innovation clusters and venture businesses (e.g. the **Technopolis program and later Industrial Cluster projects**). Japan also reformed its **science and technology governance** by creating the **Council for Science and Technology Policy (CSTP) in 2001** under the Cabinet Office to set national R\&D priorities at the highest level. National universities were reorganized as independent agencies in 2004, giving them more autonomy and incentives to collaborate with industry. A Japanese version of the **Bayh-Dole Act** was enacted in 1999, allowing researchers funded by public money to patent their inventions and easing technology transfer from academia to industry. These reforms aimed to break the mold of a closed innovation system dominated by large corporations and to create a more dynamic, venture-friendly ecosystem. Despite reforms, challenges persisted into the 2000s. Japan’s private R\&D spending remained high (around 3% of GDP), but **innovation efficiency was perceived to decline** – productivity grew slowly and few disruptive innovations or new global firms emerged compared to the earlier era. Scholars and analysts noted a *“lost decade(s)”* effect on innovation: risk-aversion in corporate culture, weak links between universities and companies, and an underdeveloped venture capital sector hindered the translation of R\&D into new growth engines. By the 2010s, Japan’s government acknowledged these issues and incrementally adjusted policies to revitalize innovation while addressing pressing societal problems (like demographic aging and energy sustainability). The stage was set for a more mission-oriented and inclusive innovation policy framework in contemporary times. ## Japan’s Present-Day Innovation System ### Public-Private Partnerships and Institutional Landscape In the 2020s, Japan’s innovation system features a **dense network of public-private partnerships** and formal programs that link government agencies, academia, large corporations, and start-ups. The legacy of MITI/METI’s close ties with industry continues, but with new emphases. METI remains the key ministry for industrial and technology policy, working alongside the **Council for Science, Technology and Innovation (CSTI)** in the Cabinet Office, which formulates national science and technology basic plans. **Public R\&D funding bodies** play crucial roles: for example, the Japan Science and Technology Agency (JST) and New Energy and Industrial Technology Development Organization (NEDO) fund a wide array of research projects in both academia and industry. These agencies often serve as nodes connecting universities and companies, administering competitive grants that encourage collaboration. Japan’s **Science and Technology Basic Plans**, updated every five years, set strategic priorities for government R\&D spending. The 5th Basic Plan (2016–2020) introduced the concept of *Society 5.0*, envisioning a future “super-smart” society that integrates cyberspace and physical space to solve social issues. Under this vision, the government has promoted cross-sector integration of digital technologies (AI, IoT, big data) to address challenges like aging and rural depopulation. Such high-level visions guide funding and regulatory support in emerging fields. One notable feature of the current system is **mission-oriented R\&D programs** that explicitly seek breakthrough innovations. For instance, the **Moonshot Research and Development Program** (launched in 2020) is a bold initiative managed by JST aiming for “disruptive innovation” by 2050. It sets ambitious goals (the “Moonshot Goals”) such as radically enhancing human capabilities (e.g., AI robots that learn and co-exist with humans, ultra-early disease prediction, even climate control technologies). These Moonshot goals reflect a willingness to pursue high-risk, high-impact research by mobilizing teams across universities, startups, and corporations, with government funding and coordination. Another program, the **Cross-ministerial Strategic Innovation Promotion Program (SIP)**, brings multiple ministries together to fund applied research in areas like automated driving, materials, and cybersecurity (this is overseen by CSTI to break silos among ministries). Through SIP, for example, the government has funded consortia developing automated vehicle technologies, involving car manufacturers, ICT firms, and universities in partnership. At the same time, Japan has been working to strengthen its **innovation ecosystem for start-ups and SMEs** as part of institutional reform. Historically, Japanese innovation was dominated by large firms (the keiretsu and multinational corporations) with SMEs playing a minor role in R\&D. Indeed, **small and medium enterprises account for only about 6% of total R\&D expenditure in Japan** – a strikingly low share that points to weak SME contribution to innovation. The government recognizes this imbalance and has introduced measures to support startups, such as tax incentives, relaxed regulations, and the creation of start-up incubators. For example, **personal guarantee requirements for business loans** – which traditionally forced entrepreneurs to put up personal assets and thus discouraged risk-taking – are being eased to improve financing for startups. Efforts are also underway to grow Japan’s venture capital market (still small relative to GDP) and to encourage more mergers and acquisitions so that new ventures can scale up. These changes represent an ongoing cultural shift towards embracing entrepreneurship, something long pointed out as a weakness in Japan’s innovation system. Structurally, Japan’s innovation system today can be described as a **hybrid of top-down strategic guidance and bottom-up entrepreneurial initiatives**. The government no longer dictates winners in the way it did in the 1960s; instead, it seeks to *“enable more robust innovations from the private sector”* by providing supportive policies and infrastructure. There is a conscious move away from the classic industrial policy of narrowly targeting sectors, towards broader frameworks like improving the digital environment, funding basic research, and integrating innovation with social goals (e.g. healthcare, smart cities). Still, in times of national priority, the government is willing to coordinate large-scale initiatives, as seen recently in the semiconductor industry revival. ### Sectoral Strategies in Focus **Semiconductors:** Maintaining a domestic capability in semiconductors has re-emerged as a strategic priority for Japan in the face of global chip shortages and techno-security concerns. After having dominated the semiconductor memory market in the 1980s, Japan’s share declined in the 1990s and 2000s as South Korea, Taiwan, and the U.S. took the lead in various chip segments. Acknowledging this, METI in recent years spearheaded a **Semiconductor Revitalization Strategy (2021)**, which combines substantial public funding with partnerships to bring cutting-edge chip manufacturing back to Japan. A flagship effort is the launch of **Rapidus Corporation** in 2022 – a new consortium of major Japanese companies (Toyota, Sony, NTT, etc.) backed by METI – to develop next-generation 2-nanometer chip fabrication domestically. The government has committed billions of dollars (JPY 330 billion or more) in subsidies and R\&D support to Rapidus and related projects. In collaboration with IBM for technology and with support from research institutions, Rapidus aims to start mass production of advanced semiconductors by the late 2020s. Additionally, Japan has attracted foreign investment such as **TSMC (Taiwan Semiconductor Manufacturing Co.) building a fab in Kumamoto** with government incentives, to ensure access to advanced logic chip production. This public-private approach – essentially a modern incarnation of consortium-led innovation – echoes the earlier VLSI project, but now with international collaboration. The rationale is not only economic but also to secure supply chains (a lesson from recent geopolitical tensions). Japan’s strategy also includes joining global research alliances (for example, Rapidus participating in the EU’s IMEC research program), emphasizing that leadership in semiconductors will require international networks in addition to domestic effort. Early signs show progress: Japan installed its first state-of-the-art extreme ultraviolet (EUV) lithography machine in 2024 to enable advanced chip fabrication, marking a concrete step toward regaining technological edge. **Robotics and AI:** Japan has long been a world leader in robotics, and this continues to be a cornerstone of its innovation policy, especially as the country faces severe demographic aging and labor shortages. The government released a **New Robot Strategy in 2015 (for 2016–2020)** aimed at boosting robot utilization in sectors with low productivity such as agriculture, infrastructure maintenance, and nursing care. By 2020, Japan was manufacturing **47% of the world’s industrial robots**, underscoring its dominance in this field. Building on that, in 2019 METI launched the **Robotics for Social Transformation Promotion Plan**, which directs robotics R\&D toward solving social issues and achieving a sustainable society. For example, given the shortage of caregivers for the elderly, METI has funded projects to develop **caregiver robots and AI-driven nursing support**, aiming to have smart robots assist or augment human workers in elder care. This not only addresses a social need but also creates a market for advanced service robots. The robotics strategy is a prime example of a sectoral public-private partnership: the government sets goals and provides funding and policy support (such as safety standards, pilot programs in hospitals or farms), while companies like FANUC, SoftBank Robotics, and multiple startups develop and deploy new robot technologies. Moreover, Japan’s prowess in **AI** is often pursued in tandem with robotics – for instance, developing AI algorithms that allow robots to learn and adapt (one of the Moonshot goals is explicitly about autonomous AI robots by 2050). Compared to the U.S., Japan’s AI strategy is less about consumer internet applications and more about **integrating AI into manufacturing and physical systems**, aligning with its strengths in hardware. The country also collaborates internationally on robotics and AI standards, seeking to shape global norms in areas like robot safety, interoperability, and ethics. **Green Technology and Energy:** As a resource-scarce nation committed to the Paris Agreement, Japan has made green innovation a strategic priority. In 2020, the government set a goal of achieving **carbon neutrality by 2050**, and soon after released the **Green Growth Strategy Towards 2050**. This strategy identifies **14 promising technology areas** for decarbonization and growth – including offshore wind, hydrogen and fuel ammonia, next-generation batteries, EVs, carbon recycling, and more. Each area has an action plan combining *industrial policy tools* (such as subsidies, regulatory reforms, and standards) with *energy policy* measures (like grid upgrades or carbon pricing). For example, Japan is heavily promoting **hydrogen energy**: subsidizing R\&D in hydrogen production, storage and fuel cells, and setting targets for hydrogen usage in power generation and transportation. Similarly, in offshore wind, the government has created an auction and incentive system to develop large-scale wind farms, aiming not only to increase renewable energy but also to nurture a domestic supply chain for wind turbine technology. Public research institutes and NEDO fund cutting-edge projects in areas like next-gen solar cells, carbon capture, and sustainable materials. Notably, the strategy emphasizes **public-private cooperation**: companies are encouraged to invest in these green tech domains with the assurance of policy support, while government funding helps de-risk the early stages of innovation. Achieving carbon neutrality also ties into innovation in nuclear technology (Japan is exploring new reactor designs and even nuclear fusion research) and in energy efficiency solutions like smart grids. The scale of the challenge is immense – renewables still account for only about 22% of Japan’s electricity as of mid-2020s – hence innovation is seen as crucial to hit the 2050 target. The government has introduced a carbon pricing framework and is planning an emissions trading system, which are meant to **incentivize private sector innovation** in low-carbon solutions by putting a clearer economic value on decarbonization. Green tech innovation in Japan thus illustrates how modern industrial policy is intertwined with social and environmental objectives. **Other Sectors:** Beyond these headline areas, Japan continues to pursue sectoral innovation strategies in fields like **biotechnology and pharmaceuticals** (especially evident during global health crises, where Japan has aimed to strengthen vaccine and drug development capacity), **advanced materials** (leveraging strong materials science research in universities and companies), and **digital industries**. Under the banner of Society 5.0, digital transformation of government and industry has accelerated – for instance, initiatives in **FinTech, GovTech, and smart city pilots** – though Japan recognizes it lags in some digital economy areas relative to the U.S. and China. Furthermore, space and aerospace are emerging focuses, with Japan’s space agency (JAXA) partnering with private startups on satellite constellations and lunar exploration, indicating an expanding innovation frontier.  **Figure 1: R\&D Intensity in Selected Countries (2022).** Japan continues to invest heavily in research and development – about **3.4% of its GDP** as of 2022 – a rate that is among the highest in the world, surpassed only by a few innovation-driven economies. For comparison, South Korea invests over 5% of GDP in R\&D, the United States about 3.6%, and Germany about 3.1%. These figures reflect Japan’s enduring commitment to innovation, even as other nations also ramp up R\&D spending. Notably, Japan’s high R\&D intensity is driven predominantly by **private sector spending**, which accounts for roughly 78% of the nation’s R\&D performance. This is a higher business share than in the U.S. or Europe, underscoring that large Japanese firms remain the principal engines of R\&D. The government’s role, therefore, is often to catalyze and complement corporate R\&D – through grants, tax incentives, and facilitating collaboration – rather than to outspend the private sector. While Japan’s R\&D/GDP ratio signals a strong national innovation effort, the **effectiveness** of this spending is a subject of scrutiny, as discussed later in this chapter. ### Institutional Reforms and Current Challenges Despite the extensive efforts to bolster Japan’s innovation system, several **structural challenges** and ongoing reforms characterize the present landscape. A foremost challenge is enhancing **innovation diffusion and productivity**, particularly among smaller firms and across the services sector. The OECD observes that while Japan’s public support for R\&D is high, the diffusion of innovation to the broader economy needs improvement. Many Japanese SMEs lag in adopting advanced technologies and practices, contributing to a wide productivity gap between large exporters and the rest of the economy. To tackle this, policies are focusing on *“digital transformation”* of SMEs, better linkage between startups and established companies, and promoting open innovation platforms. The concept of “**Society 5.0**” itself is partly about encouraging traditional industries (from agriculture to retail) to innovate by integrating digital tools, thereby raising overall productivity and creating new markets. Another area of reform is the **financing and support of high-risk ventures**. As mentioned, Japan historically underperforms in entrepreneurial activity – often attributed to cultural aversion to failure and structural hurdles. The government’s recent initiatives to remove the requirement of personal asset guarantees for startup loans, and to establish public-private venture funds, aim to lower the entry barrier for entrepreneurs. In addition, Japan has been internationalizing its innovation environment: **relaxing immigration rules for highly skilled tech talent**, encouraging English-language programs at universities and incubators, and seeking to attract R\&D centers of foreign companies. These steps are meant to inject diversity and global connectivity into Japan’s innovation ecosystem, which has sometimes been criticized as too insular. The **academic sector’s role in innovation** is also evolving. Japanese universities, while strong in scientific research output, have not traditionally been as engaged in commercialization as their American counterparts. Reforms since the 2000s granted universities more autonomy to collaborate with industry and profit from patents. We now see a rise in university spin-off companies (though still fewer than in the U.S.), and large companies investing in university labs or setting up joint research centers on campus. The challenge remains to better align academic research with industrial needs without stifling basic science. To this end, competitive funding schemes (like JST’s CREST program for team-based research in select fields) encourage projects that bridge basic and applied research. There is also emphasis on **human capital development** for innovation: promoting STEM education, interdisciplinary programs (e.g., combining engineering and business training), and programs to send young researchers abroad for experience. These human capital investments are crucial as Japan’s population ages and shrinks; nurturing the next generation of innovators is a policy priority. Finally, a candid look at Japan’s innovation system must address the **outcomes and ongoing issues**. While Japan remains a global leader in established manufacturing industries and retains world-class engineering capabilities, it has seen fewer “game-changing” new companies or platforms in the past two decades. For instance, Japan did not produce the analogues of Google, Apple, or Amazon in the digital revolution, and its biotechnology sector has been eclipsed by the U.S. in drug discovery. Japanese firms have lost market share in some electronics segments (e.g., mobile phones) and were late to the fray in some new sectors like software and Internet services. This has raised the question: is Japan getting sufficient return on its large R\&D investments? Analysts point out issues such as **rigid corporate management, insufficient diversity in R\&D teams, and slow decision-making** as factors that can hamstring innovation in large firms. In response, some large companies are adopting more agile R\&D management practices and open innovation approaches (for example, Toyota’s investments in artificial intelligence startups globally, or Panasonic’s open labs). The government, on its part, continues to fine-tune policy – for example, introducing **refundable R\&D tax credits** to benefit unprofitable startups (addressing a prior issue where only established firms could fully utilize R\&D tax incentives). Japan’s self-reflection on these issues is ongoing; the country’s capability for **incremental innovation** is unquestioned, but it aspires to enable more **radical innovation and new business creation**. The coming years will show whether the reforms and new programs can indeed rejuvenate Japan’s innovation dynamism. ## Comparative Insights: Japan, South Korea, Germany, and the United States Japan’s technology policy and innovation system can be better understood in a global context by comparing it with other major innovation economies. Each of these countries – South Korea, Germany, and the United States – has distinct institutional setups and historical trajectories, yet they share some common challenges with Japan as well. **South Korea:** South Korea’s innovation path in many ways **mirrors Japan’s postwar developmental state model**, with a time lag of a couple decades. Like Japan, Korea relied on state-led industrialization, nurturing giant conglomerates (*chaebols*, analogous to Japan’s keiretsu) that could absorb foreign technology and compete globally. During the 1970s and 80s, Korea’s government picked winners (steel, shipbuilding, electronics, etc.) much as MITI did, and directed credit and R\&D support to those sectors. As a result, Korea also achieved a dramatic economic rise and today is among the top R\&D spenders globally (over 5% of GDP as of 2022, the highest after Israel). Both Japan and Korea are characterized by a high share of R\&D conducted by large enterprises (Samsung, LG, Hyundai in Korea; Toyota, Hitachi, etc. in Japan). In recent years, both countries have confronted the need to **transition from catch-up innovation to true innovation leadership**. Korea, like Japan, is trying to foster a startup culture and reduce over-reliance on a few corporate champions. One difference is that Korea’s government has been somewhat more aggressive in promoting entrepreneurship in the 2010s, with initiatives like a \$3+ billion Startup Fund of Funds and regulatory sandboxes for new technologies. Culturally, Korea’s younger generation may be increasingly open to startups, perhaps more so than Japan’s, but both societies value stability which can temper risk-taking. Another commonality is demographic challenge: both face aging populations, which puts pressure on productivity and innovation to sustain growth. In terms of policy shifts, **Korea and Japan have both moved to a more “supportive” innovation policy approach and away from heavy-handed intervention** by the 21st century. However, Korea’s government still directly invests in certain strategic technologies (like 5G, AI, batteries) in a mission-oriented way, and its chaebols are deeply involved in national strategy (e.g., Samsung’s pivotal role in semiconductor R\&D). In comparison, Japan’s approach may involve a broader set of actors (including more international collaboration), reflecting its more mature economy and the lessons learned from past successes and failures of industrial policy. **Germany:** Germany provides a useful contrast as an innovation leader in a continental European context. Germany and Japan share some similarities: both have strong manufacturing bases known for engineering excellence, both spend about 3% of GDP on R\&D, and both have many world-class firms in automotive, machinery, and chemicals. However, the **institutional architecture** of their innovation systems differs. Germany has a decentralized, network-oriented innovation system often dubbed the “**Mittelstand model**” (Mittelstand refers to small and medium-sized enterprises, which in Germany are often highly innovative and export-oriented). Germany’s innovation is supported by a robust infrastructure of **public research institutes**, notably the **Fraunhofer Institutes** for applied research and the **Max Planck Institutes** for basic science. Fraunhofer institutes, in particular, bridge academia and industry by conducting mission-driven research funded roughly half by industry contracts and half by public funds. This model diffuses technology to a wide base of firms and has been credited with helping German SMEs innovate and remain globally competitive. In contrast, Japan historically did not develop an analogous network of independent applied research institutes to serve SMEs; instead, large companies built in-house R\&D and the government’s role was more to coordinate or subsidize consortia. Today, Japan is trying to emulate some of the **networking approaches** – for example, creating cluster programs where universities, tech SMEs, and large firms collaborate in regions (like the Tsukuba science city or Kansai life-science cluster). Another difference is in vocational training and education: Germany’s dual education system and skilled trades have supported incremental innovation on factory floors, whereas Japan’s lifetime employment system fostered firm-specific skills; each has strengths, but Germany’s system arguably allows more mobility of skilled technicians across firms, aiding knowledge diffusion. Policy-wise, Germany has been somewhat **less direct in industrial targeting** in recent decades (apart from the *Energiewende* in energy or Industry 4.0 in manufacturing digitalization). Germany’s government tends to use broad innovation incentives (R\&D tax incentives introduced more recently, grants through competitive programs, etc.) and rely on industry associations and consensus-building in setting technology standards. In the late 2010s, Germany also increased focus on digital innovation (recognizing it lagged the U.S. in digital platforms) and on green tech (with aggressive climate targets). Both Germany and Japan, as high-wage advanced economies, face the challenge of staying at the innovation frontier to maintain competitiveness. It is telling that both have strong automotive sectors now undergoing transformation (to electric and autonomous vehicles) – a sector where policy is critical. Japan’s approach (through METI’s guidance and support for auto industry R\&D in batteries, hydrogen, etc.) and Germany’s approach (via EU regulations, public charging infrastructure investment, and automakers’ own initiatives) are different in tactics but converge in recognizing the state’s role in enabling the transition. **United States:** The U.S. innovation system is often characterized as **more market-driven and decentralized** than Japan’s, with a historically limited role for industrial policy – at least until recently. The U.S. federal government’s primary role in innovation has been through funding basic research (via agencies like NSF, NIH, DoE) and mission-oriented R\&D in defense and space (via DARPA, NASA) rather than coordinating specific industries in civilian markets. This led to breakthroughs like the internet, GPS, and biotech drugs largely through public science funding and military procurement, which the private sector later commercialized. In contrast, Japan’s state support was more squarely focused on commercial industries from the outset (steel, autos, etc.). One advantage of the U.S. system has been a very strong **university research sector** and the venture capital (VC) ecosystem that turns research into high-growth startups – something that Japan has admired and seeks to emulate. Silicon Valley is a product of this dynamic: a mix of top universities, government R\&D (e.g., early internet, semiconductor research funding), and an open entrepreneurial culture backed by VC funding. Japan, by comparison, had few startup success stories and only nascent venture funding until the 2010s. Culturally, American business tolerates failure more readily, which encourages experimentation; Japan has been working to cultivate a similar tolerance for risk in entrepreneurship. **Corporate structure** is another difference: U.S. firms can be quick to restructure or spin off new ventures, whereas Japanese firms traditionally kept R\&D internal and careers were more static – though this is changing. Interestingly, the divergence is not absolute: the U.S. government has practiced forms of industrial policy, especially in high-tech. In the 1980s, SEMATECH (a government-backed semiconductor consortium) was a response to Japanese competition. And in the 2020s, the U.S. has enacted the *CHIPS and Science Act (2022)*, a major subsidy program for domestic semiconductor manufacturing, as well as the *Inflation Reduction Act (2022)* which includes large incentives for clean energy industries – both signaling a shift towards the kind of strategic industry support that Japan and others have used. Thus, one could argue that the U.S. is learning from Japan’s and its own past successes to more explicitly link government funding with industrial outcomes in critical sectors. On the flip side, Japan’s innovation system has incorporated some U.S.-style elements: for example, Japan’s **Moonshot program** is somewhat akin to DARPA’s high-risk, high-reward projects, and the increased use of competitive grants mimics the U.S. approach to funding science. In terms of performance, the U.S. remains the global leader in many innovation metrics (Nobel prizes, top tech companies, etc.), thanks to its robust ecosystem of talent and capital. Japan, while not at the very leading edge in areas like software or biotech, remains highly advanced in manufacturing and certain technologies (robotics, materials, automotive engineering). Both countries face the need to adapt their innovation systems to new realities: the U.S. grapples with issues of inequality and ensuring broad-based STEM education, while Japan grapples with demographic limits and reinvigorating risk-taking. Ultimately, Japan’s experience underscores to other countries the importance of **continual adaptation of innovation policy**. As noted in a recent comparative study, even historically top-down systems like Japan and Korea have had to evolve to become more flexible and supportive rather than directive. The U.S. and Germany, traditionally more hands-off in industrial targeting, are also recalibrating the balance between markets and state in the face of technological competition and societal needs. ## Conclusion Japan’s journey in technology policy and innovation offers a rich case study in how a nation can leap from technological backwardness to the frontier, and then struggle with the mantle of leadership. Historically, Japan’s success was built on **astute technology absorption and strong institutional coordination**, with the Meiji era establishing the norm of importing and improving foreign innovations, and the postwar MITI era demonstrating how targeted policy can accelerate industrial catch-up. Over time, the tools and focus of policy shifted – from heavy industries to high-tech fields, from import substitution to original R\&D, and from picking winners to cultivating an innovation ecosystem. Today, Japan’s innovation system stands at a crossroads: it boasts world-class talents, companies, and a high baseline of R\&D investment, yet it also faces internal and external pressures to reinvent itself. The aging society, the rise of digital and green transformations, and intensifying international tech competition all demand that Japan find new ways to generate and harness innovation for economic and social benefit. The contemporary strategy, as detailed in this chapter, involves a mix of **mission-oriented programs (Moonshot, Society 5.0, Green Growth, etc.)** and **structural reforms (regulatory easing, startup support, university-industry linkages)**. Japan is, in effect, attempting to marry its traditional strengths in coordinated, long-term planning with a new agility that encourages bottom-up innovation. The comparative perspectives with South Korea, Germany, and the U.S. highlight that there is no perfect model – each country must balance state and market, nurture both large and small firms, and align innovation with national priorities. Japan’s case illustrates the value of a proactive state in building innovation capacity (as seen in its historical rise), but also the importance of flexibility and openness (as current reforms aim for). For MBA students of industrial strategy and economic development, Japan offers lessons on the dynamic interplay between government policy, corporate strategy, and innovation outcomes. One lesson is the significance of **institutions**: dedicated agencies like MITI/METI, when used wisely, can steer an economy, but they must evolve with the times or risk stifling the very innovation they seek to promote. Another lesson is the role of **national vision** – from the Meiji mantra of “rich nation, strong army” to today’s Society 5.0, Japan has often used clear visions to mobilize public and private actors toward common goals. Finally, Japan’s experience emphasizes that innovation systems are deeply rooted in a country’s social context (culture, demographics, education). The efforts to change course in the 1990s–2000s show how difficult, yet necessary, it is to reform ingrained practices to respond to new economic realities. As Japan moves forward, it does so with a keen awareness of its past: the historical narrative of technology policy is well understood by today’s policymakers, who frequently reference both the successes and failures of the postwar period. In a way, Japan is now engaged in a second great transformation – not one of catching up to foreign powers, but of reimagining its innovation system to remain a vibrant, leading economy in the 21st century. The outcome of this transformation will not only shape Japan’s future prosperity but will also provide valuable insights for other nations seeking to sustain innovation-driven growth in an ever-changing world. The Japanese case, with its rich history and current reinvention, thus remains a fundamental reference point in discussions of innovation systems and industrial strategy. ## References {.unnumbered} Johnson, C. (1982). *MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975*. Stanford University Press. National Research Council. (1997). *Maximizing U.S. Interests in Science and Technology Relations with Japan*. Washington, DC: National Academies Press. Okazaki, T. (2017). “Industrial Policy in Japan: 70-Year History since World War II.” *RIETI*. OECD. (2024). *OECD Economic Surveys: Japan 2024* – Highlights. Atkinson, R., et al. (2025). "Understanding and Comparing National Innovation Systems: The U.S., Korea, China, Japan, and Taiwan." *ITIF Report*. METI (2020). *Green Growth Strategy Towards 2050 Carbon Neutrality*. JST (2020). *Moonshot R\&D Program Goals*. EU-Japan Centre (2024). "Robotics" – Market & Policy Update.