Media  Global Economy  2023.07.06

In Japan, "intangible support (networking) is more effective than tangible support (subsidies)" for companies

Le Monde on JUNE 23th, 2023

This article was initially published in French in Le Monde newspaper on 24. June 2023, as part of a series of monthly columns on Asian economies. The original article can be found here:

Technology/ Innovation

Column by Sébastien Lechevalier, Professor at Ecole des Hautes Etudes en Sciences Sociales (EHESS, Paris), Senior Researcher at Maison franco-japonaise (UMIFRE 19, Tokyo) and at the Canon Institute for Global Studies (CIGS, Tokyo).

Sébastien Lechevalier reports that two Japanese economists have shown that, rather than subsidies, support for innovation requires coordination and regulation of public and private players.

Column. At a time when we are rethinking state intervention in "ecological planning" and industrial sovereignty, it is interesting to rediscover the Japanese experience in innovation policy, without idealizing it or wanting to transpose it as it stands to the French context, given the different logics of innovation systems.

The book by two Japanese economists, Hiroyuki Okamuro and Junichi Nishimura, The Economics of R&D Support -- Toward Evidence-Based Policy Making (Editions Yuhikaku, 2022, untranslated), has just been awarded the prestigious Prix “Economist” 2023, at a time when Japan's reputation for innovation has faded in recent years. According to the Organisation for Economic Co-operation and Development (OECD), the public share of research & development (R&D) expenditure in Japan is only around 17%, compared with almost 23% in the USA.

Contrary to the Silicon Valley "myth" that government plays a minor role in innovation, the reality is that the US federal government invests massively, albeit often indirectly, in innovation via military and security spending.

Setting a course in the public interest

Moreover, public innovation policy is not limited to R&D spending. The two authors draw on solid, original data (company accounts, government budgets, patents, etc.) to describe the very design of innovation policies and measure their real effects according to several indicators (productivity of supported companies or their trading partners, etc.).

The results show that governments have a role to play in innovation when it comes to setting a course in the public interest, and that the market fails to coordinate players. However, the state is also fallible, and it is therefore important to evaluate its policies.

The authors observe that the formation of consortia made up of private companies, universities and governmental organizations not only has effects on the productivity of the participants, but also has positive repercussions on commercial partners.

An incentive for financial optimization

They also point out that, since the interests and ideas of the various participants are highly heterogeneous, problems of moral hazard and free riding quickly arise. In this context, public subsidies facilitate the formation of mutual trust, while government control of projects indirectly improves results by strengthening the commitment of participants.

A second set of results concerns cluster policy. The authors compare two initiatives, one from the Ministry of Economy (METI), the other from the Ministry of Education (MEXT). This comparison shows that intangible support (networking) is more effective than tangible support (subsidies). In addition, the program coordinated by METI achieved better results in terms of corporate involvement, thanks to an organization that favors commercial spin-offs.

At a time when France is rediscovering the virtues of industrial policy, having long confined itself to promoting the "start-up nation", this type of observation provides an opportunity to rethink our public policies in the field of innovation. A scheme such as the research tax credit, whose positive impact on innovation remains to be proven and whose cost is very high for public accounts, is more an incentive to financial optimization than to the coordination of innovation players around projects that are useful for society as a whole.