In the global innovation index 2018, Japan has been placed at the 13th position. Countries like Ireland, South Korea, Singapore and the United Kingdom are ahead of Japan. Does it mean that Japan has run out of innovation race? The answer appears to be 'yes'. Japanese companies are no longer making headlines in innovation news. And they are not among the top ten in major innovation indices. To shed some light on this issue, let's go back to the basics of innovation. Innovation is about taking an idea to the market at a profit. Unless and until the idea makes profit, it does not succeed as innovation in creating wealth. In taking business decision of an innovation, consumers make sure consumer surplus. That does not necessarily mean that producers also make profit in selling a new product. Until and unless both consumer and producer surpluses are ensured, innovation does not succeed in creating wealth in the market economy.
The purpose of innovation is about to create new wealth out of knowledge. Knowledge in the form of idea is added to products and/or processes so that the willingness to pay goes up and/or the cost of production comes down, thereby creating new wealth. The idea of creating this new wealth could take one of three different forms: i) improving existing products, ii) pursuing new products, and iii) improving production processes. Usually, start-ups are in the business of pursuing new products for bringing substitutions to get jobs done. Although many of the start-ups like Uber in the Silicon Valley are creating headline news, not necessarily all of them have succeeded in bringing their ideas to the market making profit. For example, despite the wide use of Uber services by consumers, the start-up has not succeeded in generating producer surplus yet. So far, the company has been burning investors' cash in providing a subsidy.
On the other hand, a company may have been quietly adding innovative features to processes in reducing the cost, perhaps also improving the quality, of whatever they are producing. As a result, they succeed in offering better quality, preferably at a lower price, thereby increasing both consumer and producer surpluses. Although such progress does not create news, it succeeds in the basic definition of innovation in taking ideas to market at profit. Similarly, a producer may choose to keep improving existing products through a series of incremental innovation creating greater appeal among consumers and producing increasing profit, even from conventional products like automobiles. Here are a few examples of Japan's quiet innovation.
Sony Corporation: Although Sony no longer creates headline news, Sony has been powering many iconic innovations like iPhone. Sony's high resolution, high performing image sensors are drivers of smartphone innovation. The company is the undisputed leader in image sensors with 50 per cent market share. Both Apple and Samsung are major customers. In the 1990s, Sony was an innovation icon like Apple. During those glorious days, Sony reported the record profit in its history (in 1998). But within a short span of time, Sony lost two of its hard-earned digital innovations to Smartphone. One of them was the camcorder, and another was the compact digital camera like Cyber-shot. By losing those icons, Sony fell into depression reporting losses almost over a decade. But by succeeding in turning knowledge into innovative product features and processes to produce them, Sony has come back reporting the 2nd highest profit with above 10 per cent net margin in 2017. In the US patent office, Sony's position is 11th, ahead of Apple's 12th, in getting US patents.
Toyota: This Company is not known for high-tech innovation. But according to the US patent office data, this automobile company, on the 9th position, is more innovative than Microsoft. Careful observations in incremental improvement of its long list of vehicle models reveal that this company has been making many high-tech innovations. With the relentless progress in high-tech innovations starting from hybrid cars to growing engine efficiency, Toyota has succeeded in reporting $5.9 billion profit in April-June of 2018, its highest-ever first-quarter result. It's quite fascinating to observe that Toyota's net profit has been climbing up reaching above 8.0 per cent.
Canon: Canon is among top five in US patent rankings for 30 years running and first among Japanese companies for thirteen years in a row. According to US patent office data, this company is more innovative than many other well-known US high-tech firms. In the 1930s, Canon started its journey with 'The Kwanon', a copy of the German camera Leica. Upon replicating, Canon started the endless journey of perfection through incremental innovation. In the process, it not only succeeded to outcompete German camera makers but most importantly, it survived the digital camera disruption, while Kodak got bankrupt. Canon is a leader in many areas of innovation, including semiconductor processing equipment.
Panasonic: Now-a-days, nobody would consider Panasonic as innovative as electric carmaker Tesla. But surprisingly, Tesla's innovation is powered by Panasonic's battery. With the continued growth of battery technology, Panasonic has become a key technology provider in many industries, including the electric vehicle. Such competence even makes German leaders nervous about the future of German's automobile industry.
Among the most 50 innovative companies, according to the ranking based on granted US patents, 13 are Japanese starting from Canon to Sharp. And Japanese companies are not known to be in the patent race just for the sake of being at the top. They meticulously calculate the commercial value of research, knowledge generation and patent filing. Instead of VC (venture capital) funds, Japan finances innovation with corporate earning. As a result, Japanese innovative ideas are highly cross-checked from the perspective of profit-making viability. Moreover, many of the innovations in the digital service space are targeted for the domestic market, creating little outside news. For example, web entrepreneurs who became billionaires did so by catering to the Japanese market only. It appears that Japan is a powerhouse of innovation where new things are launched, tried and dropped before competitors are aware of them. Instead of creating the business of hype, it just goes quietly, honestly and diligently about the business of making and selling great things to customers-turning knowledge into growing consumer and producer surpluses.
M Rokonuzzaman Ph.D is academic, researcher and activist on Technology, Innovation and Policy. email@example.com
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