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Institutional Foundations for Innovation-Based Economic Growth

Working Papers
e 1503report page 02

Innovation is essential for the growth of a matured economy like Japan. This report examines the institutional foundations of innovation-based economic growth and explores the role of Japanese government in encouraging innovation by Japanese companies and entrepreneurs. We start by summarizing eleven elements that characterize the ecosystem of Silicon Valley, which is often considered to be the best example of innovation-based economy. We then discuss how those elements fit with six institutional foundations that support the innovation-based economic growth. Those are (A) financial system that provides funding for risky ventures, (B) labor market that provides high quality, diverse and mobile human resources, (C) interactions between industry, universities, and government to generate a constant stream of innovative ideas, products, and businesses, (D) industrial organization where large established firms and small startups grow together, (E) social system that encourage entrepreneurship, and (F) professionals that assist establishment and growth of startups. Japan has not yet established these institutional foundations. The government can help by encouraging development of these institutional foundations. If it is difficult to establish a certain institutional foundation in a short time, the government may instead help Japanese firms and entrepreneurs to tap the Silicon Valley ecosystem directly. The Japanese government has been trying numerous industrial policies that may encourage development of some of the six institutional foundations, as well as policies that directly support R&D as precursors for innovation. The latest attempts are found in the Abenomics growth strategy. Thus, we find that the underdevelopment of those institutions in Japan is not due to the lack of policy ideas. The problem has been the shortcoming in the efforts of policy evaluation to find out which policy interventions are actually promising and how those should be implemented to guarantee effectiveness. The policies that help Japanese firms and entrepreneurs to directly benefit from the Silicon Valley ecosystem have been lacking. It is worthwhile to try those policies if those are accompanied by rigorous policy evaluation and adjustments to find the effective policies.

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