Financial System Change and Emerging Technology Development in Japan

Louis Ross (Director, Global Emerging Technology Institute, New York)

The continuing downturn in the global economy, which was precipitated by the collapse in the technology sector is leading the market to grasp for the next generator of economic growth. The search for the next big thing, or things, goes on at break-neck speed. In times of desperation, which include war and famine, technology development usually gets pushed to the forefront out of necessity. The development of cutting edge technology for companies of developed economies is crucial in order to maintain and expand high standards of living and create new industries and new markets.

The genesis of a good number of breakthrough technologies has been the public sector, with national governments providing seed funding for novel ideas and concepts. The center of the boom in IT growth during the 1990s was the internet, and the internet was a government funded project for years before the private sector got involved. Today, public support of next-generation computing, wireless communications, micro-mechanical system and nanotechnology, as well as in biotech, are providing strong foundations and reducing the risk of corporate investment. The development of emerging technologies get accelerated through public initiative and funding, which then supports innovation in academic labs and/or pilot projects conducted by the R&D groups of large companies. At the same time, start-up companies are then created in these areas and the core of a potentially new industry is established. In order for this new potential industry to survive, it is critical to develop commercial applications with business interests in mind during a certain window of opportunity which is provided by the financial markets. This window may open and close over time, and close permanently for those innovations which simply have no viable market to support them well into the future.

The infrastructure which supports the financing of such industries is an important factor for success. A country`s competitiveness increasingly is derived from sound, practical S&T policies that are supported by the financial markets. In Japan, the traditional main bank system provided an efficient means to provide capital for cutting edge technology development and led Japanese companies to become the world standard for high-tech manufacturing in a number of areas. In the U.S., a diversified capital market structure was the main conduit for such financing. It is clear that both methods of financing high technology were strongly influence by culture and both produced clear success stories and failures. Recent events have led both societies to re-evaluate their financial and economic systems. This, in turn, will certainly change the landscape of how cutting edge technology is supported. This goes beyond how innovation is nurtured, and financial system structure and into areas which include management, accounting and law.

Japan is currently going through an unprecedented transformation in the way it funds its high-technology development. As the Japanese main bank system is replaced by a more vibrant and much more diversified capital market, funding technology development will increasingly be influenced by the vagaries of the global market. Technology areas and geographical regions both compete and cooperate for capital. They compete for skilled human resources and markets. Pools of investment capital from various countries will influence the development of emerging technology areas, especially from the world’s two largest economies. These include government funding, R&D funding of large publicly listed companies and private equity capital which is invested directly into venture companies. It is expected that there will be more international cooperation as well, and more of a likelihood that the success of new sectors will be derived from cross-border cooperate alliances.

Though traditional corporate relationships will continue to have a strong influence on how investment capital is deployed in Japan, the current restructuring of Japan`s vaunted high-technology industries is a harbinger of things to come. Companies will increasingly compete for global investment capital that is earmarked for promising niches. Size may or may not matter, depending on the technology in question. Innovation is very important, but manufacturing is not expected to lose its importance either. Increasingly, comparative advantage of nations in certain areas will lead them to cooperate on a much wider footing than before.

Over the next 20 years, the key areas of emerging technology development which will give rise to numerous new industries in the following areas including: next-generation wireless and telecoms, software development, MEMS/Nanotechnology and a number of areas in the Life Sciences. These areas will build upon existing systems while creating markets for new ones, markets that are difficult to conceptualize now. There will be a great deal of overlap and convergence as well. As the Japanese financial system matures, it should serve the economy well in terms of having a greater ability to enhance competitiveness by fostering an environment that supports cutting edge technology development outside traditional corporate relationships and is marketable to overseas investors. Japanese firms are leaders in a number of key areas regarding the most promising emerging technologies, so the foundation is there. Japan`s wireless systems are years ahead of what is available in the US and its companies produce the best equipment for these systems. Japan also is a leader in miniaturization. The Japanese Government and private sector, regardless of the current state of the economy and financial markets, continue to support substantial R&D expenditures and continue to develop long-term planning goals. The winners are rarely private sector initiatives alone. They are mostly public/private sector collaborations where the government underwrites a lot of the risk and supports basic research and then the private sector takes over leading the innovation to the markets place, providing more funds on the way.

The foundation of Japan’s recent past and present success was built on the back of the main bank system, which is currently being dismantled. The diversification of the U.S. capital markets over the past 20 years were crucial in leading it to become the world’s leader in supporting the growth of emerging technology venture companies. The same thing must occur in Japan if it is to realize its goal of becoming one of the world’s leading IT nations, and if it is to become one of the leading catalysts for the development of new industries and markets in the future.

(Any comment or question should be sent to: louis@getinet.org)