09/24/2014 10:03 am ET Updated Nov 24, 2014

Abenomics' Innovations Threatened by Failure on Contracting Reform

With the 70th anniversary of the end of the World War II being commemorated next year, attention is being focused on the post-War life-cycle of Japanese industry and the government that so dutifully sought to back it, perhaps in ways unimaginable in the US. But what part of overall Japanese industry is being backed by government? That is the question most related to "open innovation" that was the theme of a presentation by Stanford professor Richard Dasher at Tokyo's Foreign Correspondents Club. Prof. Dasher's research shows that overwhelmingly, Japanese government support is still targeted at the largest firms that are supposed to share resources with the small and medium enterprises (SME) sector. However, it is the SME sector that appears to be dynamic and innovative and breaking new ground, while large Japanese electronics companies have become legendary for their inability to be nimble, and have been making losses or their growth has sharply reversed. But the growth and development of Japanese SMEs and women-owned firms, while eliciting plenty of rhetorical support, are in fact being starved of resources by outdated contracting.

A cornerstone of innovation would be enabling small and medium enterprises to participate through changes in governmental and private outdated contracting. However, that change has not occurred, neither in Japanese governmental agencies nor in industry. That failure to reform, a key need to enhance opportunities for small and medium enterprises, is threatening the tremendous goodwill created by Japanese Prime Minister Shinzo Abe, especially in India. In fact, with a declining Japanese population, the need for small and medium enterprises to venture abroad has never been more urgent. Prof. Dasher spoke about how Japan is still not serious enough about "open innovation".

Thus, a structural problem is apparent -- where Abenomics and its Third Arrow expect that innovation will occur through support for the SME sector, but contracting even in government agencies and indeed in companies that receive large government grants continues in the same manner as in the past 70 years. Therefore, it is a real problem for policy makers and top bureaucrats.

During the recent visit of Indian Prime Minister Modi to Japan, I wrote the attached article with Dr. Kiyoshi Kurokawa, who has been Science Advisor to the Japanese Cabinet, pointing to many new areas for potential collaboration. The Japanese and Indian prime ministers, who share an extraordinarily warm friendship and frequently tweet to one another, announced a $35 billion program of Japanese investment into India. However, these expressions of good intent may well not materialize if innovations on both sides are not enhanced.

Compared to Japan, China is able to invest its vast reserves (now about $4 trillion, or nearly three times the reserves of Japan) via its structured sovereign wealth funds that Japan still does not have. However, an incursion involving over 1,000 troops even while Chinese President Xi was on a State visit to India, and many bitter memories of the China-India year 1962 war in which 1,383 Indian soldiers died, 1,047 were severely wounded, and 1,696 were reported missing, put all talk of a broad-based rapprochement on the back burner. Older and middle-aged Indians are often reminded of the ferocity of the Chinese attack on India in 1962, how underprepared the Indian army at the time was, and are therefore wary of excessive display of bonhomie.

Head-to-head competition is emerging between companies of Japan, China, Korea, U.S., UK, France, etc. The cracks in Japanese innovation can potentially become existential risks for Japanese industry. Business as usual will create catastrophic problems. The failure to reform as per the much touted Japanese prime minister's most important initiatives, even by agencies of the Japanese government, will be taken to mean that it is no longer a vibrant economy capable of continuous transformation as was claimed in the 1980s in business schools (kaizen). That in turn will mean that key allies that would otherwise have stood by Japan will no longer do so.

In a nutshell, while Japan is still wealthy, its competitive edges are rapidly falling off amid an environment of doom and gloom, with the "lost decades of economic growth" definitely taking a toll. While things are still relatively comfortable, one has to worry for a nation unable to reform key parts of enabling its competitiveness. A post-war generation, that got most things automatically, with little risk-taking or innovation, cannot now transform itself magically without real leadership from above. Meanwhile, tremendous competition in an information-rich worldwide environment has meant that most competitive advantages have simply disappeared over time. That is why, in many emerging economies, non-Japanese company names, especially Korean companies, have emerged as the leading trusted brands.

In effect, Prime Minster Modi was offering the privileged right of first refusal -- or in other words, as much as possible to Japan, the most favored nation. It was apparent for all to see that the level of personal rapport of Prime Minister Modi with Prime Minister Abe is unmatched, and indeed Independent-India has never fought a war against Japan and no territorial disputes exist between the two countries.

But the hesitation on the part of the Japanese, and the inability to rapidly and effectively do due diligence, is epitomized by the failures of DoCoMo abroad.

Absence of Independent Mechanisms to Monitor Progress and to Report Failures

Japan's Ministry of Economy, Trade and Industry has several policies to enhance SME participation. But they have not been translated into action, yet, said Prof. Dasher. Further, at present, there are no mechanisms to report failures of reform or even to monitor progress. Without changes, business as usual will continue to prevail. For the sake of innovation, independent mechanisms are required to monitor progress, if any, and there must be safe locations to report failures.

Soon, China, Japan, Korea will be locked into an Asian and perhaps global competition for market share. This would be reminiscent of another time when that was indeed the case, in multiple ways. Clearly, Japan and Japanese companies would need to be at the top of their game, along with many changes made on the innovation side. If not, surely there will be the Asian 21st Century largely without its most important Asian economic player of the 20th century.