Priorities for the Japanese Economy in 2014 (January 2014)

A New Frontier in Science and Technology Innovation Policy: The third arrow of the growth strategy and the "nation best suited for innovation"

AOKI Reiko
Faculty Fellow, RIETI

The year 2014 will likely bring change to Japan's science and technology innovation policy. In short, this will be a year of system reform, and a number of signs of this already have become apparent. This could be called the science and technology innovation policy version of the growth strategy (the "third arrow" of Prime Minister Shinzo Abe's economic policy) for Japan.

Impulsing PAradigm Change through disruptive Technologies (ImPACT): A new and noteworthy system

Impulsing PAradigm Change through disruptive Technologies (ImPACT) is a new system that is particularly noteworthy. The system, inspired by the Defense Advanced Research Projects Agency (DARPA), a part of the U.S. Department of Defense with a record of innovative technical development, is adapted to Japan's unique innovation environment. Like DARPA, ImPACT pursues high-impact, high-risk projects. However, there are ways to secure funding for high-risk technical development besides using public funds. Other solutions are to use financial markets and financial instruments to spread out risks and to offer an insurance function for the investment. Thus what makes ImPACT's programs novel is that, instead of selecting projects to fund, it starts by selecting a program manager (PM) to run a project. This is the part of the system that was inspired by DARPA. Potential PMs are asked to propose a research and development program concept, along with their objectives and mechanisms for program implementation. Individual persons and proposals are selected as a package. The selection process, of course, looks not just at the proposal's content, but also at the likelihood of it being achieved, based on the individual's credentials, track record, and so on.

Government policy authorities choose the research theme, but the PM defines the specific problems to pursue and establishes the development objectives in line with the theme. This system is one of demand-pull innovation, in which projects develop the technology needed to solve a problem. Up to now, such innovation has been very difficult to achieve, despite the recognition that it was imperative by the science and technology policy community. ImPACT is a clear first step away from supply-push, which explores and develops applications of existing technologies. Moreover, PMs should be people with a deep understanding of certain technologies, but that is neither necessary nor sufficient to becoming one as they are expected to have a bird's-eye view of a wide range of technical fields. PMs need to know who the leaders are in individual fields, rather than have a thorough knowledge of each field personally, and have personal access to a network of researchers. PMs plan and manage projects by bringing together researchers with the technology and knowledge necessary to solve problems, as well as those who can develop new technologies that are lacking to solve the problems. PMs also need leadership ability in order to motivate individual researchers and get them working toward project objectives.

The objective of the PM is not to apply some technology. Rather, this person's mission is to solve problems, whether by adopting existing technologies or developing completely new ones. Therefore, another advantage of the PM system is that the PM is able to look at multiple technologies and pick the best one. Moreover, technologies competing against each other to be selected should encourage innovation. While investing in multiple technologies spurs technical innovation with competition, there is one drawback: deadweight loss from redundant investments. A PM with superior information is able to choose the best trade-offs by maintaining a bird's-eye view of the current and future markets and technologies as well as the overall economy.

When the PM's fate is the same as that of the project, he or she judges trade-offs according to a standard of problem-solving success. In other words, when the evaluation of a PM depends on project success, this ensures that the PM will take action that favors problem solving. Using existing innovation platforms to select technologies is very difficult as the majority of people have nothing to gain, at least directly, from the narrowing choices. Even with the same specialized knowledge, we cannot expect career government officials to make decisions based on effective problem solving. Rather, officials are evaluated on performance based on such inputs as whether they purchased goods or hired staff according to their plan. In contrast, PMs are evaluated by their output. This requires giving PMs the authority to adjust inputs and blocking policy officials from micromanaging.

Problems with the PM system

Two problems with this system are how to evaluate a PM who fails to solve the assigned problem, and how to deal with moral hazard on the part of the PM. This system deals with high-risk projects, so there is substantial probability of failure. If a project failure is also a PM failure, PMs may only choose safe problems and not take bold action. Thus, it is important to have a clear PM monitoring system. Such a system, of course, should only monitor; the information learned by monitoring must not be used to demand that the PM immediately change course. Instead, recording information is like an insurance for the PM in case he or she fails to solve the problem. In other words, monitoring should make it clear whether the failure was beyond the PM's control. PMs are hired for individual projects, thus they move on to other jobs after their work with ImPACT is finished, and this should work to soften the moral hazard problem. A PM is not likely to try as hard in his or her current role if the current performance has little bearing on later work. When the PM role and the PM labor market have been established, it becomes important that his or her results in the current project are beneficial for subsequent employment as a PM. In Japan, where the PM role and market are new, exchanges of information and personnel with other positions and institutions that use a PM's leadership and ability to draft, control, and manage projects will be important.

Finally, the significance of Japan adopting a PM-based, high-risk, high-impact innovation system should be considered. This represents an awareness that global competition is a competition of systems. As human resources become more mobile, systems that are not attractive to the best people will not be able to get them. Naturally, that will limit the quality of scientific and technical innovation. Establishing a world-class system that makes positive use of Japan's unique environment is what will make this country the "nation best suited for innovation." However, using Japan's unique environment as an excuse will only ensure that we lose in the competition among systems.

DARPA is often mentioned as an example of dual-use development. My purpose here is not to debate Japan's security policy, but note that dual use refers to the use of a technology for both national defense and a separate civilian use. In particular, it should be pointed out that dual use is not limited to hardware or weapons technology. In fact, the prototype of the mouse, which is now so indispensable to personal computer (PC) operation, and the Siri voice recognition system used on smartphones, were both born in DARPA projects. It is important to develop means for soldiers who are not computer experts to be able to operate PCs simply and correctly. Furthermore, it is well known that the U.S. Department of Defense has put a great deal of effort into linear programming (for supply management), mathematics (for encryption), and public health, medicine, as well as language education.

It is clear that the system of economic growth based on population increase has to change. There is also broad agreement that lifetime employment is irrational, labor markets are becoming more fluid, and the human resources development system, including everything from elementary school to graduate school education, has to be revised. The difficulty is finding the reforms that will be convincing to society as a whole. The realistic approach to solving this problem is to start with the possible. And, if we do this, we have to remember not to lose sight of the grand design as system reforms that cancel each other out create nothing but transaction costs and are a waste to society. For example, if society wishes to take action against greenhouse gases, it should not simultaneously lower tolls on expressways. The fact that dual use in Japan has largely been limited to hardware has to do with the national science and technology innovation policies up to now that have tended to overlook "soft" innovation—innovation of systems and software.

January 10, 2014

January 28, 2014

Article(s) by this author