Signs of Changes in the Japanese Economy Noted in TAMA (Technology Advanced Metropolitan Area)

KODAMA Toshihiro
Senior Fellow, RIETI

Our survey of cases of collaboration in product development in TAMA (*1)which covers the western Tokyo metropolitan area and is viewed as a leading example of the Industrial Cluster Plan, has shown that the intermediary functions of the TAMA Industrial Activation Association Inc. (hereinafter referred to as the "TAMA Association") have begun bearing fruit in the form of new collaborative relationships between formerly unrelated entities such as private companies and universities, leading to significant progress in product development. The TAMA Association (Chairman: Dr. Yuji Furukawa, head of the Faculty of Engineering at Tokyo Metropolitan University) was jointly established by a number of private firms (particularly small and medium-sized enterprises, or SMEs), universities and other educational research institutions, local commercial and industry associations, and municipal governments.(*2)

The impetus behind the development of these collaborative relationships is believed to be attributable to certain signs of change in the Japanese economy, including (1) the rise of SMEs as engines for new growth, (2) the creation of a Japanese version of modular clusters, and (3) the prominence of venture businesses and human resources issuing from large enterprises. This column aims to offer a broad introduction to these signs of change in the Japanese economy, with the additional inclusion of some hypothetical arguments.

(1) The emergence of small and medium-sized enterprises as engines for new growth

As production lines for mass-produced goods continue to move overseas, there is a rising need for smaller lots of a wide variety of high-value-added products. SMEs, with their relative versatility, are expected to respond to this need. However, not all SMEs are up to the task; in fact, a large number of SMEs are seriously affected by the protracted economic downturn and the hollowing-out industry.

However, there are many product-developing SMEs in the TAMA region that are capable of developing their own products based on their own ability of capturing market needs. Growth of these firms has surpassed that of larger enterprises. These product-developing SMEs have grown in tandem with the decline of the dominance of large enterprises in the domestic economy. A number of product-developing SMEs have been created from the spin-off of human resources from large enterprises, as described in (3) below. Further, the market for these SMEs has expanded through increased R&D outsourcing by large enterprises in the process of streamlining their respective business domains. Furthermore, these SMEs make use of local "product-processing" SMEs with specialized manufacturing processing technology, enabling these enterprises to develop and manufacture products that meet the varied needs of the market, functioning as the core companies of the regional economy.

These product-developing SMEs, which make use of a network of SMEs in the same area to develop and manufacture their products, can be expected to serve as one of the new engines of growth in the Japanese economy.

(2) The formation of a Japanese version of a modular cluster

In their Design Rules (2000), Baldwin and Clark refer to Silicon Valley as a "modular cluster" where product development is accelerated through the concentration of firms that design and develop products for each module of a sophisticated product system, such as a computer.

We can also view TAMA as a budding modular cluster that develops by strengthening the bonds among the product-developing SMEs that design and create products, the product-processing SMEs that provide specialized processing technology, and the scientific and engineering universities in the area (*3). In order to meet varied market needs swiftly, specialized SMEs need to establish flexible methods of collaboration suited to these needs. However, this is impossible for those SMEs that, despite excellent processing technology, do not possess product-development and design capabilities. With product developing SMEs serving as connecting hubs, as in the case of TAMA, organic collaboration among SMEs becomes possible.

Another characteristic feature of TAMA is its high concentration of scientific and engineering universities. Through the establishment of the TAMA Technology Licensing Organization, these universities are working to establish a network within which new technological seeds can be supplied to product-developing SMEs.

In TAMA, product-developing SMEs themselves handle the development of modular products, product-processing SMEs supply specialized manufacturing processing technology, and universities supply new technological seeds. The TAMA Association acts as an intermediary organization encouraging collaboration among these entities. And also there are the development divisions of large enterprises, which represent a key market for products created for product-developing SMEs. Together these entities and processes can combine to form a large modular cluster.

The difference between Silicon Valley and TAMA is that in the former, new businesses are formed in many cases by new venture firms relying on high labor mobility, while in the latter this role is played mainly by existing product-developing SMEs. As will be discussed later, it is likely that Japan will see some degree of increased labor mobility in the future. However, it is also true that continual, flexible, market-driven collaboration among product-developing SMEs, universities, and other companies may itself spawn the creation of new businesses in Japan. The creation of this kind of Japanese-version of a modular cluster will likely be one direction in which regional industrial structures should proceed in Japan.

(3) The roles of venture businesses and human resources issuing from large enterprises

A large number of the product-developing SMEs in TAMA were established by engineers spun off from existing companies (mainly large and medium-sized enterprises). A number of these spin-offs took place during the economic slump following the oil crises of the 1970s. Thus we can see that these product-developing SMEs in fact began as venture businesses founded on the technology and business expertise acquired from the larger enterprises.

Furthermore, when we look at the backgrounds of the technical staff at these firms, we again see that a great number of these individuals have experience working in existing companies-mainly large and medium-sized enterprises. These people play key roles in product-development projects conducted in collaboration with the universities. More recently, a program of "human resource matching" has begun to pair the technical staff of large enterprises with TAMA member firms requiring particular skills; results thus far are promising.

At present, large enterprises attempting to restructure their business operations are reviewing their lifetime employment practices and seniority-based wage systems. As a result, there are signs of increasing labor mobility among employees of large enterprises, and this in turn indicates the possibility of more spin-off ventures.

Even in cases where skilled technical personnel from large enterprises do not start up their own businesses, it is likely that such people will opt to put their skills to use in promising SMEs, such as in product-developing SMEs.

(4) Formation of a municipal alliance and industrial policy based on the process of concept sharing

Finally, I would like to touch upon new developments in the local and central governments relating to the TAMA movement.

On the local level, cities such as Sagamihara, Hachioji, and Sayama play a key role in the activities of the TAMA Association. Through the Association's activities, these municipalities are beginning to form a system in which individual cities stimulate and compete with each other through their respective industry promotion policies, at the same time cooperating and coordinating activities relating to issues involving the wider region. There are also indications that relevant prefectural governments are also seeking to promote partnerships with the TAMA Association.

In terms of the central government, we should note the support of the former Kanto Regional Bureau of International Trade and Industry and the present Kanto Regional Bureau of Economy, Trade, and Industry in the establishment of the TAMA Association, getting the Association's operations on track and transforming it into an incorporated body. Through this process, we can see signs of an industrial policy based on "concept sharing," one in which the Kanto Bureau respects the independence of the firms and universities in the region while taking the initiative in areas such as concept sharing and motivational activities, aiming to energize regional industry and help to revitalize the Japanese economy as a whole.

October 08, 2002

(*1) TAMA stands for the Technology Advanced Metropolitan Area and covers the areas along National Road 16 from southwest Saitama Prefecture to the Tama district of Tokyo and the central Kanagawa Prefecture. This area has a significant concentration of economic entities capable of generating new technologies and new products, thanks to a large number of a) R&D facilities of large enterprises; b) educational research institutions (such as scientific and engineering universities); c) product-developing SMEs with the ability to develop products based on precise knowledge of market needs; and d) product processing SMEs with the engineering technology to handle high-precision orders within short time periods.

In September 1997, a Preparatory Committee with 55 members was set up in response to calls from the Kanto Regional Bureau of International Trade and Industry to expand this network of firms and universities. In April 1998, the TAMA Industrial Activation Council was established with the participation of 328 members (including 190 firm members), including many promising SMEs, universities and other educational institutions, public research institutes, prefectural and municipal governments, and local commercial and industry associations. This Council was reorganized from a voluntary organization into an incorporated body in April 2001, changing its name to the TAMA Industrial Activation Association Inc. As of Oct. 1, 2002, it has 495 members (including 271 firm members).

(*2) This survey was conducted in cooperation with the TAMA Association. Classification of the cases of collaboration studied and the combination of technological seeds in those cases can be seen in Chart 1 and Chart 2. Refer to RIETI Discussion Paper Series 02-J-012 (in Japanese only) for the full results of the survey. An abridged version is also available in the Research & Review column in the October issue of the Keizai Sangyo Journal.

(*3) Although in Baldwin and Clark (2000) it is assumed that the interface rules among modules are standardized, modularization here is not so strictly defined, and refers to a system whereby each entity develops each product (part) or technology with a certain degree of independence and where various system products can be created by combining these modular products and technologies.

October 8, 2002