An Urgent Need to Establish Systems for Hastening the Fourth Industrial Revolution

KWON Hyeog Ug
Faculty Fellow, RIETI

Japan's Delay in Joining the ICT Revolution

It is said that Japan was late in joining the ICT revolution that began in the mid-1990s (Note 1). In contrast to the United States, which has achieved high growth since 1995 due to productivity increases enabled by ICT technology, Japan's ICT contributions have been remarkably few, primarily in sectors such as retail, an ICT-utilizing industry. That the scale of businesses is insufficient to achieve positive effects of ICT has been pointed out as one reason for this. Due to the constraints of Japan's Large-scale Retail Stores Law, implemented in 1974 to protect the business of small and medium-sized retailers, there have been no productivity increases in Japan caused by the market entry of retailers like Walmart in the United States, which introduced new technology such as scanners, payment by credit card, and efficient supply chain management. Although regulations were loosened due to trade pressure by the United States, the Large-scale Retail Stores Law was preserved for a long time and only abolished in 2000 after the effect of regulations of large-scale stores had been weakened with the spread of e-commerce using Internet technology, including the founding of Rakuten in 1997 and eBay's expansion into Japan in 1999. It is safe to say that because regulations meant to protect small and medium-sized retailers became a hindrance that prevented Japan from adapting to technological changes, it was unable to benefit from the ICT revolution.

Japan Risks Also Missing the Ongoing Fourth Industrial Revolution

Paul Krugman, winner of the Nobel Prize in Economics, in 1998 claimed that "By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's (Note 2)." Later, in part due to the bursting of the dotcom bubble, it looked as if this skeptical view had been correct. However, in 2007 the iPhone was released and became a driving force behind the Internet's rapid growth. Mobile Internet and new devices compatible with it caused the kind of "creative destruction" written about by Joseph Schumpeter. Old technologies and businesses continue to disappear; for example, sales of electronic products that used to be among Japan's strengths, such as digital cameras, GPS devices, video cameras, and clamshell cellphones, have fallen dramatically. Even renowned companies like Nokia, Motorola, and Research In Motion (BlackBerry) have retreated from the development and manufacture of mobile devices. New technologies such as social media, cloud services, the sharing economy, e-commerce, online payment services and video streaming services have been introduced and a new cluster of businesses based on these technologies has formed in the blink of an eye. In social media, Facebook, Twitter, LinkedIn, etc. started to prosper around 2010, as did Salesforce, Dropbox, etc. in cloud services, Uber and Airbnb in the sharing economy, Amazon, eBbay, Alibaba, Rakuten, etc. in e-commerce, PayPal, Stripe, etc. in online payment services, and Netflix in video streaming services. Microsoft and Apple, founded around the birth of personal computing, also crossed industry boundaries and proactively adapted to the mobile Internet age. Even focusing only on the development of telecommunications technology and the appearance of new devices compatible with it, we are witnessing a huge shock to the structure of industry and corporate business. The negative impact of Amazon on American bookstores and retailers has been immeasurable, and large-scale retail chains like Toys "R" Us, RadioShack, and hhgregg have gone bankrupt reportedly due to Amazon's influence. Companies like Uber, Airbnb, Netflix, PayPal, and Facebook and Google are having impacts that are spurring respective fundamental changes in the taxi, hotel, broadcasting, financial, and advertising industries. These businesses are using enormous sums of readily available capital to make large investments in new technological innovation, including electric vehicles, automated driving, robots, IoT, and AI. In the United States, Google, Amazon, Facebook, and Apple function as engines of economic growth, but no such group of companies can be said to exist in Japan. Although a new cluster of companies, including Preferred Networks, Mercari, ELIIY Power, and freee, has formed, the scale is small in comparison to the United States and obviously insufficient for reaping the same benefits of the fourth industrial revolution.

What Should Japan Do?

In the event of a large paradigm shift like the fourth industrial revolution, it can be assumed that the speed of technological change will accelerate exponentially. It is impossible to imagine at what scale and with what speed the creative destruction brought about by such technological change will occur. Industries and businesses that currently represent strengths may turn into weaknesses in an instant. Just as Japan lost its internationally competitive electronics industry and superior electronics businesses due to the ICT revolution, in the event that the country cannot adapt to new technological innovation, it may lose everything it still retains. Japan must reevaluate regulations protecting existing industries and businesses as quickly as possible and establish systems and implement policies promoting technological innovation in order to join the fourth industrial revolution. For example, I believe that there is a significant danger that Japan will be completely unable to adapt to technological innovation in the medical and transportation industries if it prohibits IT-based telemedicine in order to protect doctors and hospitals, or prohibits Uber in order to protect its taxi industry. Rather than privileging vested interests, Japan must hasten the establishment of systems that promote new innovation essential to its future. More than anything, right now, speed is of the essence.

November 1, 2019
  1. ^ Fukao, Kyoji, Kenta Ikeuchi, YoungGak Kim, and Hyeog Ug Kwon (2016) "Why Was Japan Left Behind in the ICT Revolution?" Telecommunications Policy, Vol.40, pp. 432-449.
  2. ^ Krugman, Paul (1998) "Why Most Economists' Predictions Are Wrong," Red Herring, June

December 4, 2019