Academic journal article Seoul Journal of Economics

Innovation and Entrepreneurship: A First Look at the Linkage Data of Japanese Patent and Enterprise Census

Academic journal article Seoul Journal of Economics

Innovation and Entrepreneurship: A First Look at the Linkage Data of Japanese Patent and Enterprise Census

Article excerpt

I. Introduction

Productivity increase is an important factor in the economic growth of developed nations. Of the productivity of Organisation for Economic Co-operation and Development (OECD) countries, 20-40% is attributable to high-growth-rate new start-ups (OECD 2003). The importance of entrepreneurship in economic growth is stressed by Schumpeter (1934), who defines "innovation" as a new combination, which is classified into five types of activities generally categorized into new product development and adoption of a new process. Schumpeter (1942) also argues that "creative destruction" is an essential fact about capitalism. Creative destruction (i.e., firms that succeed in innovation increase their market share, whereas firms with low productivity withdraw from the market) has been making a significant contribution to the economic expansion for a long time (Baumol 2010).

Along this line, the view that small- and medium-sized enterprises (SMEs) are a source of innovation is shared by every country in the world. However, empirical research on firm dynamics and its contribution to economic development shows mixed results. First, the survival rate of new firms is observed to be low. According to Bartelsman et al. (2005), 20-40% of new companies in 10 OECD countries disappear within two years of establishment. Furthermore, a positive correlation exists between firm entry and exit that occur together with macroeconomic fluctuations (Bartelsman et al., 2005). As a result of the churning effect resulting from market fluctuations, the generation and dissolution of small inefficient firms that have not reached a sufficient scale occur simultaneously. This phenomenon can be viewed as firms simply moving through a revolving door (Santarelli, and Vivarelli 2010). Moreover, Schumpeter also provides two concepts on innovation, that is, the roles of SMEs are important with respect to creative destruction (Schumpeter Mark I) and the circumstances in which oligopolistic economic rents occur in large firms are also essential to economic dynamics (Schumpeter Mark II).

Innovation and entrepreneurship are important topics in Japan, which has a lower firm turnover rate than other OECD countries, such as European countries and the United States. The share of the entry and exit of enterprises in Japan is lower than that of the United States, and Japan's ranking in the Global Entrepreneurship Monitor for entrepreneurial spirit is approximately the lowest in the world (GEM 2010). Startups in Japan, particularly hi-tech start-ups with a technical background, are difficult to cultivate because of the labor market rigidity and underdevelopment of venture capital activities supplying risk money to startup projects, among other factors (Motohashi 2010). In addition, a large firm with a substantial technological capability plays an important role in the Japanese national innovation system, and the in-house orientation of research and development (R&D) of large firms may hinder entrepreneurial activities. For hi-tech start-ups to grow, they should tie up with a large firm; however, large Japanese firms are generally not proactive in assimilating new technology using start-ups. Given the growing competitive pressure from Korean and Chinese firms, large Japanese firms become increasingly difficult to follow through with in-house R&D style. Large firms should form alliances with universities and start-ups to accelerate its innovation speed; moreover, the promotion of hi-tech start-ups is important for changing Japan's innovation system from large firms' in-house style to a network style (Motohashi 2005).

In this paper, we report the results of the analysis of innovation and company dynamics with the use of a dataset that links the Establishment and Enterprise Census and the Institute of Intellectual Property (IIP) Patent Database. The objective of this research is to derive new implications related to the issue of whether new firms are a source of economic growth (source-of-growth firms) or belong to the "revolvingdoor" type. …

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