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Japan's high economic growth after World War II can be attributed to its remarkable technological improvement which can largely be attributed to industry's vigorous efforts to invest in R&D, resulting in the rapid enhancement of its technology contributing to the improvement in its productivity levels. Improved productivity and the resulting increase in production induced further vigorous R&D which again resulted in further enhancement of technology. Through this mechanism, Japan constructed an elaborate virtuous cycle between technology and economic development (Watanabe, 1995). This success instilled Japan's business model a myth that R&D contributes to increase in production, improves productivity and enhances profits.
However, contrary to such a conspicuous achievement, Japan's economy has been experiencing a long lasting economic stagnation over the last decade due to clinging to a traditional business model based on growth oriented development trajectory during the course of the high economic growth period in an industrial society while shifting to an information society and also to low economic growth era under mature economy (Watanabe and Nagamatsu, 2003).
Thus, switching to new functionality development initiated trajectory is urgent. Inter-field technology spillovers leverage co-evolution between core technologies and their application to new fields leading to successful technological diversification contributes to such a shift (Watanabe, et al., 2004). Such a switching can be enabled by firms with dynamic capability (FDC) incorporating agility, flexibility, adaptability and cooperation and free from the impediment of the organizational inertia (Takahashi, 2000, Watanabe et al., 2004). FDC corresponds to requirements in a ubiquitous society characterized by 'on demand', 'all actors participation and cooperation', and 'seamless' community (Takahashi, 2000).
To date, while a few studies postulate a path to a ubiquitous society, none has demonstrated the link between new functionality development initiated trajectory, inter-fields technology spillover, FDC and the path to a ubiquitous society.
This paper, on the basis of an empirical analysis focusing on Japan's leading electrical machinery firms over the last quarter century, attempts to demonstrate this postulate.
The next section demonstrates the consequence of Japan's wrong choice of growth trajectory resulting in a reversal of the competitiveness between Japan and the US. It is followed by the next section which includes an analysis of the correlation between firms R&D strategy and their operating income structure. The consequent section analyses the impacts of technological diversification on firms operating income structure. The final section briefly summarizes the new findings and policy implications on FDC toward a ubiquitous society.
THE REVERSAL OF THE COMPETITIVENESS BETWEEN JAPAN AND THE US
Wrong Choice for the Growth Trajectory
In response to a paradigm shift from the high economic growth era up until the end of the 1980s to mature economy in the 1990s, contrary to the US' timely switch in its growth trajectory from 'growth oriented development trajectory' (which achieves economic growth leveraged by high economic growth) to 'new functionality development initiated trajectory' (which maintains sustainable growth based on development of new functionality), Japan has still been clinging to a traditional growth oriented trajectory. This can largely be attributed to the inertia of its conspicuous success during the high economic growth period based on the traditional trajectory (Watanabe, 1995).1
As a consequence of this wrong choice, contribution of technological improvement to economic growth, or contribution of TFP (total factor productivity) growth to GDP growth has dramatically declined in the 1990s resulting in the foregoing contrast. …