Contrary to a conspicuous economic accomplishment till the end of the 1980s, Japan experienced the economic stagnation in the 1990s due to its failure to maintain high productivity and increase in the efficiency of technological investment. Given that this contrast can be attributed to a co-evolution and disengagement between innovation and institutions, this paper attempts to elucidate the unique mechanism of technological co-evolution in Japan. First, a comparison of the development trajectory in Japan and the US is conducted by comparing their total factor productivity (TFP), R&D intensity and marginal productivity of technology. The clear decline of these factors in Japan is observed. It implies that the fundamental problem in Japan is the process of shifting from an industrial society to an information society. However, a surge of the co-evolutionary dynamism emerged in the information and communication technology (ICT) industry. With the focus placed on the service oriented mobile phone market in Japan, the success of mobile-driven innovation is analyzed from both supply and demand sides. The increasing learning coefficient of the market and the significant penetration rate of new functionality such as mobile camera and mobile Internet suggest that customers in Japan are rich in curiosity and smart in assimilation. On the other hand, in order to satisfy the demanding customers, service operators and handset vendors intertwine with each other leading to constructing a strong link, thereby developing new product and services by satisfying demanding customers. Thus, handset vendors and service operators themselves construct a co-evolution structure and then co-evolve with the demand side. This dual co-evolutionary dynamism leads Japan's mobile phone industry to keep creating new innovations and provides other industries invaluable suggestion to their competitiveness in a service-oriented economy.
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While Japan has experienced a vicious cycle between nonelastic institutions and insufficient utilization of the potential benefits of information technology (IT), a dramatic deployment of mobile Internet access service in the late 1990s, represented by NTT DoCoMo's i-mode service, demonstrates that once potential is exploited, Japan's institutions can effectively stimulate the self-propagating behavior of IT (Kondo et al., 2006). Since Japan has been shifting to a service-oriented economy based upon continuous technological innovation, the management of technology and the solution to create a virtuous cycle society has become a crucial issue for not only the government responsible for policy decisions but also for enterprises to identify a way to succeed in this unique market.
Since Japan experienced a significant economic stagnation in the 1990s and an outstanding accomplishment in the mobile phone driven innovation in the beginning of the 2000s, a comparison of these two trajectories is necessary. Furthermore, it is considered that some unobvious factors have affected the progress of mobile phone market and created a virtuous mechanism of co-evolution, which is hypothesized to be the system shown in Figure 1. While both the demand and supply sides can adapt themselves to the technological innovations, self-propagating development will be accelerated by the co-evolutionary structure. Such dynamism is considered to validate the revitalization of Japan's economy, especially in ICT market. However, while the customers or the service or product providers cannot adapt themselves to different institutional systems, the spiral trajectory of development will diminish gradually and prevents the society to move forward as expected. Both virtuous and vicious cycles may exist in each institutional system and creates completely different environments. The differences in this co-evolutionary dynamism cause different institutional systems to succeed or fail to evolve with technological innovations. …