Co-Evolution of the National Business System and the National Innovation System in the Age of Science-Based Innovation, with an Application to Biotechnology

A 'national innovation system' refers to the system of institutional and socioeconomic conditions that influence the innovation activity of a nation 1. It has two important characteristics. The first characteristic, say, a horizontal one, is its relationship with other 'systems'. In every country, the most active performer of innovation is private firms: inevitably, therefore, a nation's innovation system cannot be free from its business system, including the systems related to finance, corporate governance, the allocation and accumulation of human assets, and the boundary of the firm. Also, innovation is dependent on scientific research. Because such research is carried out within universities and government-sponsored research laboratories among others, a national innovation system is closely related to the country's university system and the national science system. Of course, the university system also affects the innovation system through supply of scientists and engineers. Another is the legal system because the country's law provides a basis upon which innovation is carried out. This is particularly applicable with intellectual property laws, such as the patent law, because they influence both inventors' incentives and the speed of knowledge diffusion. Also, the company law and the competition law affect private investment for innovation. The second characteristic, say, a historical one, is path-dependence: the way the country's innovation system evolves cannot be free from the path it has taken before then. Because of uncertainty, bounded rationality, and inertia, one's search for better alternatives is bound to be local and, hence, dependent on the historical path. In consequence, the national innovation system can never jump to the 'optimal' equilibrium but only evolves towards it, as the evolutionary theory argues These two facts imply that a nation's innovation system co-evolves with its other systems. In this chapter, I intend to discuss how the innovation system and the business system are currently co-evolving in Japan, because I believe that the ongoing change in scientific environment also calls for a change in the way businesses are performed. In the next section I begin by arguing that Japan's post-WWII (World War II) 1 For an international comparative study of national innovation systems, see Nelson (1993). 2 development of innovation can be separated into three periods. The third period, that began in 1990, is characterized by science-based innovation, such as information technology and biotechnology, as will be discussed in detail in Section 2. In Section 3, I will discuss how Japan's business system and …