Government Policy as Signaling

It is possible that a policy-instrument-by-policy-instrument survey of the pecuniary incentives provided by the Japanese government to promote optoelectronics may miss the forest for the trees. The total amount and terms of government aid may be less important than that such aid is given at all, as it may signal Japan's financial system that optoelectronics is a particularly promising area worthy of support.

Table 7.4
Optoelectronic Technologies Eligible for the Key Technologies
Research and Development Tax Credit, 1994

Source: Tsushosangyosho 1995

Why might Japan's private financial system respond to such a signal from the government? Indeed, how is it that the Japanese government has the information to do any kind of signaling at all? For the Japan of the 1950s, 1960s and even the 1970s, such questions could be easily answered. Then, a signal from the government compensated for a lack of information that might otherwise be provided by freely functioning capital markets. With Japan's financial system highly concentrated and heavily regulated, its equity markets played too marginal a role in the allocation of resources to serve as the ultimate arbiter of future prospects; these same attributes of Japan's financial system provided a framework within which the Japanese government could influence allocation of resources. High concentration of capital made a government presence not only possible but necessary. Moreover, as long as Japan was far from the global economy's technological frontier, fathoming what structural changes the Japanese economy required was not difficult. At the same time, however, the complicated pressures of intra-keiretsu or bank group politics often meant that in the absence of government pressure, a socially suboptimal allocation of resources might easily result. Without government regulation, it was too easy for established industries to divert badly needed resources from emerging industries.

Japan's institutions of the 1950s, 1960s, and 1970s, which allowed the Japanese government to work through Japan's private financial system to shape Japan's industrial structure, no longer exist today. Since the late 1970s, continuing financial deregulation has allowed Japanese firms to draw on far more diverse sources of finance, both domestic and foreign, than had once been the case. Between the late 1970s and the late 1980s the sources of Japanese corporate finance changed markedly. Once, bank loans had dominated all other forms of external finance; by the late 1980s, however, equity and equity-linked corporate bonds had surged to such an extent that bank loans were reduced to a secondary role. The bank-centered keiretsu of today seem loosely organized or even amorphous.

Today's Japanese firms seeking to promote new industries such as optoelectronics no longer need the government as an ally to force a main bank to turn on the financial spigot. Problems that Japan's equity market has faced in the 1990s notwithstanding, sources of finance remain so varied that a Japanese company seeking to finance new optoelectronics activities may not look to its nominal main bank at all. The same deregulation that removes the need for government intervention removes the means by which the government might intervene. The Japanese banking system, now forced to compete with many other financial institutions both at home and abroad and burdened with a staggering overhang of loans gone bad, is no longer in a position to dictate the future of the optoelectronics industry.

Government Policy as Coordinator

Cues from the government may also be taken less seriously by the private sector than before because of the highly uncertain environment within which the Japanese economy now operates. With Japan at the technological frontier, unlike in earlier decades, the precise direction an industry such as optoelectronics should follow is by no means clear; there is certainly no reason to believe the government might be better informed than the private sector on which way to go.

Optoelectronics is an excellent illustration of the difficulty the government has faced in the various joint government-business cooperative R&D projects organized by MITI since the late 1970s. Japanese government-sponsored consortia were once viewed as crucial instruments of government policy, breaking down barriers to the inter-firm transfer of information created by Japanese permanent employment practices, even while internalizing the benefits of company-conducted basic research. At the very peak of their importance and influence, projects such as MITI's celebrated Very Large Scale Integration (VLSI) semiconductor consortium were viewed, accurately or otherwise, as playing a critical role in helping diverse Japanese companies coordinate their research. Duplication of effort was avoided and information that might otherwise have been considered proprietary was shared.

In contrast to the VLSI project, the three joint government-business optoelectronic projects promoted by MITI today appear marginal to the industry's development; each project is much smaller than the VLSI in nominal terms and even more so in real terms. Compared to the VLSI project, they are also smaller relative to other related R&D activities in their industry, and what resources are available have been dissipated over a considerably larger number of firms. The VLSI project was not only relatively large, it was also viewed as having a practical objective. In contrast, the Optical Measurement and Control System project, and particularly the Optoelectronic Technology Research Corporation (OTRC) and the Real World Computing Program, all have been viewed as extremely academic activities by most of the companies the JTEC panel visited, far removed from the efforts needed to help develop technologies and products for emerging markets in optoelectronics.

Given the seemingly low regard in which the government-sponsored research consortia are held by the industry, it is somewhat surprising that MITI has been able to involve most of the major participants in Japan's optoelectronics industry. In part this may simply reflect MITI's influence in regulation-ridden Japan; more importantly, the cost of participation in these projects has been relatively minor for all member companies. MITI has fully funded both the Optical Measurement and Control System project and the Real World Computing Program. While MITI has funded only 30% of the budget of the OTRC and the Optoelectronics Technology Research Laboratory, many of the contributions of the member companies have been made in kind. Taking advantage of the aforementioned accelerated depreciation given joint government-business R&D projects, member companies have donated substantial amounts of used laboratory equipment to the OTRC.

Because MITI's latest projects have been viewed as largely academic, member companies that the JTEC panel visited seem to have been reluctant to allow their best scientists and engineers to participate in any major way. Scientists and engineers that are participating apparently have been discouraged from intimate cooperation with scientists and engineers from other member companies. Of 207 patents filed in connection with these three projects, only 34 reflect collaborative work across two or more member companies. Moreover, fearing that MITI-sponsored cooperative research and development projects are more efforts to diffuse information than to create new knowledge, optoelectronics industry leaders in any particular technology have rarely chosen to take up topics in their areas of greatest expertise.

Government Telecommunications Policy

As in the United States, so in Japan the greatest impact that government policy will have on the development of optoelectronics is in the area of telecommunications policy. For example, in February 1995 the Japanese government announced its intention to complete a nationwide fiber-optic network by 2010. This system should reach all of Japan's major population centers as early as 2000. An area will be considered to be connected if the fiber-optic network reaches a distribution node in its neighborhood (Advanced Information and Telecommunications Society 1995). Only subscribers to the information services provided by the network will be connected to the distribution node. While MPT has sought interest-free loans to build the network, the Ministry of Finance has offered only low-interest-rate loans (Mainichi Daily News 1995).

The regulatory reform of telecommunications in Japan will also shape the development of the optoelectronics industry. The speed with which deregulation occurs in the telecommunications industry in Japan will affect the role NTT (Nippon Telephone and Telegraph) will play in the optoelectronics industry and the kind of competition Japanese firms in this industry will face at home and abroad.

Published: February 1996; WTEC Hyper-Librarian