Q&A: Why Japan Can't Innovate

Japan is a technological and manufacturing powerhouse whose citizens are steeped in the gadget culture. Sony rocked the world a couple of decades ago with the Walkman. Ever since then, Japan has failed on the innovation front. Why? Yoko Ishikura, a former business consultant who now teaches management at Hitotsubashi University in Tokyo, has discussed this very question on government and industrial panels. She spoke with NEWSWEEK's Christian Caryl and Akiko Kashiwagi about Japan's struggles with the "concept" economy. Excerpts:

Why did Sony's Walkman get beaten so badly by Apple's iPod? And why does Japan seem to be having so much trouble responding to the iPod challenge?
Yoko Ishikura: That's the question I'm struggling with now. Innovation today is much more about the concept economy than the knowledge economy. The iPod is a great example of the new concept. I listen to the BBC on the train, and it has completely changed my lifestyle. That kind of thing is very difficult to capture, and I'm not really sure people here understand what a tremendous thing it is. They think it's just about music. But iPod University—that's tremendous stuff. It's such a disruptive concept that can change the whole power structure. Innovation today means that it's going to change completely the power structure. Those who are in power are going to lose it. That's why they don't want to have the innovation. It will never come from the vested interest groups. In the case of Sony, I think they were much too stuck. They have a music company. As I understand it they had such an internal conflict. They didn't even talk to each other. I think it was more difficult for them to talk to their colleagues than to talk to outside people. I think it was a big blow for Sony, because they knew they could have done something like that but were unable to deliver. They sort of lost confidence. They still have great people.

And yet isn't Japan still coming up with some powerfully innovative products?
The Wii, I think, is a very interesting concept. As I understand it, Nintendo wanted to appeal to nongamers. They said, "What will appeal to lots of people?" So they picked up sports, brain games. And they made the remote very easy to use. It's not such a fancy technology. It's much more of a cool concept. Partly because Japan is so great at manufacturing, people here are often so stuck with the hardware. They can talk in terms of specifications—memory and megapixels. But in the concept economy you really need to understand, to visualize what experience you want the customers to have. That's what I mean by concept. And that capability is missing in some places. And it's partly because we have this notion we're so good at manufacturing.

Experts often cite the nature of Japanese institutions as one of the problems. Do you agree?
Certainly. The technology and the great people are still stuck within the big corporations. And because of that they aren't getting a chance to develop. [Among other things], I believe we need a revolving door between industry and academia. Because in innovation today the key is time to market and diversity—different kinds of ideas, different kinds of people. Deep knowledge in one area doesn't necessarily produce innovations one after the other. And we're talking about series of innovations, not the big hit, once. So diversity is it. If you look at things today, it's not just one technology; it's a combination of different technologies, so you have to know a lot of facts. If the organization tries to do everything, it will be monolithic. One problem is that many of the people in Japanese corporations just haven't had diverse experiences themselves. Once you're stuck you're stuck.

Do you see a problem with entrepreneurship?
We do have some great entrepreneurs. A lot of them are from Kyoto. They went to the world market and grabbed a big share simply because no one in Tokyo bought from them. So they said, "Who cares? We're going to go out." It's similar to the situation with countries like Finland, where the domestic market is too small. India has lots of micromultinationals in information technology, and they go straight to the world market. That thinking is missing here. It's partly because the Japanese market is big enough, and complicated enough. So to get out and talk to people who don't understand you is a bit of a headache.

Some people will ask the question, "But wait—do we really need disruptive innovation? Do we really have to participate in this concept economy? Japan has this great manufacturing tradition. Maybe that's enough."

If you take a look at the percentage of the value-added of anything, it's much more software, information, knowledge, rather than hardware. We often end up citing the example of the iPod; our Japanese manufacturers make a lot of the components, but they're such a small proportion of [the value]. The value is much more in the information, in the software, the conceptual part. That's what people are much more willing to pay for.

The Japanese tend to focus a lot in this discussion on the United States. But isn't the real innovation challenge that Japan faces the one from emerging economies?
I don't think that notion is so strong here. The reason why the United States and the European Union are so keen on implementing their innovation stuff is because they feel so threatened by India and China—innovation rather than labor costs. Yet there isn't that notion in Japan at all. I think people here still feel—though it's changing a little bit—that India and China are behind. [Masamoto] Yashiro of Shinsei Bank said it clearly, and I agree. He said that most of the Japanese tend to think in stereotypes, which was good 50 years ago, or 10 years ago. But in the past five or 10 years the world has changed completely. Because we stay inside—we may go physically outside but we don't really see it—we are completely behind. We don't understand how we've lost presence. And it works both ways. We have a lot of great technology we should be much more proud of. But because we don't get out we don't know what we're missing.