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The Macroeconomic Background for High-Tech Industrialization in safari MASAHIKO AOKI The stringent macroeconomic management rule arid high house- hold savings that prevail in Japan are likely to keep generating surplus savings irz that country. Because of the relatively abundant supply of capital, coupled with organizational innovations of large establ~shedfrms Such as ever-increaszr~g hiving off of semiouton- omous subsidiaries arid reliance on long-run relational contracting with suppliers), the lack of a venture capital market and start-ups does not seen to be particularly disadvantageous to successful high- tech industrialization in Japan. A substantial portion of surplus sav- ir~gs will possibly be directed to the United States if the domestic savings-investment gap in this country continues. Increasing direct investment by Japanese companies may pose a hitherto unknown pol~tical-economic problem. This discussion of the macroeconomic background for high-tech indus- trialization in Japan focuses on the following questions: Will not the fiscal stringency currently exercised by the Japanese government reduce the ef- fectiveness and feasibility of industrial policy and thus make the future of high-tech industrialization rather dismal? Despite the diminishing role of the government, as well as the lack of a significant development of the venture capital market, can the excess of savings over investment in the household sector be channeled into high-tech industry? For a better understanding, of these problems, it is important first to recognize that a significant change in the charactensucs of the macroeconomy as well as in the role of government has taken place since the last decade. Let me begin, therefore, win a very brief review of the 1970s, during which a new set of macromanagement rules was gradually shaped. 569

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570 MASAHIKO AOKI THE 1970sA TRANSITION INTO THE NEW MACROMANAGEMENT RULES In the 1970s the Japanese economy was preoccupied with an ad hoc adaptation to a series of unanticipated events. The set of macromanagement rules that was so effective in Me period of regular cyclical grown during the 1950s and 1960s (referred to here as the period of high growth) was abandoned in the 1970s for a new set of emerging, rules. In order to understand the nature of the macroeconomic background for high-tech industrialization in the 1980s and 1990s, it is necessary to understand the significance of this . . ~ . . Reverse ale transition. Macroeconomic management during the high-growth period was based mainly or the following four nobles: (1) Maintain a fixed exchange rate of 360 yen per U.S. dollar. (2) Supply money as far as the balance of inter- national payment position permits. (3) Balance the central government bud- gets. (4) Maintain a constant tax burden of around 20 percent of He national income. The ground for these rules was laid in the stabilization policy of 1948-1949. Many observers consider these rules to be of a classical nature based on fiscal and monetary orthodoxy rather than of an expansionary Keynesian nature.* However they may be characterized, it is under these rules that high growth was realized for two decades. But the aftermath of high growth, as well as the rapidly changing external environment, made these rules increasingly difficult to maintain toward the 1970s. Yet the ~n- sition to the new rules was neither smooth nor well planned. The 1970s opened with alarming irritation among city dwellers over the adverse effects of industrial growth, e.g., pollution, congestion, and the lack of sufficient housing stocks. This discontent culminated in the successive defeats of conservative candidates in gubernatorial elections in such major metropolitan areas as Tokyo, Osaka, Kyoto, and Kanagawa. Alarmed by this political unrest, the conservative central government and bureaucrats moved swiftly to accommodate the welfare-oriented policies of the opposition parties and "progressive local autonomy groups (chiho jichita`~." Generous social security provisions began to be introduced around 1973 without pre- cautionary calculations of their impact on the future fiscal burden. The Tanaka cabinet elected in 1972 tried to solve He deficiencies of social infrastructures and private housing stocks by He now-notorious "National Land Reform Plan." The publicity that attended the plan came at a time when the increased international competitiveness of the Japanese economy made it almost im- *See Yukio Noguchi. Public Finance, and Yutaka Kosai, Macroeconomic Management, submitted for Japanese Political Economy Research Committee Conference, Hawaii, January 1985 (forthcoming in conference volume).

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MACROECONOMIC BACKGROUND FOR HIGH-TECH INDU=~HON IN ]~^ 571 possible and irrational to maintain the exchange ratio of the Japanese yen that was fixed in 1949. Yet, fearing the loss of competitiveness, the Japanese government Died in vain to adhere to rule (1) by converting insurmountable surplus dollars at the out-of-date ratio and Men at the revised rate of 308 yen per dollar beginning in December 1971. The outflow of excessive liquidity only inflamed the land speculation aroused by Tanaka's land reform policy. The fixed exchange rate system was finally replaced by the floating rate system in February 1973. But subsequent to the abandonment of the old rule (1), the first oil shock hit Japan. About 55 percent dependent on OPEC oil as an energy source at that time, Japan experienced a 25 percent increase in electricity costs for industries from 1973 to 1974. The inflation ignited demands for higher wages, and, anticipating continued inflation, management and government yielded to those demands. Wage rates were increased by about 33 percent during wage negotiations in the spring of 1974. The high wage costs, as well as high interest costs incurred by excessive borrowing in the period of land speculation and excess liquidity, weakened Me financial positions of major corporations. The semidefeat of the ruling party in the Upper House election of 1974 made price stability the public goal. Learning from mistakes committed in the early 1970s and encouraged by the growing influence of the monetarism doctrine, the monetary authority began to shift to the money-quantity tar- geting policy. In reaction to this anti-inflationary policy, the so-called "on diet" management, which sought to reduce redundant employment as well as excessive borrowing from banks, became the catchword among the busi- ness community. Despite the somewhat mystified practice of lifetime em- ployment, a substantial amount of employment adjustment occurred even in major corporations. In addition, after industrial pollution had become a big social issue and business ethics had been questioned in connection with corporate speculation on land, it became increasingly difficult for large cor- porations in smokestack industries to build large, pollution-prone factones. The Ministry of International Trade and Industry's (MITT's) well-publicized targeting of knowledge-intensive industries was a modicum of an ad hoc reaction to this changing business environment, although the foresightedness of concerned bureaucrats cannot be neglected. In my assessment, He morale of MIMI in this transitional period was not particularly high. However, in this difficult period, most business corporations shifted their emphasis from the exploitation of economies of scale to flexible adaptability to an increas- ingly uncertain environment. They restrained uneconomical growth by hiving off ever increasing numbers of subsidiaries and by malting more extensive and systematic use of long-n~n subcontracting relations. This organizational shift turned out to have, as we shall see later, an interesting implication for subsequent commercialization of innovation. Although the shift to the new monetary le was swift, the reestablishment

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572 MASAHIKO AOKI of a new fiscal rule was not smooth. Beginning in the mid-1970s, the central government started to rely more and more on national bond issues to finance its expenditures. The impact of the earlier redo of the welfare system began to be felt. In addition, under the pressure brought about by an agreement at the Bonn summit meeting in 1978 to make the United States, West Germany, and Japan a triad of "engines" for the recovery from the worldwide depres- sion, as well as in the hope of mitigating the expected adverse effect of yen appreciation, the government, led by Fukuda (long known as a believer in fiscal austerity), reluctantly adopted an expansionary fiscal policy. This ex- pansionary policy aggravated the fiscal deficit without bringing about the expected effects. The ratio of bond issues to total revenue in the general account of the central government exceeded 30 percent in 1977, an upper limit that the Ministry of Finance (MOF) insisted be kept. A tax reform, including the introduction of a general-consumption tax, seemed to be inevitable, and the MOP began to maneuver for its early introduction. But a tactical mistake committed by Prime Minister Ohira in the election campaign of 1979 and the near-defeat of the ruling party made tax reform politically impossible. Problem solvin, became more systematic and coherent toward the 1980s, however, as learning accumulated. The second oil shock, which started in 1978, was absorbed by the restraint of wage increases. In 1979 wage bar- ga~ning, influential steel-union leaders called for a "macroconsistent wage demand" that would not cause cost-push inflation. The monetary authority was by then confident in the management of monetary-quantity targeting and the flexible exchange system. In the fiscal sphere, zero ceilings on budgetary increases in public expenditures, except for defense expenditures, were in- troduced in the early 1980s by the MOP as a means of keeping the fiscal deficit at a manageable level. The increased national deficit also produced an interesting side effect. The secondary markets of national bonds, such as the gensaki market (repurchase agreement market), spontaneously grew and provided the means for deregulated financial transactions. Increasing inter- national criticism of Japanese trade bamers led to ad hoc, but significant, steps toward successive liberalizations of trade and capital flows in the late l970s. In order to solve the deficit problem from a longer-n~n point of view, a temporary council headed by a widely respected businessman, Toshio Doko, was set up in 1981 and empowered by the government to recommend wide- ranging, extraordinary measures for simplifying administrative structures to save on government costs. The government made restoring the fiscal balance, albeit somewhat vaguely, a target by 1990. Although there is some con~o- versy as to the necessity of reducing national deficits by such a substantial proportion, fiscal stringency seems to have become another new rule for macromanagement, at least for a while. Fearing increased tax burdens in the

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MACROECONOMIC BACKGROUND FOR HIGH-TECH INDUCTION IN PAPS 573 form of corporate tax, the business community as a whole is supportive of this stance, although some business leaders directly affected by expenditure reductions do complain. Thus, the new set of macromanagement rules that will operate for some years to come can be summarized, in a somewhat simplistic way, as follows: (1) adherence to the flexible exchange rate system with a minimum of in- terference by the monetary authonty; (2) anti-inflationary quantity targeting of the money supply; (3) general restraint on public expenditures, with the possible exception of defense expenditures; and (4) implicit social agreement between management and labor that annual wage revisions should be made as consistent as possible with the security of the job and control of inflation SETTING NEW NATIONAL GOALS TlIE MID-1980s As we have seen, the 1970s was not, in retrospect, a decade In which the Japanese economy was directed by a well-designed policy based on a well- defined set of rules for macroeconomic management. It was, rather, a decade characterized by a series of ad hoc reactions to evolving events as well as the disturbing aftereffects of previous policies. The public mood of the period was not that optimistic. One of the best-selling books of that decade was a science fiction novel entitled SirzLing of the Japan Archipelago. Many people drew an analogy between Me state of Me economy and the bile of the book. In retrospect, however, the Japanese economy showed remarkable adapt- abili~ to a series of external and internal challenges throughout the 1970s. Accordingly, die public mood began to change around 1980. One of the noteworthy cults events marking the transition was the enthusiastic reception of Ezra Vogel's Japan As kilo. 1. Parallel to this publication, problems of American industrial relations in unionized industries were publicized by the mass media in rather exaggerated ways. The Japanese came to realize for We first time since Me end of World War ~ Mat the economy can be, and should be, directed neither in teens of a catching-up strategy nor an ad hoc, passive adaptation to the external environment. A more positive attitude was needed. Through animated public discourse, three important objectives emerged that were widely agreed to be in the public interest. They are as follows: 1. A shift to a hzgh-tech-oriented industrial structure. It is warned, at times, that this shift may cause disturbing effects comparable to the pollution and congestion caused by the industrialization of conventional technology. Among We possible effects often cited are the rapid obsolescence of human skills and Me resulting difficulty of maintaining conventional labor practices (such as lifetime employment), the breaking up of traditional human bonds, and invasion of privacy. But there seems to exist a broadly based belief that, despite such possible costs, high-tech industrialization is inevitable and de-

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574 MASAHIKO AOKI storable if the international competitiveness of the Japanese economy is to be maintained. The Japanese perception in regard to the competitiveness of the American economy has achieved a balance and the United States is now regarded rightly as a formidable international competitor in successful high- tech industrialization. 2. Overhauling insiitunonalfFameworks of the economy to increase its com- pent~veness and ~ciency. Specifically, important agenda items include dereg- ulation of He financial market, He reduction of government intervention Trough a~ninistrative reform, pension reform, and privatization of some of the giant public ente~pnses, such as Nippon Telegraph and Telephone (NTr) and, pos- sibly, National Rail Lines If. Although Here are always conflicts between general public interests and specific interests in this sphere, the trend toward more competitive and deregulated economic institutions seems to be clear. 3. Reforming the educational system toward more diverse educational opportunities. Although the educational system in Japan has been praised internationally as effective for accumulation of human resources, an edu- cational reform is now overdue domestically because of various internal problems as well as He need for accommodation to the age of technology. Prime Minister Nakasone appointed a temporary Council for Educational Reform in September 1984, and a heated debate on educational reform is now under way in and out of He council. Although the conservatism of Ministry of Education bureaucrats may be a significant obstacle to reform, and it is extremely difficult to forge a consensus among He public on this subject, ~ would conjecture Hat a rather important reform might come out of this public debate. (Who predicted 10 years ago that He dissolution of OTT and NRL would become serious public agendas in the near future?) Are He three objectives consistent and compatible? Are they achievable under a new set of macromanagement rules? Below ~ will discuss some issues relevant to these problems. (Although He educational issue is impomnt and highly relevant, I do not address the subject because of space limitations.) Since He external and internal environments have changed substantially since the period of high grown, the future of high-tech industrialization may not be predicted on linear extrapolations of past experience. IS TARGETING OF HIGH-TECH INDUSTRIALIZATION COMPATIBLE WITH MACROMANAGEMENT RULES? Sectoral economic management, such as that administered by indlls=- based bureaus of He Ministry of International Trade and Industry, is often regarded as more important than macroeconomic management in explaining Japanese economic performance. But even in the period of high growth, sectoral policies were feasible and effective as long as they were compatible

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MACROECONOMIC BACKGROUND FOR HIGH-TECH INDU=~T70N IN }~^ 575 with overall macromanagement. This may be inferred from the preeminent position enjoyed by MOF bureaucrats (particularly budgetary bureaucrats) in the bureaucratic power structure over the entire postwar period. The availability of sectoral assistance in the form of tax incentives and subsidies was basically constrained by fiscal feasibility as determined under old rules (2), (3), and (4) dunug Be high-grow penod. This assistance was distributed to various ministries and then to those bureaus and sections Mat were in charge of particular sectors of Be economy. Of course, Here was a priority ranking of venous policy needs, but increments were distributed among ministries and their bureaus rather evenly (the so-called budget in- crementalism). The growing industries got a fair share of assistance, but so did declining sectors, such as agriculture in the form of dis~bui~onal com- pensations (e.g., rice-price support). Possible ~ntersectoral conflicts were skillfully resolved through quasi-bargaining among ministries, which was mediated by the Budgetary Bureau of the MOF. Effective in this process was comp~nentalized administrative territonalization, Bough which plur- alistic group interests were channeled and guarded through relevant and specific bureaucratic organs. But the effectiveness of this "administered pluralism" seems to have begun to erode to some extent. First, the new macromanagement rule (3) has made it increasingly difficult for the MOF not only to distribute incremental assistance evenly to various sectors, but even to single out a favored target sector into which generous fiscal and talc backing can be directed. Second, partly because of this need for fiscal stringency and partly because of the increasing complexity and intertwining of sectoral interests, compartmentalized administrative temto- rialization and mediation of conflicting interests are becoming somewhat ineffectual. A corollary to this is that Be leadership of park politicians in interest mediation is gaining in relative importance vis-a-vis that of bureau- crats. This fundamental picture seems to be applicable to the area of high tech- nology as well. Despite rawer exaggerated publicity In Be United States regarding Be cmop labs for VESI (very large scale integration) administered by MITI, government assistance of research and development in the computer industry in Japan is, as Daniel Okimoto (in this volume) correctly points out, not so important from an international standpoint. In addition, potential high- tech development is so diverse and intertwined that jurisdictional disputes among such concerned ministries as MITI, Ministry of Posts and Telecom- municanons (MPI), Ministry of Agriculture (biotechnology), Ministry of Welfare (medicine), Ministry of Education (copyright administrations, the Agency for Science and Technology, and so on, may potentially hinder the effectiveness and efficiency of sectoral management in the field of high technology. These two problems can be well illustrated by a recent decision concerning Be privatization of N11.

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576 MASAHIKO AOKI -Nil, which had monopolized telecommunication and telephone services in Japan and had been fully owned by the government, was privatized on April 1, 1985. The book value of net assets of the new private corporation was about three-quarter trillion yen (about $3 billion); one-third of the stock is to be owned by the government, and the other two-thirds is scheduled to be marketed over a 5-year period. The capital gains due to stock sales to the public is estimated in the range of 3 trillion to 5 trillion yen. MITI wanted the proceeds of stock sales allocated for the establishment of a new Industrial Technology Center, which would finance private corporations engaged in research and development of high technology, especially electrocommuni- cation. The MPT wanted the proceeds to be used for the establishment of the Organization for Promotion of Electric-communication, under its control. The MOF disappointed both by deciding that the stock to be liquidated publicly will first be allocated to the National Bonds Redemption Special Account; the proceeds from stock sales and dividend receipts therefrom will be used exclusively for the redemption of national bonds. The estimated amount of net redemption of national bonds in 1986 is 1.6 trillion yen. A small public corporation will be established from the dividend revenues from government holdings of the new Now stock and possibly by financing from the Development Bank. This new corporation will be engaged in financing private technological development under the joint administration of M1TI and My. In this settlement of jurisdictional disputes among the three rival ministries, party politicians played a decisive role. The high-tech industrialization under the new macromanagement rules will thus be likely to tale shape in a politico-economic environment different from the one that prevailed under effective sectoral management in the high- grow~ period. But does it mean that the future of Japanese high-tech in- dustnalization is dismal? EXCESS SUPPLY OF PERSONAL SAVINGS Despite Be stringency of the fiscal assistance to be expected from the government for high-tech industrialization, the future of fiscal assistance must be assessed from a broader, macroscopic perspective. In this and the next section, I will discuss the implications of the macro investment-savings balance for financial aspects of high-tech industnalization. As is well known, one of the important characteristics of the Japanese economy Is its high personal savings rate. In the period of high growth, some Died to explain this phenomenon as being the result of the lad, In the ad- justrnent of the consumption level by households to the unexpectedly con- tinuous increase in income levels (the pe~n~anent-income hypothesis). Others attributed the high personal savings ratio to the fact that the population was composed of relatively younger generations who needed to save for their

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MACROECONOMIC BACKGROUND FOR HIGH-TECH [ND U=RI~TION IN CAPS 577 life-cycle planning (the life-cycle hypothesis). Still others considered the inadequate social security provisions responsible for the phenomenon. These explanations may have been partially valid, but not entirely, because the personal savings rate went up throughout the first half of the 1970s, a time when the growth rate started to slow, the population became relatively aged, and the social security system became as generous as in Western countnes. The personal savings rate has become somewhat lower since then, but in the early 1980s the ratio of households' excess saving over investment to GNP still remains as high as around 10 percent. So, the target level of wealth relative to income for households is considered Sull high. One of the incentives for the household to accumulate wealth was to finance an investment in housing stock. Throughout the 1970s, about 15 million housing units were built, which was equal to about 40 percent of the total number of households in 1980. Because of this accumulation of housing stocks, there is some indication of a sluggishness on the demand side of the housing market in the 1980s. Instead, the households, specif- ically relatively h~gh-income households, began to show a preference for the relatively lagged accumulation of financial assets. A midterm forecast by the Economic Planning Agency predicts that a substantial amount of savings will continue to be supplied by the household sector of the economy until the end of this century despite the slowdown of housing demand, aging of population, and so on. Which sector of the economy will absorb this excess saving? According to a basic macroeconomic accounting iden- tity, excess savings of the household sector must be equal to the sum of the excess of investment over saving of the corporate sector, government deficit, and current external surplus. Until the mid-1970s, the excess savings of the household sector was mostly absorbed by excess investment of We corporate sector, but since then cor- porate investment has started to fall and, instead, the government has assumed the major role as savings absorber. In the early 1980s the government ab- sorbed about one-third of the excess savings of households. Also, current external surplus started to rise in the 1980s after the effect of the second oil shock was subdued. Japan's export of long-term capital began to rise ac- cordingly, and its total amount between 1981 and 1984 is estimated at $90 billion. In the last year alone Japan exported as much as $50 billion, out of which $6 billion was invested in common stocks, as well as in factories, largely in die United States. Japan became the largest capital exporter in the world economy. Today there is some controversy in Japan about the domestic capability to absorb the excess savings of the household sector. Some argue that an innovative expansionary policy can be, and should be, employed do- mestically to avoid a further worsening of trade frictions abroad. Others, represented by MOP bureaucrats, alarmed by accumulating national debt

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578 MASAHIKO AOKI arid in an effort to legitimize macromanagement rule (3), are reluctant to move in that direction, arguing that a substantial proportion of the in- creasing capital export is an inevitable consequence of the maturity of the Japanese economy. The controversy is not settled, but the prospect is that, given macromanagement rule (3), a substantial amount of funds is likely to be available to the corporate sector as well as to the external sector for some years to come. FINANCING HIGH-TECH INDUSTRIALIZATION It has been argued that the lack of a venture capital market, as well as the stigma against takeover, is the Achilles' heel of Japanese high-tech devel- opment. Others have argued, based on a somewhat stereotypical perception of the role of government in the period of high grown, that government assistance will provide a substitute for risk-bearing private capital. But I would submit that both of these views should be examined critically in light of the macroeconomic characteristics summarized above, specifically the significant excess savings of the household sector. I have already noted that the availability of direct financial assistance by the government will be limited under the new macromanagement rule (31. What about He venture capital market? Will it grow as a means of channeling He excess savings of the household sector to high-tech indusmes? Or will some over means of fi- nancing high-tech industrialization develop with He background of a rela- tively ample supply of savings? A comparison of the financial mechanisms of the United States and Japan leads me to conjecture that the main supply-side causes of the relatively advanced development of the venture capital market in this country are artnbutable to He combination of He following Tree factors: the relative scarcity of capital supply to He business sector, the relatively nsk-taking attitudes of investors, and He current tax structure, which treats capital gains relatively favorably. The fist two factors encourage investments in assets whose expected returns are relatively high, albeit risk may be relatively high, too. The tax reform of the Reagan administration also makes equity invest- ment more advantageous to investors in relatively higher income-t~c brackets and they are major capital suppliers. Further, it motivates entrepreneurial individuals to start up their own corporations rather than to remain as high- salaIy eamers. In Japan, in contrast, households of all tax brackets more or less contnbute to savings, and until recently, they have equally revealed solid preferences for investments in safe assets, such as bank deposits and postal savings, despite the fact that after-tax returns from stockholdin~,s far exceeded, on average, that from deposit holdings in He past. (The average annual rate of after-tax returns from stockholdings of listed corporations was around 17

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MACROECONOMIC BACKGROUND FOR HIGH-TECH INDUCTION IN RAPS 579 percent-in the period between 1964 and 1984, whereas the average annual deposit rate was around 5 percent.) This indicates that Japanese investors are, on average, very risk-averse. But there are growing signs that relatively higher-income households tend to diversify their financial portfolios more. They are active participants in the stock market despite an apparent decline in the relative ratio of individual stockholdings of listed corporations. (In- dividuals do not disclose their stockholdings fully in order to evade tax. But a recent official Survey on Household Savings, conducted by the Prime Minister's office, clearly shows the increasing shift of portfolios by relatively high-income households toward stockholdings.) Whether this trend will lead to a significant development of the venture capital market in Japan is yet to be seen. However, the relatively higher level of savings in Japan tends to reduce the supply price of capital. Also, pooling and diversification of rel- atively ample funds by conventional financial institutions (such as banks) and growing investment funds (the Japanese equivalent of mutual funds) would make the reduction of aggregate-risk costs possible. Therefore, from the supply-side point of view, one cannot conclude decisively, despite the relatively infant development of the venture capital market, that financing of the risky high-tech industry is disfavored in Japan. One has to look at the demand side as well. One of the demand-side factors responsible for the development of the venture capital market in the United States is, needless to say, that commercialization of new tech- nology very often takes the for of start-ups of new venture firms. In my opinion, one of the reasons for this is, in turn, the conflict between the individualistic and independent tendency of highly capable engineers and entrepreneurs and the near perfection of technocratic control in large, highly integrated firms. In this respect, too, Japan stands somewhat in contrast to the United States. While Japanese engineers and managers are not entirely conformists lacking any inclination toward independence, as often caricatured in the West, Japanese corporations have developed a moderate organizational innovation that will reduce the technocratic sti- fling of individual initiatives and the poor communication that are often observed in highly integrated corporate firms. Since the mid- 1970s, there has been an increasing tendency among large corporate firms to hive off fully or partially owned subsidiaries, to invest in joint ventures with other corporate firms (the so-called corporate part- nership), and to rely on outside suppliers under long-run relationships. This is very much in contrast to the tendency for major American cor- porations to integrate through acquisition as well as internal diversif~ca- tion. For instance, in 1970 major corporations in the electric machinery and electronics industry, as listed on the Tokyo Exchange, reinvested 20.0 percent of their paid-in capital in majority-owned subsidiaries, but this ratio climbed to 72.6 percent in 1984. Investment in partly owned (20 to

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580 MASAHIKO AOKI 49 percent), so-called related, corporations has increased similarly. This hiving-off tendency is certainly different from the spinning off of venture business fimns from established firms by the aid of venture capital markets as observed in this country. However, it should be noted that the relative merits of small-scale firms in high-tech industrialization, such as the more direct exposure to market incentive, the creation of an atmosphere favor- able to individual initiative, the savings on the cost of informational ex- changes by reducing hierarchical layers, the flexible and ad hoc adjustments of labor conditions, and so on, also apply, at least potentially, in those subsidiary corporations. Also "partial" ownership of major corporations is one way of attracting external funds that would be unavailable in the case of corporate venturing. Further, partial ownership of large corpora- tions provides a certain degree of insurance for minority investors in potentially risky investments. Still further, joint venturing (corporate pan- nership) may facilitate quickly combining and amalgamating hitherto un- related technological know-how and realizing discontinuous technological progress, which would be impossible under in-house research and devel- opment, yet without spoiling existing corporate cultures, as happens in . . . acqulsltlons. I would submit that this tendency toward hiving off and joint venturing (between major corporations, between foreign and domestic corporations, between larger and smaller corporations, between corporations and other investors including individuals, and so on) is one important way of com- mercializing and financing risky high technology in Japan. And these may be realized without great, if any, help from the venture capital market, but with the use of more conventional banks, securities markets, and internal funding. Finally, it should be noted that Japan is likely to become the largest capital exporter in the rest of the 1980s, as the household sector is likely to keep generating more savings than the business and government sectors can absorb. A substantial proportion of capital exports will possibly be directed to the United States if the domestic savings-investment gap in this country continues. Japanese corporations will set up subsidiaries and joint ventures here as in their home country. In the Los Angeles area, it is estimated that there are already 1,600 subsidiaries and branch offices of Japanese firms, but the number is increasing at the rate of one per day. Joint ventures between American and Japanese corporations, if econom- ically profitable, may also contribute to the establishment of a new business paradigm suitable for the age of high technology by amalgamating two important corporate cultures of the modern world. But, on the other hand, some of the investments by Japanese corporations in this country may possibly take the form of acquisition since the stigma against it is not as strong here as in Japan. This will provide a quick way for Japanese cor-

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MACROECONOMIC BACKGROUND FOR HIGH-TECH INDU~TION IN ]~^ 581 porat~ons to acquire know-how. Will, however, the overpresence of for- ei=,n ownership in strategic high-tech industries not cause resentment among the American public? The asymmetry of investment-savings gaps between the two countries, if it persists, may pose a hitherto unknown, potentially serious problem for Japan.

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