The economy of Japan has always been a subject of discussion because over years it has amazed many by its strength compared to the sheer size of the country. Since the 16th century, the country has had a culture that has established its activities in Asia and the World at large. Trade at international level kicked off during the Edo period when the country manufactured its first sea-going ship. Urbanization, domestic and foreign commerce flourished and Japan learnt western ways of doing trade.
This trend continued till Meiji period when industrialization took place imitating western trends (Dekle 1998). The economic growth in Japan had always been favored by wars from which it benefited due to its military strength. This however changed during the Second World War as witnessed not only by the reduction in exports but also demolishment of industries. In 1941 the country had a fleet of shipping of 6 million tones which was reduced to 2 million in 1946. By the end of the war the country had been wrecked by shortages, inflation and currency devaluation making its economy come into a standstill.
Most of its factories were destroyed and after the War the country embarked on rebuilding factories by the help of United States who granted $ 1. 9 billion (Tomiura and Uchida2001). The country adopted modern education systems aimed and improving technology in the country. Establishment of modern industries gave the country competitive advantage over other countries and ensured a growth of 17% from 1965-70 in manufacturing and mining (Dekle 1998). Production revolved around textiles and light manufactures which had international profitability, while mining, automobiles, machine tools and ships offered new opportunities.
Manufacturing industry was given a facelift in the 70’s and 80’s after the introduction of micro-circuitry and semiconductors which saw the entry of consumer electronic gadgets and computers in the trade arena. High productivity growth was experienced which was as a result of product diversification. In the 80’s, Japan’s shipbuilding dominated the world with the country filling more than half the world orders. In 1989 for instance the country received orders for 7. 1 million tons. Pharmaceutical production had a growth of 8% in the same year and has since then grown to be the second world largest individual market as of 2006.
Motor vehicle production is one of the economies backbone with country hosting six of the top ten world largest vehicle companies. Vehicle industry hit World number one in 1991 when Japan produced 9. 7 million automobiles compared to the United States’ 5. 4 million. Hosting seven of twenty largest chip manufacturers, Japan has continued in its computer exports prowess that enabled the country to export US $1. 5 billion worth of computer equipments compared to U. S $122 million by U. S. Other production units in Japan include biotechnology, aerospace food and textile.
To achieve all these and grow to be the second World’s largest economy Japan has heavily relied on international trade and innovation. Due to its small size, Japan heavily relies on production for lack of many resources as compared to China. The size of its population cannot guarantee its survival and has to rely on international market for sales. To do this, its products must modern and sophisticated which calls for innovation. This paper is aimed at analyzing the interrelatedness of innovation and international trade to the growth in production industry in Japan (Yamashita 2010). Innovation in Production Industry
Innovation has in many occasions been thought to be just development and improvement in products but in modern world it applies many aspects in business. On understanding this, the Japanese people broadened their perspective on the term to include improvement in structure enterprise, proprietary processes, services and customer experience. Innovation was categorized in terms of output: Tangible Outcome and Intangible Outcome. Innovation aimed at intangible outcome includes new products, knowledge, designs, formulas and technical expertise which are quantified and protected legally through patents.
Intangible outcomes include new processes and ways of doing things to give companies competitive advantage. These including merging companies and increasing the companies nationwide presence to improve quality, quantity and overall business performance. Japan had the best innovations as of the 70’s through the 80’s but has been surpassed lately to be ranked ninth in 2008 (Yamashita2010). Japan’s international recognition in computers and domestic electronics was as a result of innovation in the field in the 80’s.
In 1988 development in computer chips made in Japan was so improved that the United States spent US $ 3. 2 billion to purchase computer gadgets from Japan. Japan had invested well in idea generation aimed at developing ideas for better performance (Tomiura and Uchida 2001). Customers’ requests were the basis of innovations and supported by the governments support for research for new techniques of doing things, innovation was easy to achieve. Though suppliers had a role in defining the direction innovation, customers played an integral part in determining the destiny of innovation.
This was exemplified by the automobile industry where in the late 80’s manufacturers availed different vehicles aimed at withstanding different conditions depending on the country that requires them. In order to achieve this, the industries heavily relied on the skilled labor which was useful in implementing new ideas and looking for new ways of achieving same or better results faster in more efficient means. This was backed by the education system adopted during the postwar era. It was not only technology oriented but laid emphasis on individual development which played an important role in ensuring individual production thus innovation.
Though it cost the government billion of Yens, it was rewarding in the long run due to the innovations that came from the region giving the country an international upper hand in sales of technological gadgets. The upward trend experienced in the 70’s and 80’s in terms of economical growth came to a halt in the 90’s due to nonperforming economy. Though exports were still high, most companies recorded low profit margins. Innovation had to be used to in order to restore previous profit levels. In order to do this, most processing companies resulted in merging and acquisition.
Maksimovic and Phillips (2002) observed that most productive firms acquired less productive firms to increase their profits. This was through extending managerial skills and superior technology to acquire their assets (Yoshida 2005). Merging improved productivity which enhances profit maximization.. Yamashita (2010) analyzed mergers in Japan from the 1980 to 2004 an d observed that merging improved labor productivity and was stronger within group mergers than others. This is cautiously done to avoid R;D projects which appear unprofitable and have a high probability of causing bankruptcy.
During the merging processes, acquirers’ leverage is increased while cash holding is reduced. This is observed closely for it has had negative long tern effects to some companies. Financial market frictions and debt has been the end result of myopic markets that failed to look at the long term effect of owning some R&D projects (Yamashita 2010). After the failing economy persisted in the 90’s, merging was adopted as the new technological advancement at the expense of technological advancement. This however, did not meet the former levels of innovations as long term effects illustrated otherwise.
Studies done have shown that the total factor productivity (TFP) goes down after merging and does not recover fully until after the third year. According to Tomiura and Uchida (2001), the large cost of integration causes R;D not to change significantly despite increase in the debt-to-asset ratio. This has trailed Japans’ economic growth compared to other Asian countries like Singapore, South Korea and China. Much of innovation incorporated to overcome this trend is in management. Other innovative process involves setting up plants in other countries. This gives other nations patents to operate under brand names of companies based in Japan.
In doing this, Japan is saved the production processes and reaps benefits for the goodwill. Toyota, Sony and Toshiba have taken advantage of emerging economies in Asia to set up processing plants in these nations giving rights to the host countries to produce under the brand name on some conditions. This has been the major survival tactic of manufacturing companies in for it is a marketing strategy also. This has increase intra industrial trade and bilateral and multilateral trade making Japan soar on high despite the hard times. Intra-industry trade
International presence of multinational corporations (MNC) has helped in outsourcing fragmentation of production industry. Outsourcing used to describe a company that has relocated part of its production from home to another country. A good is example is the trade of automobiles components which is done between different units of multinational corporations which can be referred to as vertical intra-industry trade (VIIT). This largely aimed at reducing labor-market costs. Automobile firms have been exchanging intermediate goods which belong to the motor vehicle industry but are located at different levels or stages in the production process.
According to Kimura et al (2009), “trade in parts and components is regressed on the difference of GDP per capital, in addition to the incomes of trading partners and the geographical distance between them. ” Trade in components has been a case of vertical trade driven by fragmentation of components and increases larger income gap. This has resulted in the presence of dealers in components and complete products. For instance Yoshida (2005) observes that Toyota and Honda are automobile makers compared to Denso who are automobile suppliers.
FDI by the suppliers has promoted trade among different countries whether they are importers or exporters while the manufacturer only contributes to regional trade when a host country is an importer. This has been the case between China and Japan who have improved trade due to IIT. Bilateral trade between the countries grew by 12. 7% reaching record high in 2005 $ 189 billion according to Japan External Trade Organization (JETRO) (2006). Japan’s exports surged by 8. 9% to $80. 4 billion and it imported goods worth $109 billion a 15. 7% increase.
These exports were mainly IT-related items that were largely demanded in Japan. Japan imported personal computers, printers and other office equipments while the biggest surge in its exports was visual apparatus like digital cameras and home video cameras which surged to 167 percent. Grubel and Lloyd (1971) noted that the fraction deemed to be intra-industry trade depends heavily on the definition of an industry. In industries which are defined more coarsely, distribution overlaps trade. For existence of true intra-industry trade, there must be product differentiation either horizontal or vertical. (Hallak, 2006).
Trade flows in Japan have been stable and distinct compared to other markets due to control of industry composition and conditioning. This has been the main strategy used to ensure sales of its products in East Asia and Europe in general. Studies done in the past have shown rapid increase in vertical IIT in the East Asia region (Fukao et al 2009). It was observed to have increased from 31% in 1996 to 43% in 2000 in electrical machine industry. According to data provided by the Ministry of Finance of Japan, there had been dramatic increase in trade between Japan and other Asian countries from 1988 to 2000.
Electrical machinery trade increased from less than 10% in 1988 to almost 60% in 2000. This was also the trend with other Asian countries. This was due to MNEs in electrical machine setting up plants and increasing production overseas. This attributed for the 9. 4% growth in electrical machines industry recorded from 1990-98. This was the best performing industry in the manufacturing sector in Japan. 8. 5% of the 20. 8% production in 1998, was from Asia, 7. 0% from America while 4. 6% was from Europe. This promoted VIIT between Japan and the countries where MNEs were set up (Haskel and Slaughter 2000).
It was then observed that for vertical intra-industry to flourish FDI costs and trade costs are small. Substantial FDI costs surpass gains achieved from international labor which is indispensable for vertical IIT. This calls for horizontal IIT whereby developed countries instead of exporting goods set up production units in developing countries. This is further determined by factor price gap which if small reduces incentives used in international division of labor through FDI which decreases vertical IIT. Hallak (2006) observed that patterns of IIT shape both market size and membership of customs union.
This further has an impact in wages and differences in per capita GDP. On noting this, Japanese electrical and machinery products have been pursuing FDI and are characterized by division of labor. This has made Japanese MNEs to increase their activities in other countries. MNEs in Japan specialize in production of labor-intensive products of high quality while host countries major more in labor-intensive production of low products. For instance the MNEs have strengthened their competitiveness through combining China’s low production costs together with their already established brands, superior technology and global distribution systems.
This enables China (and other countries) to benefit from international vertical division of labor increasing vertical IIT. FDI has positive effects on vertical IIT while geographical region has negative effects on the same due to higher trading costs. Difference in factor endowments made VIIT to increase whenever the gap in per capita GDP exceeded 10000 international dollars which was as a result of controlling the level of FDI in the Asian region. Intra-industry Trade has been useful to the Japanese economy in recent years.
Cooperation in the same has enabled the country to maintain and improve its production capacities thereby maintaining a high GDP and per capita income. Until 2008, when global recession hit Asia the trend had been upward with most production companies seeking cooperation with other countries for maximum sales in products. Impact of International Trade Japan’s economic growth has heavily relied on the international level of trade. Its sheer size cannot fully rely on its population wholly for growth.
It doesn’t have the largest resources in Asia but this has not denied the country an opportunity among the best economies in the world. To keep up its position in the world map, Japan has over relied on multilateral trade to ensure boom in its economy. International trade has even shaped local economic trends and politics in Japan, therefore playing an important role in manufacturing industry and growth in general. International trade has affected employment rates and wages distribution in Japan.
Employment in manufacturing industry recorded a decrease of 3. % from 1988 to 1995 where figures reduced from 798 million to 770million. This mainly affected employees with lower education qualifications who were adversely affected by international trade. While there was a significant decline in employment rates for high school certificate holders, there was a sharp increase in employment rates for college and degree holders. This could be linked to decrease in exports in apparel, print, food, wood, textile and steel industries which had a higher employment for unskilled labor.
On the other increase in exports in machinery industries required more skilled labor which was through college and universities graduates. Haskel and Slaughter (2000) note that international trade demanded for improved technological skills which come with higher wages. Exports growth has had changes in employment for men as observed by Rebick (1999) unlike imports that have no noticeable effect on employment changes. Imports done in the electric machinery industry the largest sector in Japan by level of employment had an 8% share in the domestic market in 1995 according to Tomiura and Uchida (2001).
There have been debates however on the effect of imports to employment. While Rebick (1999) observes no significant difference in terms of employment as a result of imports, Delke (1998) noted there is a significant sensitivity on employment as a result of changes in import rates. This means that fluctuation in employment cannot be neglected especially in manufacturing industry. A study of 390 industries done by Dekle (1998) illustrated that there is a positive impact international trade in terms of imports and exports has an impact in prices of commodities and overall employment rates.
This is because bonus payment is dependent on negotiations between employment unions and firm management which profoundly depends on profits and trade in general. Imports and exports in manufacturing industry have relied on some factors for their smooth running which include good policies, trade liberalization and exchange rates. The strength of international currencies has influenced the level trade in Japan. High oil prices affected exports and imports level which made the country’s government to commit 6. 8 trillion yens of expenditure aimed at improving trade at international level in 2008 (Yamashita 2010).
Japan has resulted to mechanisms aimed at improving its trade in international level to achieve growth in its economy. Conclusion Japan’s presence in international level was as a result of its economic growth boom especially in the70’s and 80’s. It was innovation in technology that first set the trend of economy boom. Advancement in processes of manufacturing enabled the country to increase its production capacity in automobiles and electric machines thereby creating job opportunities. This improved the country’s export sector which hit highs in 1990’s when automobile and domestic electronics industries led the world.
In the early 90’s companies turned for foreign trade due to the asset price bubble that declined operations and affected the companies. Production companies set plants in other countries and encouraged intra-industrial trade. Trade at international level has increased the countries prospects in the recent years but got a huddle in 2008 after the global economic crises. From the interrelatedness of R;D from international trade it is clear that economic growth has big drivers in the name of innovation and intra-industrial trade.
Production in Japan has in the recent years faced stiff competition and since the shakeup in Japans economy, the country has lagged behind in terms of innovation . This has affected the growth rate of Japan’s economy which has made its prowess in Asia to be overtaken by China. Allow investment from foreigners however has enabled the country to remain in the competitive arena despite the hard economic times it has been through. This is a clear indication of the impact innovation and international trade have in ensuring economic growth.