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SUMMARY

Shifting Gears in Innovation Policy: Strategies from Asia

Asian countries need to generate more disruptive, indigenous innovation that can sustain economic growth and distribute wealth to their citizens. Photo credit: ADB.
Asian countries need to generate more disruptive, indigenous innovation that can sustain economic growth and distribute wealth to their citizens. Photo credit: ADB.

Published: 23 April 2021

A new book identifies ways to stimulate Asian economic growth through a shift from traditional industrial policies to indigenous innovation.

Overview

Asian governments have long emphasized innovation as part of their economic policies but have largely relied on traditional tools originating in industrial policy. They have typically identified promising high-tech industries and then—through direct subsidies, tax breaks, and preferential financing—tried to encourage domestic firms to import essential technologies from more advanced economies, improve them, and succeed in global markets.

The catch-up phase of economic growth, however, is over or ending for many East Asian countries. They can no longer merely emulate the technologies of more advanced countries. Rather, they need to generate indigenous innovations. Traditional policies targeting specific industries will not be effective either because it is very difficult to predict which industries will be successful.

Asian governments now seem to understand the importance of indigenous innovation. Recent administrations in Japan, People’s Republic of China (PRC), and Republic of Korea (ROK) have all put forward innovation and entrepreneurship as their primary economic policy goals. Yet it is less clear if they appreciate the necessity of breaking away from traditional industrial policies that pick promising industries and divert resources to them. The literature that examines the determinants of East Asian economic growth, too, has largely focused on industrial policy.

Shorenstein Asia–Pacific Research Center’s volume Shifting Gears in Innovation Policy, which we co-edited, critically reassesses what type of innovation policy Asian economies should pursue. It is the first in a series of publications based on the ongoing Asia–Pacific Innovation Project, which produces academic and policy research to help promote innovation and entrepreneurship in Asia.

The book focuses on national innovation strategies and regional cluster policies that can promote entrepreneurship and innovation. The contributors to the volume address questions, such as: How do institutions and policies affect the incentives for innovation and entrepreneurship? Are Asia’s innovation systems similar to or different from those of other countries, especially Silicon Valley that they try to emulate? If so, what has worked and what has not? Going forward, are there promising strategies to promote innovation? In addressing these questions, we have compared the policies and practices of India, Japan, PRC, ROK, Singapore, and Taipei,China.

We neither blindly advocate for replicating Silicon Valley nor for a government-driven, industrial-focused innovation policy. We also remain neutral as to the importance of large corporations versus startups for innovation in Asia. The book’s main contribution is in its critical approach to seeking out a fresh direction for innovation and entrepreneurship in the context of Asia today and the near future.

Key Findings

Governments still play an important role in encouraging innovation and entrepreneurship in Asia. However, the findings of the contributors to our volume suggest that future national innovation policies need to break away from the industrial policies of the past. Whereas the latter involved direct administrative guidance by picking industries and national champions, future innovation policies should focus less on the specifics and more on promoting and establishing ecosystems and environments that can help foster innovative firms, people, and ideas. Disruptive innovation is about finding new values, and hence, governments need to educate people and create environments conducive to entrepreneurship and innovation.

Our authors provide the following recommendations to help Asian nations generate more disruptive and impactful innovations that can sustain economic growth and distribute wealth to their citizens:

  • Change mindsets. Stanford’s Edison Tse examines how platforms that link different economic agents and a top-down approach to transformation of mindsets toward entrepreneurship can initiate disruptive innovation in the PRC. The success of companies like Alibaba, Tencent, and Baidu demonstrates the impact of this approach. Ways to further spur innovation include creatively imitating information technology-related innovations that have been successful in the United States and transforming traditional businesses by adapting new technologies and business models to ease the pains introduced by rapid economic development, among others.
  • Promote technical education. Stanford Law School’s Dinsha Mistree highlights India’s national policy in relation to its software industry and examines the government’s role in creating a successful cluster of firms. At both the federal and state levels, the Indian government adopted a broad set of measures fostering an innovation-friendly environment for its growing software industry. These, in contrast to traditional industrial policy measures, included investment in technical education, development of telecommunications infrastructure, and creation of technology parks. The government promoted the entire software industry rather than targeting a few winners, which proved to be a successful strategy.
  • Invest in “deep technologies.” Assessments of Singapore's innovation and entrepreneurship ecosystem by National University of Singapore Business School’s Poh Kam Wong show that government initiatives to promote entrepreneurship and innovation have increased startups in the internet, mobile, and IT services sectors, but not in “deep technology” sectors—i.e., those that may incur high fixed research and development (R&D) costs but have the potential for greater payoffs in the future, such as biomedical, clean tech/energy, and advanced engineering. Wong finds that, despite the increase in the number of startups, the pace of innovation in Singapore has been slow. He stresses the importance of promoting indigenous private innovation by fostering technology entrepreneurship, not simply IT service-oriented entrepreneurship; balancing the promotion of innovative capability between incumbent firms and startups; developing international connections to draw talent and capital; and supporting universities to serve as local incubators.
  • Incentivize firms. Keio University’s Toshihiro Okubo finds that in Japan, regional cluster policies for promoting industries and R&D did successfully increase the number of firms and industrial clusters, but that the resulting firms were neither highly productive nor innovative. Okubo commends Japanese officials on their willingness to invest in examining the efficacy of their policies and argues that, rather than a top-down, fully funded approach to regional cluster policies, Japan should implement a scheme where the government matches 50% of the funds and provides better incentives for firms to become productive and innovative.
  • Encourage a holistic approach to collaboration. The efficacy of regional innovation clusters depends not only on the performance of each constituent but also on how the actors interact with one another. Korea Development Institute's Injeong Lee and Korea Advanced Institute of Science and Technology's Wonjoon Kim examine the connections among three key actors—universities, industries, and government research institutions—and their roles in two representative innovation clusters in the ROK and Germany. Their comparative analysis reveals that concentrated collaboration led by a smaller number of firms seems to be related to better overall economic performance compared with diffused collaboration among a large number of actors within the cluster. These findings suggest that, when promoting joint R&D activities among entities within a cluster via subsidies or other policies, governments should incentivize entities to strengthen and deepen their collaboration rather than promote the overall quantity of R&D collaborations.
  • Build flexible and dynamic ecosystems. Academia Sinica’s Michelle Hsieh shows how innovation occurs through collaborative learning and technology diffusion, using the case of Taipei,China’s small- and medium-sized enterprises. In what she calls “the less-celebrated model,” these initiatives tend to deploy relatively flattened resources and low budgets. In the less-celebrated model, building capability is a matter of bridging different production networks to induce technological advancement along the entire supply chain, and sustaining clusters. Therefore, what makes a cluster tick is not the size of the firms in it but the specific ways in which the network of firms and public research institutes are linked in a decentralized system. This kind of flexible and dynamic ecosystem enables some clusters to remain resilient, territorially rooted, and globally connected.
  • Create distributed innovation models and embrace cutting-edge technologies. Proponents of government-led innovation typically argue that a top-down approach is necessary because developing countries lack human capital and organizational capacity in the private sector. Singapore University of Social Sciences' David Kuo Chuen Lee, however, points out the problems of top-down national innovation strategies, especially those pertinent to many developing countries, and finds a more promising approach in decentralized innovation policies and distributed innovation models. He also argues that new technologies, especially blockchains and cryptocurrency, can help solve the problem of technological progress in developing countries by allowing innovation to progress in a decentralized and distributed fashion.
  • Support enterprises of all sizes and involve the global value chain. Should Asian governments work to create environments more amenable to large businesses or to small businesses and startups? A prevailing notion is that startups are the drivers of innovation. However, Seoul National University's Hwy-Chang Moon and Seoul Business School, aSSIST University's Yeon Lee emphasize that enterprises of all sizes contribute to economic growth and that innovation policy should emphasize the cooperation and harmony among them rather than trying to implement a one-sided policy that favors one over the others. They also argue that Asian countries should continue to be active members of the global economic system for their innovation and entrepreneurship policies to be successful going forward.

Resources

Stanford Asia-Pacific Innovation.

Walter H. Shorenstein Asia-Pacific Research Center. Book interview with Yong Suk Lee. SoundCloud audio. 19:17. 2021.

Y.S. Lee, T. Hoshi, and G.W. Shin, eds. 2020. Shifting Gears in Innovation Policy: Strategies from Asia. California: Walter H. Shorenstein Asia-Pacific Research Center.

Ask the Experts

  • Yong Suk Lee
    Assistant Professor, University of Notre Dame

    Yong Suk Lee’s research focuses on how new digital technologies, such as robotics and artificial intelligence, affect labor, education, entrepreneurship, and productivity. Prior to joining the University of Notre Dame, he was SK Center Fellow and Deputy Director of the Korea Program at Stanford University’s Shorenstein Asia-Pacific Research Center. He holds a PhD in Economics from Brown University and a Master of Public Policy from Duke University. 

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  • Takeo Hoshi
    Professor of Economics, University of Tokyo

    Takeo Hoshi’s research areas include corporate finance, banking, monetary policy, and the Japanese economy. Previously, he served as Henri and Tomoye Takahashi Senior Fellow at the Freeman Spogli Institute for International Studies at Stanford University and Pacific Economic Cooperation Professor in International Economic Relations at the University of California, San Diego.  He holds a PhD in Economics from the Massachusetts Institute of Technology.

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  • Gi-Wook Shin
    Director, Shorenstein Asia–Pacific Research Center, Stanford University

    Gi-Wook Shin is William J. Perry Professor of Contemporary Korea, professor of Sociology, senior fellow at the Freeman Spogli Institute for International Studies, and director of the Korea Program. His research concentrates on social movements, nationalism, development, and international relations. His current book project on global talent flows examines the growing importance of transnational human and social capital and assesses talent development and recruitment in the Asia–Pacific region. He holds a PhD from the University of Washington.

  • Walter H. Shorenstein Asia–Pacific Research Center (Shorenstein APARC)

    Founded in 1983, Shorenstein APARC addresses critical issues affecting the countries of Asia, their regional and global affairs, and U.S.–Asia relations. As Stanford University’s hub for the interdisciplinary study of contemporary Asia, it produces policy-relevant research and provides education and training to students, scholars, and practitioners. It also strengthens dialogue and cooperation between counterparts in the Asia–Pacific and the United States. 

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