How Institutional Arrangements in the National Innovation System Affect Industrial Competitiveness: A study of Japan and the United States with multiagent simulation

The Japanese national innovation system (JP NIS) and that of the United States (U.S. NIS) differ. One of the differences is that firms in the JP NIS are likely to collaborate with historical partners for the purpose of innovation or rely on in-house research and development (R&D), approaches that form a "relationship-driven innovation system." In the U.S. NIS, however, firms have a relatively weak reliance on prior partnerships or internal R&D and are likely to seek entities that know about the necessary technology. Thus, U.S. players acquire technologies through market transactions such as mergers and acquisitions (M&A). This paper primarily discusses how this institutional difference affects country-specific industrial sector specialization. Then, by using a multiagent model of the NIS and conducting simulation, we examine what strategy would help Japanese firms in industries dominated by radical innovation. The results show that the JP NIS provides an institutional advantage in industries with fast-changing consumer demand that require incremental innovation. However, the U.S. NIS benefits industries that require frequent radical innovation. Our analysis reveals that extending the partnership network while keeping internal R&D capability would be a beneficial strategy for Japanese firms in industries driven by radical innovation. Therefore, the present research suggests that policymakers need to differentiate policy that emphasizes business relationship and market mechanism importance according to industrial characteristics in order to improve overall national industrial competitiveness. At the same time, Japanese firms need to strengthen their R&D capability while trying to extend their pool of technology partners in order to improve the flexibility of their responses to radical changes in an industry.