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Going Soft: How the Rise of Software Based Innovation Led to the Decline of Japan's IT Industry and the Resurgence of Silicon Valley

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  • Ashish Arora
  • Lee G. Branstetter
  • Matej Drev

Abstract

This paper documents a shift in the nature of innovation in the information technology (IT) industry. Using comprehensive data on all IT patents granted by the USPTO from 1980-2002, we find strong evidence of a change in IT innovation that is systematic, substantial, and increasingly dependent on software. This change in the nature of IT innovation has had differential effects on the performance of the IT industries in the United States and Japan. Using a broad unbalanced panel of US and Japanese publicly listed IT firms in the period 1983-1999, we show that (a) Japanese IT innovation relies less on software advances than US IT innovation, (b) the innovation performance of Japanese IT firms is increasingly lagging behind that of their US counterparts, particularly in IT sectors that are more software intensive, and (c) that US IT firms are increasingly outperforming their Japanese counterparts, particularly in more software intensive sectors. The findings of this paper thus provide a fresh explanation for the relative decline of the Japanese IT industry in the 1990s. Finally, we provide suggestive evidence consistent with the hypothesis that human resource constraints played a role in preventing Japanese firms from adapting to the shift in the nature of innovation in IT.

Suggested Citation

  • Ashish Arora & Lee G. Branstetter & Matej Drev, 2010. "Going Soft: How the Rise of Software Based Innovation Led to the Decline of Japan's IT Industry and the Resurgence of Silicon Valley," NBER Working Papers 16156, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16156
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    References listed on IDEAS

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    Cited by:

    1. Ashish Arora & Lee G. Branstetter & Matej Drev, 2013. "Going Soft: How the Rise of Software-Based Innovation Led to the Decline of Japan's IT Industry and the Resurgence of Silicon Valley," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 757-775, July.
    2. Dominique Guellec & Caroline Paunov, 2017. "Digital Innovation and the Distribution of Income," NBER Chapters,in: Measuring and Accounting for Innovation in the 21st Century National Bureau of Economic Research, Inc.
    3. Marcus Noland, 2015. "Comment on “Determinants of International Research Collaboration: Evidence from International Co-Inventions in Asia and Major OECD Countries”," Asian Economic Policy Review, Japan Center for Economic Research, vol. 10(1), pages 122-123, January.

    More about this item

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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