Globally, industrial policy is back. In their quest to lead global innovation, countries from the United States to China are relying on multibillion-dollar policies to bolster their industrial technologies, hoping that these measures will somehow propel them forward. Will take. Japan is taking a more deliberate route.
Instead of throwing vast amounts of public money at companies, Tokyo plans to encourage its industrial giants – long at the forefront of chips, cars, batteries and machines – to invest in startups and attract technological advances to home For, and that too, with the help of non-glamorous tax reforms.
A sharp step would be to focus on the capital of the companies. Big spending does not necessarily lead to immediate results, as shown in the case of China, the world’s second largest research and development (R&D) spender.
While Japan has used R&D tax credits for years, its latest corporate incentive is narrower in comparison: Firms can claim a deduction for up to a quarter of the amount they buy into a startup. However, they need to pick up a minimum 50% stake, and hold it for at least five years.
Meanwhile, another new stimulus that helps push stock-trading profits into new ventures will spur re-investment in businesses. All told, Japan wants fresh ideas and committed capital.
As part of this strategy, policy makers are creating programs to support new businesses focused on industrial technology, from Sapporo and Hokkaido in the north to Fukuoka in the south. These include funding to help bridge the gap between research and commercialization and developing prototypes – typically major hurdles for startups.
At first glance, such corporate tax reform would help spur investment without putting a strain on Japan’s coffers. This approach is different from most in the current context as it avoids traditional position-based subsidies or war-games to prevent the rise of other countries. Instead, the domestic measures spread the burden of innovation across industries—from iPhone-making equipment to semiconductor-production machines and factory-automation systems—to encourage overall productivity.
By helping large lumber companies free up capital and investing in startups, the government is making decisions about which technologies to put back in the hands of these corporates, rather than making the call. [No cherry-picking here.]
This calculation matters: Businesses will back money-making projects or people with practical purposes on basic research that isn’t driven by a specific goal and often serves as a foundation for future ideas. It also creates a financing channel for nascent firms at a time when venture capital is shying away from large investments in physical industrial hardware that, unlike the booming cloud-era startups, won’t show hockey-stick growth anytime soon .
Running Japan’s big businesses is no easy feat. The country, while still ranked high on a broad scale of global innovation, has stagnated on several measures. The likes of Toyota Motor and Honda Motor Co. are still among the biggest corporate R&D investors, while high-tech goods account for about 55% of total manufacturing output, largely flat over the past decade. Its share of new patents has fallen over the past 20 years, while spending on research domestically has remained flat and far below rising outlays by the US and China on purchasing power parity basis. According to a study by the Bank of Japan, American companies that spend top dollar on future projects increase productivity faster than Japanese companies.
Clearly, the country’s declining status as an innovator needs to be addressed.
If Tokyo can cultivate a class of corporate venture capitalists through its latest tax reforms, it is a chance to freshen up its storied industrial companies. When large firms back innovative and agile startups, they focus on leveraging new-age technology to create synergy – an investor favorite. It’s more of a strategic investment than a financial one—a large pot of money meant to generate high returns similar to the traditional venture-capital world. It could also set a new guide for other countries to drive domestic innovation.
It is still too early to say whether heavy subsidies and incentives will work better than a more targeted tax approach as we move into the current industrial cycle. It can take years to materialize the returns on innovation. However, it’s already easy enough to see what will prove more durable.
Anjani Trivedi is a Bloomberg Opinion columnist covering industries in Asia Pacific.
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