Economic crisis and innovation capacity of Japan: Evidence from cross-country patent citations
Introduction
The effects of the 2008 global financial crisis (GFC) have ignited a new wave of scholarly debate regarding economic crisis and innovation, as occurred following the Great Depression in the 1930s (Schumpeter 1939; Nicholas 2008). Two main theories regarding the disruption of the innovation process by the economic crisis have been presented. The first argues that the disruption of the crisis to innovation was only temporary because innovation is a slow, cumulative process predominantly undertaken by large and established firms (e.g., Ahuja and Lampert, 2001; Amore 2015; Archibugi et al., 2013; Filippetti and Archibugi, 2011; Paunov 2012). The second posits that the crisis disrupted the innovation process by creating opportunities for new inventions by fresh young innovators. As such, a central question in this line of research focuses on the type of firms (established versus emerging) driving innovation processes both during the crisis and in the post-crisis period. Overall, research has found that regardless of who drives innovation, the economic crisis reduced innovation temporarily and only marginally; the innovation process is persistent and robust.
However, these findings sit uncomfortably in the contemporary debate regarding the inability of innovation to drive the economy out of the long-term economic slump since the GFC (Gordon 2018; Mokyr 2018). This raises the following question: if innovation is largely driven by a persistent process, did the economic crisis have a limited effect on the innovation capacity of a nation? The post-GFC episode at the innovation–growth nexus suggests otherwise. Overall, scholars possess little understanding of what extent an economic crisis shapes the trajectory of a nation's innovation capacity, especially in the long term.
This topic is examined by exploring the performance of Japan's innovation activity. This is achieved by comparing Japan to other innovating nations before and after the Japanese economic crisis using patent and citation data from the United States Patent and Trademark Office (USPTO) from 1980 to 2006. The origin of the economic crisis is set a year when a large drop in the stock market was observed in 1991 (Hoshi and Kashyap 2004). This economic crisis led to a subsequent long-term economic downturn, called the ‘lost decades’ (Fukao 2013).
In terms of answering the posed research enquiry, the Japanese context provides the following strengths. First, the Japanese economy, considered a technological powerhouse in the 1980s, has demonstrated reduced technological progress relative to the US since the early 1990s (Arora et al., 2013; Branstetter and Nakamura, 2003; Kwon et al., 2017). Hence, Japan offers an ideal case study of how an established innovating country coped with the major disruption to innovation that was triggered by the economic crisis. Having innovated successfully in the pre-crisis period (Suzuki and Kodama 2004; Wakasugi 1992), Japan's innovation capacity may have been affected only marginally in the post-crisis period. Second, Japan's early-1990s economic crisis was followed by slow long-term economic recovery (Fukao 2013; Hoshi and Kashyap 2004). Consequently, the Japanese experience is a unique, quasi-natural example that resembles the current growth episodes of some industrial economies since the GFC.
This study employs a difference-in-differences (DiD) framework by differencing various citation-based metrics of Japan's patents (‘treated’) from those of control patents from 11 other innovating nations - the US, Germany, France, the UK, Taiwan, South Korea, Canada, Switzerland, Australia, Israel and China - before and after the economic crisis in 1991. This method is beneficial for three reasons. First, the use of patents registered in a reference country (i.e., the US) negates the challenge of separating the demand and supply shocks created in a time of economic crisis. In innovation studies literature, the demand-pull and supply push is identified as the intertwining factors that create an environment conducive to innovation. The shift of focus to a reference country rather than the country affected by the crisis partially increases the chance of solely identifying the supply-side factor, rather than identifying innovation driven by a change in aggregate demand. Second, a quality cross-country comparison of innovation is only possible because the USPTO enables a streamlined examination of all patents submitted to the office. Hence, it offers a credible basis from which to undertake a cross-country comparison of the citation performance of quality-adjusted patents. Third, the proposed framework circumvents the mechanical difference in citations over time because it only estimates differences in citations between treated and control patents before and after the crisis. More citations are accumulated for older patents than new ones that are closer to the end of the data point, rendering an upward bias to the coefficient of the post-crisis dummy. Therefore, this estimation strategy does not simply estimate the technological obsolescence of Japanese patents compared to other patents from the pre-crisis period. It allows a causal inference by tracking the difference of citations between Japanese patents and those of the comparison group before and after the economic crisis. The use of this method rests on the assumption that the economic crisis created exogenous shocks linked to a trail of citations attached to Japanese patents. The Japanese financial crisis in 1991 originated when a collapse in the financial sector caused a sudden drop in the stock market, which had subsequent ramifications across the whole banking sector (Hoshi and Kashyap 2004). Therefore, unlike in the Great Depression (Nicholas 2008), innovation was not a triggering factor behind the economic crisis in Japan.
In sum, the objective of this paper is to examine the consequence of long-term economic downturn and slower recovery from a crisis on the innovation capacity of a nation, taken up Japan as a case study. This framework makes a departure from other existing studies arguing that the economic crisis only inflicts the marginal reduction to innovation activities. The key account in the literature argues that the economic crisis brings about little disruption to the trajectory of innovation for a nation. These insights lead to a research inquiry in which we explore in this paper. If innovation is mostly driven by persistent innovators as found in the micro-based literature, does the crisis affect the innovation capacity of a nation in the long-term? The empirical analysis of this paper is designed to provide evidence to that query.
The rest of the paper is organised as follows. Section 2 presents the literature review on economic crisis and innovation. Section 3 develops the study's empirical framework and data. Section 4 discusses the results, and the conclusion is presented in Section 5.
Section snippets
Studies on economic crisis and innovation
This paper is related to the following two strands of literature. First, there are the two contrasting views that one argues that economic crisis may generate the new wave of innovation opportunities that were not necessarily involved with the generation of knowledge in the pre-crisis period, while the other contends that innovation is impacted little by the economic crisis because of the cumulated process of innovation. Using the UK innovation surveys, the study by Archibugi et al. (2013)
Estimation specification
We use the framework developed in Furman et al. (2002) in defining a country's innovation capacity, defined as carrying out a different type of innovation and knowledge creation activity. This capacity depends on the multitude of factors such as the institutional structure such as intellectual property and trade policies, the existence of unique demand factors, a base of supply factors such as technology, knowledge, research funding, universities, basic research infrastructure, geography, and
Results
Table 2 presents the estimation results of Equation (1) for the post-crisis period (restricted to a five-year window since the crisis [i.e., 1991–1995]) and the pre-crisis period (1980–1990). The entire estimation covers the period 1980–1995 in Table 2. Each column displays the regression of a different dependent variable: total forward citations (see column 1), total external citations (see column 2), total US citations (see column 3), total non-US citations (see column 4), total
Discussion
Empirical evidence shown here is that the innovation capacity of Japan in the post-crisis period has been marked by a secular drop in citations. This main finding is in sharp contrast to the findings in the existing studies uncovering a short-term relationship between the economic crisis and innovation (Amore 2015; Archibugi et al., 2013; Filippetti and Archibugi, 2011; Paunov 2012). In particular, the firm-level evidence collectively has been in support of creative accumulation of innovation
Conclusion
Understanding the economic repercussions of economic crises on technological processes is an important issue, especially in the current context, in which industrial economies are struggling to recover from the 2007–2008 GFC (Gordon 2018; Mokyr 2018). Using a difference-indifferences (DiD) framework with cross-country citation data registered in the United States Patent and Trademark Office (USPTO), this study examined Japan's 1991 economic crisis and how it affected the innovation capacity of
Acknowledgements
For their useful suggestions and comments, I would like to thank reviewers for the journal, Isamu Yamauchi, Keun Lee, and the seminar participants at the 16th EAEA in Taipei, SUIBE, and Keio University. I also acknowledge the excellent research assistance of Trong Anh Trinh.
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