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Industrial governance structures, innovation strategies, and the case of Japan: sectoral or crossnational comparative analysis?

Herbert Kitschelt

International Organization / Volume 45 / Issue 04 / September 1991, pp 453 493DOI: 10.1017/S002081830003318X, Published online: 22 May 2009

Link to this article: http://journals.cambridge.org/abstract_S002081830003318X

How to cite this article:Herbert Kitschelt (1991). Industrial governance structures, innovation strategies, and the case of Japan: sectoral or crossnational comparative analysis?. International Organization, 45, pp 453493 doi:10.1017/S002081830003318X

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Industrial governance structures,innovation strategies, and the case ofJapan: sectoral or cross-nationalcomparative analysis?Herbert Kitschelt

In their studies of policy strategies designed to bring about industrialinnovation and competitiveness, political scientists have generally followed theapproach developed by Andrew Shonfield and described in his classic analysisof modern capitalism.1 Taking the nation-state as the basic unit of analysis,Shonfield extracted a general description of the interplay between market andpolitical actors from a myriad of observations in each country. He thenexplained these national patterns of industrial policy in terms of domesticinstitutions, which specify the rules of interaction among players, and theirinitial endowments. Finally, he evaluated the extent to which each domesticarrangement and dominant strategy helps or hinders nation-states in theirattempts to achieve short- and long-term national economic performancegoals, such as high growth, favorable trade balances, and the ability to adjustcontinuously to new international competition.

This "classic" approach has generated many insightful studies,2 yet it hasbeen increasingly challenged by critics and qualified by its defenders. Thedescription of sweeping aggregate national patterns may hide considerablepolicy variance across industrial sectors within each country. In the same vein,the success of industrial strategies may depend more on sectoral governancestructures than on national ones. The new sectoral approach to economicgovernance has raised interesting questions but thus far has done little to

I performed the initial research for this article under the auspices of the Center forInterdisciplinary Studies at the University of Bielefeld, Germany. For helpful comments on earlierdrafts of the article, I am grateful to Michael Atkinson, Robert Bates, Joseph Grieco, StephenKrasner, Tim McKeown, and the anonymous reviewers of International Organization. Of course, Iam responsible for the article's remaining deficiencies.

1. See Andrew Shonfield, Modern Capitalism (Oxford: Oxford University Press, 1965).2. For important contributions to this body of literature, see Peter Katzenstein, ed., Between

Power and Plenty (Madison: University of Wisconsin Press, 1978); Peter Katzenstein, Small States inWorld Markets (Ithaca, N.Y.: Cornell University Press, 1985); John Zysman, Governments, Markets,and Growth (Ithaca, N.Y.: Cornell University Press, 1983); and Peter Hall, Governing the Economy(New York: Oxford University Press, 1986).

International Organization 45, 4, Autumn 1991© 1991 by the World Peace Foundation and the Massachusetts Institute of Technology

454 International Organization

develop theoretical tools that would enable us to compare sectors systemati-cally, explain their governance structures, and account for differential eco-nomic success. Even a theoretically fruitful conceptualization of the notion of"industrial sector" is still hard to come by.

In this article, I will draw on recent contributions to organization theory insociology, economics, and business history to specify how one set of contingen-cies—the properties of technology—shapes the choice and efficiency ofgovernance structures and industrial innovation strategies in different indus-trial sectors. If the choice and efficiency of governance structures are learnedby rational actors or reinforced by evolutionary selection, the theory canexplain the variance of industrial institutions and problem-solving strategiesacross sectors within a particular country.

Nevertheless, learning and evolutionary processes cannot account for thepersistent failure of sectors in some countries to adopt efficient governancestructures, nor can they account for the set of sectors or the "portfolio" ofindustries that become vital in a particular country. I will argue that familiarmacro-variables, such as the timing of industrialization and the preexistingpolitical economic institutions, are still useful in explaining the trajectorieswithin which industrial sector portfolios are chosen and instituted. In otherwords, national conditions constrain the learning process of new industrialcapabilities and governance structures. Sectoral and national-level conditionsinteract in shaping governance structures and innovation strategies. Efficientgovernance structures can be explained—to a certain extent—in terms oftechnological contingencies. The choice of technology, in turn, must be"endogenized" and explained in part as a consequence of institutionalcapabilities and constraints.

After briefly reviewing the existing literature in the first section of this article,I outline how challenges of technology may affect governance structures in thesecond section. In the third section, I present a sketch of the linkage betweennational-level institutions, the choice of technology, and governance structures.In the final section, I illustrate my hypotheses by applying them to Japaneseindustrial strategy. Explanations of Japanese "success" often unwittinglygeneralize from the experience of particularly successful industrial sectors andtend to ignore the sectors in which Japanese industry has been less successful.My theoretical approach helps explain the strengths and weaknesses ofJapanese industrial strategy and also permits some speculations on thelikelihood for Japanese success with respect to many technologies that arepresently being developed.

My account should not be read as a conclusive new interpretation ofJapanese policy based on extensive empirical research, let alone as a systematictest of the theoretical argument I will advance, but should serve as an invitationto reconsider theoretical frameworks used by students of industrial policy.Moreover, it is obvious that a technology-driven theory of sectoral governancestructures provides only a partial explanation of industrial institutions and

Governance structures 455

success. Business organizations face a variety of contingencies, rather than oneundifferentiated uncertainty, in the choice of governance structures. Inaddition to technology, such contingencies include the securing of rawmaterials and other inputs and the adjustment of producers to market demandconditions.3

From national to sectoral analyses of industrial institutionsand governance structures

In the literature on industrial policy and innovation, the independent variableshave been conceptualized either as attributes of nations (national institutionsor a country's position in the international system) or as sectoral endowmentsand properties, while the dependent variables have been conceptualized asnational characteristics of industrial governance structures or of sectoralgovernance structures (see Figure 1). In the classic research paradigm, theattributes and capabilities of government agencies and other national politicalinstitutions (the "strength" of states) and the self-organization of economicactors outside the marketplace (the centralization or decentralization of civilsociety) explain industrial governance structures (cell 1 in Figure I).4 As arefinement of this approach, domestic regime structuralists show that nationalinstitutions explain why similar sectors in different countries are associated withvarying governance structures and why different sectors in the same countrydevelop similar industrial strategies.5 In this modified classic approach, theexplanandum is the industrial sector, but variation among sectors is accountedfor by national institutions (cell 2 in Figure 1).

All of the studies in this body of literature introduce the concept of "sector"

3. For recent works advocating a multivariate theory of industrial governance structures andcompetitive success, see Arthur Stinchcombe, Information and Organization (Berkeley: Universityof California Press, 1990), especially pp. 33 and 345; and Michael E. Porter, The CompetitiveAdvantage of Nations (New York: Free Press, 1990), especially chap. 3. Porter, however, does nottreat governance structures (for example, firm strategy, structure and rivalry, patterns ofinteraction between related and supporting industries, and government intervention) as ex-plananda in their own right. He instead treats them as additional inputs that explain the ultimatecompetitive success of industries.

4. Both dimensions were first combined in Peter Katzenstein's "Conclusion: Domestic Struc-tures and Strategies of Foreign Economic Policy," in Katzenstein, Between Power and Plenty, pp.295-336.

5. For example, the following works emphasize national political institutions as at least oneexplanation for sectoral innovation policies: Kenneth Dyson, "West European States and theCommunications Revolution," West European Politics 4 (Autumn 1986), pp. 11-55; Wyn Grant andWolfgang Streeck, "Large Firms and the Representation of Business Interests in the UK and theWest German Construction Industry," in Alan Cawson, ed., Organized Interests and the State:Studies in Meso-Corporation (Beverly Hills, Calif.: Sage, 1985), pp. 145-73; Katzenstein, SmallStates in World Markets; Peter Katzenstein, ed., Industry and Policy in West Germany (Ithaca, N.Y.:Cornell University Press, 1989); and Geoffrey Shepherd, Francois Duchene, and ChristopherSaunders, eds., Europe's Industries: Public and Private Strategies for Change (Ithaca, N.Y.: CornellUniversity Press, 1983).


Independent variables

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(1)"Classic" approach:national attributes explainindustrial governance struc-tures

(4)Modified sectoral ap-proach: growth of sectorsexplains national regimestructure, international po-sition, or both

Sectoral governance structures

(2)Modified "classic" ap-proach: national institu-tions explain variationsamong sectoral governancestructures

(3)Sectoral approach: indus-trial innovation strategiesand outcomes explain varia-tions among sectoral gover-nance structures

FIGURE l. National-level and sectoral analyses of industrial governancestructures and innovation strategies

on an ad hoc basis, without explicit theoretical conceptualization. They identifysectors by the proper names found in industrial classification and accountingschemes (steel, shipbuilding, computers, and so forth).6 Given that varianceamong sectors is expected to be explained in terms of differing nationalinstitutions, this theoretical deficiency in this context does not matter much. Asimilar underconceptualization of sectoral properties, however, also occurs instudies that attempt to explain sectoral governance structures in terms ofsectoral endowments or even smaller units called "policy networks" and"policy communities" encompassing clusters of interacting firms and publicofficials (cell 3 in Figure I).7 While this literature has made headway in

6. At most, sectoral distinctions are grounded in product cycle theory and subdivide industriesaccording to their capital intensity, research and development effort, or change in product lines.See, for example, Peter Katzenstein, "Industry in a Changing Germany," in Katzenstein, Industryand Policy in West Germany, pp. 21-28.

7. See, in particular, Michael M. Atkinson and William D. Coleman, "Corporatism andIndustrial Policy," in Cawson, Organized Interests and the State, pp. 22-44; Michael M. Atkinson andWilliam D. Coleman, "Strong States and Weak States: Sectoral Policy Networks in AdvancedCapitalist Economies," British Journal of Political Science 19 (January 1989), pp. 47-67; AlanCawson, "Introduction: Varieties of Corporatism—The Importance of the Meso-Level ofInterest-Intermediation," in Cawson, Organized Interests and the State, pp. 1-21; Stephen WilksandMaurice Wright, "Conclusion: Comparing Government-Industry Relations—States, Sectors, andNetworks," in Stephen Wilks and Maurice Wright, eds., Comparative Government-Industry


distinguishing different sectoral governance structures (state-centered, concer-tation-based, corporatist, or various types of pluralist networks), it has nothelped us explain what accounts for institutional differences among sectors orpolicy networks and what determines the success of industrial governancestructures.8

Probably the most sophisticated theoretical accounts of industrial gover-nance structures come out of a fourth strand of reasoning on industrial policythat relies on sectoral endowments and properties in order to predict sectoraland ultimately also national governance structures (cell 4 in Figure 1). Turningdomestic structuralism on its head, scholars such as James Kurth and PeterGourevitch, building on previous studies by Alexander Gerschenkron, haveargued that specific conditions, resources, and capabilities within particulareconomic sectors and a sector's embeddedness in the world economy explainsectoral governance structures. National institutions, in turn, result frompolitical coalitions among especially resourceful sectors with converginginterests and governance structures.9

This fourth approach often employs the structure of technology as anindependent variable to determine the demarcation of sectors and the natureof governance structures. Yet it provides neither an analytic scheme describingthe range of technologies and associated governance structures nor a micro-logic of human action that would illuminate why particular technologicalsystems correlate with industrial institutions. For example, Kurth argues thatcountries in which industrialization was driven by light consumer goods, rather

Relations (Oxford: Clarendon Press, 1987), pp. 274-313; and Maurice Wright, "Policy Community,Policy Network and Comparative Industrial Policies," Political Studies 36 (Fall 1988), pp. 593-612.

8. Some economists have therefore advocated abandoning premature theoretical or prescriptivearguments about the linkage between governance structures and economic success in favor ofqualitative case studies. See Richard R. Nelson, "Government Stimulus of Technological Progress:Lessons from American History," in Richard R. Nelson, ed., Government and Technical Progress: ACross-Industry Analysis (New York: Pergamon Press, 1982), pp. 481-82. A first step toward ananalytic explanation of sectoral variance has been made by J. Roger Hollingsworth and Leon N.Lindberg in "The Governance of the American Economy: The Role of Markets, Clans,Hierarchies, and Associative Behavior," in Philippe Schmitter and Wolfgang Streeck, eds., PrivateInterest Government (Beverly Hills, Calif.: Sage, 1985), pp. 221-54. Hollingsworth and Lindbergdistinguish sectors by typical firm size and level of technological sophistication in order to predictgovernance structures. Unfortunately, firm size is an aspect, not a determinant, of governancestructures, and the variable "technological sophistication" must be further specified, as I suggest ina subsequent section of my article.

9. See, in particular, James R. Kurth, "Industrial Change and Political Change: A EuropeanPerspective," in David Collier, ed., The New Authoritarianism in Latin America (Princeton, N.J.:Princeton University Press, 1979), pp. 319-62; James R. Kurth, "Political Consequences of theProduct Cycle: Industrial History and Political Outcomes," International Organization 33 (Winter1979), pp. 1-36; and Peter A. Gourevitch, Politics in Hard Times (Ithaca, N.Y.: Cornell UniversityPress, 1986). The theoretical inspiration for these studies was Alexander Gerschenkron'sEconomic Backwardness in Historical Perspective (Cambridge, Mass.: Harvard University Press,1962).


than by heavy industry, were more likely to end up as liberal democracies.10 Theindependent variable in this argument is the "scale" of indivisible technologicalsystems (capital investment, size of production facilities, and so forth), but isthis the only dimension of technology that affects the nature of governancestructures? What we are looking for is a more exhaustive classification oftechnological alternatives that yields predictions of associated governancestructures.11

Michael Piore and Charles Sabel's The Second Industrial Divide representsthe most sophisticated effort to link technology, industrial governance struc-tures, and territorially defined political regimes.12 Yet even this study's mainpropositions do not fully spell out the relationship between these three criticalvariables.13 The first proposition is that the type of technological system affectsthe nature of the institutional governance structures. Piore and Sabel arguethat crafts production involves the use of general purpose machinery andskilled labor, has low fixed capital costs, and therefore promotes small firms inassociative networks of exchange and reciprocity. In contrast, mass productionutilizes dedicated (specialized) machinery and unskilled labor, has high fixedcosts, and fosters large integrated corporations in competitive or oligopolisticmarkets. But this argument ignores the fact that in many economic activities,the variables that define mass and crafts types are not associated in thesestylized combinations. In numerous service sector and entertainment activities,for example, flexible machinery goes with unskilled labor; and in the aerospaceand nuclear power industries, dedicated machinery is operated by highly skilledlabor and involves high fixed capital costs. What is more important to note isthat, like Kurth's approach, Piore and Sabel's approach taps only onedimension of technological systems, that of the scale and the tightness of "•

•»

10. Kurth, "Industrial Change and Political Change," p. 327.11. A similar criticism applies to the most general, comprehensive, and elegant theoretical work

explaining national governance structures in terms of the comparative advantages and disadvan-tages of economic "sectors" in world markets, Ronald Rogowski's Commerce and Coalitions: HowTrade Affects Domestic Political Alignments (Princeton, N.J.: Princeton University Press, 1989).Rogowski states that the key actors are broad sectors (industry versus agriculture) and classes(capital versus labor in industry) and that their coalition potential depends on two independentvariables: the relative scarcity of the factor of production controlled by each group and theexpansion or contraction of the world economy. While he argues that technology and technologicalchange play a role in constituting or dismantling collective actors and in accounting for the relativescarcity of factors of production, he never systematically develops this argument. For example, onpp. 18 and 178, he claims that improved technology has rendered the three-group model obsoletefor the period since 1960, but he fails to demonstrate that technologies before 1960 weresufficiently homogeneous within the agricultural and industrial areas and sufficiently differentbetween them to qualify each area as a sector with interests and governance structures.

12. See Michael J. Piore and Charles F. Sable, The Second Industrial Divide: Possibilities forProsperity (New York: Basic Books, 1984). For another study with a similar thrust, see Horst Kernand Michael Schumann, Das Ende der Arbeitsteilung? (The end of the division of labor?) (Munich:Beck, 1984). For a survey of the burgeoning literature, see Scott Lash and John Urry, The End ofOrganized Capitalism (Madison: University of Wisconsin Press, 1987).

13. For the theoretical core of Piore and Sabel's The Second Industrial Divide, see especially pp.14-15 and 50-65.


linkages between different components of a technological system (rigid orflexible employment of machines and human labor). Based on CharlesPerrow's work, I will argue below that there is at least one other dimension oftechnological systems that influences governance structures.

Piore and Sabel argue that "machines are as much a mirror as the master ofsocial development."14 There is no natural trajectory of technological develop-ment, but technologies are chosen in the light of "designers' technologicalparadigms."15 Sectoral technological choices depend on two factors: territorialpolitical institutions (national or regional) and changing patterns of consumerdemand. National and regional differences in production systems influence theresponses of countries to industrial crises such as that which occurred in the1980s.16 In a similar vein, autonomous or induced changes of consumerpreferences contribute to the choice between mass and craft production.17

Piore and Sabel here argue that technological choice must be endogenizedwithin a sociocultural process, an explanatory strategy that I will adopt in thisarticle as well.18 Yet they pursue this avenue to such an extreme that"technological choice" becomes almost synonymous with "technologicalvoluntarism," in which case it becomes difficult to understand why countries orregions would ever develop sectors employing technologies with governancestructures that diverge from existing institutional arrangements. AlthoughPiore and Sabel's theory accounts for path-dependent learning, it does notaccount for "revolutionary" learning in which conditions for the efficient use oftechnology lead to the adoption of new institutions. Their model stands andfalls with two implicit premises. The first is that technological systems, taken bythemselves, do not determine which governance structures are efficient, andthe second is that institutions are not adopted in a process of rational choice orevolutionary selection on the basis of their efficiency in delivering desiredservices. Sociocultural models alone, not technology and efficiency, shapegovernance structures.19 In contrast, I will illustrate with reference to theJapanese case that all three mechanisms—path-dependent sociocultural learn-

14. See ibid., p. 5.15. Ibid., p. 43.16. See ibid., p. 14. For the institutional arrangements conducive to craft production, see pp.

264-71.17. Ibid., pp. 189-92.18. For another effort to link national institutions and sectoral analysis, see Michael Atkinson

and William D. Coleman, The State, Business and Industrial Change in Canada (Toronto: Universityof Toronto Press, 1989).

19. For example, Piore and Sabel's chapter on the crisis of "Fordist" mass production (TheSecond Industrial Divide, chap. 7) emphasizes changing consumer demand but mentions only in asingle passing phrase (p. 191) that new flexible technologies may be economically more efficientthan mass production systems. By neglecting considerations of market efficiency in the design ofeconomic institutions that are exposed to evolutionary selection and learning in the marketplace,Piore and Sabel become vulnerable to the same criticisms that institutional economics scholarshave advanced against power- and culture-based theories of the firm. For these criticisms, seeOliver Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985), pp.231-37.


ing, evolutionary selection in competitive market environments, and diffusionof efficient patterns—account for sociotechnical change.

My brief review of studies on economic governance structures in theindustrial policy and innovation literature has set the agenda for the followingsections. If technology is a constraint on organizational patterns, the conceptmust be specified better than in existing contributions. Sectors can bedelineated analytically in terms of characteristic technological arrangementsthat are associated with specific governance structures, as I will explain in thenext section. Based on this hypothesis, the interplay between national condi-tions and technological and sectoral conditions can be respecified in thesubsequent section.

Technological systems, governance structures, andindustrial innovation

I assume here that industrial organizations grow so as to cope efficiently withuncertainties that impinge on their pursuit of goals.20 By "efficient coping" Imean strategies that minimize the ratio between an organization's expenditureof resources and its yield in terms of time, money, information processing, andso forth. Environmental uncertainties essentially fall into three interdependentclasses: the acquisition of resources (factor inputs), the internal processing ofresources (manufacturing, research, and training), and the delivery of products(marketing, demand patterns, and service).21 For theoretical purposes, anindustrial sector can be defined as the set of industrial organizations that facesa similar profile of uncertainties. In practice, an industrial sector is oftendefined exclusively in terms of market conditions.22 But similar products andservices may be delivered with different techniques and factor inputs. For thisreason, I conceptualize a sector as a technological system within a particularmarket segment. I base my definition of industrial sectors on technologicalsystems in order to develop the hypothesis that technology is one of the keydeterminants of industrial governance structures.

A rigorous empirical test of this argument presupposes extensive research toidentify industrial sectors according to properties of technology and then torelate each sector to a predicted governance structure, a task I cannotundertake here. In order to illustrate my theoretical argument, therefore, Irefer to sectors in a more loosely defined language. Nevertheless, I imply thateach sector I discuss is dominated by a technological system whose properties

20. For this basic assumption, see Stinchcombe, Information and Organizations, pp. 3-8.21. A somewhat more complex division among elements of a firm's "value chain" can be found

in Porter's The Competitive Advantage of Nations, p. 41.22. In The Competitive Advantage of Nations, p. 33, for example, Porter defines a sector as a

"group of competitors producing products or services that compete directly with each other."


shape its governance structure. In theoretical respects, my hypothesis requiresoutlining analytic types of technological systems, distinguishing types ofgovernance structures to which they are expected to relate, and identifying themechanisms that establish the correspondence between technological systemsand governance structures. Although Charles Perrow's work on technology andorganization provides a starting point to meet these objectives,23 his governancestructures are quite undifferentiated. I therefore rely on Oliver Williamson'swork to propose more sharply defined associations between technologicalsystems and governance structures.24

According to Perrow, technological systems include the design, equipment,procedures, operators, supplies, and materials as well as the physical environ-ment of a production process that yields some kind of specific product orservice. In contrast to the older literature on sociotechnical systems inorganization theory, which defines the unit of analysis as a concrete organiza-tion, Perrow defines it as a network of cooperation that may involve a variety of(or parts of) concrete legal and economic organizational entities. Perrow'ssecond advance over the older literature is a two-dimensional typology oftechnological systems.25 Each of the variables that constitute the two dimen-sions is continuous, although for the sake of exposition, I will discuss them as ifthey were dichotomous.

With respect to the first dimension, Perrow distinguishes whether theelements of a technological system are loosely or tightly coupled. In looselycoupled systems, each step or component of production is separated from everyother step in space and time. In tightly coupled systems, there are close spatialand temporal links. With respect to the second dimension, Perrow contraststechnological systems according to levels of "complexity." Complexity refers tothe pattern of causal interaction among system components. In systems withlinear interaction, an element A causes B, but B has no causal impact on A. Insystems with complex interaction, elements influence each other mutually. Incognitive terms, for humans involved in technological systems, the more thatelements engage in circular causal interaction, the more difficult it is tounderstand the system's operation, to learn from feedback signals, andtherefore to keep the system's outputs under control.

Perrow argues that the operating conditions of each technological systemmandate unique governance structures, yet he remains unclear about themechanisms that bring about this correspondence. In practice, the problem of

23. My account draws primarily on the following works of Charles Perrow: Normal Catastrophes(New York: Basic Books, 1984), chap. 3; and Complex Organizations: A Critical Essay, 3d ed. (NewYork: Random House, 1986), pp. 146-54.

24. See Williamson, The Economic Institutions of Capitalism.25. A review of the older literature can be found in Perrow's Complex Organizations, pp. 140-46.

The most influential contribution to these "contingency theories" of organization was James D.Thompson's Organizations in Action (New York: McGraw Hill, 1967), which distinguishedmediating, long-linked, and intensive technologies.


governance for Perrow is one of minimizing transaction costs.26 Given a scarcityof resources, such as the time and human intelligence available for checking,analyzing, and coordinating parts of a technological system, the most appropri-ate governance structures are the ones that minimize the use of resources toreach desired results. Perrow is particularly concerned with minimizing twospecific drains on resources—industrial accidents and catastrophes—but hisargument applies to the broader question of institutional efficiency. Implicitly,he supposes that evolutionary selection or the conscious rational choice ofdecision makers brings about efficient governance structures.

According to Perrow, efficient governance structures vary on a continuum ofoptions from centralized hierarchies to decentralized networks of actors inmarket exchange. The propensity of organizations to minimize communicationcosts links each feature of governance structures to the two dimensions oftechnological systems: tightness of coupling and causal complexity. Tightcoupling favors centralized control structures because the divergence of oneelement in a technological system from its desired state rapidly spreads havocthroughout the entire system. Loose coupling, in contrast, allows for decentral-ized control structures because errors in system components do not easily affectthe entire system. However, the degree of centralization in governancestructures also varies according to the level of complexity of the technologicalsystem. Because full understanding of complex interactive processes requiresmuch information and monitoring, a centralized hierarchy charged withcontrolling the system would be quickly overloaded. For this reason, themonitoring, analysis, and correction of complex interactive processes takeplace in decentralized organizational units. In contrast, in less complex systemswith linear causality among the components, the straightforward intelligibilityof systemic interactions reduces the probability that centralized control unitswill be overloaded with information processing.

Perrow's linking of technology and governance structures also applies to theorganization of research and innovation. Tightly coupled systems require"global" learning in which innovation addresses the mutual fit of all systemcomponents. Loosely coupled systems, in contrast, can afford more "local"learning through improvement of individual system components. With respectto complexity, causally linear systems present few uncertainties and facilitate

26. A logic of transaction costs was already the underlying driving concern in the oldercontingency theories of technology and organization, such as Thompson's Organizations in Action,p. 57. Interestingly, Perrow himself does not recognize his proximity to economic theories oforganization that emphasize transaction costs and in fact attacks Oliver Williamson for placingundue emphasis on transaction costs at the expense of power and domination. See Perrow,Complex Organizations, pp. 236-47. In reality, however, Perrow's own theory of the interfacebetween technology and efficient organizational forms does not rely on power and domination as astructuring principle of social institutions. Nevertheless, power and domination can be brought inas a constraint on the efficient structuring of technology-organization interfaces. The role ofdomestic and international regimes in shaping governance structures that diverge from efficientarrangements can be interpreted in this way, as I will argue below.


programmed, incremental strategies of problem solving. Causally complexinteractive systems, however, involve greater uncertainty in the interplay ofsystem components and yield poorly understood results that will often beuncovered and explained in patterns of nonincremental, revolutionary learningthrough trial and error.27

Perrow combines both dimensions of technological systems—tightness ofcoupling and causal complexity—in order to understand their joint impact ongovernance structures. While the first two of the following technical configura-tions yield unambiguous organizational structures, the patterns of governancein the remaining ones are harder to predict:

(1) Tightly coupled systems with linear interaction call for centralizedorganization. The classic hierarchy permits speedy and global coordinationbecause linear relations among system components are easily understood andcentral agents will not face information overload.

(2) Loosely coupled systems with complex interaction call for decentralized,horizontal networks of coordination. The distance among system componentsallows for decentralization. Moreover, complex interaction among componentscan be better understood by decentralized monitoring agents than by central-ized agents.

(3) Loosely coupled systems with linear interaction are the systems in whichgovernance structures are least constrained by technology-based coordinationproblems. Although linear interaction poses no insuperable information-processing obstacles to central control, loose coupling makes it possible to relyon less demanding horizontal coordination. Thus, the choice of organizationalform is determined primarily by other nontechnical considerations.

(4) Tightly coupled systems with complex interaction face contradictoryimperatives. On the one hand, tight coupling calls for organizational centraliza-tion to address failures of coordination that may spread through the entiresystem quickly. On the other hand, complex interaction mandates decentral-ized governance to avoid information overload at the top. Tightly coupledsystems with complex interaction are beset with what I will call Perrow'simpossibility theorem: they are liable to catastrophes because no single knownform of social organization can master their imperatives for efficient controland coordination.28

The problems of predicting governance structures based on Perrow's

27. The governance of innovation, of course, also follows an internal trajectory. Although mosttechnological systems start out with revolutionary invention, they often move down a learning curvetoward incremental improvements. Nevertheless, even if we hold the maturity of a technologyconstant, critical differences between more causally complex and less causally complex systemsremain.

28. For an argument about the management of research and development that is similar yetlacks the analytic elaboration and detailed comparative empirical evidence which Perrow provides,see the following works of David Collingridge: The Social Control of Technology (New York: St.Martin's Press, 1980); and Technology in the Policy Process: Controlling Nuclear Power (New York:St. Martin's Press, 1983).


distinction (centralized and decentralized control) can be partially remedied byturning to additional distinctions made in Williamson's study, The EconomicInstitutions of Capitalism.29 Because Williamson analyzes not only technologicaldeterminants of transaction costs but also their consequences in the light ofhuman self-interests and incentives, his predictions of governance structurestend to be more specific than Perrow's in two important respects. First, theysingle out the kinds of market contracts (standard or nonstandard) that arelikely to occur among actors in a given configuration. Second, they help predictthe kinds of property relations (public, private, or mixed) that are likely to bemost efficient in the organization of a particular technological system.

According to Williamson, there are three conditions under which opportun-ism and self-interest subvert the stipulations of standard market contracts:asset specificity, uncertainty, and frequency of interaction between suppliersand customers. These conditions are directly or indirectly related to the designof technical delivery systems, though not entirely reducible to it.30 Assets areconsidered highly specific if they are committed to a particular location,production process, or customer.31 In other words, high asset specificityestablishes "tight linkages" (in Perrow's sense) between different elements andstages in the production process, whether it is based on purely technical orpurely economic conditions, whereas low asset specificity establishes "looselinkages." In the same vein, uncertainty in contractual linkages has a technicaland an economic face. High uncertainty often stems from the "complex causalinteraction" among agents and techniques involved in the production processand requires, in Perrow's sense, decentralized intelligence and the autonomy ofprofessionals. Conversely, low uncertainty is generally associated with "linearcausal linkage." In complex interactive production processes, it is difficult tospecify contracts fully in advance and hence to enforce them. These circum-stances also enable self-interested actors to take advantage of underspecifiedcontracts by opportunistic behavior.32

The various distinctions regarding characteristics of technological systems,conditions under which self-interested actors subvert market contracting, andtypes of contracts and property rights are incorporated in Figure 2. Asindicated in the figure and emphasized below, Williamson's predictionsregarding governance structures are more specific than Perrow's:

(1) In technological systems with loose coupling, linear technology, low asset

29. Oliver Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985).30. For a discussion of the three contingencies, see ibid., pp. 52-61.31. See ibid., pp. 95-98.32. See ibid. Williamson's third condition subverting standard contracting—the frequency of

interaction between suppliers and customers and the accumulation of insider's knowledge—maybe more indirectly related to technological conditions. Complex interactive and tightly coupledproduction systems involve frequent interactions between unique actors. Moreover, interactivesystems may facilitate innovation through close relations of mutual trust that allow suppliers andcustomers to learn from each other. See also Bengt-Ake Lundvall, "Innovation as an InteractiveProcess: From User-Producer Interaction to the National System of Innovation," in Giovanni Dosiet al., eds., Technical Change and Economic Theory (London: Pinter, 1988), pp. 349-69.

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specificity, and low uncertainty about the nature of the production process (cell3 in Figure 2), Perrow sees no particular constraints on organizational form.For Williamson, however, standard contracts in competitive markets withprivate property rights are most appropriate here because they provide thestrongest incentives to pursue self-interests yet are not hampered by problemsof opportunism. Innovation in these systems stems from the disjointed, local,and incremental process of "learning by doing,"33 rather than from systematicresearch organization. Given the property relations and the conditions forinnovation, public involvement in technology development is inefficient.Obvious examples of sectors employing this technological configuration aremany of the final consumer goods and light manufacturing industries.

(2) In technological systems with tight coupling, linear technology, highasset specificity, and low uncertainty (cell 4 in Figure 2), Perrow predictshierarchical governance structures, whereas Williamson would expect fullhierarchical integration only when the interactions among asset-specific contrib-utors are sufficiently frequent. Innovation in these systems is global butincremental. It requires concertation but involves relatively limited uncertain-ties. For this reason, innovation will be primarily propelled by privatecorporations through in-house research or networks of private laboratories.Rather than supplying assistance for innovation, state agencies support suchindustries by stabilizing labor relations (through corporatist or authoritarianinstitutions), subsidizing or protecting domestic firms from foreign competi-tors, and making capital funds available.34 Many of the heavy industry and largemachinery production systems fit this configuration.

(3) In technological systems with loose coupling, complex interactivetechnology, low asset specificity, and high uncertainty (cell 1 in Figure 2),Perrow predicts decentralized organization. Williamson's approach permitsthe more specific hypothesis that horizontal nonstandard contracts are mostefficient in this case because the uncertainty surrounding the accomplishmentof a joint task and the incentives for opportunism make both market andhierarchical relations inefficient. To avoid opportunism among the partici-pants, relations of professional trust and reciprocity will emerge.35 Theorganizational form approximates clan-like and collegial structures that blendcooperation and competition.36 Innovations occur in these technological

33. The importance of "learning by doing" in innovation strategies has been pointed out byNathan Rosenberg in Inside the Black Box (New York: Cambridge University Press, 1982), chap. 6.

34. See Kurth, "Industrial Change and Political Change," pp. 330-46.35. For an analysis of the conditions conducive to normative integration, see William G. Ouchi,

"Markets, Bureaucracies and Clans," Administrative Science Quarterly 25 (Winter 1980), pp.129-41. Hirschman's notion of "loyalty" as the basis of coordination hints at a corresponding formof social coordination but is not sufficiently developed in his writings. See Albert O. Hirschman,Exit, Voice, and Loyalty (Cambridge, Mass.: Harvard University Press, 1970), chap. 7.

36. Actually, Williamson calls systems with inseparable, uncertain task structures and low assetspecificity "primitive teams," whereas the notion of "relational teams" or "clans" is reserved forconfigurations in which asset specificity is high (cell 2 in Figure 2). A problem here is themeasurement of asset specificity. Williamson is concerned only with human asset specificity as a


systems as a process of localized trial-and-error learning, often in interactionwith customers.37 In terms of property relations, mixed private and publicnetworks, with information and people freely traveling across the boundary,are most conducive to innovation. Private business will invest in those nodes ofthe network in which causal relations are sufficiently well understood to limitrisks by spreading venture capital across a number of relatively small researchefforts. In cases in which research and development (R&D) uncertainties aresubstantial and markets for venture capital remain underdeveloped becausethey are subject to adverse selection and moral hazard,38 a comprehensivepublic and semipublic infrastructure of technology development throughuniversities, professional associations, and research centers can further R&Defforts. Many of the industries involved in biotechnology and in softwaredevelopment efforts exhibit technical structures that benefit from mixedcooperative and competitive governance structures.

(4) In technological systems with tight coupling, complex interactive technol-ogy, high asset specificity, and high uncertainty (cell 2 in Figure 2), Perrow'simpossibility theorem applies. The fact that Williamson also faces problems inassigning an efficient governance structure with respect to these systems is areal lacuna in his theory.39 Because an efficient form of governance appears tobe difficult to establish, the systems are de facto developed only under thetutelage of national governments, with private investors relieved from all or

determinant of governance structures, whereas Perrow includes all human and nonhumancomponents of technological systems under the notion of loose or tight coupling. The knowledge ofeach individual software architect is highly asset-specific vis-a-vis the joint effort of the firm todevelop a new program. The technology of writing software programs, however, is not highlyasset-specific, since it can be redeployed from program to program. Investments in any individualproduct remain limited. When Williamson discusses physical asset specificity, he sees organiza-tional hierarchy as a consequence. See Williamson, The Economic Institutions of Capitalism, pp.213-14 and 242-47; and Perrow, Complex Organizations.

37. See Lundvall, "Innovation as an Interactive Process," especially pp. 351-53. Because causalconnections among system components are ill-understood, sociologists of science have hypothe-sized a changing logic of research from a causal analysis of mechanisms to a functional analysis ofoutcomes. For this "finalization" of research, see Wolf Schaefer, ed., Finalization in Science: TheSocial Orientation of Scientific Progress (Dordrecht, Netherlands: Reidel, 1983).

38. See Partha Dasgupta, "The Economic Theory of Technology Policy: An Introduction," inPartha Dasgupta and Paul Stoneman, eds., Economic Policy and Technological Performance(Cambridge: Cambridge University Press, 1987), pp. 15-16.

39. In principle, uncertainty and asset specificity are constraints that increase the probability ofnonstandard contracting and organizational integration. But up to what point do they do so? Thedevelopment and control of complex interactive technology requires professionals, and asWilliamson acknowledges in The Economic Institutions of Capitalism, pp. 242-47, it is difficult tomonitor professionals in strict hierarchies. Hence, integrated organizations may rely on "fiercelyegalitarian," collegial practices that are designed to promote trust among their members. At thesame time, however, asset specificity in large-scale technological systems may render it impracticalto confer organizational control on clans of professionals, rather than to submit them to centralizedauthority. It is not clear whether Williamson can identify an optimal form of organization. InComplex Organizations, chap. 7, Perrow criticizes Williamson on a number of occasions for fallingvictim to a functionalist logic which does not specify the mechanisms that determine the efficiencyof a particular governance structure. This criticism applies with full force to configurations oflarge-scale technological systems with high asset specificity and uncertainty.


most of the investment risks through cost-plus contracts, favorable regulation,or outright public entrepreneurship.40 Examples of such arrangements aboundin the areas of energy systems (nuclear power) and aerospace.

The theory of organizational governance I have derived from Perrow andWilliamson yields several general propositions. Industrial sectors, identified bycore technologies, efficiently operate only if governance structures matchtechnological constraints. Over time, learning and evolutionary selectionshould yield identical governance structures in identical sectors, regardless oftheir embeddedness in broader domestic or international institutional environ-ments. In cases in which sectoral governance structures diverge from theprescriptive model, industries will yield inefficient results both in static as wellas dynamic perspective (profit levels, the balance of trade, and records ofadaptation to new demand conditions over time). The theory can be checked ina cross-national and cross-sectoral comparison of technological systems,governance structures, and innovation strategies.

The theory's explanatory reach, however, is limited in several respects. First,the theory cannot explain why efficient governance structures sometimes fail toappear. In order to understand barriers to learning within sectors, we mustexamine broader institutional arrangements in a region or country. Second,organization theory cannot account for the relative emphasis on and choice oftechnological systems in a territorially defined institutional setting (a country orregion). In other words, the overall "portfolio" of technologies that come to thefore in a particular area cannot be explained in terms of contingent relationsbetween technology and efficient governance structures within individualsectors. A theory of technology portfolios would have to endogenize technolog-ical choice in the ways suggested by Piore and Sabel. It is here that macro-leveldomestic structuralism emphasizing regional or national institutions can playits part in clarifying the opportunities for and constraints on sectoral learning.Organization theory tells us only why, in principle, learning of governancestructures occurs within sectors. It does not specify when and how it occurs. Toaccount for learning processes, we must therefore further explore how sectoraland national conditions interact in the emergence of governance structures andinnovation strategies.

Political regimes and technological development

The linkage between domestic structural and sectoral theories of industrialinnovation strategies can be built on two hypotheses. My first is that countrieswill successfully innovate in those new sectors in which their prior institutionalendowments are conducive to the emergence of governance structures optimal

40. It would be mistaken, however, to assume that governments are always less risk-averse thanprivate investors. For a critique of this assumption, see Paul Stoneman, The Economic Analysis ofTechnology Policy (Oxford: Oxford University Press, 1983), pp. 118-24.


in those sectors. Under these circumstances, the cost of learning to master anew technological trajectory is quite modest and actors will seize newopportunities quickly. The underlying micro-logic of domestic structuralism isone of institutional inertia and bounded rationality. Regimes have developedpower relations, collective cognitive frameworks, and standard operatingprocedures of search and innovation that can be changed only incrementally.They will adopt those technological systems that "fit" already existing patternsof governance.41

The key variables in domestic structuralism—the capacities of the state tointervene in the economy and the cooperative self-organization of privateeconomic actors—can be linked to characteristics of the technological systems Ihave discussed above. The more that countries have developed the capacity toaccommodate nonstandard contracting in economic innovation through coop-erative business relations and government involvement, the more they will beable to develop technologies in which such nonmarket regimes are optimal—that is, technologies characterized by tight coupling, complex causal interac-tion, or both. In terms of property relations, the state will assume an increasingburden of development costs and technological guidance as these characteris-tics become more prevalent.

Hence, in some countries, specific sectors fail to learn efficient governancestructures because they are located outside the path of national institutional-ized learning capabilities. Given limited national resources and institutionalvariability but a wide range of technological systems and related governancestructures, it is unlikely that any single country will succeed in all sectors.42 Ofcourse, the scope of industrial success may be expected to vary with country sizeand internal diversity of institutional patterns.43

My second hypothesis is that only on rare occasions will industrial innovationsharply diverge from the path-dependent learning of institutional governancestructures in new technology sectors.44 Economic depression, victory or loss in amajor war, or a fundamental change in a country's position in the internationalsystem can serve as the catalyst for a "paradigm shift" yielding new "technolog-

41. This is essentially the logic that also underlies Piore and Sabel's analysis of the capacity ofadvanced industrial economies to move toward flexible specialization. See The Second IndustrialDivide, chap. 9.

42. It is not countries that succeed or fail in innovation policies; it is particular sectors. This pointis emphasized by Porter in The Competitive Advantage of Nations, p. 144.

43. Thus, the diversity of American success in industries with entirely different technologicalcharacteristics (entertainment, financial services, key areas of microelectronics, and aerospace) hasto do with the regional variation of governance structures, a point emphasized by Piore and Sabel inThe Second Industrial Divide, pp. 248—49, and by Porter in The Competitive Advantage of Nations, pp.507-35. Conversely, the emergence of encompassing corporatist governance structures has oftenbeen attributed to the narrow scope of relevant industrial sectors in small European democracies.See Katzenstein, Small States in World Markets, pp. 165-70.

44. Here, the idea of a "punctuated equilibrium" adapted to social science explanations canserve as a useful concept. See Stephen Krasner, "Approaches to the State: AlternativeConceptions and Historical Dynamics," Comparative Politics 16 (January 1984), pp. 240-44.


ical trajectories" and governance structures.45 In light of the fact that seriousnational predicaments may be a consequence of a country's inability to acquirenew technologies efficiently, technology itself can be considered one of theultimate sources of political regime change and revolutionary learning ofinstitutional arrangements.4*

Path-dependent learning and revolutionary learning mark the endpoints ona continuum of learning experiences. For example, in cases in which path-dependent innovation based on existing institutional capabilities will notmaintain or improve a country's international economic and military competi-tive position, several alternative paths to technological progress may presentthemselves. Countries will choose those technologies and governance struc-tures that minimize the adjustment costs (the "distance" to be traveled fromavailable institutions to new governance structures). For example, a countrywith already strong centralized oligopolistic corporations or a country withextensive state involvement in industrial development will provide betterconditions for developing technologies with complex causal interaction andtight coupling, such as aerospace or nuclear power, than will a country withneither of these institutional conditions available. After World War II, forexample, France and the United States each met one of these criteria, makingit possible to develop effective technology delivery systems in the aerospace andnuclear power areas, whereas Britain met neither criteria and did much worsein the same areas.47

In the rest of this section, I weave together both hypotheses in a brief analyticsketch of the interaction between institutions and technological systems inadvanced capitalist countries. This sketch introduces my more detailed analysis

45. The notion of "technological trajectories" is taken from Dosi. See Giovanni Dosi,"Technological Paradigms and Technological Trajectories: A Suggested Interpretation of theDeterminants and Directions of Technical Change," Research Policy 11 (Spring 1982), pp. 147-62.

46. As I already argued in my critique of Piore and Sabel's The Second Industrial Divide,domestic structuralism may endogenize technology and sectoral governance structures too much.The international systemic conditions of competition and the brute opportunities of technologyshape institutional responses as well. Unquestioned international hegemony may stifle any form oflearning to innovate, as the example of the Chinese armament industry illustrates. See WilliamMcNeil, The Pursuit of Power (Chicago: University of Chicago Press, 1982), chap. 2. Conversely,domestic vulnerability may accelerate a country's willingness to engage in institutional andtechnological innovation. For a general review of these linkages, see Peter Gourevitch, "TheSecond Image Reversed: The International Sources of Domestic Politics," International Organiza-tion 32 (Autumn 1978), pp. 281-313.

47. My argument diverges from the conventional wisdom that the United States is unable toengage in effective industrial policy. At least for some sectors in which appeals to the "nationalinterest" can serve in part as a smoke screen behind which massive sectoral development aid isdisbursed, American industrial policy has been effective. Precedents include not only nuclearpower and aerospace but also biotechnology (labeled cancer research), microelectronics, and ahost of technologies covered by the strategic defense initiative (SDI) program of the 1980s. For acogent review of U.S. industrial policy activism, see David Vogel, "Government-Industry Relationsin the United States: An Overview," in Wilks and Wright, Comparative Government-IndustryRelations (Oxford: Clarendon Press, 1987), pp. 91-116.


of Japanese innovation. I argue that the properties of newly emergingtechnologies over the past two hundred years differed across time periods.48

Countries could seize the opportunities involving a new technology primarily atjunctures when national institutional endowments permitted the developmentof efficient sectoral governance structures matched to the properties of thattechnology.

Industrialization in the late eighteenth century was based on light consumerand investment goods, particularly textiles and machine tools that essentiallyinvolved loosely coupled technological systems with linear interaction amongtheir components ("mark I technology"). Such systems could be developed in amarket setting. Consistent with the theory, Britain, as a decentralized,market-oriented society with a weak state, could seize most energetically theopportunities offered by the new technological trajectory.49

The next surge of industrialization is commonly associated with the steamengine, railway, iron, and coal boom that began in the middle of the nineteenthcentury. The knowledge intensity or causal complexity of production andinnovation remained fairly low, although economies of scale increased rapidlyowing to the tight coupling of components in technological systems requiringlarge capital investments ("mark II technology"). Therefore, efficient sectoralgovernance structures began to shift from small to large corporations and fromcompetitive to oligopolistic markets. The domestic structures that gainedadvantage were those which facilitated industrial centralization, state involve-ment in industrial development, or a combination of both. Industrial latecomers, such as Germany and Japan, each with a combination of theseconditions, and the United States, with increasing industrial centralization,now seized the opportunity to narrow Britain's industrial lead.50

At the end of the nineteenth century, new "science-based" technology in

48. I draw here on the following works: David Landes, The Unbound Prometheus (Cambridge:Cambridge University Press, 1969); Christopher Freeman, John Clark, and Luc Soete, Unemploy-ment and Technical Innovation: A Study of Long Waves and Economic Development (Westport,Conn.: Greenwood Press, 1982); and Christopher Freeman, Technology Policy and EconomicPerformance: Lessons from Japan (London: Pinter, 1987), especially the summarizing historicaltypology on pp. 68-75. I do, however, alter Freeman's interpretations in some instances. I willrefrain here from placing the surge of technologies with new qualities within the framework ofKondratieff cycles, as Freeman and others do. I find the idea of Kondratieff cycles useful,particularly in the weak version which focuses on lead countries and lead technologies and whichwas recently advanced by William R. Thompson in "Long Waves, Technological Innovation, andRelative Decline," International Organization 44 (Spring 1990), pp. 201-33. Since Kondratieff cyclesare not central for my article, I will follow the advice of an anonymous reviewer and refrain fromburdening it with yet another controversial argument.

49. Here, I am following Kurth's argument about technology and political regime structures in"Industrial Change and Political Change," pp. 326-51.

50. For a comparison of British and German industrial innovation, see Landes, The UnboundPrometheus, pp. 326 and 358. For a comparison of the broader industrial consequences ofinstitutional conditions in the United States, Britain, and Germany, see Alfred Chandler, Scale andScope (Cambridge: Cambridge University Press, 1970), chaps. 2-4.


areas such as chemical production, electrical engineering, and machinebuilding emerged. Although the technological systems in these new areas allinvolved considerable knowledge intensity and complex interaction amongcomponents ("mark III technology"), their tightness of coupling and thereforetheir capital requirements and economies of scale varied considerably. For thisreason, no single governance structure matched the requirements of produc-tion in all areas. On the one hand, the tightly coupled systems and largeeconomies of scale involved in the production of "Fordist" mass-producedconsumer goods or intermediate products fostered the emergence of largecorporations.51 On the other hand, the loosely coupled systems and limitedeconomies of scale involved in electrical engineering and the production ofelectrical motors fostered networks of medium-sized companies with closelinkages between customers and suppliers and close interaction with anonprofit research infrastructure of universities and laboratories. Countrieswith a cooperative, sometimes guild-like social structure of firms, such asGermany, Japan, Sweden, and Switzerland, could take more advantage ofthese conditions than could countries relying primarily on competitive markets,such as Britain.

No period in the twentieth century can be unambiguously described as theage of Fordist mass production. Newly emerging industries always includedimportant applications not leading to mass production. After World War II, themass consumer industries that had begun to grow in the first half of the century(automobiles, electrical appliances, and consumer electronics) reached theirpeak, yet so did systems characterized by neither "mass" production nor"craft" production. These systems involved small-batch manufacturing withtight coupling and high uncertainty about the complex causal interactionamong system components ("mark IV technology"). Representatives of thisclass included nuclear fission (military and peaceful), aircraft and spaceindustries, and, to a lesser extent, large computer and telecommunicationssystems and advanced chemical processing plants. Mark IV technologiesrequired new governance structures and innovation strategies that put theburden of investment risks on public agencies, even in cases in which thetechnologies would be developed or produced in privately owned facilities.Two types of countries excelled in the new technologies: countries that hadalready developed state capabilities in economic governance before the newtechnologies surfaced and countries that acquired such capabilities in connec-tion with the military competition of World War II and the ensuing Cold War.52

Thus, while the victors of World War II all ventured into the development of

51. The modern multidivisional enterprise has been and continues to be prevalent primarily insectors that emerged in the nineteenth and early twentieth centuries: food processing, chemicals,petroleum, primary metals, and various machine groups. See Chandler, Scale and Scope, p. 20.

52. The United States, for example, acquired new capabilities following the "Sputnik shock" in1957.

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these "state technologies," the losers and small neutral countries were forcedto the sidelines.53

The technologies and market conditions that have emerged since the late1970s no longer reward the organizational capabilities of highly integratedenterprise or of direct state concertation.54 The technological systems involveloose coupling, with modest economies of scale and capital investments butwith considerable causal complexity and uncertainty ("mark V technology").The main examples for this new configuration are computer software, custom-ized microprocessors and work stations, genetically engineered products andPharmaceuticals, and specialty chemicals. Corresponding governance struc-tures include mixed private and public networks of "clubs" and "clans" thathave egalitarian and reciprocal exchange patterns with respect to R&D,manufacturing, service, and producers and customers.55 In cases in which thecompliance with regulatory requirements and the exigencies of effective globalmarketing strategies give large corporations an advantage (as in the pharmaceu-ticals sector), unprecedented organizational decentralization neverthelesscontinues to prevail under the umbrella of the large corporation.56

Figure 3 summarizes my argument about the linkage between historicalphases of industrialization, properties of technological systems, and institu-tional forms of governance. The most interesting task from the perspective oftheory and policy now is to determine which country or region has the greatestpotential to make use of technologies associated with the most recent wave ofinnovation. If my characterization of new frontier technologies is roughlycorrect, countries with centralized, directive public or private governancestructures, such as France, and countries with decentralized, competitive

53. In France, where institutional capabilities and the lessons of World War II reinforcedindustrial innovation policy, industrial success has been greatest in technologies that are highlydependent on government development and procurement. See Christian Stoffaes, "IndustrialPolicy in the High-Technology Industry," in William J. Adams and Christian Stoffaes, eds., FrenchIndustrial Policy (Washington, D.C.: Brookings Institution, 1986), p. 45. Other important Frenchexport industries, such as specialty foods, clothing, and design, are of the crafts type and originatedin the earliest wave of industrialization. France has always remained weak in mark II and IIItechnologies because it had weak corporations or nonmarket networks among smaller firms.

54. See Chandler, Scale and Scope, pp. 622-23.55. According to Amendola and Gaffard, "The essence of the process of production, therefore,

is no longer embodied in devices and equipment, but lies in the characteristics of the specific inputsinvolved which themselves contribute to defining the profile of the process and its effectivearticulation contextually." See Mario Amendola and Jean-Luc Gaffard, The Innovative Choice: AnEconomic Analysis of the Dynamics of Technology (Oxford: Blackwell, 1988), p. 13.

56. There is reason to believe that a number of biotechnologies, especially in the field of geneticengineering, are mark IV (tight coupling and complex interaction) rather than mark V (loosecoupling and complex interaction). As Perrow argues in Normal Catastrophes, pp. 293-302, thesebiotechnologies involve uncertain damage potentials for the environment which follow from tightlycoupled processes that are irreversible once set into motion. This increases capital cost andbureaucratic management of innovation not so much in the initial stages of innovation but incomprehensive testing and safety research on new organisms. Because small venture capital firmsusually cannot raise the capital and conduct long-term safety testing, many genetic engineeringupstarts have been bought out by major pharmaceutical companies.


market relations but little nonprofit research infrastructure, such as Britain inthe 1980s, will encounter the greatest difficulties in assimilating the newtechnological trajectories. Other countries—including the United States,Japan, and, to a lesser extent, Germany—have relied on institutional arrange-ments that come closer to the mix of efficient governance structures that mayprevail in many new technologies, such as decentralized nonprofit researchinstitutions (for example, universities) combined with mixed cooperative andcompetitive interfirm relations. As I will show in the final section, however,contrary to many assertions, Japan does not offer optimal conditions forpromoting all of the technologies at the present innovation frontiers.

Japanese industrial strategy: a sectoral analysis

Over the last twenty years, Japan has clearly established itself at the frontier oftechnological innovation. This is evident in a variety of aggregate indicators,some of which are presented in Table 1. A comparison of the advancedindustrialized countries' inputs in innovation policy shows that Japan wassecond only to the United States in terms of R&D expenditures as a percentageof gross national product (GNP) by the mid-1980s (column 1 of Table 1). Withrespect to numerous other input measures, such as R&D expenditures percapita, R&D personnel as a percentage of the labor force, and industrial R&Dexpenditures as a percentage of the domestic industrial product, Japan hasclearly moved to the forefront (columns 2, 3, and 4). This picture is alsoconfirmed by rough output indicators, such as the share of total world exportsin high-technology sectors and the share of external patent applicationsexpressed as a percentage of the total applications received by the Organiza-tion for Economic Cooperation and Development (OECD) members (columns5 and 6).57

While the R&D investment strategies of Japan are in several respects similarto those of Switzerland, they differ substantially from those of Japan's otherimportant industrial competitors, as shown in Table 2. In 1985, Japan's publicexpenditures for civilian R&D were comparatively low, while its publicexpenditures on military R&D were next to nonexistent (columns 1 and 2 ofTable 2). As a consequence, public funds for R&D amounted to barely

57. For the purposes of my argument, it is unimportant to examine the precise validity andcomparability of these indicators. As is well known, Japanese companies have internal incentivesystems that inflate the number of patent applications. See Daniel I. Okimoto and Gary R.Saxonhouse, "Technology and the Future of the Economy," in Kozo Yamamura and YasubaYasukichi, eds., The Political Economy of Japan, vol. 1 (Stanford, Calif.: Stanford University Press,1987), pp. 390-91. Moreover, the definition of "high-technology commodities" is disputable as ameasure of success. Regarding this point, see Bernhard Gahlen, Fritz Rohmeyer, and ManfredStadler, "Zur internationalen Wettbewerbsfahigkeit der deutschen Wirtschaft" (The competitive-ness of the German economy), discussion paper no. 85-19, International Institute of Managementand Administration, Wissenschaftszentrum Berlin, 1985.

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one-fifth of the total funds for innovation (column 3). Since the percentage ofthese total funds applied to the business sector was relatively low, there was asubstantial net transfer of funds from the business sector to nonprofit researchinstitutions in the public sector (columns 4 and 5). In contrast, most otheradvanced industrialized countries made much larger public investments incivilian R&D, military R&D, or both and had a higher ratio of public to privateR&D funding. Although business sector investments varied considerablyamong Japan's industrial competitors in Europe, all of them except Switzer-land had net transfers of R&D funds from public sector sources to businesssector uses. The largest contrast with respect to net transfers was the contrastbetween Japan and the United States.

Table 2 lends direct or indirect support to two free market argumentsadvanced in several influential scholarly interpretations of the Japaneseindustrial experience. First, the low share of public funding can be taken as atestimony to the importance of the fierce domestic market competition thatprecipitates a shakeout of slow innovators and thus accelerates technologicalchange.58 Second, the relatively low commitment to public R&D, however,suggests that Japan's advantage has so far been through a low-cost, low-riskindustrial catch-up strategy. In addition to favorable macroeconomic condi-tions, its extraordinary growth rates are due to the rapid imitation andimprovement of Western technology ("reverse engineering"). Catch-up wasmade possible by sheltering Japan from international competition, a policybecoming less feasible since the 1970s.59 Econometric research suggests thatnational economic growth is more influenced by imitation than by innovation inthe technology frontier.60

Yet Table 2 also provides at least indirect evidence for two furtherarguments that place more emphasis on politics. One is that the Japanese statecontributed more intelligence than funding to economic development, backedup by sanctions if industries failed to comply with market-conforming govern-ment programs, primarily those of the revered Ministry of International Trade

58. For the free market argument, see Hugh Patrick and Henry Rosovsky, eds., Asia's NewGiant: How the Japanese Economy Works (Washington, D.C.: Brookings Institution, 1976); CharlesL. Schultze, "Industrial Policy: A Dissent," Brookings Review, Fall 1983, pp. 3-12; and Philip H.Tretize, "Industrial Policy in Japan," in Margaret E. Devvar, ed., Industrial Vitalization: Toward aNational Industrial Policy (New York: Pergamon Press, 1982), pp. 177-95.

59. See Mottotada Kikkawa, "Shipbuilding, Motor Cars, and Semiconductors: The DiminishingRole of Industrial Policy in Japan," in Geoffrey Shepherd et al., eds., Europe's Industries, pp.236-68; and George C. Eads and Kozo Yamamura, "The Future of Industrial Policy," inYamamura and Yasuba, The Political Economy of Japan, vol. 1, pp. 423-68.

60. See Keith Pavitt and Luc L. G. Soete, "International Differences in Economic Growth andthe International Location of Innovation," in Herbert Giersch, ed., Emerging Technologies:Consequences for Economic Growth, Structural Change, and Employment (Tuebingen: Mohr, 1982),pp. 105-33; Jan Fagerberg, "A Technology Gap Approach to Why Growth Rates Differ," ResearchPolicy 16 (Spring 1987), pp. 87-99; and Jan Fagerberg, "Why Growth Rates Differ," in Dosi et al.,Technical Change and Economic Theory, pp. 432-57.


and Industry (MITI).61 The other is that the Japanese government stimulatedand protected the self-organizing capacity of Japanese private businesses inhorizontal networks and allowed industrial enterprises to cooperate with eachother while at the same time maintaining market competition.62 A fifthinterpretation, finally, combines the free market and political arguments andreasons that the system's virtues can be had only as a package.63

It is striking, however, that all of these explanations of Japanese industrialinnovation policy are derived from particular sectoral experiences, yet noneprovides a systematic, theory-guided analysis of sectoral policy success.64 Thefree market interpretation points to the fierce competition among Japanesesuppliers of mass consumer goods and their recalcitrance to go along withMITI directives, as was evident in the actions of Sony and Honda in the 1960s.Statist interpretations often acknowledge the sectoral limitations of Japanesestrength that emerged in the 1950s through 1970s under the umbrella ofgovernment concertation, with financial inducements and industrial restructur-ing as the major instruments in sectors including steel, shipbuilding, railroads,consumer electronics, watches, cameras, and synthetic fibers.65 Other interpre-tations are less self-conscious of the sectoral limitations of governancestructures. In this vein, the studies of David Friedman and of Michael Pioreand Charles Sabel tend to emphasize Japan's advanced "craft-like" industrialstructure yet take all or most of their evidence from the machine tool industry,an industry in which success never fully depended on long mass productionruns with little flexibility.66 In contrast, most analysts agree with Laura Tysonand John Zysman's argument that "the Japanese have a marked advantage in

61. The classic study of this topic is Chalmers Johnson's MITI and the Japanese Miracle: TheGrowth of Industrial Policy, 1945-1975 (Stanford, Calif.: Stanford University Press, 1982).

62. This interpretation was proposed by Piore and Sabel in The Second Industrial Divide, pp.217-20 and 223-26, and has been fleshed out by David Friedman in The Misunderstood Miracle:Industrial Development and Political Change in Japan (Ithaca, N.Y.: Cornell University Press, 1988).

63. Regarding this argument, see Ronald Dore, Taking Japan Seriously: A Confucian Perspectiveon Leading Economic Issues (Stanford, Calif.: Stanford University Press, 1987); Freeman,Technology Policy and Economic Performance; and Richard R. Nelson, High-Technology Policies: AFive-Nation Comparison (Washington, D.C.: American Enterprise Institute, 1984). The mostdetailed interpretation along these lines, providing an impressive range of evidence and analyticelaboration, is Daniel I. Okimoto's Between MITI and the Market: Japanese Industrial Policy for HighTechnology (Stanford, Calif.: Stanford University Press, 1989). As Okimito states, however, he goesbeyond the "synthetic literature and emphasizes the sectoral variability of Japanese success" (p. 4).

64. To be fair, Okimoto's Between MITI and the Market makes some effort to identify sectoralpatterns (see especially pp. 193-206). Similarly, Okimoto and Saxonhouse's "Technology and theFuture of the Economy" makes an attempt to identify Japan's sectoral strengths and weaknesses,but it does not provide a theory of why Japanese success has varied across industrial sectors.

65. See Johnson, MITI and the Japanese Miracle, pp. 307-12; and Okimoto and Saxonhouse,"Technology and the Future of the Economy," pp. 407—9.

66. See Friedman, The Misunderstood Miracle; and Piore and Sabel, The Second Industrial Divide,pp. 216-20 and chap. 9. Although Piore and Sabel identify some interesting variance acrosscountries within broadly defined industries, they make no systematic comparison of sectoralfortunes and development strategies within countries.


managing large-batch and mass production."67 Neither of these arguments isright or wrong, but both tend to generalize from the experience of mark II andIII technologies, as I will show below. In a similar vein, "holistic" analyses thatstress the government-business synergism in Japan focus most of theirattention on Japan's catching up and moving to the frontier in a narrow rangeof electronic technologies, particularly in the development of powerful dy-namic random access memory (DRAM) integrated circuit technology.

Japanese institutions and strong technology sectors

Given the narrow empirical base evidenced by most sweeping accounts ofJapanese industrial success and the continued disagreements about the generalcharacter of Japanese success, a sectoral approach may be useful. As MichaelPorter notes, Japan is a "study in contrasts" with some of the most internation-ally competitive industries found side by side with some of the most uncompet-itive.68 How can we account for this variance? Based on the theory outlinedabove, I hypothesize that success or failure depends not only on a matchbetween the properties of technology in individual sectors and the nationalinstitutional capabilities but also on the ability to translate these properties andcapabilities into efficient sectoral governance structures. Japan's institutionshave permitted it to succeed in a limited range of industrial sectors throughpath-dependent learning. In cases in which technological challenges do notmatch institutional capabilities, Japan's industries have been unsuccessful orhave begun to move toward governance structures that result from revolution-ary change brought about by adaptive learning or evolutionary selection ratherthan by path-dependent learning.

Japan's industrial success is usually attributed to the dominance of a"cooperative economy." Its institutions differ from liberal competitive gover-nance structures that emphasize market competition and a minimalist role forthe state and also differ from state interventionist hierarchical governancestructures. Japan's state is neither dominant nor subservient to privatebusiness; it is instead tied into "relational" networks enmeshing politics inmultiple formal and informal linkages across the business-government frontier.Political coordination is based more on organizational intelligence and strate-gic financial incentives than on coercion and tends to blur the line between theprivate and the public realm. In a similar vein, relations among privatebusinesses involve "controlled competition"—a combination of fierce marketcompetition for customers on the one hand and cooperative and reciprocal

67. See Laura Tyson and John Zysman, "American Industry in International Competition," inLaura Tyson and John Zysman, eds., American Industry in International Competition: GovernmentPolicies and Corporate Strategies (Ithaca, N.Y.: Cornell University Press, 1983), p. 37. See alsoOkimoto, Between MITI and the Market, p. 25. For a similar assessment that Japan's industries donot perform well with highly customized products involving heavy after-sale support and small lotsizes, see Porter, The Competitive Advantage of Nations, p. 411.

68. Porter, The Competitive Advantage of Nations, p. 394.


relations among networks of banks, manufacturers, and their suppliers on theother.69

If this general description of Japan's institutional capabilities is correct, theemergence of efficient governance structures is most likely to occur in mark IIItechnologies, whose systems involve intermediate coupling but only limitedcausal complexity among components. Intermediate coupling promotes cooper-ative business relations yet no full vertical integration of all research andproduction facilities. At the same time, limited causal complexity contains therisks of private investment, thereby opening business opportunities withoutextensive support through a public research infrastructure or subsidies. Japan'sstrength in mark III technologies shows why its success is concentrated neitherin pure "crafts" production systems with one-of-a-kind customization nor inideal-typical "mass" production with fully standardized goods generated in atightly coupled, vertically integrated production system. Cooperative businessnetworks infuse an element of flexibility into production systems, enablingthem to thrive in "flexible mass production" characterized by the constantvariation of basically standardized products. This flexibility also surfaces inunique innovation strategies based on the continual modification and upgrad-ing of existing components and products, yielding a constant flood of newmodels.™ At the same time, business concertation and reliance on privatefunding render it unattractive to engage in highly customized one-of-a-kindproducts and in risky research that aims at delivering technologies with acomplex interactive causal structure.

A brief glance at the industries in which Japan has been particularlysuccessful confirms this picture. Japan's strength lies in goods that aremanufactured in medium to long production runs and can be substantiallyimproved through incremental innovations of process and product technology.These include transportation equipment, office machines, appliances, con-sumer electronics and optical products, electronic components for computingequipment and telecommunications hardware, steel and fabricated metals, andprinting equipment, to name only some of the most important items.71 Inmachine tools and engineering, Japan has captured a significant market sharefor relatively standardized equipment yet not for customized machinery andplants.

69. My general characterization of Japanese institutional resources is based on the followingworks: T. J. Pempel, Policy and Politics in Japan (Philadelphia: Temple University Press, 1982),especially chaps. 1 and 2; Dore, Taking Japan Seriously; and Okimoto, Between MITI and the Market.Within this pattern, Okimoto (pp. 193-206) distinguishes three different patterns of politicalexchange.

70. Much of Japanese innovation has been in the area of process innovation rather than productinnovation. See Edwin Mansfield, "Industrial Research and Development in Japan and the UnitedStates: A Comparative Study," American Economic Review 78 (May 1988), pp. 223-38. OnJapanese strategies in mass production industries, see also Porter, The Comparative Advantage ofNations, p. 409; and Economist, 12 January 1991, p. 61.

71. My empirical reference for this assessment is Porter's The Competitive Advantage of Nations,pp. 385-94.


If my argument is correct, Japan's industries should be less successful in thedevelopment of technologies that involve configurations inimical to a "cooper-ative market economy," such as mark IV technologies, whose systems aretightly coupled and causally complex, and mark V technologies, whose systemsare loosely coupled and causally complex. Indeed, there are indications thatJapanese industry has encountered considerable difficulties in these areas.72

Japanese governance structures comprising corporations, public agencies, anduniversities have been too centralized and consensus-oriented and haveallocated too much risk to private investors to cope with the challenges ofhighly uncertain, complex interactive systems. Most research is performed inlarge corporate laboratories that focus on improvements of those technologiesin which incremental learning trajectories promise considerable payoffs. At thesame time, public universities and nonprofit research laboratories havereceived too little support to engage in ambitious high-risk technologyprograms and have been characterized by internal management hierarchiesthat have stifled innovation.

A further hypothesis that follows from this argument is that in cases in whichJapan has engaged in mark IV and V technologies and is moving along a newtrajectory of development, it has been forced to resort to governance structuresthat clearly diverge from the familiar patterns of Japanese industrial success insectors where technological properties are matched to general institutionalcapabilities. Moreover, experimentation with innovative governance structuresis risky and often produces the same disappointments that are so familiar fromother countries' experience in "high-technology" sectors.

Mark IV technologies

Path-dependent learning has constrained Japan's technological develop-ment in two critical areas of mark IV technology, nuclear power and aerospace.While these technologies have given rise to governance structures withlarge-scale, publicly funded research programs in other countries, they havedone so to a lesser extent in Japan. Moreover, in cases in which Japan hasengaged in interventionist practices to promote mark IV technologies, it hasexperienced problems not to be expected in a cooperative economy: theemergence of frictions between business and government and the spectacularfailure of large, publicly subsidized projects.

In the area of nuclear power, systems involve extremely complex interactionamong components and tight linkages among elements and therefore entail

72. According to Okimoto and Saxonhouse, "Progress has been slower in technologies wherethe theoretical parameters for problem solving are highly complex (jet aircraft design) andtechnological trajectories are not readily predictable (advanced software). Japanese firms are notas apt to make seminal inventions that lead to the creation of whole new industries, owing in thepast to the relatively low level of government sponsorship and the (until recently) narrowly appliednature of much commercial R&D." See Okimoto and Saxonhouse, "Technology and the Future ofthe Economy," pp. 396-97.


high capital costs. As a consequence, new technologies were developed only incountries offering massive state aid. The American light water reactor, whichwas designed and built initially under a navy contract, set the pace, and earlymassive U.S. government investment in this reactor line preempted a compara-ble exploration of potential rivals. The only reactor that became a commerciallyviable challenger, the Canadian heavy water reactor, was also built under atight regime of state governance.73 The eventual commercial success of thenuclear power industry in France, Japan, Sweden, and West Germany cannotbe attributed to the withdrawal of the state from funding and the finalbreakthrough of a free market business-led industrial strategy. In all thesecases, success relied on the dissemination of American technology throughlicensing agreements—a process not to be confused with the development of anew nuclear reactor technology—and on the continued presence of a compre-hensive government infrastructure protecting the industry from financialrisks.74

In Japan, MITI strategists had the ambition of producing an independentline of gas-cooled nuclear reactors and considerable state funding wasprovided, yet control of project development was handed over to the privatereactor manufacturers. Because of conflicts about the sharing of constructioncosts for demonstration plants, nuclear power development in Japan experi-enced delays similar to those in other countries that also relied on private-public arrangements, such as West Germany. In the end, the Japanese heavyelectrical industry acquired American light water reactor patents and, togetherwith the utility industry, which was unwilling to share the risks of newtechnology development, imposed the "proven" American reactor design onthe government bureaucracy.75 Even then, Japanese nuclear reactor supplierscould approach but could not exceed the world standard in nuclear technology.In the 1980s, after more than a decade of start-up problems, Japanese reactorssurpassed the especially dismal performance record of American reactors butnot that of most European reactors.76 This may explain why Japanesemanufacturers have been generally unsuccessful in gaining export orders fortheir reactors.

73. The early preemption of technological alternatives in nuclear reactor development throughdetermined state funding of light water reactors is analyzed and compared across Westerncountries in Irvin C. Bupp and Jean-Claude Derian's Light Water: How the Nuclear Dream Dissolved(New York: Basic Books, 1978).

74. The success of nuclear power has been erroneously attributed to markets by Burn, DeLeon,and Keck. See David Burn, Nuclear Power and Its Critics (London: Macmillan, 1978); PeterDeLeon, Development and Diffusion of the Nuclear Power Reactor (Cambridge, Mass.: Ballinger,1979); and Otto Keck, Policy-Making in a Nuclear Program (Lexington, Mass.: Lexington Books,1981).

75. For a good account of industry-government conflicts over nuclear power, see Richard J.Samuels, The Business of the Japanese State: Energy Markets in Comparative Historical Perspective(Ithaca, N.Y.: Cornell University Press, 1987), pp. 234-45.

76. In 1989, the availability of Japanese commercial reactors was 72.3 percent, while theavailability of American reactors was 63.3 percent. See The New York Times, 28 February 1990, pp.ClandC17.


Japan's negative experience is even more pronounced in aerospace technol-ogy, which is comparable to nuclear power technology in complexity, though ona somewhat lesser scale.77 Innovation in aerospace does not exclusively rely onincremental upgrading of system components; it also relies on bold systemicinnovations that integrate components into entirely new configurations whosesuccess is beset with great technical and market uncertainties. In terms ofgovernance structures, meeting this challenge of complex interactive technol-ogy not only requires hierarchical integration but also requires more leeway forindividual ingenuity of design and exploration of alternative solutions than anydevelopment strategies in the cooperative economy mould would generallypermit.

In terms of property relations, a cooperative economy placing much of theinvestment risks on private business is inimical to the development ofaerospace technologies. This is because private companies tend to avoid theuncertainties of tightly coupled, complex interactive systems. Almost all oftoday's successful airliners in Europe and America originated from govern-ment cost-plus contracts for defense projects or from extensive public subsidiesfor civilian technology development. Even in Japan, policymakers werecompelled to subsidize aerospace projects to a substantial extent becausestandard operating procedures, such as the pooling of private businessresources, facilitated by public seed money and program guidance, provedinapplicable. MITI thus provided considerable resources to individual compa-nies for specific aircraft projects in an industry that lacked a sufficient industrialinfrastructure and has shown little signs of domestic competition.78

Japan's first civilian plane project in the 1960s proved to be a commercialfailure, as did its effort to develop a 180-seat plane in the 1970s and 1980s, aneffort that cost $210 million in public subsidies. As a consequence, Japanesepolicymakers have resorted to a strategy commonly used in other catch-upefforts: enter joint projects with foreign companies and improve on theirproducts. Boeing's reluctance to grant Japanese corporations equal status andaccess to the technology for a new generation of airplanes, however, suggeststhat this strategy now promises only limited success.79

The constraints of Japan's industrial governance structures also come to thefore in its space program. Although Japan spent $1.1 billion on spacetechnologies in 1989 alone, it has fallen further behind American andEuropean efforts. The program to build rockets with gradually increasing

77. For a discussion of Japan's growing disadvantage in aerospace development, see Pari Pateland Keith Pavitt, "Is Western Europe Losing the Technological Race?" Research Policy 16 (Spring1987), pp. 59-85.

78. For a comparison of American and Japanese aircraft innovation, see David Mowery andNathan Rosenberg, "Government Policy, Technical Change, and Industrial Structure: The U.S.and the Japanese Commercial Aircraft Industry," in Richard Langdon and Roy Rothwell, eds.,Design and Innovation: Policy and Management (New York: St. Martin's Press, 1978), pp. 71-100.

79. Regarding Boeing's decision to cut back on Japanese participation in the 767-X project, seeThe New York Times, 14 April 1990, p. 1.


payloads has turned out to be too slow to keep up with foreign competition.The successor to Japan's earlier launch vehicles is already outmoded, will betoo expensive, and has been delayed until the mid-1990s.80 In a nutshell,Japan's institutions have not provided adequate governance structures forglobal and nonincremental technological changes that require a combination ofdecentralized autonomy in the search for innovative solutions and highlycentralized project management in vast technology development programs.81

Mark V technologies

While the mismatch between Japan's prevailing institutional capabilities andindustrial success is most glaring in the governance of tightly coupled, complexinteractive technologies, it is not a foregone conclusion that Japan will besuccessful with technologies that involve less coupling yet have complexinteractive causal structures. These mark V technologies are best explored intrial-and-error research, yielding fast-paced revolutionary innovations withlittle incremental improvement after major breakthroughs, thus thwartingstrategies of reverse engineering and incremental catch-up. Many technologiesat the present innovation frontier exhibit mark V properties, especially withinthe broad areas of electronics, information technology, and bioengineering.

The field of computing and information technology involves numeroussystems with varying levels of coupling and causal complexity. Characteristi-cally, Japanese industry has performed best when technology does not have ahigh level of complex interaction that prevents incremental learning fromproviding an efficient development trajectory. The most important example of aprogram in which Japan's institutional capabilities worked well is the oneinvolving dynamic random access memory (DRAM) integrated circuits, whichthe Japanese have developed incrementally through process and productimprovements that have doubled the capacity of each chip every three to fiveyears.82 Facilitated by initial guidance from MITI, large Japanese corporationspooled some resources for joint precommercial research projects, simulta-neously made strenuous efforts to acquire advantages over their competitorsthrough proprietary research, and eventually succeeded in controlling the bulk

80. See "Thinking Ahead: A Survey of Japanese Technology," Economist, 1 December 1989,p. 14.

81. The following comment on Japan's technology program reflects this problem: "Japan'sproblems with aerospace run deeper than engineering. Its engineers are as good as any in theworld; their handicap is lack of a culture that continuously challenges all design decisions, nomatter how high in the hierarchy they were made. Without it, debugging aircraft design isimpossible." See Economist, 8 April 1989, p. 72.

82. For studies of Japanese semiconductor and computer development, see especially KennethFlamm, Targeting the Computer: Government Support and International Competition (Washington,D.C.: Brookings Institution, 1987), pp. 125-53; Kenneth Flamm, Creating the Computer: Govern-ment, Industry, and High Technology (Washington, D.C.: Brookings Institution, 1988), pp. 172-202;and Okimoto, Between MITI and the Market, especially chap. 2.


of the international DRAM market.83 Success has been a matter of tenacity,long time horizons, and considerable capital investments.84 As the complexityof further improvements in semiconductors increases and the cost of produc- r

tion technologies accelerates, it is questionable, however, whether pastpatterns of innovation with relatively little direct state subsidies will be a guideto future success in this technology area.85

While the DRAM industry has been an undisputed Japanese success, U.S.manufacturers have kept their competitive edge in microprocessors and similarinformation technologies that involve revolutionary learning.86 Japan's incre- ,mental strategy has also yielded only limited success with respect to supercom-puters. MITI envisioned a continued dominance of computers with a smallnumber of processors and geared its strategy for innovation in computerarchitecture to this expectation. In contrast, U.S. supercomputer designersbroke with conventional wisdom and have begun developing computers with upto 64,000 processors.87 Only recently has the Japanese government strategyshifted to catch up with U.S. developments that were promoted under theauspices of the strategic defense initiative (SDI) program.88 Computers withlarge numbers of processors have simple hardware but extremely complexsoftware. Yet software design is an area in which the Japanese industry, in the

83. Interestingly, MITI's efforts to impose a stronger hierarchical structure on research effortsand draw activities from company laboratories into central facilities shared by several companieswere strongly resisted, as was evident in the very large scale integration (VLSI) project. See GlennR. Fong, "State Strength, Industry Structure, and Industrial Policy: American and JapaneseExperiences in Microelectronics," Comparative Politics 22 (April 1990), pp. 273-99.

84. In a similar vein, Japanese manufacturers managed to perfect the so-called Josephsonjunction technology (the ultrafast semiconductor switching devices on which IBM and ATT made finitial breakthroughs), but they were too impatient to fund further work in the early 1980s. This \rival to conventional silicon technology was developed with $190 million of MITI funding. SeeEconomist, 21 July 1990, p. 87.

85. Because the costs of developing new DRAMs and setting up production facilities haveescalated with each generation of new devices, competition among Japanese manufacturers hasbecome ruinous and may discourage further private developments. In the mid-1980s, it was theU.S. protectionist policy of imposing minimum prices on DRAMs sold in America thatunintentionally saved Japan's industry from collapse. In the early 1990s, the new round of price •cutting in 1- and 4-megabyte DRAMs appears to be leading the industry back to the brink ofcatastrophe. Further innovation may therefore require more state involvement, as Americanmanufacturers have claimed for some time. See Economist, 23 February 1991, pp. 64-65; and TheNew York Times, 21 February 1991, p. C3. In "State Strength, Industry Structure, and IndustrialPolicy," p. 294, Fong notes that there appears to be a convergence of governance structures in theAmerican and Japanese semiconductor industries. If this is the case, the convergence is on a higherlevel of public involvement than in the past.

86. Toshiba has recently become willing to swap its DRAM technology for access to some of "tMotorola's microprocessor know-how. See Economist, 2 March 1990, p. 66. But Motorola and Intelhave remained unwilling to license their most advanced microprocessors to Japanese companies.

87. Cray computers with 16 processor units will be on the market in the mid-1990s, andsupercomputers with up to 256 processors are under development. See Economist, 15 April 1989,pp. 91-92. Computers with thousands of parallel processors are being developed by other firms,such as Connection Machines, which operates under contracts from the Defense AdvancedResearch Projects Agency (DARPA).

88. See The New York Times, 29 April 1990, p. 1.


eyes of most analysts, has remained firmly behind the U.S. and West Europeanindustries.89

Excessive focus on hardware and incremental technology development mayalso force Japan into a dead end with respect to high-definition television(HDTV). While Japan is widely believed to be ahead of its American andEuropean competitors in bringing a viable HDTV system to the marketplace,its prototypes are based on an antiquated analog technology of data transmis-sion. If commercialized, it would require 30-megahertz bands for transmission(bands that are five times as wide as those used for present televisionbroadcasting) and would cut down on the number of available channels withinthe relevant frequency spectrum. American research therefore has focused onmore advanced digital transmission technology that economizes on band widthand can be accommodated within the present transmission system.90

In light of these experiences, we can also speculate about the potential ofJapanese industries in biotechnology and related fields that often involvecomplex causal interaction among system components. The precursor and onestrand of the emerging biotechnology industries, the pharmaceutical industry,has never equaled the market and export performance of other Japaneseindustries or of its American and European competitors. In part, this was dueto purely institutional constraints.91 Yet even recently, with many of theinstitutional barriers removed and strong market incentives for innovation inplace, the Japanese pharmaceutical industry continues to exhibit familiarattributes. Innovation is mostly confined to antibiotics, the low-technology endof a high-technology business, and the majority of emerging new drugs appearto be variations of well-known chemical structures, rather than completely newproducts which yield the highest profitability in the international drug market.92

The unique challenges of innovation in drugs and other biotechnologicalproducts may call for strategies that are fundamentally at odds with standardJapanese innovation practices. What appears to benefit innovation is a broadfoundation of basic research from which scientists can draw selectively inloosely coupled, highly decentralized experiments and innovation programs.The pooling of company resources in precommercial development programs,the coordination of interfirm research, and the concentration of substantiveprogram objectives by government agencies hold little promise in this area. Inthe past, Japan's universities lacked a strong basic life science program thatcould have helped in the launching of major initiatives in commercial

89. See Patel and Pavitt, "Is Western Europe Losing the Technological Race?" p. 73; andEconomist, "Thinking Ahead: A Survey of Japanese Technology," pp. 12-13.

90. Regarding the HDTV competition between Japan and the United States, see InternationalHerald Tribune, 22 March 1989, p. 1; and The New York Times, 28 November 1989, pp. 19 and 22.

91. Until recently, the Ministry of Health and Welfare was regulating competition and cuttingprices rather than stimulating R&D and international competitiveness in the Japanese drugindustry.

92. See Economist, 2 March 1991, pp. 61-62.


biotechnology.93 Japanese government efforts to acquire basic scientific exper-tise quickly by means of an international "human frontier science program" incooperation with Western research institutions have run into resistance fromAmerican and European scientists, who suspect Japan of trying to buy its wayinto frontier research without giving its competitors anything worthwhile inreturn.94 Moreover, in industrial biotechnological research, Japanese strengthhas been limited to fermentation technology, the area in which incrementallearning from established industrial processes is most plausible.95

Having illustrated the limitations of path-dependent learning in Japaneseindustry, I will now briefly turn to evidence supporting my final hypothesis thatwhen the results of path-dependent learning remain unsatisfactory, actors maybe forced to engage in revolutionary learning and adopt governance structuresthat diverge from standard institutional capabilities. The limitations of conven-tional Japanese institutions for innovation strategies at the cutting edge oftechnology have not escaped the attention of Japanese corporate and govern-ment managers. For example, university basic research has been earmarked formajor expansion. Corporations have also shifted resources to basic researchjust at a time when American companies believe they can learn from Japan'stight subordination of research projects to development projects.96

The introduction of new institutions, however, has led to predictabledifficulties that can be illustrated in the case of MITI's project for "fifth-generation" computers. Inaugurated in the early 1980s, the project has had astrong emphasis on innovative software development. In comparison withprevious government-industry projects in computer and information technol-ogy, this project has received a larger proportion of government funding, aproportion amounting to over 50 percent of the total funding. Japanese policythus has moved from limited financial incentives to a level of government R&Dfunding similar to that of other advanced capitalist democracies.97 Moreover,the often praised but usually exaggerated consensualism in cooperativeresearch projects in Japan has been shaken.98 When private industry was

93. This reflects the broader problem of weak basic research in Japan and little government-industry interpenetration. See Okimoto and Saxonhouse, "Technology and the Future of theEconomy," pp. 403 and 412-13.

94. See Economist, 16 December 1989, p. 84.95. See Margaret Sharp, "Biotechnology: Watching and Waiting," in Margaret Sharp, ed.,

Europe and the New Technologies, pp. 179-81.96. Regarding the shifting balance between basic research and development in Japanese

industry, see ibid., p. 225. This shift was evident, for example, in Hitachi's 1985 decision to open anadvanced research facility modeled on that of Bell Laboratories. See Economist, 11 August 1990,p. 82.

97. See Okimoto, Between MITI and the Market, pp. 80-81.98. In The Business of the Japanese State, Samuels reports similar problems in innovation

programs in the energy sector, where the technological properties of the systems (tight couplingand often complex interaction) frequently place them out of the realm in which horizontalcooperative strategies are successful. Conflicts also surfaced in semiconductor research wheneverMITI attempted to centralize authority over program activities. See Fong, "State Strength,Industry Structure, and Industrial Policy," pp. 290-93.


reluctant to join the program, MITI bullied some companies into compliance.For the first time in Japanese computer research, key activities of thefifth-generation computer program were assigned to a central laboratory,rather than being distributed to a research network of scientists and engineers,most of whom continued to work in company laboratories. Moreover, whereasJapanese industry representatives insisted on incremental technology improve-ments, Japanese scientists and government bureaucrats called for morerevolutionary technology innovation." Finally, the industry representativesobjected not only to the administrative cost and risk of the new program butalso to the free availability of research results to all firms in the Japanesecomputer industry, including those which had not contributed to the project.All of these frictions at the business-government-science interface are familiarproblems associated with West European and American innovation policy. Atthe same time, however, the nature of new technological challenges may renderit impossible for the Japanese to follow the conventional cooperative innova-tion strategies that have in the past allowed them to avoid these problems.

Both in biotechnology and in a variety of information technologies, theinstitutional arrangements that appear to work well fly in the face of standardJapanese governance structures. In the United States, for example, largeexpenditures for basic research without any clear industrial applications haveserved as a foundation for future commercial development. These haveincluded U.S. public investment in early computer development during the1950s and 1960s, the extensive financing of the life sciences by the NationalInstitutes of Health from the 1960s to the present, and the growth of theDefense Advanced Research Projects Agency (DARPA) in the 1980s, anagency that is really charged with civilian technological innovation but hides itsmission behind the smoke screen of national defense interests.100 At the sametime, in biotechnology and information technologies, rapid revolutionarylearning is likely to give small companies and autonomous subunits of largefirms an advantage over more integrative, cooperative research arrangementsin developing new products and in bringing them to the marketplace.

Based on a sectoral analysis of Japanese innovation policy, then, it is notclear that Japan offers the most advanced and efficient institutions adapted tothe present innovation frontier, as Japan enthusiasts have often maintained.101

99. See Erik Arnold and Ken Guy, Parallel Convergence: National Strategies in InformationTechnology (Westport, Conn.: Quorum Books, 1986), pp. 86-87.

100. DARPA, for example, was responsible for the initial research on personal computers,computer graphics, computer networks, and artificial intelligence. With DARPA funding,scientists from Stanford and Berkeley launched Sun Microsystems, Inc., a major innovativecomputer company of the late 1980s. See The New York Times, 19 November 1989, p. E4. For adiscussion of U.S. industrial policy in the information and computer area, see Arnold and Guy,Parallel Convergence, chap. 3; and Flamm, Targeting the Computer, chaps. 3 and 4. The general casefor the existence of an interventionist U.S. industrial policy has been made convincingly by Vogel in"Government-Industry Relations in the United States."

101. See, for example, Freeman, Technology Policy and Economic Performance, pp. 78-79.


TABLE 3. U.S. international competitiveness in ninety-four key technologies,1990"

Strong or dominantposition

Competitive position

Weak position

Uncompetitiveposition

(1)

Informationtechnology

72% (18)

28% (7)

- (0)

- (0)

(2)Power train

andpropulsion

43% (3)

43% (3)

14% (1)

- (0)

(3)Materials and

associatedprocessing

26% (7)

41% (11)

11% (3)

22% (6)

(4)Engineering

andproduction

6% (1)

33% (6)

50% (9)

11% (2)

(5)

Electroniccomponents

12% (2)

18% (3)

29% (5)

41% (7)

"Figures in parentheses indicate the number of technologies in each category.Source. American Council on Competitiveness, 1991 survey, reported in The New York Times,

21 March 1991, p. C2.

It is at least equally plausible that, contingent upon institutional strengths,there will be a distribution of industrial capabilities across the three majorindustrial blocs: the United States, Western Europe, and Japan.102 Americanindustrial strength lies primarily in mark IV "state technologies" (aircraft andspace, although no longer nuclear power),103as well as in many mark Vbiotechnologies and information technologies. European strengths are distrib-uted over mark III technologies (engineering and chemicals, particularly inWest Germany), mark IV technologies (nuclear power and aerospace, particu-larly in France), and a few mark V technologies (computer software and sometelecommunications equipment). Japan's profile of industrial strength is quitesimilar to Europe's profile (for example, in engineering and heavy equipment)but with greater emphasis on flexible mass production systems relying on rapidincremental learning trajectories (for example, systems involved in the produc-tion of cars, consumer electronics, and electronic components).

The general picture drawn here is confirmed by the results of a recent surveyof U.S. competitiveness in ninety-four key technologies (see Table 3), con-ducted by the American Council on Competitiveness, a nonprofit organizationwith representatives from business, education, and labor. According to the

102. This argument can be derived from Patel and Pavitt's comprehensive overview of industrialstrengths in the three blocs: "Is Western Europe Losing the Technological Race?"

103. The problems of the nuclear power industry are, however, primarily due to public safetyconcerns, which proved to be politically more effective in the United States than in almost anyother advanced capitalist democracy. See Herbert Kitschelt, "Political Opportunity Structures andPolitical Protest: Anti-Nuclear Movements in Four Countries," British Journal of Political Science16 (Winter 1986), pp. 57-86.


survey, the United States holds a dominant or competitive position in typicalmark V technologies, particularly in the areas of information (column 1) andbioengineering (included in column 3), as well as in mark IV aerospacepropulsion systems (included in column 2). The U.S. position is deteriorating,however, in engineering and electronic components (columns 4 and 5), whichare mark II and III technologies in which the Europeans or Japanese havetypically shown strength.

It should be borne in mind, however, that it would be far from adequate toassess an industry's or a country's competitiveness based solely on the matchbetween technological innovation strategy and institutional governance. Ja-pan's industrial strength feeds on a number of advantages not discussed here,particularly its ability to gear product development to rapidly changing marketconditions.104 These strengths may somewhat compensate for the weaknesses ofits innovation regime. For this reason, my analysis must not be interpreted asforecasting the inevitable demise of Japanese industrial competitiveness inadvanced industries. It suggests only that Japanese innovation strategies arenot unconditionally successful. Understanding the interface between technol-ogy and governance structures is important, a lesson often not heeded in theindustrial policy debate.

Conclusion

My argument can be summarized in three propositions. First, sectoral analysisof innovation policies must in many respects complement and partiallysupersede national explanations of innovation policies. National-level analysesdo not supply the conceptual framework to account for sectoral variations ofindustrial strategy.

Second, sectoral studies have suffered from weak theoretical conceptualiza-tions of the analytic properties that distinguish sectors and the mechanismsthat create sectoral variation. To overcome this deficiency, I have drawn onPerrow's observations and conceived of sectors as a function of technologicalsystems that engage in particular technological trajectories. Although thisapproach leads beyond simple dichotomous characterizations of technology(such as that between mass and craft production), it obviously requires furtherelaboration, particularly in order to subject the various hypotheses to moredemanding empirical tests.105 While I do not claim that all variations in sectoral

104. For a discussion of free market conditions, see Porter, The Competitive Advantage ofNations, pp. 384-421. Compare the discussion in Information and Organization, pp. 173-89, whereStinchcombe emphasizes that innovations are ultimately successful only if they affect more than theengineering component of a production system.

105. Problems of Perrow's typology include those related to the determination of technologicalsystem boundaries and to the operational measures of tight coupling and causal complexity. Perrowprovides little help in addressing the first problem, yet he offers considerable elaboration of thesecond problem in a wealth of highly instructive case studies.


institutions and policy are technology-based, I do argue that technologicalfeatures are one of the major factors shaping the institutions of industrialsectors. Other factors that have not been discussed in this article, such asmarket conditions (small numbers problems) and the self-interested opportun-ism of suppliers and purchasers of goods, introduce further contingencies thatshape sectors.

Third, I have argued that there are at least three mechanisms that identifythe conditions under which actors "learn" transaction cost efficient sectoralinstitutions and innovation strategies. The first consists of the endogenizationof technology within a framework of path-dependent learning. Above all,actors develop efficient institutions for technological systems whose gover-nance structures match general institutional skills and capabilities alreadyavailable in a region or nation. National-level variables (domestic structures)are introduced to explain the technological choices—that is, the mix of sectorsor the "technological portfolio"—pursued in a country. Moreover, nationalinstitutions explain why some sectors cannot be efficiently organized in acountry: existing institutional capabilities may prohibit the acquisition ofappropriate governance structures.106 The second mechanism, which is particu-larly evident in periods of economic or military crisis, involves learning to adaptto new technologies and efficient governance structures that are beyond thereach of path-dependent learning. Technology is here an exogenous variable,and actors learn through feedback mechanisms. In many instances, however,the inherent uncertainty of innovation strategies and ambiguity about theobserved linkage between technology and governance structures obfuscate thediscovery of efficient institutions. Learning often assumes a perverse or"superstitious" character.107 Efficient matches between technology and gover-nance structures may then emerge only through a third mechanism, that ofevolutionary selection in competitive markets and international systems. Yetcompetition among states and industries is imperfect. For this reason, rationalexplanations of institutional choice and institutionalist theories of domesticstructures must complement each other. I have employed the Japaneseexperience with industrial policy to illustrate the usefulness of a multilevelexplanatory strategy that combines rational and path-dependent learning ofgovernance structures. Again, it should be emphasized that these argumentsmust be subjected to more rigorous empirical tests than presented here.

106. In a corresponding critique of historical functionalism, March and Olsen postulate thatefficiency rationales govern the choice of institutions. See James G. March and Johan P. Olsen,"The New Institutionalism: Organizational Factors in Political Life," American Political ScienceReview 78 (September 1984), p. 737. Nevertheless, the authors may go too far in rejecting theoccurrence of efficient learning. A substantive policy theory would have to identify the opportuni-ties and limitations of efficient learning.

107. On this point with respect to decision theory, see Robyn M. Dawes, Rational Choice in anUncertain World (New York: Harcourt, Brace, Yovanovich, 1988), pp. 100-120; and Barbara Levittand James G. March, "Organizational Learning," Annual Review of Sociology, vol. 14, 1988, pp.319^0.


If the hypotheses developed in this article are correct, they would not onlyoffer a new explanation of national and sectoral differences among governancestructures in industry but would also yield some interesting policy conse-quences that can be explored in future research.108 One consequence is thatboth within and across countries, the demand to establish uniform governancestructures would become obsolete. Rather than viewing Japan's structures asthe "recipe" for designing efficient patterns of government-business interac-tion, countries would instead strive for a diversification of regional institutions,a strategy that promises to be more feasible in federal than unitary systems.Institutional monocultures are also inadequate at the supranational level. Nosingle trade regime, whether it encourages open competition or erectsprotectionist barriers, is likely to further industrial growth across all sectors. Inthe worst case, institutional uniformity will yield lopsided shifts in worldtechnology because entire areas of improvement will be ignored for want of anappropriate differentiation of governance structures. "Learning from Japan"would be perverse in the precise sense that entire areas of innovation would besacrificed if any particular recipe for industrial success were imposed on a widevariety of industrial sectors.

Efforts to homogenize institutions within and across countries fall prey towhat Jon Elster has described as the fallacy of composition: a "naturalcognitive tendency to believe that statements which are true from the point ofview of any individual agent remain true when applied to the totality of allagents."109 When the term "agents" is replaced by "sectors," Elster's statementcaptures the essence of the fallacy that has driven much of the industrial policydebate. Only careful comparison of the performance of industrial sectors withdifferent governance structures will enable us to overcome this fallacy.

108. I owe most of these suggestions to Timothy McKeown.109. Jon Elster, Making Sense of Marx (Cambridge: Cambridge University Press, 1985), p. 487.

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