Entrepreneurs and Markets in Innovation-Driven Industry Growth: Lessons from Meiji-Era Cotton Spinning Industry in Japan, 1883-1918

Project Outcomes Statement

Japan, whose remarkable development prompted Robert E. Lucas to place it in its own category in his account of economic growth since the Industrial Revolution, started its transformation by growing its cotton spinning industry--the same industry that had been the key to industrialization in England and elsewhere. In this project, we have conducted an in-depth investigation of key factors that enabled this industry's growth and considered the implications for modern-day developing countries and economic and management research and policy-making in general.

The project commenced with data development, during which we digitalized and processed firm-level monthly output data by product varieties, giving us information about product innovation and product diversification (see exhibit 1 for an example of archival data used to create this part of the database). We also compiled a database of machine capacity for each firm from Japanese archival sources (exhibit 2) and collected and digitalized data on the industry's machine orders using records from the Platt Collection archives in Lancashire, England (see exhibit 3 for an example of an archival order used for this). Finally, we completed the database using semi-annual company reports and other Japanese archival sources. From these, we obtained information on members of firms' top management teams (TMTs) and degreed (university- and technical college-educated) engineers employed (see exhibits 4, 5, and 6). All these data were matched to the firm-month-level input-output data and semi-annual financials that we constructed prior to this project. The result was a comprehensive database covering the industry's technology choices, inputs and outputs by varieties, balance sheets and income statements, and top management teams and engineering personnel.

In the project's second phase, we utilized this database to examine several key issues related to the industry's spectacular growth. First, we examined the roles of product upgrading and diversification. The literature on industrial organization and endogenous growth has recognized the importance of heterogeneous firms' choices of what products to produce, but has treated product innovation and diversification as separate issues. In contrast, our conceptual and empirical frameworks allow for combined treatment of innovation and diversification, and we opened the "black box" of firms' product varieties choice by utilizing our data on machine orders, TMT composition, and employment of educated engineers. We found that a firm's key first step toward successfully expanding its scale and product portfolio was introducing innovative products beyond its previous technical capabilities. However, because this process involved a high degree of uncertainty, firms tended to introduce innovative products on experimental basis. One particularly novel contribution of this project stems from our discovery that experimenting with technologically challenging, innovative products was not only necessary to capture the market in innovative products, but also facilitated horizontal product differentiation within the firm's previous technical capabilities. We thus establish what we believe is a new insight: growth-enhancing knowledge capital does not arise from omnidirectional expansion efforts. The identity of the new products added to a firm's portfolio is crucially important.

We also examined TMT composition for the universe of industry firms through the prism of individual versus shared leadership. Previous research has highlighted how political jockeying negatively affects firm strategy and performance when there are multiple leaders. We found that while most firms indeed experienced power struggles among top management, firms that were available to avoid this and enjoy stable shared leadership had common elements: a focus on long-term value creation rather than short-term gains, adoption of merit-based promotion systems, power-sharing within TMTs to enable efficient division of labor, and honorable resolution of conflicts and ethical breaches. This let them engage in long-term expansion strategies and emerge as "centers of gravity" for industry outputs and talent.

Furthermore, spearheaded by a graduate assistant financed by the grant, we conducted a study of the development of the industry's labor market. We found that workers, especially female factory operatives, experienced large wage increases due to intense competition for workers among firms. Moreover, leading firms, including industry-dominant "centers of gravity," consistently paid their workers more than did other firms.

We believe the project's detailed examination of the interactions among industry technology, human capital, market demand, and institutions will have broad impact by informing policy debates relevant to today's efforts against poverty and stagnation. Our findings suggest that the value appropriation issues that are often a priority of policy recommendations for development actually take a back seat to creating conditions for unleashing entrepreneurship and technological prowess. The project also shows that stable shared leadership is key to firms emerging as industry centers of gravity, and competitive selection of firms benefits workers who are potentially the most vulnerable, like female factory operatives. Further still, the project has built a decades-long comprehensive dataset on firms and individuals in a crucially important industry that will shortly become available to other researchers through a dedicated NBER site so as to spur future research.