Although a large number of empirical studies have set out to investigate the economic development of Japan during the post-war period, little is known about how innovation and imitation have had an effect on efficiency by exploiting long-term subcontract networks and agglomeration economies. The case of Japan is particularly note-worthy, as the fine division of labor apparent among assemblers and part-suppliers located in small industrial areas is regarded as a major characteristic of post-war industrialization in this country (Kawasaki and Macmillan, 1987, Asanuma, 1989 and Yamamura et al., 2005). Thus, we presume that the assembly industry has been the driving force behind the Japanese economy in the post-war period and so focus on it. The purpose of this study is to provide evidence about the determinants of improvements in productivity in the assembly industry, when decomposed into technological progress and changes in technical efficiency and viewed as a dynamic development process.