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While Japan has led the world in certain high-technology industries, such as automobiles and electronics, it has remained a minor player in the global pharmaceutical industry. Japan's leading pharmaceutical firms invest less in R&D and record lower sales than leading global firms. Japan remains a net importer of pharmaceuticals and few Japanese drugs are found outside the country. The global pharmaceutical industry is led by firms from the United States, the United Kingdom and Switzerland, rather than those from Japan. This article explains why the pharmaceutical industry has remained largely in the second tier of Japan's dual economy. For the purposes of this paper, the dual economy refers to the pronounced divide observed between the globally competitive and non-competitive sectors of the Japanese economy. Japan's pharmaceutical industry long subsidised other sectors, including those in the competitive tier, by providing medicines at low prices for a universal health care system. This played a critical role in shaping the industry's domestic orientation. While no single reason explains why pharmaceuticals did not become one of Japan's first tier industries, the major reasons lay in the smaller size of Japanese firms, the lack of R&D incentives, and the government's protectionist policies. [ABSTRACT FROM AUTHOR]