The Chrysanthemum Meets the Eagle

The interplay of U.S. and Japanese innovation policy began in the mid-19th century when Commodore Perry sailed into Tokyo Bay in 1853. The Japanese witnessed the technological power of a modern navy and the strategic implications of government investment in technology development. Recognizing the need to enhance its technological capacity, Japan soon began what became a mainstay of its innovation policy, scanning the globe for technologies that it could import and use.

These strategies remained essentially the same during the rest of the 19th century and first half of the 20th century. The United States continued to invest in military technology development in areas such as aviation and communications, and it also helped universities develop research capacity that would be useful to agriculture and industry. Japan maintained a relatively weak system of intellectual property protection, which was consistent with its position as mainly an importer of foreign technology. The government took an active role in subsidizing and supporting the industrial infrastructure it strove to develop in the national interest. A strong and highly capable elite bureaucracy was created to coordinate and support the efforts of the private sector in reaching this target. Japan’s drive for industrialization and the adoption of Western technology led to the establishment of its national university system and the founding of elite private universities, such as Keio and Waseda, modeled after institutions their founders had observed abroad.

World War II was enormously costly for Japan and Japanese industry, and much of the early postwar history of Japanese innovation policy concerns the rebuilding of a modern, technologically advanced economy out of the wartime rubble. Rapidly importing and adapting foreign technology was once again the key. Buoyed by the important role that technological innovation played in World War II, the United States expanded its investment in R&D and emphasized the importance of interaction among government, industry, and academia.

Japanese technological capabilities first came onto the U.S. radar screen in the late 1950s, when the Japanese electronics industry succeeded in mastering the production of transistors for use in consumer electronics. To some extent, Japanese success in this arena was dependent on U.S. antitrust policy: As a price for dropping its antitrust litigation against AT&T, the Justice Department had required AT&T to license critical patents on the transistor for a reasonable fee to all comers, a mandate interpreted to include foreign companies. Massive U.S. imports of Japanese transistors, primarily assembled into inexpensive consumer electronics, provoked the first public campaign against high-tech Japanese imports. In a preview of debates to come, the U.S. electronics industry divided over how to react. Some component makers called for restrictions on Japanese imports, whereas the more advanced producers of the highest-tech devices (high-performance silicon transistors and early integrated circuits) argued that the key was to invest in newer, more advanced technology, leaving more mature, and hence less profitable, products for followers—such as the Japanese—to fight over.

Through most of the 1960s and early 1970s, a series of high-tech products, including televisions, then calculators, then digital watches, fell into this cycle of U.S. product innovation, followed by Japanese imitation, adaptation, and improvement. The cycle time between an initial U.S. innovation and successful Japanese improvement, and ultimately market dominance, seemed to get shorter and shorter. A similar story also played out in a product with a distinctly more mature and less high-tech character: the automobile. The common denominator in both cases was that Japanese improvements seemed typically to focus on continuous improvement of manufacturing processes and product quality, which resulted in a higher-quality product at lower cost. An explosion of interest in Japanese manufacturing techniques and Japanese industrial policies ignited U.S. industrial and policy circles in the late 1970s and early 1980s.

The result was a series of trade battles over Japanese exports. In addition to the more obvious weapons of trade policy (dumping cases, retaliatory tariffs, and quotas) some more creative armaments were also deployed. Japanese exporters of high-tech products into U.S. markets were sued over infringement of patents through the federal courts and through the U.S. International Trade Commission. Others focused on Japanese use of home market protection as an indirect method of subsidizing its high-tech industry and urged that political pressure be applied to Japan to lower the formal and informal barriers surrounding its high-tech markets, particularly for semiconductors and computers, where U.S. firms seemed to hold a clear technical lead.

A seminal event for U.S. innovation policy was Japanese success in the global market for dynamic random access memory (DRAM) chips in the late 1970s and early 1980s. DRAMs were the technology driver for the entire semiconductor industry: the highest-volume product, making use of the most advanced available manufacturing equipment. U.S. DRAM producers were shocked by the rapid advance of Japanese producers into the manufacture of the highest-tech current-generation chips in the early 1980s. Worse yet, customers were reporting that the reliability and quality of the Japanese chips exceeded those of the U.S. product. Even worse, the Japanese DRAM makers in some cases seemed to be selling at prices below U.S. producers’ costs and were using Japanese production equipment that seemed better than that available to U.S. makers.

Convinced that one of the keys to Japanese success was an innovation policy that enabled researchers from government and numerous companies to work cooperatively in R&D consortia, the U.S. Congress responded with a flurry of initiatives. The Stevenson-Wydler Technology Innovation Act of 1980 encouraged industry and government researchers to work together in Cooperative Research and Development Agreements (CRADAs). The Bayh-Dole University and Small Business Patent Act of 1980 was designed to encourage university researchers to transfer their technology to commercial companies. The National Cooperative Research Act (NCRA) of 1984 gave U.S. industry R&D consortia that registered with government some limited immunity from prosecution under U.S. antitrust laws. The SEMATECH consortium to improve semiconductor manufacturing technology was a successful example. The National Science Foundation expanded its support for basic scientific research to include more applied work, by funding the creation of engineering research centers where academic and industry researchers could work together. Steps whose ultimate effectiveness is still being debated were taken to strengthen the patent system, and the Department of Defense funded a billion-dollar Strategic Computing Initiative that helped U.S. industry overcome the challenge of Japan’s efforts to capture the lead in supercomputers.

Although scholars are divided in their assessment of the effectiveness of these U.S. policies, one result is undeniable: The perceived success of these U.S. innovation policy changes led Japan to alter some of its policies in the mid-1990s.

Japan redirects policy

There have been significant new developments in Japanese innovation policies since the 1990s, strongly influenced by U.S. developments in the 1980s. They include a significant increase in funding in the science and technology budget, coupled with major institutional reforms in national universities and research laboratories; measures to strengthen industry and academic science partnerships, including the enactment of the Japanese version of the Bayh-Dole Act; and a significant strengthening of intellectual property rights protection. The most important reason for these changes was the recognition by policymakers that Japan needed to strengthen its innovation capability as an engine of economic growth, given that the catch-up phase of Japanese economic growth was over. This perception was widely shared, as shown by the fact that the Basic Law on Science and Technology, which set the new framework for science and technology policymaking, received unanimous support from all political parties when enacted in 1995. The policy emphasis on innovation increased as the stagnation of Japan’s economy extended over almost a decade.

The U.S. model of an innovation system has strongly influenced the development of Japanese innovation policy. It is widely believed in Japan that the strong basic research capability of U.S. universities supported by a high level of federal support, close collaboration between industry and universities, and strong protection of intellectual property rights have been major contributing factors to the impressive recovery of the U.S. economy since the early 1980s. More specifically, the general perception in Japan is that significant government support for basic or generic research, combined with strong research competition, has enabled U.S. research universities to continuously create scientific discoveries, retain leadership in global scientific research, attract the best talent in the world, and accumulate know-how and human capital in technological frontier areas. Close partnerships between universities and industry have enabled basic scientific capabilities to be transformed into emergent new industries in areas such as biotechnology and information technology. The Bayh-Dole Act, encouraging patent ownership by universities, is believed to have been an important reform stimulating this process, by enhancing the incentives for university professors to engage in technology transfer. Finally, strong protection of intellectual property rights in the United States is thought to have stimulated private R&D investments in risky frontier areas. This popular interpretation of the U.S. experience led to major Japanese policy initiatives in three areas: research, partnerships, and intellectual property rights protection.

More research support. Four major changes in research policy have taken place. First, there has been a significant expansion of government support for research, prescribed in the five-year Science and Technology Basic Plans, starting in 1996. This happened despite the dire fiscal situation created by continuing economic stagnation. As a result, the ratio of government-funded research to gross domestic product (GDP) increased over the past decade from 0.60% in the first half of the 1990s to 0.67 % in the latter part of the 1990s, and then to 0.69% in the first half of the 2000s. This compares with 0.83% of GDP in the United States in 2004 and 0.76% in Germany (including military R&D budgets in these figures). The expansion of government funding helped modernize the research facilities in national universities and laboratories, which had become increasingly obsolete due to underinvestment in previous years. The budget expansion also enabled a significant amount of new research investment in four priority areas: life science, information and communication, the environment, and nanotechnology/new materials. The share of the R&D budget allocated to these priority areas increased from 29.1% in early 1990s to 38.6% in early 2000s.

In semiconductors in particular, Japanese government funding for R&D consortia had dimmed in the face of trade friction with the United States in the 1980s. By the mid-1990s, however, as the U.S. SEMATECH effort seemed to produce results and the competitive fortunes of U.S. semiconductor producers rebounded, the Japanese semiconductor industry began a decline in the face of intensified global competition. Japan launched a new round of industrial, university, and private R&D consortia (with names such as SELETE, STARC, and ASET) that seemed modeled, in part, on SEMATECH and growing government/industry/university collaborative efforts in the United States.

Second, there have been a number of important institutional reforms. The portion of research funding allocated through competition has increased significantly. It rose almost sixfold during the period from 1991 to 2005. Perhaps most important, national universities and national research institutes have been transformed from government entities into independent nonprofit institutions, starting in April 2004. This transformation was motivated in large part by a government desire to reduce the number of national civil servants by the end of fiscal year (FY) 2003. However, it has also greatly increased freedom in activities undertaken at Japanese universities. Because national universities and laboratories account for the bulk of scientific and technological research within the Japanese university system, their independence should enhance research flexibility and efficiency over the long term.

Since one might expect a significant lag before policy reforms affect research performance at national universities and laboratories, it is too early to assess their impact. However, some statistical indicators are available. The 2006 White Paper on Science and Technology suggests that the research performance of Japanese scientists has improved, although the gain may not be impressive. The share of Japanese researchers in both numbers and citations of scientific papers in major scientific journals has increased significantly over the past two decades. Japan’s share of papers published increased from less than 7% in 1981 to around 10% in 2004 (compared with 32% for the United States), while its share of citations increased from less than 6% in 1981 to around 9% in 2004 (compared with the U.S. share of 48%). There remain, however, doubts about the impact of the increases in government expenditures for science and technology on enhancing industrial innovations in Japan to date.

Stronger partnerships. There once was strong collaboration between universities and industry in Japan. For an example, the Department of Engineering of Tokyo University, established in 1873 as the first engineering department in a university in the world, played a major role in facilitating the absorption of foreign advanced technology within Japan. University professors also contributed as industrial inventors when the R&D capability of Japanese firms was weak. A good example is the former RIKEN (Institute of Physical and Chemical Research), which successfully incubated a number of new firms based on the inventions of university professors. However, university/industry partnerships had become less important by the late 1960s and 1970s, as the absorptive and R&D capability of Japanese firms strengthened and as student political activism and turbulence on campus discouraged such partnerships.

The importance of the university has reemerged in Japanese research in recent years, because it is now expected to play a central role in creating the foundation for industrial innovation. In both the United States and Japan, a university is a major player in basic R&D, accounting for 62.0% and 46.5% of basic research, respectively, in the United States and in Japan. Thus, improved efficiency in technology transfer from university to industry could play a major role in strengthening science-driven industry. There has been significant institutional reform in Japan designed to pursue this objective

First, Japanese policymakers have adopted a system of technology transfer based on the principle of university ownership of patent rights, following precedents set out in the Bayh-Dole Act. In particular, the Japanese version of the law (the Law on the Special Measures for Revitalizing Industrial Activities), which was enacted in 1999, permits the retention by the grantees or by contractors of the patents to the inventions derived from publicly funded research. In 1998, legislation to promote the establishment and activities of Technology Licensing Organizations (TLOs) was enacted, and today all Japanese universities with major scientific and engineering research capability have technology transfer offices. After national universities were incorporated in 2004, most of them adopted employment contracts containing an invention-disclosure obligation for faculty members and a transfer of ownership of inventions to the university. As in the United States, an inventor owns patent rights even if he is employed, unless otherwise agreed. In the past, it often used to be the case that when a university professor supported by a research grant made an invention, the patent rights to the invention were transferred to a private company because universities did not have the institutional capabilities to support the filing, licensing, and enforcement of patents.

Second, the government has encouraged collaborative research among industry, universities, and national research laboratories, as well as the incubation of new business entities derived from these organizations. The government started by helping to establish collaborative research centers in national universities after 1987. The government has also provided research grants targeting university/industry joint research through programs such as Research Grants for University-Industry Collaborative Research, which began in FY 1999. In 1995, it began supporting the establishment of Venture Business Laboratories to help startup companies. Finally, the 2000 Law on the Enhancement of Industrial Technologies relaxed regulations preventing national university professors from serving as board members of private companies, particularly when this is helpful for technology transfer.

Again, it is too early to assess the full impact of this reform. However, there are hints of some notable changes. The number of annual domestic patent applications by universities and approved TLOs has increased substantially, from 641 in 2001 to 8,527 in 2005. The number of domestic patent applications is at a level equivalent to that of U.S. universities (6,509 in year 2002). In addition, the number of university/industry joint research projects increased from less than 1,500 annually in 1995 to more than 10,000 in 2005. The number of academic industrial spinoffs has also increased significantly (179 in Japan in 2003, compared with 364 in the United States in 2002).

On the other hand, the amount of licensing revenue received by Japanese universities is still tiny (less than 0.5% of the U.S. level), and the number of academic startups that have reached the initial public offering stage is also tiny. The apparent impact of university research on industrial innovation, by these measures, is still very small. The short history of university ownership of patents is one explanation, but other possible causes are the absence of really valuable university inventions, lack of experience in patenting and licensing strategies, and a weak infrastructure for supporting high-technology startups, including limited availability of risk capital and professional services.

Intellectual property protection. Although Japan has a long history of intellectual property rights (IPR) protection (the first full-fledged patent law was enacted in 1885), IPR protection in Japan has been significantly strengthened since the early 1990s. Initially, the impetus for such change came from abroad: a U.S.-Japan agreement in 1994 and the Trade-Related Aspects of Intellectual Property Rights agreement negotiated in creating the World Trade Organization in 1995. Subsequently, however, further changes have been a core domestic reform initiative in Japan. Extensive reforms since 2000 include the implementation of the series of action plans coordinated by the Intellectual Property Policy Headquarters headed by the prime minister since 2002 (including the enactment of the Basic Law on Intellectual Property in 2003), and the 2005 establishment of the Intellectual Property High Court, modeled on the U.S. Court of Appeals of the Federal Circuit.

Stronger penalties to deter infringement have been a major policy change. The patent law was revised in 1998 to reinforce the private damages system, increase criminal sanctions, and improve the ability of a patentee to collect evidence of infringement. The amendments introduced a new provision that allows a patentee to presume the amount of damages due to infringement, based on the sales made by an infringer and on the profit rate of the patentee. The law was further amended in 1999, again strengthening the power of a patentee to collect evidence needed to show infringement of a patent.

Second, there has been an expansion of patentable subject matter in the field of computer programs. A major constraint in Japan was that the patent law defines an invention eligible for patent as a “technical idea utilizing natural laws.” Reflecting this qualification, a computer program per se was not patentable, unless it was a part of an invention using hardware. It became patentable in 1997, when recorded in a computer-readable storage medium. In 2000, computer programs themselves became eligible to be product patents.

Third, the Japanese Supreme Court affirmed the “doctrine of equivalents” in 1998. The Supreme Court ruled, among other things, that “equivalence” should be determined on the basis of technologies available at the time of the infringement, not at the time of the patent application. Thus, the modifications that are obvious given the technologies available at the time of infringement are deemed equivalent. After this ruling, 140 cases involving the issue of equivalence were initiated from 1998 to 2003, and equivalence was recognized by the courts in 15 cases during this period.

Fourth, in 1994 there was a switch from a pre-grant opposition system to a post-grant opposition system. The pre-grant opposition system allowed any person to oppose a patent before it was formally granted, which was one source of delays in patent examination in Japan in the early 1990s. Even though it provided a mechanism for a third party to add valuable information on prior art, it also opened the door for a competitor to file opposition without substantial merit. The post-grant opposition system was integrated into invalidation trials after 2004, in order to provide a definitive resolution of conflicts between a patent applicant and opponents.

The level of IPR protection in Japan is now widely recognized to be very high. According to the assessment by the Business Software Alliance of the level of business software piracy, Japan is the third lowest (25%) in 2006, trailing only the United States (21%) and New Zealand (22%). The effect on innovation is more difficult to assess. The number of patent examination requests has increased substantially over time. This may indicate that the value of patents has risen, encouraging R&D by Japanese firms. Stronger protection of IPR may have also strengthened R&D rivalry among firms and therefore increased R&D. On the other hand, the increasing complexity of patent claims and the increasing number of requests for patent examinations are putting strong pressure on scarce examination capacity at the Japanese Patent Office. The proliferation of patents and other intellectual property rights can deter rather than promote innovation by hindering a firm from combining technologies efficiently because of high transaction costs, holdup risk, and inefficiency in chains of vertical monopolies, given the difficulty of forming and coordinating coalitions to exploit elements of technology owned by different firms.

Where does this dance lead?

There have been significant changes in Japanese innovation policy since the 1990s, influenced by the perceived success of U.S. innovation policy initiatives in the 1980s. These U.S. policy changes of the 1980s in turn were developed in response to increased high-tech competition from Japanese firms. Although it will require significantly more evidence and research in order to evaluate the full effects of these changes on U.S. and Japanese innovation policies, some preliminary observations can be made with respect to the lessons learned and challenges faced in both systems since the 1990s.

First, policy reform in Japan has placed priority on strengthening competitive mechanisms in creating innovations, emulating a process that is regarded as a main source of strength in the U.S. innovation system. A substantial expansion of competitive research funding, the privatization of national universities and public laboratories, and stronger IPR protection are best interpreted as important steps in that direction. Because competition not only strengthens the intensity of a race for research results but also helps avoid duplication in research and facilitates the division of labor in research, both locally and globally, this policy shift seems to be clearly pointed in the right direction.

Second, recent innovation system reforms in Japan also put priority on strengthening university and industry partnerships, another major source of strength in the U.S. innovation system. Although there is a long tradition of university/industry collaboration in Japan at the individual professor level, Japanese universities did not provide institutional support for such collaboration until recently. Stronger institutional support for collaborative research, licensing, and high-tech startups would strengthen technology transfer from university to industry. Even in the United States, however, how a university can best contribute to industrial innovation remains controversial. Some argue that universities can best contribute through research excellence, transmitted via good scientific publications, and education, and that university/industry partnerships may crowd out these more traditional but core activities. In addition, the effectiveness of these partnerships may depend on the availability of complementary institutions, such as infrastructure for supporting high-tech startups, including the availability of risk capital and professional services. This suggests that a model that works well in the United States may not work in Japan. More research—and experience—may be needed to resolve this complex issue.

Third, although IPR protection is an important stimulus to innovation, current systems seem far from perfect. How effectively IPR protection serves the goal of innovation may depend on details of institutional design and management. Excessive protection of IPR under a low standard of non-obviousness or inventiveness may motivate firms to apply for patents for low-quality inventions, which can stifle innovation. High standards for granting patent protection and efficient use of third-party information in patent examination may be very important. Furthermore, the proliferation of IPR can deter innovation in technology areas where progress is cumulative by creating a “patent thicket” problem. It is important to improve the efficiency of technology markets, including licensing mechanisms for patents related to industrial standards.

Fourth, it is important to strengthen mechanisms for international collaboration. Because knowledge flows do not respect borders, and high-tech competition has become global, efficiency in knowledge production and use will often involve global solutions. The success of International SEMATECH in coordinating and accelerating global semiconductor innovation through the international semiconductor technology roadmap is a good example of how a global approach to coordinating private and public innovation investments can be effective. International sharing of databases and international coordination of patent examinations among major national patent offices may also help improve the quality of patent examinations worldwide and contribute to an improved global innovation system.