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21ST CENTURY INNOVATION SYSTEMS FOR JAPAN AND THE UNITED STATES

Lessons from a Decade of Change

Report of a Symposium

Sadao Nagaoka, Masayuki Kondo, Kenneth Flamm, and Charles Wessner, Editors

Committee on Comparative Innovation Policy: Best Practice for the 21st Century

Board on Science, Technology, and Economic Policy

Policy and Global Affairs

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS

Washington, D.C.
www.nap.edu



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21st Century Innovation Systems for Japan and the United States: Lessons from a Decade of Change Report of a Symposium Committee on Comparative Innovation Policy: Best Practice for the 21st Century Board on Science, Technology, and Economic Policy Policy and Global Affairs Sadao Nagaoka, Masayuki Kondo, Kenneth Flamm, and Charles Wessner, Editors ThE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu PRePublication coPy

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tHe national acaDeMieS PReSS 500 Fifth Street, n.W. Washington, Dc 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by: Contract/Grant No. SB1341-03-C-0032 between the National Academy of Sciences and the U.S. Department of Commerce; Contract/Grant No. OFED- 381989 between the National Academy of Sciences and Sandia National Laboratories; OFED-858931 between the National Academy of Sciences and Sandia National Labora - tories; and Contract/Grant No. NAVY-N00014-05-G-0288, DO #2, between the National Academy of Sciences and the Office of Naval Research. This material is based upon work also supported by the Defense Advanced Research Projects Agency Defense Sciences Office, DARPA Order No. K885/00, Program Title: Materials Research and Development Studies, Issued by DARPA/CMD under Contract #MDA972-01-D-0001. Additional fund - ing was provided by Intel Corporation, International Business Machines, the Palo Alto Research Center, and Google. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number-13: 978-0-309-13662-4 International Standard Book Number-10: 0-309-13662-8 Limited copies are available from Board on Science, Technology, and Economic Policy, National Research Council, 500 Fifth Street, N.W., W547, Washington, DC 20001; 202-334-2200. Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Copyright 2009 by the National Academy of Sciences. All rights reserved. Printed in the United States of America PRePublication coPy

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The national academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The national academy of engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibil- ity given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The national Research council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scien - tific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. www.national-academies.org PRePublication coPy

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committee on comparative innovation Policy: best Practice for the 21st century* William J. Spencer (nae), Chair alan Wm. Wolff, Chair (through Aug 2007) (Aug 2007-present) Chairman Emeritus, retired Partner SEMATECH Dewey & LeBoeuf LLP and STEP Board Kenneth S. Flamm, Vice Chair Mary l. Good (nae), Vice Chair Dean Rusk Chair in International Affairs Donaghey University Professor Lyndon B. Johnson School of Dean, Donaghey College of Public Affairs Engineering and Information University of Texas at Austin Technology and STEP Board University of Arkansas at Little Rock and STEP Board alice H. amsden bronwyn Hall Professor of Political Economy Massachusetts Institute of Professor of Economics Technology University of California at Berkeley Gail H. cassell (ioM) Mark b. Myers Vice President, Scientific Affairs and Senior Vice President, retired Distinguished Lilly Research Scholar Xerox Corporation for Infectious Diseases Eli Lilly and Company carl J. Dahlman Henry R. Luce Associate Professor Edmund A. Walsh School of Foreign Service Georgetown University *As of December 2008.  PRePublication coPy

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Project Staff* charles W. Wessner Sujai J. Shivakumar Study Director Senior Program Officer Mcalister t. clabaugh adam Gertz Program Associate Program Associate (through July 2006) Jeffrey c. Mccullough David e. Dierksheide Program Associate Program Officer (through August 2008) *As of December 2008. i PRePublication coPy

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For the National Research Council (NRC), this project was overseen by the Board on Science, Technology and Economic Policy (STEP), a standing board of the NRC established by the National Academies of Sciences and Engineering and the Institute of Medicine in 1991. The mandate of the STEP Board is to integrate understanding of scientific, technological, and economic elements in the formulation of national policies to promote the economic well-being of the United States. A distinctive characteristic of STEP’s approach is its frequent interactions with public and private-sector decision makers. STEP bridges the disciplines of business management, engineering, economics, and the social sciences to bring diverse expertise to bear on pressing public policy questions. The members of the STEP Board* and the NRC staff are listed below: lawrence H. Summers (naS), Chair edward e. Penhoet (ioM), Charles W. Eliot Professor Vice-Chair Kennedy School of Government Director Harvard University Alta Partners lewis W. coleman Mary l. Good (nae) President & CFO Donaghey University Professor DreamWorks Animation Dean, Donaghey College of Engineering and Information Kenneth S. Flamm Technology Dean Rusk Chair in International University of Arkansas at Little Rock Affairs amory Houghton, Jr. Lyndon B. Johnson School of Public Affairs Former Member of Congress University of Texas at Austin David t. Morgenthaler alan M. Garber (ioM) Founding Partner Morgenthaler Ventures Henry J. Kaiser, Jr. Professor Professor of Medicine Joseph P. newhouse (ioM) Director, Center for Health Policy John D. MacArthur Professor of Director, Center for Primary Care Health Policy and Management and Outcomes Research Harvard Medical School Stanford University arati Prabhakar Ralph e. Gomory (naS/nae) General Partner Research Professor U.S. Venture Partners Stern School of Business New York University William J. Raduchel & President Emeritus Alfred P. Sloan Foundation Chairman Opera Software ASA *As of December 2008. ii PRePublication coPy

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Jack W. Schuler alan Wm. Wolff Partner Partner Crabtree Partners Dewey & LeBoeuf LLP SteP Staff* Stephen a. Merrill charles W. Wessner Executive Director Program Director Mcalister t. clabaugh Jeffrey c. Mccullough Program Associate Program Associate (through July 2006) (through August 2008) David e. Dierksheide Daniel Mullins Program Officer Program Associate adam Gertz Sujai J. Shivakumar Program Associate Senior Program Officer *As of December 2008. iii PRePublication coPy

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Contents PReFace xiii i. intRoDuction: the chrysanthemum Meets the eagle— 3 the co-evolution of innovation Policies in Japan and the united States Sadao Nagaoka, Hitotsubashi Uniersity Kenneth Flamm, Uniersity of Texas at Austin ii. oVeRVieW 21 Sadao Nagaoka, Hitotsubashi Uniersity Kenneth Flamm, Uniersity of Texas at Austin Masayuki Kondo, Yokohama National Uniersity and National Institute of Science and Technology Policy (NISTEP) iii. SyMPoSiuM PaPeRS technology Policies in Japan: 1990 to the Present 29 Akira Goto, Uniersity of Tokyo Kazuyuki Motohashi, Uniersity of Tokyo and Research Institute of Economy, Trade and Industry (RIETI) ix PRePublication coPy

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x CONTENTS Reform of university Research System in Japan: 40 Where Do they Stand? Ryuji Shimoda, Tokyo Institute of Technology Government’s evolving Role in Supporting 57 corporate R&D in the united States: theory, Practice, and Results in the advanced technology Program Stephanie Shipp, National Institute of Standards and Technology Marc Stanley, National Institute of Standards and Technology Government Programs to encourage innovation by Startups and 77 SMes: the Role of innovation awards Charles W. Wessner, National Research Council Programs to Stimulate Startups and entrepreneurship in Japan: 95 experiences and lessons Takehiko Yasuda, Toyo Uniersity and Research Institute of Economy, Trade and Industry (RIETI) economic impacts of international R&D coordination: 108 SeMatecH and the international technology Roadmap Kenneth Flamm, Uniersity of Texas at Austin Semiconductor consortia in Japan: 126 experiences and lessons for the Future Shuzo Fujimura, Tokyo Institute of Technology and Hitotsubashi Uniersity issues in and Possible Reforms of the u.S. Patent System 138 Bronwyn H. Hall, Uniersity of California at Berkeley Reform of Patent System in Japan and challenges 153 Sadao Nagaoka, Hitotsubashi Uniersity industry-university R&D Partnerships in the united States 169 Irwin Feller, American Association for the Adancement of Science university-industry Partnerships in Japan 186 Masayuki Kondo, Yokohama National Uniersity and National Institute of Science and Technology Policy (NISTEP) the connected Science Model for innovation: the DaRPa Role 206 William B. Bonillian, Massachusetts Institute of Technology PRePublication coPy

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xi CONTENTS Public-Private linkage in biomedical Research in Japan: 238 lessons of the 1990s Yosuke Okada, Hitotsubashi Uniersity Kenta Nakamura, Japan Society for the Promotion of Science and Hitotsubashi Uniersity Akira Tohei, Competition Policy Research Center, Fair Trade Commission of Japan iV. aPPenDiXeS a. Symposium agenda 253 b. bibliography 260 PRePublication coPy

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Preface Recognizing that a capacity to innovate and commercialize new high- technology products is increasingly a key for the economic growth in the envi - ronment of tighter environmental and resource constraints, governments around the world have taken active steps to strengthen their national innovation systems. These steps underscore the belief of these governments that the rising costs and risks associated with new potentially high-payoff technologies, their spillover or externality-generating effects and the growing global competition, require national R&D programs to support the innovations by new and existing high- technology firms within their borders. Innovation can be defined as the transformation of an idea into a marketable product or service, a new or improved manufacturing or distribution process, or even a new method of providing a social service. This transformation involves an adaptive network of institutions that encompass a variety of informal and formal rules and procedures—a national innovation ecosystem—that shape how individuals and corporate entities create knowledge and collaborate to bring new products and services to market. If competitiveness can be defined as the ability to gain market share by adding value better than others in the globalized economic environment, the ability of these actors to collaborate successfully within a given innovation ecosystem gains significance.1 Recognizing this, policymakers around the world are supporting a variety of initiatives to reinforce their national innova - tion ecosystems as a way of improving their national competitiveness. 1The issue of whether nations, like businesses, can capture market share has been the subject of debate since Adam Smith. A more recent critique can be seen in Paul Krugman, “Competitiveness: A Dangerous Obsession,” Foreign Affairs, March/April 1994. xiii PRePublication coPy

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xi PREFACE In the United States, the proliferation of national initiatives to support inno- vation highlights the need for better understanding by U.S. policymakers of the objectives, structure, operation, funding levels, and trends characterizing some of the major programs around the world. These programs and associated policy measures are of great relevance to the United States both for their potential impact on U.S. competitiveness and for the lessons they may hold for U.S. programs. With these objectives in mind, the National Research Council’s Board on Science, Technology, and Economic Policy (STEP) has embarked on a study of selected foreign innovation programs in comparison with major U.S. programs. As such, the premise of this study is not to consider the possibility of a pure laissez-faire approach to fostering innovation, but rather to recognize the impor- tance of targeted government promotional policies relative to innovation.2 The analysis, carried out under the direction of an ad hoc Committee, is to include a review of the goals, concept, structure, operation, funding levels, and evalua - tion of foreign programs designed to advance the innovation capacity of national economies and enhance their international competitiveness.3 In Japan, there have been significant new developments in Japanese innova - tion policies since the 1990s. They include the enactment of the Science and Technology Basic Law in 1995 to promote science and technology in a more systematic and coherent way, a significant increase for funding in the science and technology budget, coupled with major institutional reforms in national universities and research laboratories, measures to strengthen industry and aca - demic 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 of policy makers 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. The policy priority on innovation increased as the stagnation in Japan’s economy extended over almost a decade. 2Government programs to promote promising technologies are a well-known and longstanding prac- tice. See, for example, Vernon W. Ruttan, Technology, Growth, and Deelopment: An Induced Innoa- tion Perspectie. Oxford, UK: Oxford University Press, 2000. For a critique of Ruttan, see Richard Lipsey’s review of this book in the Journal of Economic Literature, 5(2):439-442, June 2007. 3Thus, while cognizant of the role of DARPA, and more broadly the Department of Defense, in the U.S. innovation system, the focus of the conference was on civilian technology programs that operate closer to market than does DARPA. In addition, as Alic and Branscomb et al. have described in Beyond Spin-off, the earlier military driven model of U.S. innovation is no longer as effective as it once was. DARPA funding of advanced technologies, particularly in IT, have had enormous impact, although largely on platform technologies that had wide and profound spillovers. Indeed the emergence of China and certainly India in the global economy attests to the impact of the Internet, to which DARPA made major contributions. See John A. Alic, Lewis M. Branscomb, Harvey Brooks, Ashton B. Carter, and Gerald L. Epstein, Beyond Spin-off: Military and Commercial Technologies in a Changing World, Boston, MA: Harvard Business School Press, 1992. PRePublication coPy

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x PREFACE tHe conteXt oF tHiS RePoRt In the United States, since 1991 the STEP Board has undertaken a program of activities to improve policy makers’ understanding of the interconnections among science, technology, and economic policy and their importance to the American economy and its international competitive position. The Board’s interest in com - parative innovation policies derives directly from its mandate. This mandate has previously been reflected in STEP’s widely cited volume, U.S. Industry in 2000, which assesses the determinants of competitive performance in a wide range of manufacturing and service industries, including those relating to information technology.4 The Board also undertook a major study, chaired by Gordon Moore of Intel, on how government-industry partnerships can support the growth and commercialization of productivity enhancing technologies.5 Reflect- ing a growing recognition of the importance of the surge in productivity since 1995, the Board also launched a multifaceted assessment, exploring the sources of growth, measurement challenges, and the policy framework required to sustain the New Economy.6 The current study on Comparative Innovation Policy builds on STEP’s experi- ence to develop an international comparative analysis focused on U.S. and foreign innovation programs. The analysis will include a review of the goals, concept, structure, operation, funding levels, and evaluation of foreign programs similar to major U.S. programs. Among other initiatives, this study will convene senior officials and academic analysts engaged in the operation and evaluation of these programs overseas to gain a first-hand understanding of the goals, challenges, and accomplishments of these programs. In Japan, the research on the innovation process and policy has become very important in the midst of increasing government commitment to the innovation policy. In particular, the government asked the National Institute of Science and Technology Policy (NISTEP), the Ministry of Education, Culture, Sports, Science and Technology, to conduct a comprehensive review to see the effects of the First and Second Science and Technology Basic Plans in 2003. NISTEP spent two years to conduct this review. The staff of NISTEP, cooperating with outside think tanks, analyzed how public funds were spent, how science and technology systems, such as 4National Research Council, U.S. Industry in 2000: Studies in Competitie Performance, David C. Mowery, ed., Washington, D.C.: National Academy Press, 1999. 5This summary of a multi-volume study provides the Moore Committee’s analysis of best prac - tices among key U.S. public private partnerships. See National Research, Goernment-Industry Partnerships for the Deelopment of New Technologies: Summary Report, Charles W. Wessner, ed., Washington, D.C.: The National Academies Press, 2003. For a list of U.S. partnership programs, see Christopher Coburn and Dan Berglund, Partnerships: A Compendium of State and Federal Coopera- tie Programs, Columbus, OH: Battelle Press, 1995. 6National Research Council, Enhancing Productiity Growth in the Information Age: Measuring and Sustaining the New Economy, Dale W. Jorgenson and Charles W. Wessner, eds., Washington, D.C.: The National Academies Press, 2007. PRePublication coPy

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xi PREFACE funding channels, were changed, what outputs, such as research papers and patents, were created, what were the outcomes and impacts of the two Plans in regions and the society, etc. In conducting this exercise, NISTEP employed international com- parisons against the United States and European Union countries. The other research institutions, such as Research Institute of Economy, Trade and Industry and the Institute of Innovation Research of Hitotsubashi University, have also undertaken a number of innovation related studies, including that on the research consortium and on the interaction between innovation and intellectual property rights. Based on the activities mentioned above both in Japan and the United States, in January 2006, a major international symposium on “21st Century Innovation Systems for the United States and Japan: Lessons from a Decade of Change” was organized by NISTEP and STEP and was held in Tokyo in cooperation with the Institute of Innovation Research of Hitotsubashi University.7 The Symposium was opened by two distinguished addresses. Rep. Donald A. Manzullo, Chairman of Committee on Small Business, U.S. House of Representatives, made a speech titled “Challenges in the U.S. Innovation System.” Professor Taizo Yakushiji, a Member of the Council for Science and Technology Policy, made an address titled “Evolution and Challenges to the Innovation Systems in Japan—Innovation by Emulation.” This Symposium reviewed government programs and initiatives to support the development of small- and medium-sized enterprises, government- university-industry collaboration and consortia, and the impact of the intellectual property regime on innovation. While the symposium could not cover every issue in this complex and changing area, every effort was taken to ensure that the issues selected were significant for the two innovation models being discussed. This book brings together the papers presented at the conference and provides a historical context of the issues discussed at the symposium. acKnoWleDGMentS We are grateful for the participation and the contributions of the Defense Advanced Research Projects Agency, the National Institute of Standards and Technology, the National Science Foundation, the Office of Naval Research, and Sandia National Laboratories. We are grateful for the members of the Organizing Committee in Japan, chaired by Masayuki Kondo and Sadao Nagaoka and including Akira Goto (Professor, Research Center for Advanced Science and Technology, University of Tokyo), Hiroyuki Tomizawa, and Masaru Yarime (both of whom are the Senior Research Fellows at the Second Theory-oriented Group, NISTEP) for organizing and implementing the conference. We are also thankful for the support of the staff of the NISTEP and of the Institute of Innovation Research of Hitotsubashi University for the conference. 7The symposium agenda and organizing committee can be found in Appendix A. . PRePublication coPy

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xii PREFACE nRc ReVieW This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Academies’ Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for quality and objectivity. The review comments and draft manuscript remain confidential to protect the integrity of the process. We wish to thank the following individuals for their review of this report: Arthur Alexander, Georgetown University; William Bonvillian, Massachusetts Institute of Technology; Randall Goodall, SEMATECH; Thomas Howell, Dewey & LeBoeuf LLP; and Nicholas Vonortas, The George Washington University. Although the reviewers listed above have provided many constructive com- ments and suggestions, they were not asked to endorse the content of the report, nor did they see the final draft before its release. Responsibility for the final con - tent of this report rests entirely with the author(s) and the institution. Sadao Nagaoka Masayuki Kondo Kenneth Flamm Charles Wessner PRePublication coPy

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