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10 Biotechnology in Japan: A Challenge to U.S. Leadership? ALTHOUGH FEW OF ITS PRODUCTS have yet reached the market- place, biotechnology clearly has the potential to become a major commercial enterprise. As such, it could eventually join the handful of advanced technologies that have assumed a prominent role in the U.S. economy. These technologies have formed the basis of core industries whose potential for increased productivity and falling costs has contributed to economic growth and rising employment. Their effects have also radiated into other areas of the economy, even into traditionally low-technology or service sectors. In addition to their effect on the domestic economy, high-technology industries have a critical influence on the U.S. balance of trade. The commercial products of advanced technologies have in the past shown a positive trade balance for the United States, while other manufac- tured goods have shown a trade deficit. The United States currently holds the highest market share of the industrialized countries' exports of high-technology products, but that share has been declining in recent decades. At a time of high U.S. trade deficits, the balance of trade in high-technology products inevitably draws special attention. The United States currently enjoys a sizable lead in transforming the This chapter includes material from the presentations by Gary R. Saxonhouse and Irving S. Johnson at the symposium. 107
108 BIOTECHNOLOGY SCIENTISTS GET FID5I CLOSt LOOK AT \ MOIECULE results of basic biomedical research into commercial products. How- ever, the economic appeal of biotechnology as an expanding high- technology industry has not escaped the attention of other industrial- ized countries. "Most other developed countries have targeted biotechnology as a goal," says Irving S. Johnson of Eli Lilly. "These countries include the United Kingdom, France, West Germany, Russia, and, most vigorously, Japan. The national efforts of these countries have ranged from modification of guidelines for carrying out research, to legislative assistance, to financial support of private companies, to dismantling of unneeded antitrust legislation." Unlike other national governments, the federal government of the United States has no explicit policies to encourage the development of biotechnology. As a result, Johnson feels that "the United States may well be flirting with the loss of its current, but in my view fragile, competitive lead." The country expected to be the United States' leading competitor in commercializing genetic engineering is Japan. A major contributor to the strength of the Japanese effort has been the Japanese government's promotion of the field. "It is very clear that the Japanese government
BIOTECHNOLOGY IN JAPAN 109 is interested in biotechnology at the highest levels," says Gary R. Saxonhouse of the University of Michigan. "At the 1983 economic summit held in Williamsburg, Virginia, Prime Minister Nakasone astounded the other participants, and particularly, I am told, President Reagan, by spending as much as 15 or 20 minutes attempting to enlighten the President on the nature of recombinant DNA and its prospects for the future, an example of a strategy for industrial development in both Japan and the United States that Prime Minister Nakasone alleged would lead to more harmonious economic relations." But even though the Japanese interest in biotechnology is strong, its origins are relatively recent, according to Saxonhouse. Not until 1980, with the success of Genentech's public stock offering and the Supreme Court's decision allowing the patenting of microorganisms, did the Japanese government begin to expand its previously low-key efforts in biotechnology. Ironically, says Saxonhouse, the Japanese feared that "the American government was weaving around the biotechnology industry a network of protective patents, and that, in some fashion, Japanese firms were going to be denied access to this important technology. . . . Their interest was a reaction to developments in the United States." Nevertheless, the Japanese have quickly built a strong program in biotechnology. The government has supported biotechnology research not only in universities but in government institutes and selected industries. It has helped form consortia of industries to coordinate research and development in biotechnology and reduce duplication of effort. "The Japanese have frankly admitted that, whereas they may be five years behind in biotechnology, they intend to make up the difference quickly, by scrapping older technology and improving on new technology imported from the United States," says Johnson. "That has a familiar ring to me." National Policies Affecting the Commercialization of Biotechnology Although the U.S. government has no explicit policies concerning biotechnology, federal policies have exerted, and will continue to exert, an important indirect effect on the field, both in the research labora- tories where it was developed and in the firms where it is being commercialized. These policies and their counterparts in other coun- tries will have an important influence on the competitiveness of biotechnology firms in world markets.
110 BIOTECHNOLOGY Governmental Funding of Basic and Applied Research The U.S. government has concentrated its direct support for biotechnology on basic scientific research conducted in universities and other research institutes. The main source of this support has been the National Institutes of Health, with lesser amounts provided by the National Science Foundation, the U.S. Department of Agriculture, the Department of Energy, the Department of Defense, and the Agency for International Development. All told, this federal support of basic research in biotechnology amounts to some $750 million per year. It is difficult to estimate just how much other governments are spending on biotechnology, partly because of problems in defining the term and partly because of the inevitable overlap between biotechnol- ogy and other scientific and industrial endeavors. But after a careful review of the available statistics, Saxonhouse concludes that the Japanese government is probably spending no more than $60 million per year on biotechnology research. Thus, he points out, "the American government probably sponsors and conducts 10 times as much activity, at a minimum, as the Japanese government does." . One difference between government-sponsored research in Japan and in the United States involves the use of funds. Whereas U.S. funding goes almost entirely for basic research, Japanese funding is directed much more heavily toward more applied research, including work on product development and scale-up. For instance, the Ministry of International Trade and Industry (MITI), under its Office of Biotechnology Promotion, is sponsoring research in three broad areas: recombinant DNA technologies, large-scale cell cultures, and biopro- cess engineering. Part of its funds go directly to a group of 14 chemical and energy companies, which are working together on projects in each of the three research areas MITI has selected. MITI is not the only Japanese agency that supports research in biotechnology. For instance, the Ministry of Agriculture, Forestry and Fisheries provides much of the Japanese government's support for cell fusion techniques. But this diversification of effort can have disadvan- tages as well as advantages, according to Saxonhouse. "Biotechnology is not easily incorporated within the purview of any particular Japa- nese government ministry. The coordinating apparatus among these government agencies looks no better than the coordinating apparatus that you would probably find in the United States among the many different government agencies here that have an interest in biotechnol- ogy research." Also, Saxonhouse believes that governmental support for biotechnol-
BIOTECHNOLOGY IN JAPAN 111 ogy in Japan has had a narrower focus than might be expected. The bulk of the funds has gone toward commercial sectors that are struc- turally depressed, including agriculture, energy, chemicals, pulp and paper, and textiles. "The interest in biotechnology in Japan, in partic- ular MITI's interest, is largely centered on helping companies that are presently in difficulty," says Saxonhouse. "This is a very different kind of policy than the Japanese government pursued in the semiconductor industry." It now appears as if the first test of international competitiveness in biotechnology will be in the pharmaceuticals industry. The Japanese pharmaceuticals industry has been trying to increase its global market share in recent years, and the Japanese government has been encour- aging this expansion through such actions as changes of patent laws and pricing guidelines in the national health insurance system. An- other highly competitive sector in the early years of biotechnology will probably be the specialty chemicals industry, where Japan already has a substantial market presence. The Financing of the Biotechnology Industry The single most important factor contributing to the United States' current lead in biotechnology has been the establishment and growth of the new biotechnology companies. Bolstered by ready supplies of venture capital and by tax and investment laws encouraging their development, these firms have demonstrated to industries around the world the commercial viability of the field. With a handful of exceptions in the European Economic Community, there are no start-up biotechnology firms outside the United States. In Japan there are more than 200 firms working on the commercial applications of biotechnology, but they are all established firms from traditional industrial sectors. "Start-up firms are encouraged in the United States through the tax code in a way that start-up firms simply are not encouraged in Japan," notes Saxonhouse. Firms working on biotechnology in Japan generally rely on internal sources of funds and on bank loans to finance their research and development. Public stock offerings, venture capital, and related means of equity financing are of relatively minor importance in Japan. To some extent, the promotion by the Japanese government acts as a signal to the financial system to be more receptive to requests for funds to finance biotechnology research and development, according to Saxonhouse. But, with the single exception of a recently enacted 7 percent tax credit on investment in R&D-related equipment, there are
112 BIOTECHNOLOGY no provisions within the Japanese tax code that are any more benefi- cial to biotechnology than to other industries, nor have any loans been given to Japanese companies working in biotechnology at low or concessional rates. To the extent that the industrial policies devel- oped by the Japanese government do boost the development of bio- technology, says Saxonhouse, they can be seen more as substitutes for the efficient capital markets of other countries than as indepen- dent influences. The Regulation of Biotechnology Many foreign countries, including Japan, generally followed the United States' lead in first establishing guidelines on recombinant DNA research and then gradually easing them as the initial fears proved groundless. However, the guidelines in Japan remain signifi- cantly stricter than in the United States, which may prevent some promising research from being done there. Japan also has the most restrictive regulations concerning health and safety for new drugs, biologics, and medical devices of any of the countries that are commercializing biotechnology. In the past Japan has used these regulations, which include approval policies, product standards, and testing procedures, as nontariff barriers to the import of pharmaceuticals. In 1983 the laws were changed to give equal treatment in principle to foreign products, and "there have been a number of anticipatory steps within the product approval machinery within Japan's Ministry of Health and Welfare to ensure that this [discriminatory approval] does not happen," says Saxonhouse. But as in other areas of dispute involving U.S.-Japanese trade, the effects of old laws still linger. Multilateral trade agreements like the General Agreement on Tar- iffs and Trade work to lower tariffs, discourage nontariff barriers to trade, and eliminate governmental subsidies to industry. U.S. trade law also provides American companies with ways to seek relief from unfair import or export practices. For instance, section 301 of the Trade Act of 1974 allows firms to petition the U.S. government to enforce their rights under trade agreements or to negotiate to eliminate actions by foreign governments that limit their access to foreign markets. The Protection of Intellectual Property The degree of protection that a company can obtain over products or processes it has developed can be an important factor in determining
BIOTECHNOLOGY IN JAPAN 113 its competitiveness. In the United States, inventors can apply for a patent up to a year after an invention is described in a scientific journal or meeting. Patent applications can also be kept secret until a decision on the application is made. In Japan, the grace period for applying for a patent after public release of the patentable information is only six months. About 18 months after a patent application is filed, the information is released to the publicâeven if the patent has not yet been issuedâprecluding the option of trade secrecy once the decision is made to pursue a patent. Partly as a result of the Supreme Court's 1980 decision in Diamond v. Chakrabarty, the range of patentable subject matter in the United States is very broad. Japan, in contrast, does not grant patents on medical processes that involve the human body as an indispensable element. Japan's strict health and safety guidelines regarding genetic engineering may also restrict the patenting of organisms viewed as hazardous. The Availability of Trained Personnel The biotechnology industry has already created some 5,000 to 10,000 jobs in the United States. At this early stage in the industry's development, these jobs are predominantly for highly trained research scientists, such as molecular biologists, immunologists, and related technologists. As biotechnology moves toward large-scale manufactur- ing of its products, the personnel needs of many biotechnology firms will shift. To design and develop the production technologies needed for manufacturing, these firms will need more process-oriented research- ers, including bioprocess engineers and industrial microbiologists. In Japan a sharp division between basic and applied research in universities, along with limited support for basic scientific research, initially caused a shortage of experts trained in the basic techniques of genetic engineering. The Japanese are taking a number of steps to ease this shortage. For one, they are drawing on their extensive historical experience with fermentation techniques in developing production methods in biotechnology. The Japanese are also sending researchers abroad to study. Many Japanese scientists in disciplines related to biotechnology are cur- rently working and studying in the United States. For instance, more than 200 are currently working at NIH, a number that is bolstered by an accounting provision that allows laboratories to exceed their max- imum staff sizes with foreign nationals in temporary positions. At the same time, the number of American scientists and engineers traveling abroad to study has been falling steadily, despite the fact that there are
114 BIOTECHNOLOGY a number of eminent foreign institutes in the field, such as Japan's Fermentation Research Institute, where American researchers could receive valuable training. Finally, Japanese government and industry are attempting to induce Japanese nationals working abroad to return to the country and are retraining scientists and technicians within Japan. Retraining of industrial personnel is much more common in Japan than it is in the United States, and Japan's extraordinary ability to overcome weak- nesses in its labor force is one of its great strengths. This ability is also one of the factors that have enabled Japan to quickly become a global competitor in biotechnology. International Technology Transfer The imbalance between foreign researchers studying in this country and American researchers studying abroad is one way in which technology moves out of the United States. Another is joint ventures between American and foreign biotechnology firms. Japanese compa- nies, in particular, have supported a large amount of contract research by American biotechnology firms, enabling the Japanese companies to keep up with the state of the art in biotechnology. With biotechnology still in a knowledge-intensive phase, it is possible that the movement of this information could help foreign firms establish themselves more favorably in world markets, to the detriment of U.S. firms. The openness of the American university system and the frequent movement of personnel within American industry contribute to the diffusion of information in science and technology, both domestically and overseas. In Japan, however, researchers usually stay with a single firm or university throughout their lives. This results in much less communication and cooperation among scientists and engineers in Japan, which in turn tends to inhibit the flow of technological infor- mation out of the country. Indeed, the joint R&D programs sponsored by the Japanese government are to some degree an attempt to over- come this intranational insularity. The differences in the openness and degree of communication among researchers in the United States and researchers in Japan may partly explain how the Japanese have managed to build a strong effort in biotechnology so quickly. The results of American research are avail- able to all through open publication, while Japanese research is much harder for Americans to receive and use. "If we look at what the Japanese government spends for biotechnology, chances are that most of it is of use almost entirely to the Japanese biotechnology industry,
BIOTECHNOLOGY IN JAPAN 115 and of relatively small benefit to foreign biotechnology firms," Saxonhouse points out. "On the other hand, much of what the U.S. government spends is as useful to Japanese biotechnology firms as it is to American biotechnology firms." It must be remembered that foreign technology does flow into the United States, although it is difficult to assess the magnitude of this flow. The most notable example in biotechnology is the process for making monoclonal antibodies, which was developed in the United Kingdom. High-quality research in molecular biology, immunology, and bioprocess engineering is also being conducted and published in other countries. But most observers would agree that the net flow of technology transfer in biotechnology is currently out of the United States. It is too soon to tell if this will significantly impair the competitiveness of U.S. biotechnology firms. Possible Governmental Responses to International Competition in Biotechnology The U.S. government would have a number of alternatives if it were to decide that biotechnology is important enough to the future of the nation's economy to warrant direct governmental assistance. At one extreme, it could adopt some of the more overt targeting practices of foreign countries, including direct development aid to private compa- nies, industrywide assistance through low-interest loans or tax credits, or interagency oversight to coordinate federal policies and industrial R&D. However, it is highly unlikely that many of these options would be accepted in the United States, given the traditional roles of govern- ment and industry. The federal government could also act to boost the competitiveness of U.S. biotechnology firms in a number of indirect or less industry- specific ways. According to Johnson, such actions together could provide the United States with a much more consistent and effective approach to promoting biotechnology than now exists. Among the steps he suggests as part of such a policy are the following: ⢠Further increase federal support of basic research related to biotechnology, particularly in agriculture. ⢠Target federal assistance to bioprocessing and applied microbiol- ogy centers, possibly by funding through universities. ⢠Reassign some of the U.S. fellowships used to train foreign scientists at leading biotechnology centers in this country to the training of American scientists at foreign technology centers.
116 BIOTECHNOLOGY ⢠Strengthen intellectual property law through the formation of a scientific advisory committee in biotechnology in the Patent and Trademark Office. ⢠Export products rather than technology whenever possible, and obtain adequate returns from the export of technology should such export be necessary. ⢠Clarify and update the tax code to provide incentives to conduct research and development in biotechnology. ⢠Reexamine antitrust regulation to further cooperation among companies conducting basic research in biotechnology. Additional Readings Mark D. Dibner. 1985. "Biotechnology in Pharmaceuticals: The Japanese Chal- lenge." Science 229(September 20): 1230-1235. Ralph W. F. Hardy. 1985. "Biotechnology: Status, Forecast, and Issues." Pp. 191-226 in Technological Frontiers and Foreign Relations. Washington, D.C.: National Academy Press. National Research Council, Office of International Affairs, Panel on Advanced Technology Competition and the Industrialized Allies. 1983. International Com- petition in Advanced Technologies: Decisions for America. Washington, D.C.: National Academy Press. Office of Technology Assessment. 1984. Commercial Biotechnology: An Interna- tional Analysis. Washington, D.C.: U.S. Government Printing Office. U.S. Department of Commerce, International Trade Administration. 1984. High Technology Industries: Profiles and OutlooksâBiotechnology. Washington, D.C.: U.S. Government Printing Office.
