The Changing Place of Japan in the Global Scientific and Technological Enterprise1

DAVID C. MOWERY AND DAVID J. TEECE

INTRODUCTION

During the past 20 years, Japan's role within the global network of public and private institutions that influence the creation and adoption of new technologies has changed. Along with dramatic structural change in the Japanese economy, this period has witnessed a transformation in Japanese technological capabilities. From its position in the 1960s as an economy that relied extensively on the transfer and modification of externally developed technologies, Japan has emerged as an economy with many firms that define the technological frontier in their industries.

This transformation in Japanese technological capabilities has created complex challenges for U.S. managers and public officials. The rapidly expanding network of "strategic alliances" among U.S. and Japanese firms has fueled concern that the pursuit by U.S. managers of corporate interests may not coincide with the advancement of U.S. national economic interests. The contrasting structure of the U.S. and Japanese "national innovation systems" means that U.S. firms may have more difficulty accessing Japanese scientific and technological research than Japanese firms have accessing

1  

Research for this paper was aided by support from the Alfred P. Sloan Foundation and the Sasakawa Peace Foundation through the Consortium on Competitiveness and Cooperation at the University of California at Berkeley. We also wish to thank Tom Cottrell for research assistance and William Finan, Ulrike Schaede, and John Cantwell for valuable comments. Dr. Takebi Otsubo also assisted us in obtaining data on interfirm alliances. We are most grateful for all of this assistance.



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Japan's Growing Technological Capability: Implications for the U.S. Economy The Changing Place of Japan in the Global Scientific and Technological Enterprise1 DAVID C. MOWERY AND DAVID J. TEECE INTRODUCTION During the past 20 years, Japan's role within the global network of public and private institutions that influence the creation and adoption of new technologies has changed. Along with dramatic structural change in the Japanese economy, this period has witnessed a transformation in Japanese technological capabilities. From its position in the 1960s as an economy that relied extensively on the transfer and modification of externally developed technologies, Japan has emerged as an economy with many firms that define the technological frontier in their industries. This transformation in Japanese technological capabilities has created complex challenges for U.S. managers and public officials. The rapidly expanding network of "strategic alliances" among U.S. and Japanese firms has fueled concern that the pursuit by U.S. managers of corporate interests may not coincide with the advancement of U.S. national economic interests. The contrasting structure of the U.S. and Japanese "national innovation systems" means that U.S. firms may have more difficulty accessing Japanese scientific and technological research than Japanese firms have accessing 1   Research for this paper was aided by support from the Alfred P. Sloan Foundation and the Sasakawa Peace Foundation through the Consortium on Competitiveness and Cooperation at the University of California at Berkeley. We also wish to thank Tom Cottrell for research assistance and William Finan, Ulrike Schaede, and John Cantwell for valuable comments. Dr. Takebi Otsubo also assisted us in obtaining data on interfirm alliances. We are most grateful for all of this assistance.

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Japan's Growing Technological Capability: Implications for the U.S. Economy U.S. research activities and results.2 Added to these and other challenges for public policy is that of assessing the "lessons," if any, of postwar Japanese government industrial and technology policies for a U.S. economy that has produced minimal growth in overall productivity or median household incomes during the past two decades. Our survey of these issues begins with a brief overview of Japan's emergence as a producer of "state-of-the-art" technology during the past 20 years. We then describe U.S. firms' evolving links to Japanese technology development through alliances, R&D activities conducted in Japan, and other means. The next section discusses some of the complexities for corporate managers and public policy created by these links and by other efforts by policymakers and scholars to divine the "lessons" of Japanese policy. JAPAN'S CHANGING TECHNOLOGICAL POSITION, 1960-1990 A number of indicators suggest that Japanese firms have progressed during the postwar period from borrowing, modifying, and successfully commercializing foreign technologies to operating at the technological frontier. No individual indicator is definitive, but together they are suggestive. Okimoto and Saxonhouse noted that the ratio of Japanese exports of technology to imports increased from 0.12 in 1971 to 0.30 in 1983.3 This indicator reflects historical trends in licensing and therefore includes royalty payments for technologies licensed years ago. The ratio of technology exports to imports in new contracts alone, however, has risen from 1 in 1972 to 1.76 in 1984—in other words, Japanese firms are now net exporters of intellectual property as measured in new contracts.4 The average annual rate of 2   See Christopher Freeman, Technology Policy and Economic Performance: Lessons from Japan (London: Frances Pinter, 1987) and Richard R. Nelson, ed., National Innovation Systems: A Comparative Study (New York: Oxford University Press, forthcoming). 3   See Daniel I. Okimoto and Gary R. Saxonhouse, "Technology and the Future of the Economy," in K. Yamamura and Y. Yasuba, eds., The Political Economy of Japan, vol. 1, The Domestic Transformation (Stanford: Stanford University Press, 1987), pp. 384–395. 4   This conclusion is corroborated by other data from the Japan Science and Technology Agency, reported in the 1985 Japan Economic Almanac : "Technology exports in fiscal 1983 totaled 6,403 cases, up a significant 35.1 percent of 1,665 cases from the previous year. On the other hand, technology imports came to 7,839 cases, up 13.0 percent or 903 cases. In this area, imports continue to surpass exports. However, what deserves attention is that exports of new patents, excluding exchanges on a continuous basis, have stayed substantially above imports since the latter half of the 1970s, showing a stable surplus. Exports of new patents in fiscal 1983 stood at 2,494 cases as compared with 1,073 cases of imports, with a surplus of Y32.5 billion" See Y. Nakazora, "Science and Technology: Private sector holds initiative in research and development," Japan Economic Almanac 1985 (Tokyo: Nihon Keizai Shimbun, 1985). For a report of similar findings for fiscal 1984, see Industrial Review of Japan: 1984 (Tokyo: Nihon Keizai Shimbun, 1984).

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Japan's Growing Technological Capability: Implications for the U.S. Economy growth in Japanese payments for imports of technology declined from 31 percent in the 1950s to 6 percent in the late 1970s, according to Uekusa.5 Alone among industrial nations, Japan registered an increase, rather than a decrease, in the number of patents received per scientist and engineer during 1967–1984, as well as an increase in the number of patents received in foreign countries. Pavitt and Patel point out that on a per capita (adjusted by home-country population) basis, Japanese patenting in the United States increased by more than 650 percent during the period from 1963–1968 to 1980–1985, far more than any other industrial economy.6 The U.S. National Science Foundation (NSF) reported in 1988 that Japanese firms accounted for the largest single share of foreign-origin U.S. patents.7 A comparison of U.S. patenting by U.S. and Japanese firms in 1975 and 1986 reveals dramatic improvements in Japanese patenting performance, relative to that of U.S. firms, in selected technologies (Table 1). Moreover, according to the NSF report, Japanese-origin U.S. patents were cited more than proportionately in other patent applications, an indicator of the high quality of the Japanese patents.8 Japan outstripped the combined totals of Germany, France, and England in patents granted in the United States in 1987 (Table 2). Other indicators of technological performance also suggest considerable Japanese strength. Technology adoption is a critical factor in national competitive performance, and in some technologies Japanese adoption performance appears to exceed that of the U.S. economy. The rate of adoption and intensity of utilization of advanced manufacturing technologies (including robotics, computer-integrated-manufacturing workcells, and flexible manufacturing systems) in Japanese manufacturing both considerably exceed 5   See M. Uekusa, "Industrial Organization," in K. Yamamura and Y. Yasuba, eds., The Political Economy of Japan, vol. 1, The Domestic Transformation (Stanford: Stanford University Press, 1987). 6   See K. Pavitt and P. Patel, "The International Distribution and Determinants of Technological Activities," Oxford Review of Economic Policy 4, 1988, pp. 35–55. 7   See National Science Foundation, The Science and Technology Resources of Japan: A Comparison with the United States, NSF report 88-318 (Washington, D.C.: 1988), p. 33. 8   Ibid., p. xii. "Given their total representation in the U.S. patent system, Japanese patents account for 45 percent more of the top I percent most highly cited U.S. patents than expected. The highest citation rates for Japanese patents are in the automotive, semiconductor electronics, photocopying and photography, and pharmaceuticals patent classes." The relatively high quality of Japanese firms' U.S. patents, however, may reflect some tendency of these firms to seek U.S. patents only for their most important technological advances. Taylor and Yamamura argue that Japanese firms are far more likely to seek domestic patent protection for minor technical advances than are U.S. firms: see S. Taylor and K. Yamamura, "Japan's Technological Capabilities and its Future: Overview and Assessments," in G. Heiduk and K. Yamamura, eds., Technological Competition and Interdependence: The Search for Policy in the United States, West Germany and Japan (Seattle: University of Washington Press, 1990).

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 1 U.S. and Japanese Shares of Total Patents Granted in the United States for Selected Technologies: 1975 and 1986 (percentage) Selected Technologies United States Japan 1975 1986 1975 1986 Lasers 63 50 14 35 Telecommunications 66 52 14 26 Steel and iron 48 37 18 29 Internal combustion engines 54 28 17 44 Semiconductor devices and manufacture 68 57 13 29 Jet engines 66 60 4 9 General-purpose programmable digital computer systems 77 69 5 19 Robots 63 50 20 29 Machine tools—metalworking 65 51 8 17 All technologies 65 54 9 19   SOURCE: Office of Technology Assessment and Forecast, U.S. Patent and Trademark Office, unpublished data. National Science Foundation, The Science and Technology Resources of Japan: A Comparison with the United States, NSF report 88-318 (Washington, D.C.: 1988). their levels in U.S. manufacturing.9 Other research has documented the ability of Japanese automotive firms to bring new models to market more rapidly than U.S. auto firms, and Mansfield's research indicates that for technologies based on sources of knowledge outside of the firm, Japanese firms exhibit significantly shorter development and commercialization cycles.10 Mansfield's research also indicates that Japanese firms devote roughly 9   See C. Edquist and S. Jacobsson, Flexible Automation: The Global Diffusion of New Technology in the Engineering Industry (New York: Blackwell, 1988); K. Flamm, "The Changing Pattern of Industrial Robot Use," in R.M. Cyert and D.C. Mowery, eds., The Impact of Technological Change on Employment and Economic Growth (Cambridge, Mass.: Ballinger, 1988); and E. Mansfield, "The Diffusion of Industrial Robots in Japan and the United States," Research Policy, vol. 18, 1989, pp. 183–192. 10   See Kim B. Clark, W.B. Chew and Takahiro Fujimoto, "Product Development in the World Automobile Industry," Brookings Papers on Economic Activity (Washington, D.C.: 1987), pp. 729–771; Kim B. Clark and Takahiro Fujimoto, Product Development Performance: Strategy, Organization and Management in the World Auto Industry. (Boston: Harvard Business School Press, 1991); and Edwin Mansfield, "Industrial Innovation in Japan and the United States," Science, September 1988.

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 2 Applications (Registrations) in Selected Countries, by Nationality, 1989   Country of Application           Nationality of Applicant Japan United States FRG France England Soviet Union Others Japan 317,609 (54,743) 33,104 (20,168) 14,454 (6,888) 10,765 (4,294) 2,938 (5,440) 202 (102) 43,598 (13,932) United States 17,563 (3,799) 82,956 (50,185) 18,693 (7,135) 17,483 (6,118) 19,598 (6,859) 1,664 (167) 161,087 (44,092) FRG 7,436 (1,813) 13,245 (8,303) 43,265 (16,904) 13,471 (6,832) 13,075 (6,179) 830 (240) 87,999 (32,720) France 2,624 (654) 4,960 (3,140) 5,115 (2,752) 15,468 (8,301) 4,920 (2,422) 291 (86) 37,545 (15,139) England 2,861 (432) 6,502 (3,100) 4,778 (1,637) 4,461 (1,471) 24,031 (4,234) 489 (50) 43,242 (10,470) Soviet Union 357 (108) 570 (161) 459 (227) 365 (126) 403 (87) 146,021 (83,348) 5,420 (1,552) Other 9,014 (1,752) 20,323 (10,482) 15,663 (16,690) 12,929 (5,737) 15,269 (5,676) 2,311 (584)   Total 357,464 (63,301) 161,660 (95,539) 102,427 (42,233) 74,942 (32,897) 90,234 (30,897) 151,808 (84,577)   % of Foreign Applications 11.1 (13.5) 48.7 (47.5) 57.8 (60.0) 79.4 (74.8) 73.4 (86.3) 3.8 (1.5)   NOTE: Figures in parentheses are registrations. SOURCE: Kagaku gijutsu-cho (Science and Technology Agency)(ed.), Kagaku gijustu hakusho heisei 3 nendo: Kagaku gijustu katsudo no guroobarizeeshon no shinten to wagakuni no kadai (1991 White Paper on R&D: Developments Towards the Globalization of R&D and Japan's Tasks), (Tokyo: Okurasho Insatsukyoku, 1991). twice as large a share of their R&D budget to process research as U.S. firms. Interestingly, Mansfield's econometric analyses suggest that the returns to R&D investments in Japanese industry substantially exceed those in U.S. industry.11 This remarkable record of technological achievement has rested largely on R&D funding from private industry, rather than from government. The 11   Edwin Mansfield, ''Industrial R and D in Japan and the United States: A Comparative Study,'' American Economic Review Papers and Proceedings, 1988.

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Japan's Growing Technological Capability: Implications for the U.S. Economy share of national R&D that is privately financed is higher in Japan than in the United States or other industrial countries. The share of national R&D expenditures financed by the Japanese government was only 20 percent in 1987, and this included grants-in-aid to national and private universities. The comparable figure for the United States in 1987 was 49 percent. The large military R&D budget in the United States accounts for much of this difference, but the Japanese share of R&D financed by the private sector is larger than that for the United States even if we consider only nondefense R&D.12 When military R&D expenditures are removed from the figures for both countries, the share of gross national product (GNP) devoted to R&D in Japan has exceeded the American figure since the early 1960s. The U.S.-Japan contrasts in the direct role of government R&D funding are linked to other important differences in the structure of the U.S. and Japanese "national research systems" (a term meant to include both public and private research organizations). Along with a relatively open market for imports and foreign investment (albeit one that has faced significant demands for protection in recent years), the United States maintains a relatively open research system. More than 50 percent of the basic research performed within the U.S. economy is carried out within universities (including federally funded R&D centers, or FFRDCs). The structural characteristics of the U.S. R&D system, with its high mobility of engineers, scientists and entrepreneurs among firms, heavy reliance on university research for basic science and training, and on small firms for technology commercialization, mean that access by foreign firms to U.S. scientific and technological advances is relatively easy.13 The relative importance within the Japanese R&D system of "open" and "closed" research institutions, respectively universities and private firms, contrasts with that of the United States. Comparative statistics suggesting that Japanese universities account for a larger share of that nation's total R&D investment overstate the performance of R&D within Japanese universities; moreover, the contribution of Japanese universities to basic knowledge historically has been modest in many areas. The Japanese economy's system of industrial finance and governance also makes it difficult for U.S. and other foreign firms to gain access to industrial technologies or innovations through acquisitions of firms or intellectual property. The structure of both the Japanese and U.S. R&D systems is chang- 12   R&D expenditures constituted roughly 1.70 percent of Japanese GNP in the years 1975–1978. This ratio rose to 1.80 percent in 1979 and to 2.77 percent in 1985, exceeding the U.S. GNP share of 2.4 percent in that year. 13   See Stephen Cohen, David Teece, Laura Tyson, and John Zysman, "Competitiveness," in Global Competition: The New Reality, vol. III (Washington D.C.: President's Commission on Industrial Competitiveness, 1985) for an early statement on this issue.

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Japan's Growing Technological Capability: Implications for the U.S. Economy ing,14 but in the near future, the U.S. system is likely to remain unparalleled as a performer of basic research, even as the Japanese R&D system strengthens its already impressive capabilities in the creation, modification, and adoption of technology. Among other things, the deeply rooted nature of differences in the structure of the Japanese and U.S. R&D systems means that changes in public policy will work slowly and incompletely to remove structural impediments to access. U.S. FIRMS' GROWING LINKS WITH THE JAPANESE R&D SYSTEM The rise of Japan as a technological powerhouse has been paralleled by growth in the importance of the Japanese market for consumer and industrial goods. Foreign firms have pursued a number of approaches to improving their access to Japanese technology and markets, including the establishment of R&D facilities in Japan and the development of complex "strategic alliances" with Japanese firms. Remarkably, in view of the urgency and importance of this issue for U.S. public policy and private managers, federal agencies provide only the most rudimentary data on U.S. and foreign R&D investment in Japan or on the growth of U.S.-Japanese interfirm alliances. In this section, we review the development of both of these approaches to access, relying on fragmentary data from the Japanese Ministry of International Trade and Industry (MITI) and other sources.15 One of the most important implications of the growth of Japanese technological capabilities is the need for better data on the nature of private and public relationships between U.S. and Japanese entities in technology development, transfer, and exchange. All too often, U.S. policy toward Japanese industrial R&D is formulated in a factual vacuum. 14   For example, Japanese university research has played an important role in the development of molecular beam epitaxy (MBE), a semiconductor component manufacturing process: "While universities played a minor role in MBE-research in the early 1980s in Japan, they are ten years later contributing very actively, especially in research related to quantum materials and quantum-effect devices. The pattern is similar in other countries and partly a consequence of changes in MBE technology and related research topics. The development of MBE technology has, for example, become increasingly dependent on an understanding of the basic mechanisms of the MBE growth process and as the sophistication of MBE technology has grown it has become possible to grow materials and structures which can be used to study scientifically increasingly more interesting physical effects, changes which both have served to attract academic scientists to MBE-research. Although Japanese universities have responded vigorously to the new challenges opening up, their response has been weaker, in quantitative terms, than that of the American universities but comparable to that of European universities." See L. Stenberg, "Molecular Beam Epitaxy—A Mesoview of Japanese Research Organization," unpublished manuscript, Research Policy Institute, University of Lund, Sweden, p. 56. 15   We are indebted to Dr. Takebi Otsubo of the Nomura School of Advanced Management for his assistance in obtaining these data.

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Japan's Growing Technological Capability: Implications for the U.S. Economy Foreign Patenting and R&D Activity in Japan Patent activity by foreign firms in postwar Japan indicates that foreign firms have had a long-standing interest in utilizing their technology in Japan. Though the data we have found are extremely sketchy and relate only to patent applications, they indicate that foreign firms accounted for 23.2 percent of the total of all patent applications in Japan in 1970, although by 1978 this had fallen to 14.8 percent.16 Chemicals was the most active of these sectors in foreign patenting within Japan during the 1970–1978 period. The United States accounted for 42.7 percent of the total number of foreign patent applications (30,089) in 1989. Germany was the second most significant applicant in 1989, with 19.4 percent of the total (see Figure 1). Table 2 indicates, however, that foreign firms have been less active in patenting in Japan than they have in the United States, Germany, France, or England. Of perhaps greater interest are the R&D activities of foreign firms in Japan.17 Table 3 contains data from a MITI survey of growth in foreign R&D laboratories in Japan during 1975–1990 in manufacturing, which account for the vast majority of foreign R&D activity.18 The number of foreign-owned Japanese R&D facilities in manufacturing grew rapidly during this period, from 51 in 1975 to 123 in 1990, by 1990, this study suggests, total foreign R&D expenditures within Japan amounted to more than 200 billion yen, more than $1.5 billion. Interestingly, despite widespread perceptions of Japanese technological strengths in electronics and manufacturing process technologies, Table 3 suggests that the chemical and pharmaceutical industries account for the largest number of foreign-owned R&D facilities in both 1975 and 1990 and the largest share of foreign firms' investment in 1990. A substantial portion of foreign pharmaceutical firms' R&D investment almost certainly is linked to their efforts to obtain regulatory approval for the introduction of new drugs into the Japanese market. Although foreign clinical trial data are increasingly acceptable to Japanese regulatory authorities, the use of domestic medical personnel and researchers for such trials remains a more effective strategy for gaining regulatory approval. Much of foreign pharmaceutical firms' R&D investment, therefore, appears to be linked to growth in the Japanese consumer market. 16   Kagaku gijutsu-cho (Science and Technology Agency), ed., Kagaku gijutsu hakusho heisei 3 nendo: Kagaku gijutsu katsudo no guroobarizeeshion no shinten to wagakuni no kadai (1991 Science and Technology White Paper: Developments towards the Globalization of R&D and Japan's Tasks), (Tokyo: Okurasho Insatsukyoku, 1991), p. 374. 17   Patent applications in Japan undoubtedly primarily reflect technology developed outside of Japan. 18   For purposes of the survey, "foreign-owned R&D" establishments are defined as those operated by foreign firms or joint ventures in which non-Japanese firms control more than 51 percent of the equity.

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Japan's Growing Technological Capability: Implications for the U.S. Economy Figure 1 Number of patent applications by foreigners in Japan, 1989, by country. Source: Kagaku gijutsu-cho (Science and Technology Agency) (ed.), Kagaku gijutsu hakusho heisei 2 nendo (1990 White Paper on R&D), (Tokyo: Okurasho insatsukyoku, 1990). A separate tabulation compiled as part of the MITI study contains data on the number and expenditure of Japanese R&D facilities owned by U.S. and non-U.S. firms in 1990 (including nonmanufacturing industries). According to this analysis, U.S. firms operated 83 R&D laboratories at a cost of nearly 83.5 billion yen in 1990. European firms accounted for 58 laboratories but invested a larger amount, more than 122 billion yen. The apparent differences in the average size of U.S. and European R&D laboratories in Japan are not explained in the study, but may reflect differences in the industrial composition of U.S.-and European-owned R&D laboratories within Japan. The European R&D presence within Japan may contain a larger share of chemical and pharmaceutical firms, which typically operate large laboratories, than the U.S. industrial R&D investment, which contains a higher share of software and electronics firms. In the absence of additional data, however, any such conclusion is purely speculative. These data on foreign firms' R&D investment in Japan differ somewhat from the portrait of foreign firms' innovative activities in Japan presented

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 3 Foreign R&D Facilities in Japan, 1975 and 1990; Foreign Firms' R&D Expenditures in Japan, 1990   No. of Labs 1975 No. of Labs 1990 R&D Expenditure 1990 (billion yen) R&D Expenditure 1990 (million dollars) Chemicals 26 59 25.9 199.23 Pharmaceuticals 12 25 127.3 979.23 Electric Machinery 3 11 15.5 119.23 Nonelectric Machinery 1 5 8.6 66.15 Instruments 1 5 0.6 4.61 Transportation equipment 1 4 3.1 23.85 Petroleum 3 3 14.9 114.62 Food 1 2 1.1 8.46 Paper/pulp 2 2 0.3 2.31 Ceramics 0 2 1.0 7.69 Nonferrous metals 1 2 2.2 16.92 Rubber products 0 1 0.01 0.08 Total manufacturing 51 123 202.9 1,560.76 Retail services 4 15 2.9 22.31 Other services 0 5 4.0 30.77 Petroleum extraction 4 4 15.2 116.92 Total number of foreign R&D labs in Japan 59 137 211.4 1,626.15   SOURCE: Ministry of International Trade and Industry, Results of the 24th Survey of the Trend of Foreign Affiliates in Japan (Tokyo, 1990). by Cantwell.19 Cantwell's data are based on U.S. patents received by large U.S. and foreign firms' Japanese research facilities, and suggest that the contribution of foreign-owned R&D in Japan during 1978–1986 was greatest in motor vehicles, scientific and measurement instruments, and electrical equipment (including semiconductors). The modest contribution of foreign-owned pharmaceuticals research in Japan to these firms' U.S. patents is consistent with our earlier discussion of this R&D investment in Japan, much of which is concerned with clinical testing and approval of new drugs for the Japanese domestic market. The great contribution of foreign-owned R&D to motor vehicles patenting in Japan, however, does not appear to be matched by high levels of foreign R&D investment or large numbers of foreign-owned facilities in 19   See John Cantwell, "Global R&D and U.K. Competitiveness," in M. Casson, ed., Global Research Strategy and International Competitiveness (Oxford: Blackwell, 1991).

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Japan's Growing Technological Capability: Implications for the U.S. Economy this industry within Japan. There are at least two possible explanations for this disparity. Cantwell's patent data are classified by the field of application of the patent, while the data presented above are classified by the "primary industry" of the investing firm. Cantwell's data thus treat a patent received on a ceramic engine part by a foreign-owned chemicals R&D laboratory in Japan as a "motor vehicles" patent, while the data in Table 3 classify this laboratory and its associated costs as a chemicals industry R&D facility. Alternatively, this disparity may reflect a failure by foreign motor vehicles firms to reward the significant technological contributions of their Japanese R&D facilities with higher levels of investment. A recent contractor report to the National Science Foundation provides additional information (some of which appears to be inconsistent with the MITI data) on U.S. firms' R&D presence within Japan.20 The NSF study found 71 U.S. firms with R&D operations in Japan, and received responses from 36 of these to a detailed questionnaire. The authors of the study note that their count of U.S.-owned R&D laboratories yielded an unexpectedly low total, a smaller number than was tabulated in the MITI study discussed above.21 As in the MITI survey, the NSF study found that more than half of the firms responding to the survey were from the pharmaceuticals, chemicals, or petroleum industries, rather than the electronics sector.22 The NSF study also obtained information on staffing patterns and motives for the establishment by U.S. firms of Japanese R&D facilities. In general, despite the evidence cited above concerning the importance of Japan as a source of new industrial technology, the NSF study suggests that most U.S. firms continue to use Japanese R&D laboratories as instruments for improving or maintaining access to Japanese markets. This conclusion, which 20   See National Science Foundation, Survey of Direct U.S. Private Capital Investment in Research and Development Facilities in Japan , contractor report for Science and Engineering indicators program prepared by Global Competitiveness Corporation and Technology International, Inc. (Washington, D.C.: 1991). 21   "A major recent trend is the divestiture of established R&D operations in Japan by U.S. firms as a result of merger and acquisition (M&A) activity. Within the past four years, at least eleven U.S. firms with R&D facilities in Japan were either acquired by foreign companies or they sold off their R&D facilities... "The divestiture of Japanese R&D facilities has been offset by a new wave. The latest group establishing R&D facilities has consisted primarily of software firms (CADEM, Lotus, MicroSoft, Nova Graphics) and medium-sized firms involved in electronics. In addition, a number of semiconductor and pharmaceutical firms are currently building R&D facilities or have indicated they will establish such facilities within the next two years. "However, the number of U.S. companies with R&D facilities in Japan is substantially less than that believed at the onset of this study." Ibid., p. 3. 22   "...17 of the 30 responses (57%) show primary R&D activity in the related fields of chemicals, plastics, petroleum refining, and drugs. We had anticipated that electronics and related fields would prove to represent the majority interest." Ibid., p. 8.

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 5 Formation of New International Research Joint Ventures Involving Japanese Firms, by Year and Industry, 1982–1987 Venture 1982 1983 1984 1985 1986 1987 Cumulative Total Total 7 7 23 37 25 36 135 Manufacturing 6 7 19 29 18 30 109 Food 0 0 1 2 1 1 5 Textiles 0 0 0 2 0 3 5 Chemicals 1 1 7 7 4 4 24 Steel 1 1 4 0 0 2 8 General machinery 1 0 1 2 2 5 11 Electric machinery 3 4 4 9 6 6 32 Heavy electric machinery 3 1 0 4 3 0 11 Household appliances 0 1 3 2 2 0 8 Communication/computer 0 1 1 2 1 3 8 Other electric machinery 0 1 0 1 0 3 5 Transport machinery 0 0 1 5 3 1 10 Instruments 0 1 1 1 0 3 6 Other manufacturing 0 0 0 1 2 5 8 Nonmanufacturing 1 0 4 8 7 6 26 Construction 0 0 1 1 0 1 3 Communications 0 0 1 2 1 0 4 Finance 0 0 2 3 1 2 8 Utilities 0 0 0 0 1 0 1 Other services 1 0 0 2 4 2 9   SOURCE: Ministry of International Trade and Industry, Status Report on International Joint Research and Development of Japanese Private Enterprises (Tokyo: 1987). or fundamental research.32 Instead, consistent with the blend of technology access and market access motives that underpin many such undertakings, they are focused on product development and/or modification for global markets.33 A recent study by the U.S. Department of Commerce examined a much broader array of linkages—what might be thought of as strategic alliances—between U.S. and Japanese firms, focusing on a "snapshot" of U.S.-Japan corporate linkages in six high technology industries during 1989–1990 (Table 8). Joint ventures account for less than 40 percent of the number of interfirm collaborative relationships in all of these industries, and in most instances are less frequent than are marketing collaborations 32   David C. Mowery, op. cit. 33   "Market-specified" R&D in Table 7 refers to incremental product modifications for new markets.

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 6 Technology Fields of International Research Joint Ventures Involving Japanese Firms, 1982–87, by Field of Technology and Nationality of Foreign Firm Venture by nation 1982–87 All Technology Fields Conventional Technology Advanced Technology Communications/ Computers Integrated Circuits Factory and Office Automation Medical Biotechnology New Materials Nuclear Power United States 93 30 63 16 15 9 4 13 4 2 Canada 4 2 2 0 0 0 0 0 2 0 United Kingdom 13 8 5 2 0 1 0 2 0 0 Germany 9 7 2 0 1 0 0 1 0 0 France 7 6 1 0 0 1 0 0 0 0 Italy 5 5 0 0 0 0 0 0 0 0 Other 4 3 1 0 0 0 0 1 0 0 Total 135 61 74 18 16 11 4 17 6 2 NOTE: Advanced technologies includes the seven columns to the right of this category, respectively communications and computers; integrated circuits; factory and office automation; medical technologies; biotechnology; new materials; and nuclear power. SOURCE: Ministry of International Trade and Industry, Status Report on International Joint Research and Development of Japanese Private Enterprises (Tokyo: 1987).

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 7 International Research Joint Ventures Involving Japanese Firms, 1982–87, by Type of Research and Technology Field Venture/Type of Research Conventional Technology Advanced Technology Communications/ Computers Integrated Circuits Factory and Office Automation Medical Biotechnology New Materials Nuclear Power Basic research 2 1 0 0 0 0 1 0 0 Applied research 7 18 3 0 0 0 11 3 1 Product oriented 23 38 9 10 3 3 7 4 2 Market specified 28 23 6 7 6 1 2 1 0 Other 1 0 0 0 0 0 0 0 0 Unspecified 4 3 0 0 2 0 1 0 0 Total 65 83 18 17 11 4 22 8 3   SOURCE: Ministry of International Trade and Industry. Status Report on International Joint Research and Development of Japanese Private Enterprises (Tokyo: 1987).

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Japan's Growing Technological Capability: Implications for the U.S. Economy and agreements.34 The importance of the market access motive for many current interfirm alliances may be inferred from the substantial portion of collaborations in all of these industries that are focused on marketing or marketing and development of new products. Consistent with the MITI data on the research content of international joint ventures, very few of these U.S.-Japan joint ventures in Table 8 are concerned with research, as opposed to production and/or the development of products (an exception to this statement is the biotechnology industry). Although the full impact of U.S.-Japanese collaboration on the competitiveness of U.S. firms will not be apparent for some time, the visible consequences of these collaborations thus far do not support the critical view of these ventures presented by Reich and Mankin.35 Technology transfer within these ventures is more modest in scope and less uniformly ''outbound" than some assessments assume. Just as U.S. industries vary in their trade balances in goods, the net inflow or outflow of technology through U.S.-Japan collaborations varies across industries. Requiring balance in technology transfer on an industry-by-industry basis makes no more sense than a requirement for such balance in goods trade. In a number of industries, including steel, automobiles, and portions of microelectronics, international collaboration can improve the international competitiveness of the U.S. participants. 36 In other industries, such as robotics, the competitiveness of U.S. systems engineering and software firms and the ability of large U.S. firms to offer a full line of factory automation hardware and software depend on access to foreign hardware through joint ventures and licensing. As we note below, however, the ability of U.S. firms to reap benefits from international collaboration ventures depends on the care with which these undertakings are organized and managed. In particular, U.S. firms participating in international joint ventures may need to strengthen their abilities to learn and absorb new technologies from their partners. Many U.S.-Japan collaborative ventures involve the purchase by large Japanese firms of significant equity positions in small start-up firms. Do these foreign investments result in the export of critical technological assets that will strengthen Japanese competitors? Very little is known about the economic or technological importance of foreign acquisitions of U.S. high technology start-up firms. Although there are numerous uncertainties on 34   Unfortunately, the lack of data on the size of the ventures in Table 8 means that the only basis for comparison of the "importance" of different types of collaborative activity is their number. Adjusting these data for the size of individual collaborative undertakings might yield different conclusions regarding the relative importance of various types of ventures. 35   See R. Reich and E. Mankin, "Joint Ventures with Japan Give Away Our Future," Harvard Business Review, March–April, 1986. 36   For a recent example, see the discussion of the alliance between Ford Motor Company and Mazda, "The Partners." Business Week, February 10, 1992, pp. 102–107.

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 8 U.S.-Japan "Corporate Linkages," 1989–1990, in Selected High Technology Industries U.S.-Japan Links 1989–1990 Aerospace Computers Software Semiconductors Semiconductor equipment Biotechnology Total Marketing 19 36 38 33 11 22 159 Marketing/development 0 2 3 1 1 0 7 Joint venture: 15 18 27 34 10 28 132 R&D/product 7 10 12 18 8 10   Production 6 5 13 14 2 4   Research 2 3 2 2 0 14   Licensing 6 3 11 11 3 10 44 Technology exchange 0 2 0 10 0 2 14 Merger and acquisition 2 8 3 7 5 4 29 Direct investment 0 12 8 2 5 5 32 Consortia 1 1 0 0 0 1 3 Internal venture 0 0 0 4 2 4 10 Production 4 4 1 1 1 1 12 Other 0 1   2   1 4 Total 47 87 91 105 38 78 446   SOURCE: U.S. Department of Commerce, Japan Technology Program, The Role of Corporate Linkages in U.S.-Japan Technology Transfer: 1991 (Washington, D.C.: NTIS, 1991).

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Japan's Growing Technological Capability: Implications for the U.S. Economy this issue, the "leakage" of U.S. technology through such acquisitions may have only a slight economic impact. In many instances, start-up firms pursue international collaborative ventures because of their need for capital. Policies to reduce this supposed outflow of U.S. technology must address the availability of capital and/or the willingness of managers in established U.S. firms to support small start-up enterprises (overcoming resistance to technologies "not invented here"), rather than attempt to restrict collaboration.37 Smaller firms' "export" of technology through international collaborative ventures rarely means that opportunities for exploitation of these technologies are lost to U.S. firms—in most cases, the U.S. partner in such a collaborative venture does not change its management or its location, and protection from other U.S. firms of its intellectual property is not airtight. The critical agents for the diffusion of these technologies (managers and employees of the small firm) remain in the United States, where they move to other firms, present the results of their research to domestic audiences, and otherwise act to disseminate much of the technology domestically. Indeed, the basis for such domestic high technology concentrations as Silicon Valley in California, Route 128 in Massachusetts, and North Carolina's Research Triangle is the tendency for critical technological assets (mainly people and specialized suppliers of goods and services) to remain regionally concentrated. If the enormous interregional flows of capital of the past 30 years have not diluted and diminished these regional concentrations within the United States, it seems unlikely that international capital flows will do so. CONCLUSION U.S. policymakers have yet to address the implications of change in the technological relationship between the United States and Japan. These changes pose a fundamental challenge to much current thinking in the executive branch and Congress, which now all too often proposes that Japanese access to U.S. science and technology be limited. Any restrictions on commercial technology transfer from U.S. universities or firms to Japanese entities, however, could provoke reciprocal restrictions that would harm U.S. competitiveness. Paradoxically, the U.S. economy appears to have much more to lose and much less to gain by restricting foreign access to U.S. research and technology than at any previous point in the postwar era. The end of U.S. technological hegemony has weakened this nation's control over technology vis-à-vis foreign firms or individuals seeking access to U.S. Technologies, 37   See David J. Teece, "Foreign Investment and Technological Development in Silicon Valley,'' in D. McFetridge, ed., Foreign Investment, Technology and Economic Growth (University of Calgary Press. 1991), pp. 215–235.

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Japan's Growing Technological Capability: Implications for the U.S. Economy In the current environment, U.S. firms stand to gain from continued improvements in their access to foreign markets, investment opportunities, and technologies. Achieving these improvements will be hampered if efforts are made to deny access to the U.S. research system. The actions of many U.S. firms suggest that managers are beginning to pursue strategies designed to improve their access to the Japanese technological research system. Nonetheless, the evidence discussed above indicates that too many U.S. firms still view their Japanese R&D operations as oriented largely toward the domestic Japanese market, and are not working to exploit and transfer technologies from Japan into their global R&D networks. Japan's importance as a source of industrial technology means that U.S. firms must do more to gain access. This will require the expansion and establishment of corporate R&D facilities within Japan, as well as efforts to more closely link these facilities to corporate technology development strategies. Similarly, the view that joint ventures with Japanese firms in research or product development give away our future must be qualified by an awareness of the potential and actual benefits of well-managed joint ventures for U.S. firms. U.S. managers nonetheless must proceed carefully in cooperating with an actual or potential competitor, and manage their technological and other assets strategically. In most cases, this requires that one maintain or strengthen independent technological and other capabilities, such as manufacturing or knowledge of markets and user needs, improving or sustaining the value of one's contributions to the joint venture. Successful participation in joint ventures requires that senior managers understand their firms' technological and other capabilities and incorporate them into strategic planning. Strategies designed to learn from the joint venture partner must be actively pursued, for ultimately the distribution of the benefits and costs from joint ventures in high technology will swing on how well each party is able to learn from the other. The growing web of U.S.-Japanese technological linkages among private firms has and will continue to complicate any efforts by one or the other government to restrict access to its domestic research system. The effectiveness of SEMATECH's restrictions on foreign participation, for example, may be undercut by collaborative relationships between U.S. participants in the consortium and such Japanese semiconductor producers as Hitachi (which is working with Texas Instruments on advanced memory chips) and Toshiba (working with Motorola on memory and microprocessor chips). The development of international collaborative ventures among corporations is likely to frustrate attempts by governments to pursue "technological mercantilism"—attempting to restrict outflows of technology by governments in the same way that seventeenth-century European governments restricted outflows of specie. Such mercantilist policies provide powerful

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Japan's Growing Technological Capability: Implications for the U.S. Economy incentives for private firms to collaborate in R&D, marketing, and manufacture in order to improve their access to foreign markets.38 The growth of Japan's technological strengths has raised to high levels of the U.S. and Japanese governments (as well as increasing the level of conflict regarding it) the issue of access by foreign firms to the Japanese research system. This issue figured prominently, for example, in the 1988 negotiations over the renewal of the U.S.-Japanese agreement on scientific cooperation. The Japanese R&D system is difficult for foreign firms to penetrate for reasons that reflect the historic legacy of government policies, as well as differences in industry structure and in the structure of capital markets; these difficulties are not solely a result of current government policies. The complex origins of these structural differences in the organization of national R&D systems and in the ease with which foreigners can gain access to national R&D systems mean that government-to-government negotiations and agreements cannot address all of the causes and consequences of "asymmetrical access." The structural differences between the U.S. and foreign research systems are such that a strict requirement of reciprocity in access to research facilities is either worthless or infeasible. Assurances by the Japanese government of complete access to Japanese universities, for example, may be of limited interest to U.S. firms, in view of the modest amount of world-class research performed by Japanese university researchers. A "results-oriented" reciprocity requirement that mandated that Japanese firms open their industrial research facilities to foreign researchers could impose a similar requirement on U.S. firms and is scarcely likely to elicit the support of U.S. firms. Some evidence suggests that the structure of the U.S., Japanese, and Western European research systems may be converging somewhat. As and if the quality and amount of world-class research performed in Japanese universities and quasi-public "hybrid" institutions improve, for example, access to these facilities may become more attractive and important for informed U.S. and European firms. Reduction in the structural dissimilarities of these research systems could attenuate difficulties over reciprocal access, but any such process of institutional change and convergence is 38   See David C. Mowery. "Public Policy Influence on the Formation of International Joint Ventures," International Trade Journal, vol. 6, 1991, pp. 29–62; and F. Chesnais, "Technical Cooperation Agreements Between Firms," STI Review, no. 4, 1988, pp. 51–119. Chesnais has noted the complementary relationship between relatively closed domestic research programs in the EC and the United States, such as JESSI and SEMATECH and international product development and technology exchange agreements in microelectronics: "...one finds a combination between domestic alliances in pre-competitive R&D (with all of the provisos attached to this notion), and a wide range of technology exchange and cross-licensing agreements among oligopolist rivals at the international level" (p. 95; emphasis in original).

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Japan's Growing Technological Capability: Implications for the U.S. Economy likely to move so slowly that the issue of reciprocal access will remain very difficult for the foreseeable future. The serious impediments to U.S. acquisition of firms in other industrial economies, particularly Japan, are not exaggerated. They will continue to create serious tensions, exacerbating the effects of other structural differences in access to research projects and results, until they are reduced or circumvented. The interdependent relationship between a scientifically strong U.S. research system and a technologically strong Japanese research system also raises complex issues of balancing national contributions and benefits to the global scientific and technological enterprise. The results of scientific research are increasingly mobile internationally and difficult to ''appropriate" by the discoverer, a characterization that applies less accurately to the results of technology-oriented research. As a result, the possibility exists that the U.S. research system produces global "public goods," which can be exploited by (among others) Japanese firms for private profit. This characterization of scientific and technological research is at best a caricature, and understates the difficulties and costs of transferring and absorbing either type of information, but it captures an important difference between two research systems such as those of Japan and the United States. The Japanese government has proposed several international scientific research projects (e.g., the Human Frontiers Science Program), in part as a means of expanding its contribution to global scientific research. The HFSP project has progressed quite slowly, however, and Japan's nonfinancial contributions to its advance are likely to remain modest. Significant Japanese participation in international scientific research projects in any but a financial role is likely to be hampered in the near term by the weakness of Japan's basic research capabilities in many areas. Japan's proposed Intelligent Manufacturing Systems (IMS) project, however, focuses on an area (advanced manufacturing process technologies) in which Japanese firms are in a leadership position and to which they could make significant contributions.39 The IMS appears to contain considerable potential benefits for U.S. corporate participants. Partly because U.S. government officials felt they had not been sufficiently consulted by the IMS project's Japanese sponsors, the U.S. government was initially reluctant to support the IMS proposal. In addition to their concerns over a perceived lack of advance consultation, some U.S. officials felt that U.S. firms would contribute more to the undertaking than they would receive, transferring U.S. technology to Japanese firms. This concern appears to be misplaced, for several reasons. It is based on an 39   See George R. Heaton, International R&D Cooperation: Lessons from the Intelligent Manufacturing Systems Proposal, Manufacturing Forum Discussion Paper #2 (Washington, D.C.: National Academy Press, 1991).

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Japan's Growing Technological Capability: Implications for the U.S. Economy outdated assessment of U.S. and Japanese technological strengths in manufacturing. This approach also attempts to substitute the technological judgments of U.S. policymakers for those of corporate managers. Finally, opposition to U.S. participation in the IMS may reinforce the already distressing tendencies of U.S. managers to ignore external sources of industrial technology. The ambivalent response of the U.S. government to this Japanese proposal for international collaboration on technology-oriented research is unfortunate, and suggests the need for a recognition by U.S. policymakers of Japan's technological capabilities and a more realistic appraisal of the costs and benefits of U.S. participation in international technology development programs. Intellectual property rights is another area of U.S.-Japan tension and negotiations that may now assume a very different role in this bilateral economic relationship. During the past decade, U.S. pressure has led the government of Japan to improve the protection offered to foreign firms' intellectual property, and U.S. firms such as Texas Instruments have begun to reap significant royalty payments for such key patents as that covering the integrated circuit. Simultaneously, the executive branch and Congress have taken a number of steps to strengthen the domestic protection of intellectual property rights in the United States. As was noted above, however, Japan now is increasingly a technology exporter and is a major patentor in the United States. Stronger international and domestic intellectual property rights protection thus may raise the costs to some U.S. firms of access to the increasingly important flow of technology from Japanese sources.40 As the example of intellectual property suggests, the effectiveness and value of specific technology policy initiatives depend critically on the level of technological development within an economy, both absolutely and relative to other economies. The Japanese government policies that are asserted to have contributed to the technological transformation of that economy now have many admirers and advocates within the United States. Even as some U.S. observers recommend emulation of Japanese research policies and institutions, however, a search is under way within Japan for new institutions to support the indigenous basic research believed necessary to underpin commercial innovation. Japanese cooperative research policies, for example, historically supported the diffusion and utilization of technological and scientific knowledge that was derived from external sources, and supported Japanese firms' efforts to "catch up" with global technology leaders. Within Japan, however, cooperative research rarely served to advance the scientific or technological frontier, a purpose for which it is often 40   Some Japanese firms already are aggressively pursuing infringement actions against South Korean firms. See S.K. Yoder, "Hitachi Reaches Patent Accord with Samsung," Wall Street Journal, April 5, 1989, p. B3.

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Japan's Growing Technological Capability: Implications for the U.S. Economy promoted in the United States. Moreover, uncritical imitation of this and other technology policies associated with the period of "catch-up" in the Japanese economy overlooks considerable evidence suggesting that Japanese policymakers are now considering policies, such as public funding of basic research, that have long been central features of the U.S. national research system. Above all, it is important to recognize that the current complexities in U.S.-Japanese economic and technological relationships are a legacy of successful domestic and international policies. Japan's postwar rise to technological leadership is attributable in part to U.S. policies that assisted Japanese national security and economic reconstruction. U.S. and Japanese citizens alike should be proud of this remarkable accomplishment. Nonetheless, adjustment by policymakers and managers in both the United States and Japan to new technological realities will require fresh thinking on both sides of the Pacific. Failure to adjust to the new environment will result in missed opportunities and unnecessary friction.