Executive Summary

Overview

Innovation, "the process by which firms master and get into practice product designs and manufacturing processes that are new to them," is vital for companies wishing to remain competitive in today's rapidly changing high technology industries.1 American and Japanese firms are among the world's most technologically innovative and competitive. However, the changing dynamics of global competition are forcing them to rethink their technological innovation strategies. The choices they make will have great impact on their futures as companies as well as on the livelihoods of their employees and the communities in which they operate.

In order to understand the ways in which Japanese and American companies are changing their technological innovation strategies and practices, the Committee on Japan of the National Research Council and the Committee on Advanced Technology and the International Environment (Committee 149) of the Japan Society for the Promotion of Science (JSPS) organized a bilateral task force composed of leading representatives from industry and academia to assess developments in corporate innovation strategies and report on their findings. Through a workshop discussion of the issues and subsequent interaction, the task force explored the institutional division of innovation in both countries: the structure and performance of technology-based industries, the role of the government in the support of science and technology, and the role of universities in the science and technology system. The task force was particularly interested in exploring the points on which the two systems are converging,—i.e., becoming more similar in strategy and practice—and where they continue to be distinct and different.

Although a comprehensive study of these trends in U.S. and Japanese innovation was not easily feasible, the task force was able to develop several conclusions based on its workshop discussion and follow-up interactions that were substantial in time and content. This report identifies a set of issues whose further elucidation should be helpful in guiding public policy in both nations. These issues include the role of external sourcing of innovation, transnational activity and globalization, the organization and performance of R&D, and the role of consortia, joint ventures and other joint activities. A call for greater international efforts to collect and analyze data on these important trends is the central recommendation of the task force.

Major Areas of U.S.-Japan Convergence and Continued Disparity

There is both evidence of convergence in innovation strategies and practices between U.S. and Japanese corporations and also of sustained differences. Furthermore, there is great diversity within each system .

In developing this report, the task force used the concept of convergence—the idea that U.S. and Japanese corporations are beginning to function more like each other than they once did—as a lens with which to focus and clarify the complex and often confusing array of adaptations in corporate technological innovation strategies. This approach naturally led to searching-out similarities and differences in corporate innovation practices as they are currently evolving and also to a comparison of current practices with past paradigms of U.S. and Japanese corporate innovation systems.



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Executive Summary Overview Innovation, "the process by which firms master and get into practice product designs and manufacturing processes that are new to them," is vital for companies wishing to remain competitive in today's rapidly changing high technology industries.1 American and Japanese firms are among the world's most technologically innovative and competitive. However, the changing dynamics of global competition are forcing them to rethink their technological innovation strategies. The choices they make will have great impact on their futures as companies as well as on the livelihoods of their employees and the communities in which they operate. In order to understand the ways in which Japanese and American companies are changing their technological innovation strategies and practices, the Committee on Japan of the National Research Council and the Committee on Advanced Technology and the International Environment (Committee 149) of the Japan Society for the Promotion of Science (JSPS) organized a bilateral task force composed of leading representatives from industry and academia to assess developments in corporate innovation strategies and report on their findings. Through a workshop discussion of the issues and subsequent interaction, the task force explored the institutional division of innovation in both countries: the structure and performance of technology-based industries, the role of the government in the support of science and technology, and the role of universities in the science and technology system. The task force was particularly interested in exploring the points on which the two systems are converging,—i.e., becoming more similar in strategy and practice—and where they continue to be distinct and different. Although a comprehensive study of these trends in U.S. and Japanese innovation was not easily feasible, the task force was able to develop several conclusions based on its workshop discussion and follow-up interactions that were substantial in time and content. This report identifies a set of issues whose further elucidation should be helpful in guiding public policy in both nations. These issues include the role of external sourcing of innovation, transnational activity and globalization, the organization and performance of R&D, and the role of consortia, joint ventures and other joint activities. A call for greater international efforts to collect and analyze data on these important trends is the central recommendation of the task force. Major Areas of U.S.-Japan Convergence and Continued Disparity There is both evidence of convergence in innovation strategies and practices between U.S. and Japanese corporations and also of sustained differences. Furthermore, there is great diversity within each system . In developing this report, the task force used the concept of convergence—the idea that U.S. and Japanese corporations are beginning to function more like each other than they once did—as a lens with which to focus and clarify the complex and often confusing array of adaptations in corporate technological innovation strategies. This approach naturally led to searching-out similarities and differences in corporate innovation practices as they are currently evolving and also to a comparison of current practices with past paradigms of U.S. and Japanese corporate innovation systems.

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The picture which emerged is mixed. The Joint Task Force agrees that there is strong evidence that U.S.-Japan problem convergence, or increasing commonality in the problems addressed by corporate innovation in the two countries, is occurring.2 However, there are a variety of views among committee members over whether there is growing similarity in the institutions underlying innovation in the two countries, as well as in the strategies and approaches to innovation of U.S.- and Japan-based companies. Some practices appear to be growing more similar, such as the use of external sources of innovation and the relationships of original equipment manufacturers with suppliers and customers. Other practices, such as those of human resources utilization and development, are still different to the extent that ongoing change appears insufficient to alter the mismatch that in the past has created friction between the United States and Japan. Following are specific points of convergence and continued differentiation: Growing Similarities and Evidence for Convergence Original Equipment Manufacturer (OEM)-Supplier Relations In the past, U.S. firms have been seen as choosing suppliers based on short-term price criteria, and promoting price competition among a number of suppliers. Japanese supplier relations have been seen as more stable. Some U.S. firms have been moving toward reliance on a smaller number of trusted suppliers while Japanese suppliers are beginning to expand business with firms outside their traditional business groups.3 Drivers of this phenomenon include increasing global competition and the search for cost reduction and quality through innovation. In the case of Japanese OEMs, the successful experience of transplant companies (which in many respects have been forced to use non-group suppliers), and exchange rate shifts have fueled a search for non-Japanese based suppliers to keep costs competitive. Inventiveness Companies in each country are focused on attaining innovation-related capabilities associated with firms in the other nation. For example, Japanese firms are putting greater emphasis on inventiveness, while U.S. firms are focusing more on being responsive to market needs, improving existing products, shortening product cycles, and improving manufacturing processes and quality. Focus on Core Business Activities Firms in both countries are focusing their resources on core business activities in the quest for greater efficiency and lower cost. Many lower priority activities are being outsourced. However, there is no consensus among Japanese and U.S. practitioners on the extent to which it is an effective general strategy. Role of Government The role of government with respect to innovation and competition is in flux in both the United States and Japan. In the United States, debates continue over the appropriate federal role in supporting the development and diffusion of precompetitive commercial technology. 4 While support for basic research has been largely maintained across relevant agencies, the outlook for

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continued long-term growth in entitlement spending has negative implications for discretionary programs, including science and technology. In Japan, the government is said to be reducing industrial intervention. At the same time, it is increasing subsidies for research and development and continues to play a coordinating role in setting industrial policy. Also, a number of policy changes undertaken after the active portion of the Joint Task Force activity was completed reveal renewed determination on the part of the Japanese government to strengthen basic science. These changes include increased support for educational infrastructure in the supplemental budgets of recent years, as well as new and expanded programs of support for academic research by agencies other than the Ministry of Education, Science, Sports and Culture (Monbusho), such as the Science and Technology Agency (STA) and the Ministry of International Trade and Industry (MITI). In 1995, Japan passed a new Science and Technology Basic Law, and released its Science and Technology Basic Plan in July 1996. Two key elements of these initiatives are increased public support for science and technology, and systemic changes aimed at improving the environment for creative basic research.5 Encouragement of university-industry cooperation has also been a major issue, as seen in the establishment of the new Office for the Promotion of Academia-Industry Cooperation at MITI in 1995, and legislation drafted jointly by MITI and Monbusho in 1998. Continuing Fundamental Differences and Evidence Against Convergence Defense-Related R&D Spending Despite a long-term decline in the share of U.S. R&D efforts devoted to defense, defense will continue to play a major role in U.S. research and innovation, while Japan's defense R&D, although growing rapidly, continues to be relatively limited. Role of Universities Universities in the United States play a much greater role as performers of research and as partners with industry than do universities in Japan. Industry/Government Division of Responsibility Notwithstanding recent changes in Japanese policy outlined above, industry continues to be the predominant source of research and development funding in Japan. In the United States, due primarily to defense R&D, government funds a higher proportion of R&D than in Japan, although the proportion of U.S. R&D funded by industry has grown over the long-term. Labor-Market Practices The Japanese labor market is characterized by long-term employment, whereas the U.S. labor market is characterized by job mobility. These attributes lead to significant differences in corporate employee development practices, although the historic commitment to lifetime employment at some Japanese companies has given way in Japan to pressures from the recession, as it has in some U.S. companies such as IBM that were characterized by long-term employment until the 1990s.

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Supplier Networks U.S. supplier networks are comparatively more accessible to newcomers than Japanese supplier networks, which are characterized by long-term business ties, often reinforced by ownership linkages. Japan's vertical keiretsu are adapting to new challenges, as described below, with indications that they will become more open, particularly as Japanese firms continue to globalize. Still, U.S.-Japan differences are likely to continue, especially with regard to innovation and production networks inside Japan. Component Sourcing Japanese subsidiaries abroad continue to be more dependent on imports from the home country than do American subsidiaries abroad. Financial Environment for Innovation In Japan, cross share-holding and traditional horizontal business groups (horizontal keiretsu) composed of major banks and manufacturers help ensure long-term financial stability. In the United States, venture capital is a driving force for innovation and competitiveness. Emerging Trends Greater Reliance on External Sources of Innovation. In the view of the task force, external sourcing of technology and innovation—that is, the acquisition of technology and innovation from sources outside one's own firm—is the most important development in global technology management. External sourcing is taking place through what is traditionally referred to as the process of outsourcing—the practice by which OEMs solicit increasingly sophisticated technological components from suppliers—and through newly emerging forms of technological partnerships and alliances with other firms. American firms are becoming more like Japanese firms which have long sourced technology and innovation from outside. At the same time, the traditionally strong vertical alliances between Japanese OEMs and suppliers are gradually changing as suppliers develop diagonal relationships with firms outside the group. The burgeoning integration of U.S. and Japanese corporations is a major factor in innovation sourcing. As corporations adapt to the imperatives of global financial markets, the complexities of high technology products and processes, and the high costs of innovation, they are entering into many forms of alliances, consortia, and joint ventures in which technology sharing, based on complementary assets, is a major factor. Some recent U.S.-Japan alliances would have been unthinkable a few years ago. For example, in the semiconductor industry U.S. and Japanese companies have concluded agreements to engage in joint production in the United States.

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Shifts in Corporate R&D Strategies and Organizations As large U.S. corporations restructure to achieve efficiency and competitiveness, their internal basic research is diminishing, whereas some Japanese companies are beginning to enhance their research organizations and investments. Even though U.S. firms continue to increase linkages to universities and other external performers of basic research and innovation, some observers worry that if U.S. firms fail to continue internal research in leading edge fields, their attempts to rely on universities and other institutions may fail for lack of the ability to identify and absorb the help they need. Japanese corporations, on the other hand, seem to be protecting their internal basic research even as their overall R&D spending has declined or been fiat over the past several years. Role of Consortia in Setting De Facto Standards The emergence of business consortia to set de facto technology standards is a major development which will have far-reaching impact on industrial competitiveness and innovation.6 The formal standards process is often too slow and too open to meet all the needs of firms, especially in information industries, to find a path to open systems that is consistent with business objectives. In the past, electronics markets could be divided into proprietary systems built to proprietary standards, and proprietary systems built to open standards.7 Increasingly, "owned" open standards are emerging in electronics, exemplified by the VHS video format (Matsushita), the x86 microprocessor architecture (Intel), and the MS-DOS operating system (Microsoft). However, the growing number of business consortia composed of multinationals based in the United States, Japan and other countries that set de facto technology standards, while solving commercial needs, has raised antitrust concerns because these standards are often proprietary. This is likely to be an important issue in future multilateral trade negotiations. More attention needs to be devoted to this issue as well as to the proper role of national governments. Recommendations Need for More Data on U.S., Japanese and Global Trends in Corporate Innovation Much more systematic data collection and analysis is needed in order to make it possible to identify and understand the significant trends in corporate innovation practices. In particular, lack of data to measure the extent of sourcing of innovation, and international trends in particular, is perhaps the most serious impediment to understanding the relationships of transnational outsourcing of innovation on industrial dynamics and on international relations. Need to Continue Scholarly Work on Models and Frameworks for Innovation Continued work on new frameworks of analysis of systems of innovation is needed in order to better understand the discrepancies between the changes that are truly occurring in corporate and government policies and those that are merely being advocated. Changes taking place today in the structure of high technology industries, the methods being used to optimize the technological components of competitiveness, and the importance of transnational as well as domestic relationships among firms, are occurring so rapidly that the

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models underlying many government policies and attitudes toward U.S.-Japan relations in science and technology may be outdated. There is a continuing need for private sector input into policy decisions that affect the environment for innovation. Future study of national systems of innovation needs to reflect the increasingly global nature of markets and production networks. Various approaches have been suggested in order to better understand the emerging dynamics and characteristics of global innovation. Each approach attempts to illuminate a part of this complex issue. For example, market pull vs. technology push have long been employed as alternative analytical descriptors of different behaviors and stimuli for innovation. The concept of demand articulation, a two step process for working from market data to the development of products, explains innovation through an integration of supply and demand rather than from either the traditional supply or demand aspect alone. Innovation-mediated production, which recognizes that information is at the core of new industrial innovation, is premised on understanding the increasingly central role of knowledge in the process of value creation. It is used to comprehend the emerging patterns in the globalization of innovation. Each of these conceptual frameworks represents an attempt to capture and explain the essentials of real-world behavior and serve as a rough guide for innovation strategy. Also needed are more realistic categories to measure and compare U.S. and Japanese technology resources and assets. The corporate technology stock model, which calls for accounting for R&D as an investment rather than as an expense, is one possible way of placing financial value on R&D activities that would lend itself to cross-national comparisons. The task force learned that American firms have done much to address problems of competitiveness by adapting lessons learned from Japanese competitors. Japanese firms are also changing, but less is known about the extent of these changes. Despite the existence of a large volume of literature on innovation, systematic collection of basic data is the greatest need for accurate analysis of developments in innovation. The task force recommends that government departments concerned with data collection and technology policy, such as the U.S. National Science Foundation (NSF), the Bureau of the Census, the Bureau of Economic Analysis of the Department of Commerce, and the Science and Technology Agency (STA) and Management and Coordination Agency in Japan, increase their efforts to collect meaningful data on innovation. Multinational agencies such as the Organization for Economic Cooperation and Development (OECD), the United Nations, and the Asia Pacific Economic Cooperation forum also have important roles to play. Efforts in this area are already under way in agencies such as NSF and STA. However, without real encouragement from the private sector, such efforts may fall subject to budget constraints. This would be regrettable given the importance of innovation to economic performance. As the scope of interests covered by the subject of innovation is so broad and complex, many different kinds of data and analysis are needed. Specific areas for further work are included in the last chapter of this study. Notes and References 1   Richard R. Nelson, National Innovation Systems: A Comparative Analysis (New York: Oxford University Press, 1993), p. 4. The task force believes that it is important to examine comprehensively the conditions and practices underlying both the generation and exploitation of innovations. 2   Box 3-1 explains the definition of convergence used by the Joint Task Force, as well as alternative formulations.

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3   Chapter 4 provides a more detailed discussion. 4   Lewis M. Branscomb and James Keller, eds., Investing in Innovation: A Research and Innovation Policy that Works (Cambridge, Mass.: MIT Press, 1998). 5   Motivations and context for the Basic Law and Basic Plan are covered in "Constructing a New Global Partnership: Science and Technology as an Investment for the Future," address by Minister of State for Science and Technology Hidenao Nakagawa at the National Academy of Sciences, August 8, 1996. 6   Consortium is a generic term meaning "an agreement, combination, or group (as of companies) formed to undertake an enterprise beyond the resources of any one member." This report discusses both consortia that set de facto technology standards, some of which involve a formal organization, and consortia that perform R&D through a dedicated organization, such as SEMATECH. The report will refer to the latter as "research consortia." 7   Michael Borrus, presentation to the Joint Task Force meeting, August 1994.