2
Past Perceptions of U.S. and Japanese Innovation Systems

Many observers have compared the U.S. and Japanese corporate innovation systems in order to better understand their inherent strengths and weaknesses and to ascertain which elements might be borrowed or adapted as a means of improving competitive performance. Some experts have focused on particular aspects such as R&D; others have focused on distinctive institutional and organizational features; while yet others have produced broad overviews encompassing historical as well as current developments.1 A summary of past perceptions of the U.S. and Japanese corporate innovation systems will be useful in evaluating ongoing changes.

In general, observers have concluded that in the spectrum of attributes and capabilities comprising innovation, the United States is strongest in inventiveness, and Japan is strongest in manufacturing and customer feedback to enhance product quality. More specifically, as described by Lynn and others, the strengths and weaknesses of the Japanese system, in contrast to the U.S. system, are as follows: (1) an alleged unique ability to exploit technical knowledge developed in other countries; (2) speed in commercializing technology; (3) strength at incremental innovation in processes and products; (4) weakness at making breakthroughs and generally in basic research; and (5) emphasis on manufacturing process and customer feedback.2

National Level Differences

Underlying the strategies toward innovation in each country are fundamental national level differences that influence corporate innovation choices. These fundamental differences include:

  • a higher share of GNP for nondefense R&D in Japan (2.74 percent) than in the United States (2.05 percent)3
  • the higher percentage of total national R&D funded by industry in Japan than in the United States (72 percent in Japan [1995] vs. 60 percent in the United States [1995])4
  • venture capital and strong equity markets as driving forces for innovation and competitiveness in the United States
  • the prominent role of U.S. universities as performers of research, especially basic research (most of which is funded from federal sources), and strong linkages between university research and private industry 5
  • the prominent role of the Japanese government in establishing industrial and technology policies, disseminating information about technological needs and opportunities, assisting technology adoption, and otherwise working with Japanese corporations through trade associations, trading companies, and other intermediaries that distribute technological information6
  • the increasing focus of U.S. firms on partnering


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2 Past Perceptions of U.S. and Japanese Innovation Systems Many observers have compared the U.S. and Japanese corporate innovation systems in order to better understand their inherent strengths and weaknesses and to ascertain which elements might be borrowed or adapted as a means of improving competitive performance. Some experts have focused on particular aspects such as R&D; others have focused on distinctive institutional and organizational features; while yet others have produced broad overviews encompassing historical as well as current developments.1 A summary of past perceptions of the U.S. and Japanese corporate innovation systems will be useful in evaluating ongoing changes. In general, observers have concluded that in the spectrum of attributes and capabilities comprising innovation, the United States is strongest in inventiveness, and Japan is strongest in manufacturing and customer feedback to enhance product quality. More specifically, as described by Lynn and others, the strengths and weaknesses of the Japanese system, in contrast to the U.S. system, are as follows: (1) an alleged unique ability to exploit technical knowledge developed in other countries; (2) speed in commercializing technology; (3) strength at incremental innovation in processes and products; (4) weakness at making breakthroughs and generally in basic research; and (5) emphasis on manufacturing process and customer feedback.2 National Level Differences Underlying the strategies toward innovation in each country are fundamental national level differences that influence corporate innovation choices. These fundamental differences include: a higher share of GNP for nondefense R&D in Japan (2.74 percent) than in the United States (2.05 percent)3 the higher percentage of total national R&D funded by industry in Japan than in the United States (72 percent in Japan [1995] vs. 60 percent in the United States [1995])4 venture capital and strong equity markets as driving forces for innovation and competitiveness in the United States the prominent role of U.S. universities as performers of research, especially basic research (most of which is funded from federal sources), and strong linkages between university research and private industry 5 the prominent role of the Japanese government in establishing industrial and technology policies, disseminating information about technological needs and opportunities, assisting technology adoption, and otherwise working with Japanese corporations through trade associations, trading companies, and other intermediaries that distribute technological information6 the increasing focus of U.S. firms on partnering

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Firm Level Differences Different historical backgrounds and industrial structures make it inevitable that Japanese and U.S. corporations approach technology and innovation from different perspectives. Experts have noted the following firm-level characteristics and differences.7 Organization and Geography of R&D Japanese firms have tended to locate their divisional laboratories within or beside production facilities whether in Japan or in off-shore production sites, and maintain more of their technology development at the plant level, particularly incremental improvements in processes or products. However, Japanese corporations, like their U.S. counterparts, typically locate their basic research laboratories at some remove from their factory sites. The geographic, organizational and social distance between basic research and manufacturing is likely to increase as the pressures for globalization increase.8 In the United States, the location and relative emphasis of R&D vary greatly from firm to firm, but there has been a general movement to link R&D more closely with the needs of customers. Long-Term and Short-Term Perspectives The Japanese task force members and others have remarked on the tendency of corporate research in large Japanese companies to be persistent and to take a long-term perspective in speculative areas. This is seen as an important means of reducing technological and business risk for the company.9 R&D organizations in Japanese corporations allocate percentages of their budgets to "seed" research that is intended to encourage individual researchers to look into potentially promising areas that may or may not be tied to the company's shortand medium-term strategic plans. By contrast, U.S. companies that focus on quarterly financial results and short-term product development are thought to be more conservative and risk averse than those with a relatively long technological time horizon. R&D's Role in Setting Corporate Business Plans Differences in the degree of integration between research and business divisions in Japanese and U.S. corporations influence the role that R&D organizations play in carrying out fundamental business plans. Over the past two decades, Japanese firms have increasingly made their R&D organizations the centers of diversification efforts. While some leading U.S. industrial corporations have looked to acquisitions to diversify their businesses and technologies, Japanese firms have more often utilized internally sourced diversification, perhaps because acquisitions are much more difficult to accomplish in Japan. For example, Sumitomo Electric Incorporated (SEI) began in 1897 as a family copper smelting business combined with silver extraction. By 1931, it was manufacturing copper wire and cable. The manufacture of cable for the transmission of information is the defining market for SEI. SEI's technology strategy is based on diversification through innovation to ensure that its position in a well-defined market is not threatened by unexpected innovations outside the industry. This strategy led SEI to recognize the emergence of optical fiber as both a threat and an opportunity to be acted upon. As a guiding principle for diversification, SEI has a 50/50 program. The program maintains a 50:50 ratio between the company's main business and its

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diversified businesses. SEI is more diversified than it might be if it followed a technology strategy based on core technical competencies. Even though it says it is in the cable business, it has grown by branching into nuclear fuels, super hard metals, compound semiconductors, automotive brakes, and electronic systems. The common denominators for these fields are materials science and engineering.10 Human Resources Utilization and Development Many differences between Japanese and U.S. corporate organization cluster around human resource development and the careers of researchers: Japanese corporations hire relatively few Ph.D. holders, considering them to be over-specialized and lacking commitment to corporate business goals. American corporations have been more willing to trade off these drawbacks for the Ph.D. holders' greater capacity to do independent and creative research. These disparities reflect U.S.-Japan differences in graduate science and engineering education as well as in corporate human resource practices. Many Japanese corporations move R&D personnel into production divisions to follow their projects through the chain of production and into the market.11 In the United States, however, firms have drawn sharper lines among personnel in R&D, production, and manufacturing, permitting less crossover among these functional areas. The result may be to hamper intrafirm technology transfer. In Japan, midcareer researchers rarely move from one large company to another, whereas in the United States the practice is quite common. For the Japanese corporation this means that all the investment that the corporation pours into the person—the education, experience, sabbaticals at U.S. and European universities, the contact network, the knowledge, etc.—stays with the corporation. This in turn creates substantial incentives for the company to continue to invest in that person (asset) because the person (asset) is secure and relatively riskless. It is more risky for a U.S. corporation to make the same calculation given the high probability that the person will leave. The incentives for companies reflect and contribute to the corresponding differences in incentives for Japanese researchers, who tend to identify more with their organizations, and U.S. researchers, who tend to identify more with their fields or professions. Survey research indicates that technology strategy is more tightly integrated into overall corporate strategy by the top managements of Japanese companies than those of U.S. companies.12 U.S. industrial R&D organizations assign great importance to new product innovation versus the higher Japanese reliance on acquiring and enhancing externally generated technology and on incremental innovation. In addition, Japanese firms are often considerably faster at carrying out innovations based on external technology than are American firms.13 Notes and References 1   The list of innovation characteristics for this report was compiled from National Research Council, Learning the R&D System: Industrial R&D in Japan and the United States (Washington, D.C.: National Academy Press) 1990; Leonard Lynn, "Japan's System of Innovation: A Framework for Theory Guided Research," in Research in International Business and International Relations, Volume 6, pp. 161-187 (JAI

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    Press, Inc., 1994) pp. 162-163; and Committee on Science, Engineering, and Public Policy (COSEPUP), The Government Role in Civilian Technology: Building a New Alliance (Washington, D.C.: National Academy Press, 1992), pp. 31-39. Broader treatments may be found in David C. Mowery and Nathan Rosenberg, "The U.S. National Innovation System," in Nelson, op. cit., pp. 29-75; and Hiroyuki Odagiri and Akira Goto, "The Japanese System of Innovation: Past, Present, and Future," also in Nelson, pp. 76-114. 2   Points 1-4 are from Lynn, op. cit., p. 163. See also National Academy of Engineering, Mastering a New Role (Washington, D.C.: National Academy Press, 1993), especially Chapter 3: "Strengths and Weaknesses of the U.S. Technology Enterprise," pp. 61-90, and Richard Florida and Martin Kenney, The Breakthrough Illusion (N.Y.: Basic Books, 1990). 3   Figures for 1995. National Science Board, Science and Engineering Indicators 1998 (Arlington, Va.: U.S. Government Printing Office, 1998). 4   Ibid. 5   See COSEPUP, op. cit., p. 31, and Cohen, Florida and Goe, University-Industry Research Centers etc. For a different viewpoint which stresses the reliance of Japanese corporations on research in Japanese universities, see D. Hicks et al., "Japanese Corporations, scientific research, and globalization," Research Policy, June 1994, pp. 375-384. 6   Lynn, op. cit. Richard Florida is of the opinion that the role of trade associations is critical and if anything more important, and less well-understood than MITI, as they frequently motivate and add the content to MITI decisions. He has likened the Japanese system as, in a way, a logical extension of Herbert Hoover's notion of " voluntary associationalism." (From a personal communication) 7   See National Research Council, op. cit., pp. 6-13 and Branscomb and Kodama, op. cit., pp. 2-5. 8   See Richard Florida and Martin Kenney, "The Organization and Geography of Japanese R&D: Results of a Survey of Japanese Electronics and Biotechnology Firms," Research Policy 23 (1994), pp. 305-323. 9   Branscomb and Kodama, op. cit. 10   Ibid. 11   Kiyonori Sakakibara and D. Eleanor Westney, "Comparative Study of the Training, Careers, and Organization of Engineers in the Computer Industry in the United States and Japan," Hitotsubashi Journal of Commerce and Management, Volume 20, Number 1, 1985, pp. 1-20. 12   Edward B. Roberts, "Benchmarking the Strategic Management of Technology, Part 1," Research-Technology Management, January-February 1995, pp. 45-47., and Branscomb and Kodama, op. cit. 13   See Edwin Mansfield, "Industrial Innovation in Japan and the United States," Science, Vol. 241, September 30, 1988, pp. 1769-1774.