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3 Are the U.S. and Japanese Innovation Systems Converging? Evidence for and Against How are the innovation strategies of Japanese and U.S. corporations changing, and to what extent are they becoming more alike as they adjust to new and unprecedented global market conditions? The attempt to answer such questions involves a discussion of the concept of "convergence"—the hypothesis that globalizing market and financial conditions tend to force similar responses from globally competing companies, irrespective of their national origins, whereas heretofore the strategies of companies based in different countries were shaped more significantly by national differences in circumstances and needs. Some observers believe that the attention being paid to innovation in both countries, brought on by emergent trends in science, engineering and management, is resulting in a growing similarity in approaches to industrial innovation in the two countries. According to this formulation, this similarity appears as the problems addressed by corporate innovation in the two countries converge toward each other under the influence of these emergent trends. As evidence, they point to the fact that Americans are adopting many Japanese practices, including fewer suppliers with stronger relationships, just-in-time production, and heightened attention to quality control through process control; and Japanese firms are adopting U.S. practices by expanding their relationships with universities and urging greater investments by government in fundamental research.1 Some observers argue that Japan and the United States have both entered a new era in relationships in which we face each other more as equals economically and technologically than in the past.2 With improvement in the cost and quality of many U.S. products in industries that had been hurt—and stimulated to improve—by Japanese competition, a number of sectors, such as semiconductors and automobiles, have seen increased market shares in recent years.3 It can be postulated that, if the innovation systems of both countries were to converge on a more common model, relationships might be expected to exhibit less friction, especially in trade relations. Although it is often asserted that U.S. and Japanese industry and government are converging and changing drastically, it is unclear whether this is happening and to what extent. At the national level, U.S. defense R&D continues to be predominant.4 Japanese industry still funds a higher percentage of the total national R&D effort than U.S. industry, although they have been converging in recent years. High technology start-ups, which play a very important role in commercializing U.S.-generated innovations, are not prominent in Japan. Given the diversity of approaches by industries and individual companies within each country, it is difficult to draw firm conclusions. Finally, some experts believe that even as the strategies of multinational corporations based in different countries become more similar, regional and national specialization in the generation of innovation may become more pronounced.5 The following sections include a review of how Japanese and American universities, industry and government are adapting to changing global conditions and a discussion whether conclusions can be reached
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about the extent of convergence. Box 3-1 describes the Joint Task Force's approach to convergence. Box 3-1 Defining "Convergence" Amid the changing strategies for corporate innovation on which the Joint Task Force has focused, it is clear that certain aspects of U.S. and Japanese corporate innovation have grown more similar to each other while others have remained distinct. Just what can be said about the aggregate trend of these changes and the resulting implications is less obvious. For this reason, the question covered in this chapter—whether or not U.S. and Japanese companies are moving toward similar approaches to innovation—is a central issue in the report. In order to address this question, the task force employed the concept of convergence as a tool with which to elucidate the complex and often confusing array of adaptations occurring in corporate innovation strategies. Such a framework enables the strategies to be analyzed in light of the innovation process itself. Therefore, the Joint Task Force thought it would be useful to clarify its own definition, and relate its approach to other debates over U.S.-Japan convergence. One usage of convergence which is distinct from the usage by the task force is one which we call "productivity convergence." This is an aspect of growth theory that concerns the striking postwar convergence between industrial nations in terms of productivity, per capita income and other indicators. Productivity convergence research attempts to understand the mechanisms that have enabled the convergence to occur and is thus positive (empirical) in nature. Its focus is on the catch-up process of lagging nations rather than on new strategies for corporate innovation.1 Another usage, which we call "institutional convergence," addresses the desire for a common ideology as a way for industrial nations to overcome the challenges of globalization. In theory, as the ideologies of nations converge, national policies, particularly economic policies, can be brought in line with each other through negotiated agreements so as to allow smooth transnational interactions. Implementation may be problematic, however, particularly when proponents of convergence adhere too rigidly to a specific model. In the case of the United States and Japan, some proponents of convergence have assumed that Japan should fit into the set of constructs used to analyze U.S. trade policies. It may make more sense to build upon the individual constructs of each country to form a set applicable to both the United States and Japan. As Eileen M. Doherty observes, "Historically, U.S. trade policy has been based on the belief that market economies can, and should, converge. Consequently, trade talks have centered on the need to remove trade barriers. More recently, (beginning primarily with the Uruguay Round), negotiations have focused on ways to harmonize trade-related rules (such as intellectual property rules and trade-related investment measures) and domestic regulatory structures."2 Advancement of one-sided convergence concepts has elicited strong criticism, such as this one by Chalmers Johnson: "The idea of Japanese-American convergence is a Western intellectual conceit with roots in the Allied Occupation of Japan after World War II and in the United States' shift from an alliance with China to an alliance with Japan as the basis of its Cold War strategy in East Asia."3 In the view of the Joint Task Force, institutional convergence is an attempt to change the nature of corporate innovation rather than a result of the changing nature of corporate innovation. Biased implementation of it may create rather than resolve problems associated with globalization. The Joint Task Force wants to make it clear that it is not advancing an analogous one-sided concept of convergence in the area of corporate innovation. In this report, the Joint Task Force would like to advance the concept of "problem convergence" as an outgrowth of the process of innovation itself. Problem convergence is based on two factors common to all players. The first factor is the driving force of technological innovation in today's businesses (companies on the cutting edge must increasingly respond to similar market conditions in similar ways). The second factor is the growing inter-penetration of vanous players into each other's markets due to the process of globalization (markets themselves
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are merging). Rather than implying that the United States and Japan will converge to a similar, normal way of business, the idea is that the problems addressed by corporate innovation throughout the world have more in common than they once did. In such an environment, "the great national differences that used to matter are no longer national." 4 As the problems faced by companies become more similar, aspects of the innovation systems of the two countries may converge toward each other as they approach a new innovation model relevant to all players. While the specific structures for innovation naturally differ among industrial nations, such trends may lead to a stronger level of functional equivalence among the structures. In this way, increased similarity of the problems addressed by corporate innovation in the two countries tend to increase the similarity of the two countries' innovation approaches, but does not necessarily imply that the approaches will become the same. For the United States and Japan, the implication is that although the two innovation systems are still very different, they are now less different than they were. Among the Joint Task Force membership, there is a range of views regarding the specifics of U.S.-Japan problem convergence in corporate innovation and its implications. There is consensus among all task force members that some degree of U.S.-Japan problem convergence in the area of corporate innovation is occurring. Most of the Japanese members along with several U.S. members would go further to argue that the approaches utilized by companies in the two countries are also converging. They emphasize the evidence for U.S.-Japan convergence, and believe that companies based in both countries are converging toward a new model, driven by globalization.5 In contrast, several of the U.S. members point to evidence that U.S. and Japanese companies continue to develop distinct approaches, even where they face similar problems, and these approaches are shaped by their previous organizational and technological development. Although a project of this type could not hope to confirm one or the other view, the task force does agree that the issue itself is and will continue to be critical. Distinguishing between the various convergence concepts is important to this project. For the innovation-based approach of the task force, convergence does not carry the baggage of implying shared core beliefs and attitudes, which has proved to be a stumbling block for institutional convergence. And while its positive rather than normative approach has similarities to productivity convergence, problem convergence's focus on the implications for innovation strategy makes it more suitable for the forward looking task at hand. 1 Moses Abramovitz, "Catching Up, Forging Ahead, and Falling Behind," Journal of Economic History, vol. 46, no. 2. 1986, pp. 386-406; Richard. R. Nelson and Gavin Wright, "The Rise and Fall of American Technological Leadership: The Postwar Era in Historical Perspective," Journal of Economic Literature, December 1992, pp. 1931-1964; "Economic Growth," The Economist, vol. 339, no. 7967, May 25, 1996. 2 Eileen M. Doherty. "Introduction," in Eileen M. Doherty, ed., Japanese Investment in Asia. International Production Strategies in a Rapidly Changing World, (Berkeley, Calif.: Asia Foundation and the Berkeley Roundtable on the International Economy, 1995), p. 22. 3 Chalmers Johnson, Japan: Who Governs? The rise of the Developmental State (New York: W.W. Norton and Company, 1995), p. 70. 4 Richard R. Nelson, "U.S. Technological Leadership: Where Did It Come From and Where Did it go?" Research Policy, vol. 19, 1990, p. 130. 5 For an example where the institutional convergence perspective led policymakers astray while problem convergence occurred in innovation strategies, see Gerald Hane. "The Real Lessons of Japanese Research Consortia," Issue in Science and Technology, Winter 1993-94, pp. 56-62.
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Changes in Industry Table 3-1 shows trends in Japanese and U.S. industrial R&D expenditure. Spending was constrained in both countries during the early to mid 1990s. More recent U.S. statistics show that U.S. industrial R&D performance has risen moderately over the 1995-1997 period, but comparable figures for Japanese industry are not yet available. In some respects, large U.S. and Japanese companies appear to be adopting more similar approaches to technology strategy and management as they restructure themselves in response to new global economic conditions. U.S. firms are relying more on trusted suppliers for innovations, while Japanese suppliers are beginning to expand business with firms outside their normal business groups. Technological parity seems to have been reached in many high tech industries between the U.S. and Japan; and the rate of change of relative technical capability has slowed as U.S. firms in several industries have recovered some of the market share lost to Japan in the 1980s.6 In attempting to understand the changes in corporate innovation outlined in this chapter, it is important to keep in mind the effects of global partnering and the transnational nature of today's markets. The different approaches used by various alliances have broad implications for corporate innovation strategy. Because many alliances are multinational groupings of companies, comparative analyses must go beyond U.S.-Japan comparisons. In light of these trends, it may be less useful than it was in years past to think in terms of distinct U.S. and Japanese approaches. Corporate alliances are discussed in greater detail in Chapter 4. Capital Markets A major difference between Japan and the United States is that the United States has well-developed venture capital markets which provide an institutionalized system of capital for small, entrepreneurial high-tech enterprises, in combination with an active equity market that rewards successful ventures with cash for their equity interest when they sell their stock to the public.7 The U.S. business culture supports the formation and growth of technology-based firms, allowing successful entrepreneurs and their investors to reap significant rewards if successful. TABLE 3-1 U.S. and Japanese Industrial R&D Performance, billion dollars United States Japan 1990 109.73 47.45 1991 116.95 50.30 1992 119.11 51.20 1993 117.11 49.12 1994 119.60 49.59 NOTE: Figures are given in current purchasing power parity dollars. SOURCE: National Science Board, Science & Engineering Indicators 1998.
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Japan does not yet have an incentive system to compare with this, although recent developments in Japan, such as changes in stock market regulations allowing firms to list intellectual assets and attempts to develop a venture market, indicate a desire to develop venture capital as a factor in Japanese financing. The U.S. business culture is also more supportive of talented individuals who leave large, established firms to start new technology ventures than is the business culture of Japan. The cost of capital is frequently mentioned as one of the principal factors influencing differences in the behavior of U.S. and Japanese companies.8 Many believe that the gap in interest rates which was highly advantageous to Japanese companies, has largely disappeared after the collapse of Japan's bubble economy, leading to a more similar environment in the two countries. Others contend that the cost of capital in Japan has again receded to very low levels, making it still cheaper than in the United States. Still others argue more fundamentally that the cost of capital is neither a compelling nor useful explanation of the success of Japanese industry compared to U.S. industry.9 Corporate Innovation Management In the area of corporate innovation strategy, there are indications that firms in the two countries are converging in their approaches to management. Many U.S. companies are beginning to focus their R&D efforts on being more responsive to market needs, improving existing products and shortening product cycles. For example, the trend in GE research and development over the past twenty years has been away from "field of dreams" research motivated primarily by intellectual curiosity, to market-oriented R&D. This is exemplified by the teaming with customers at GE's Research and Development Center, especially with GE's own businesses, on multi-generational product developments. Other prominent examples of U.S.-based companies that are shifting their R&D operations to more market-oriented, short-term work include IBM and AT&T.10 A related trend in the United States is a shift away from central corporate control of R&D toward more control by business units. Survey results show that very few U.S. companies reported increasing corporate control of R&D, in contrast to Europe and Japan.11 The U.S. trend is also apparent at the firm level. For example, GE businesses in 1994 accounted for roughly 50 percent of the funding for corporate R&D, whereas in 1986 they accounted for less than a quarter.12 Focus on Improving Productivity Intense competition has driven corporate managements in both nations to heightened efforts to increase productivity, match R&D to market needs, shorten product cycles, and seek to identify and optimize each firm's competitive advantage. The resulting constraints on investment call for a strict reprioritization of resources. One approach is a focus on the core competence of the company.13 Rather than view the company as a portfolio of businesses, the core competence approach seeks to establish business advantage by exploiting company capabilities that are used in more than one business, deliver value to the customer, and are difficult to duplicate. Examples of core competence strategy include NEC's concentration on communications and computing technology, 3M's capability in adhesives and overall new product development, Xerox's
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capability in developing and manufacturing machinery to move paper, and Sony's focus on miniaturization in new product innovation.14 Role of Knowledge The role of knowledge in value creation is becoming increasingly important and is giving rise to new ways of looking at the relationship between physical and intellectual capabilities as exemplified in the theory of innovation-mediated production discussed later in Chapter 5.15 It is also causing companies to look more closely at the kinds of knowledge actually being applied at various levels within the company. For example, companies are becoming increasingly aware of the importance of tacit knowledge—largely unspoken, unwritten, and often unrecognized knowledge and skills necessary to get the job done—as exemplified by Xerox's focus on communities of practice, a term which refers to slowly evolved often unstructured networks of people who get things done within the company. Priority Setting While firms are pursuing more productive approaches to innovation through prioritization and focus on critical capabilities, and often use the same phrases to describe it, it is not clear that each is addressing priority setting in the same way. Indeed, case studies suggest that such technology strategies will depend on the business model adopted by each firm.16 Therefore, it is uncertain how truly these concepts are influencing the way firms invest in and outsource R&D. When prioritization on core business activities leads to a narrowing scope of investment, which it surely does when overall expenditures are sharply reduced, it follows that requirements for innovations no longer addressed within the core investments must be outsourced. Other firms that are not reducing their overall level of expenditure and investment may also be deliberately reducing the scope of R&D in order to assure a strongly competitive technological position in their core technologies. Others may be focusing resources more sharply on diversification to meet competitive challenges from outside their historic competitor group. All of these strategies may lead to increased outsourcing of innovation. Globalization of Innovation The globalization of innovation has grown substantially over the past decade or so. And, while companies continue to do the lion's share of their research and development at home, they are rapidly expanding their global innovation efforts. Research indicates that roughly 15 percent of all U.S. patents are granted to foreign inventors. 17 It has also been found that the number of cross-national patents (that is, patents granted to inventors in two or more countries), while relatively small, is growing at a rapid rate. Furthermore, the United States is at the cutting edge of the shift toward global innovation. Table 3-2 shows off-shore R&D performed by U.S.-based companies. U.S. corporations spend roughly 10 percent of their total R&D expenditures on offshore facilities, and about 10 percent of all U.S. industrial R&D expenditures are provided by foreign-affiliated laboratories operating within the United States.18 While Japanese companies are rapidly increasing their offshore R&D spending in the United States, Europe and Asia, Japan itself has had a relatively low level of foreign-owned R&D facilities.19 There are indications that foreign-owned corporate R&D activity in Japan is increasing. 20
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TABLE 3-2 Company-financed R&D Performed Outside the United States by U.S. Companies and Their Foreign Subsidiaries, 1986-1996, million dollars Industry 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Total 4,624 5,226 6,208 6,706 7,952 9,147 10,063 9,565 9,395 13,052 14,050 Food, kindred, and tobacco products 69 37 27 42 41 66 88 112 117 142 155 Chemicals and allied products 1,071 1,243 1,548 1,532 2,007 2,401 2,676 2,833 2,456 4,194 3,801 Petroleum refining and extraction 40 47 59 47 76 107 119 104 111 76 78 Stone, clay, and glass products a a a a 59 38 41 38 27 31 32 Primary metals a 18 23 24 26 20 18 12 15 26 29 Fabricated metal products 26 40 a a 95 86 109 119 125 111 133 Machinery 951 1,233 1,326 1,432 1,451 1,476 1,439 340 308 501 1,404 Electrical equipment a 432 591 573 770 651 586 525 495 872 959 Transportation equipment a a 1,750 1,916 2,055 2,402 a a a a a Professional and scientific equipment 212 317 404 474 611 656 685 751 900 988 960 Other manufacturing industriesb 141 138 178 269 344 467 524 a 572 a a Nonmanufacturing industriesb 27 64 146 256 415 778 835 1,770 1,500 2,206 2,510 a Data have been withheld to avoid disclosing operations of individual companies. b Beginning in 1996 manufacturing companies with fewer than 50 employees and nonmanufacturing with fewer than 15 employees were sampled separately without regard to industry classification to minimize year-to-year variation in survey estimates. Estimates for manufacturing companies in this group are combined with those for companies in "Other manufacturing industries." Estimate for nonmanufacturing companies in this group are combined with those for companies in "Nonmanufacturing industries." As a result, statistics for "Other manufacturing industries" and "Nonmanufacturing industries" for 1996 are not comparable with statistics for prior years. NOTES: Data are reported in current U.S. dollars. As a result of a new sample design, statistics for 1988-1991 have been revised since originally published. These statistics now better reflect R&D performance among firms in the nonmanufacturing industries and small firms in all industries. As a result of the new sample design, statistics for 1991 and later years are not directly comparable with statistics for 1990 and earlier years. SOURCE: National Science Foundation, Division of Science Resources Studies, Survey of Industrial Research and Development: 1996.
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Driven by exchange rate shifts as well as by globalizing markets, Japanese firms are diversifying. their manufacturing abroad and are becoming increasingly multinational in production as well as in sales. For example, Aiwa transferred 78 percent of its production to Singapore and other overseas units, mostly in Asia; and Sony plans to raise its overseas production ratio to 45 percent.21 Direct investment overseas by Japanese corporations rose 5.5 percent in fiscal 1993 to $36 billion due to the shift to offshore production. Also, in 1993, the number of Japanese cars made in the United States surpassed the number of Japanese cars shipped from Japan to the United States. 22 In a sample of eight consumer products, from color TVs and video decks to refrigerators and washing machines, the number of products in which overseas production exceeded production in Japan went from one in 1985 to three in 1990 and five in 1993.23 In the electronics industry, the overseas employment as a percentage of total industry employment rose from 29 percent in 1991 to 41 percent in 1995.24 Some studies show that although economic activity has been globalizing, the globalization of R&D activity has not progressed as much as have other corporate activities such as manufacturing. Corporate R&D activity is still primarily home based.25 This implies a need to look at the globalization of R&D activity in terms of "economy of scope" rather than economy of scale. Doing research overseas rather than in one central location may enable firms to achieve economies of scope by allowing R&D in more fields and by placing laboratories near customers and sources of technology for those customers. In this context, the trade metaphor which is based on economies of scale might not be appropriate. Major Japanese electronics, automotive and biotechnology companies have moved rapidly in the past ten years to globalize their research and development capabilities in concert with the globalization of their economic activities.26 According to one report, Japanese corporate R&D facilities in the United States increased from slightly over 20 in 1985 to approximately 225 in 1994.27 This trend in some ways resembles the globalization of R&D followed by U.S.-based companies such as IBM and Xerox. However, the data also indicate that whereas the number of Japanese R&D facilities abroad is high compared to the U.S. R&D facilities of companies based in other countries (Figure 3-1), Japan-based companies spend less on R&D in the United States than companies based in several other countries, implying lower spending per facility (Figure 3-2). What this means is unclear. Some have contended that Japan's foreign R&D facilities are primarily listening posts to grab technology and talent. Others, however, have pointed out that Japan's foreign R&D is primarily in industries such as electronics and automobiles in which Japan is a technological leader and that the net flow of technology is likely toward the host country.28 The disparity between the number of Japanese-owned U.S. R&D facilities and their spending levels compared with other foreign owners may be due to the relatively shorter history of the Japanese facilities or strategic differences in terms of a closer linkage to production of the non-Japanese foreign-owned R&D facilities. Indeed, one report indicates that Japanese-owned R&D is trending toward higher spending per facility.29 In addition, it should be noted that the question of how much foreign R&D has helped Japanese companies has not been studied extensively to date. Joint Initiatives in Manufacturing and Product Development Effects of the above-mentioned changes can be witnessed through the joint initiatives in manufacturing and product development that emerged in the mid-1990s. Driven by intense competition, globalization of markets, and the intensifying demands of innovation, hitherto unlikely alliances were formed by major electronics firms in Japan, the United States and
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Figure 3-1 Number of foreign-affiliated R&D facilities in the United States by country of origin. SOURCE: Richard Florida, International R&D Affiliate Database, Center for Economic Development, Carnegie Mellon University, April 1994. Figure 3-2 Foreign R&D expenditures in the United States by country, 1995. NOTE: Includes foreign direct investments of nonband U.S. affiliates with 10 percent or more foreign ownership. Excludes expenditures for R&D conducted for others under contract. SOURCE: National Science Board, Science and Engineering Indicators 1998.
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Europe. For example, in 1995 Hitachi and Texas Instruments teamed up to build a factory in Richardson, Texas to manufacture first 16Mb and later 64Mb DRAMS.30 The venture, TwinStar Semiconductor, began operations in 1996. At about the same time, Motorola, IBM, Siemens and Toshiba announced an alliance to develop future generations of chips, such as the 1Gb DRAM. The alliance was built on the separate relationships in 16Mb DRAM manufacturing by Toshiba and Motorola (in Japan) and by IBM and Siemens.31 Also at about the same time, Toshiba and IBM announced their plans to establish a joint venture for the manufacture of 64Mb DRAMS in Manassas, Virginia.32 A similarly tradition-breaking development was the agreement by Hitachi to buy IBM's S/390 mainframe CMOS, Power, and PowerPC microprocessors for Hitachi computers. This was the first time that IBM had sold these microprocessors to other companies; and it is evidence of the difficulty which Hitachi had with its own microprocessor development strategy, and perhaps IBM's need to gain more value from its mainframe technology investment.33 Similarly, Toshiba, in a departure from its previous policy of keeping the manufacture of semiconductors inside Japan, licensed its 0.5 micron CMOS chips to Singapore's Chartered Semiconductor Manufacturing Ltd. due in part to the cheaper costs of production in Singapore.34 However, the same trends that led to these new initiatives have also made their survival difficult. Successful innovation which has lead to greater memory capacity of DRAMS; increased supply due to entry into the DRAM market by newcomers to IC production in countries like Korea, Taiwan and others; and the slump in demand due to Asian financial troubles among others have led to a glut in the DRAM market. This state has also been exacerbated by the emergence of DRAM alternatives like flash memory cards. According to Dataquest, demand is not expected to catch up to supply until 2001.35 As a result, Hitachi and TI have decided to end their joint venture, with TI buying out Hitachi's share of TwinStar Semiconductor.36 Furthermore, TI has decided to sell its remaining memory business—including the Richardson operation—to Micron Technology Inc. in order to focus on digital signal processing solutions and analog semiconductors.37 In a similar move, Motorola has decided to exit the DRAM business, but it will continue its manufacturing joint ventures with Toshiba in Japan, switching the production capability over to logic products.38 Meanwhile, Toshiba is balking at continued development of the 1Gb DRAM with Siemens and IBM due to Toshiba's desire to focus on stacked-capacitor memory while IBM and Siemens are backing trench capacitor cell technology.39 Issues Raised by Globalization Globalization of the world economy and corporate technology development raises important policy questions for the United States and Japan, which have been widely debated in recent years.40 On one side are those who believe that governments should embrace, not restrict cooperative technology development with foreign companies and governments and on the other those who believe that policies of openness that ignore reciprocity concerns are ideologically driven and ignore the enduring importance of national interest.41 The former emphasize the strong trend toward global technological and economic integration, the global spread of innovative activity, and growing technological cooperation among private firms. They believe that restrictive measures threaten to cut off a critical source of innovation, productivity improvement, and economic growth, namely the influx of
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manufacturing and technological investments from abroad. They point out that the total value of goods and services resulting from foreign investment had reached $6 trillion by 1995, whereas the same figure for trade is $4 trillion, with one-third of that taking place between affiliates of businesses located in different countries.42 Consequently, they view restrictive approaches as potentially dangerous ways of addressing these important changes in the global economy.43 On the other side are those who stress the possible risks faced by countries with relatively accessible systems of research and innovation in interacting with systems where capability is less accessible, and who point out that national and corporate interests may sometimes diverge. They believe that doctrines advocating free trade and open markets are neither practiced nor taken seriously in most of the world and that as long as different systems of capitalism exist, countries will need to pursue activist government policies.44 Changes in Government's Role Both in Japan and in the United States, the role of government in R&D and innovation has been much discussed in recent years. In Japan, the most significant recent policy changes have been aimed at expanding the government's role in funding long-term fundamental research, and enhancing the scale and quality of graduate science and engineering education. For some years, experts inside and outside Japan have pointed out that Japan has lagged in funding basic research in open settings.45 The Science and Technology Basic Law was passed in 1995, and the Science and Technology Basic Plan was adopted in 1996.46 At the same time, the Japanese government announced ambitious goals for increased funding, but it is unclear whether these goals will be met in light of Japan's continued economic difficulties. Other changes have been made to encourage venture business interactions with academia and wider agency support for academic research. For instance, MITI established the Office for Promotion of Academia-Industry Cooperation within the Ministry's Industrial Policy Bureau, and MITI and Monbusho have jointly drafted legislation that went into effect in August 1998 for the promotion of the transfer of research outcomes at universities to the private sector.47 A second aspect of Japanese policy discussion involves calls to ease regulations and otherwise reduce government's role in the overall economy. The Japanese government, in particular the Ministry of International Trade and Industry (MITI) has played an important role in Japan's technological and industrial development. Several members of the task force have pointed out that government's influence has declined significantly over the years.48 At the same time, the central government in Japan continues to play a different and more direct role with respect to industrial and technology policy than it does in the United States. MITI still performs a coordinating role with respect to industrial policy where market mechanisms alone appear insufficient. For example, with 70 percent financing from MITI, NEC, Matsushita, Sony, Ascii, Toshiba, Fujitsu, and Hitachi, through the Japan Key Technology Center, have agreed to jointly develop the system technologies central to multimedia, including standards needed for new products.49 MITI also established a committee to examine the current problems facing Japan in the development of science and technology and to report on how to improve government policies in that area.50 Furthermore, in addition to MITI, there are other government agencies which influence the actions of the private sector. In this regard, some observers have pointed out that the Ministry of Finance (MOF), referred to as "the Ministry of Ministries," deserves more study in that it ultimately controls the purse strings of all the other
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ministries, including MITI. This is summed up in the familiar phrase "MITI proposes, and the MOF disposes."51 In the United States, any description of government policy is greatly complicated by differences in philosophy over the appropriate federal government role in national research and development activities, differences which have sharpened in recent years with the end of the Cold War and increased pressure to balance the federal budget. For example, in the aftermath of the November 1994 elections, federal programs supporting the development and diffusion of generic or precompetitive commercial technology have come under attack. A number of federal initiatives in this area were launched during the Reagan and Bush administrations, and funding support grew rapidly in the first few years of the Clinton administration. To some, this restraint or scaling back of federal civilian technology programs signalled a return to the traditional U.S. policy of caution in economic intervention and S&T policies that emphasize the support of basic science and mission-oriented technological developments in defense and public health.52 However, the 105th Congress has seen a substantial reduction in the conflict over industrial policy, as both Democrats and Republicans in the political center have accepted the concept of public-private partnerships in R&D with certain policy safeguards.53 One of the main differences between the currently emerging policy and that of the past is that there is no longer a consensus on the role of government in such areas as energy and space, and even in defense the long-term trend has been toward shrinking budgets despite recent relative increases. For some time, experts have noted a decline in commercial spin-offs from government mission-oriented R&D, particularly in defense.54 Consequently, there is no longer any theoretical or financial basis to expect much technological spin-off from the government to the private sector. Instead the policy has shifted to a concern for "spin-on," as defense agencies seek to use commercial products and technologies in military applications. In conclusion, it is clear that in responding to global developments, U.S. and Japanese companies are adopting and adapting each other's approaches. To that extent, it can be said that they are converging in their approaches. However, some movement toward convergence in approaches does not mean that the U.S. and Japanese environments for innovation are the same, and problem convergence itself is not premised on U.S. and Japanese top managements or policymakers sharing the same core beliefs. As long as differences remain in the basic relationships between manufacturers and suppliers in Japan and the United States, in their respective business networks abroad, and in the structure of their R&D systems, areas of convergence should be considered in balance with continuing differences in formulating innovation strategy. Therefore, the caution expressed in a 1990 National Research Council report is still valid today: It is highly unlikely, given vastly different historical backgrounds and the different industrial bases which Japan and the United States are building, that there will soon be a homogenization of the patterns of R&D within industrial firms in the two countries. But in an age of increasing competition both in technology development and market position, firms on both sides of the Pacific are finding it necessary to learn from each other's strengths.55 Notes and References 1 Branscomb and Kodama, op. cit., p. 2.
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2 For a comprehensive discussion of Japan's technological capabilities see Thomas S. Arrison, et al., eds., Japan's Growing Technological Capability: Implications for the U.S. Economy (Washington, D.C.: National Academy Press, 1992). 3 The strong yen has helped this effect, but it is not solely responsible. 4 For fiscal 1996, 54.7 percent of U.S. federal R&D was defense-related, with the comparable figure for Japan being 6.2 percent. See National Science Board, Science and Engineering Indicators 1998 (Arlington, Va.: National Science Foundation, 1998). 5 John Cantwell, "The Globalisation of Technology: What Remains of the Product Cycle Model?", Cambridge Journal of Economics 1995, 155-174. 6 Use of the term technological parity to compare the United States and Japan raises questions as to what is meant by technology. Indeed, many would agree that the United States generally has the most advanced technology in most fields. Here the task force refers to technology as a means to commercial ends. Therefore, it includes both the technical knowledge and the tools, skills and management structure—plus imbedded knowledge—that permit innovations to be accomplished. The best evidence for technological standing is to look at the sophistication and competitiveness of products. They are not the technology, but rather the products of technology. 7 See Richard Florida and Martin Kenney, "The Breakthrough Illusion," and idem., "Venture Capital-Financed Innovation and Technological Change in the USA," Research Policy 17, (1988), pp. 119-137. 8 Discussions of cost of capital and cost of funds containing frequent comparisons of the United States and Japan can be found in National Research Council, Investing for Productivity and Prosperity (Washington, D.C.: National Academy Press, 1994); Thomas R. Howell et al., Creating Advantage: Semiconductors and Government Industrial Policy in the 1990s, (Semiconductor Industry Association, 1992), especially Chapter III C. "Capital," pp. 181-200; and National Academy of Engineering, Time Horizons and Technology Investments (Washington, D.C.: National Academy Press, 1992), especially Chapter 4 "Time Horizons and Cost of Capital," pp. 43-58, and Appendix A: Joseph Morone and Albert Paulson, "Cost of Capital—The Managerial Perspective," pp. 79-104. 9 See W. Carl Kester and Timothy A. Luehrman, "The Myth of Japan's Low-Cost Capital," Harvard Business Review, May-June 1992, pp. 130-138. 10 Richard Rosenbloom and William Spencer, Engines of Innovation: U.S. Industrial Research at the End of an Era (Boston, Mass.: Harvard Business School Press, 1996). 11 Roberts, op. cit., pp. 8-9. 12 Source: Marvin Garfinkel, "The GE R&D Center: Structure and Strategy," from presentation made at the meeting of the United States-Japan Joint Task Force on Corporate Innovation, Makuhari, Japan, September 11-13, 1994. 13 See C.K. Prahalad and Gary Hamel, "The Core Competence of the Corporation," Harvard Business Review, May-June 1990, pp. 79-91. 14 Ibid. Several of the examples cited here were discussed in the article, while others are drawn from task force discussions. 15 See also Peter F. Drucker, Post-Capitalist Society. (New York: Harper Business, 1994), and Ikujiro Nonaka and Hirotaka Takeuchi, The Knowledge-creating Company: How Japanese Companies Create the Dynamics of Innovation. (New York: Oxford University Press, 1995). 16 See Branscomb and Kodama, op. cit., pp. 38-53 for a discussion of the business models employed by a number of leading Japanese firms. 17 See Pari Patel and Keith Pavitt, "Large Finns in the Production of the World's Technology: An Important Case of Non-Globalization," International Business Studies 1, 1991. 18 National Science. Board, Science and Engineering Indicators 1998 (Washington, D.C.: U.S. Government Printing Office, 1998), and National Science Foundation statistics on U.S. industrial R&D for 1996. 19 The member countries of the Organization for Economic Cooperation and Development display a wide disparity in the proportion of R&D performed by foreign-based companies, with Japan by far the lowest of the group. The figure for the United States in 1995 was 11.3 percent, for the United Kingdom 19 percent,
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for Germany 1.9 percent (1996), for Italy 5.4 percent (1996), for France 11.2 percent (1994), for Canada 17 percent (1996) and for Japan 0.1 percent. Ibid. 20 Although a number of U.S. companies have long maintained R&D facilities in Japan. See Donald Dalton and Manuel Serapio, Globalizing Industrial Research and Development (Washington, D.C.: U.S. Department of Commerce, 1995). 21 "Overseas Shift of Production Key to Bullish Results," Journal of Japanese Trade and Industry No. 4, 1994, p. 6. 22 Tohru Hirose, "Hollowing out: Can new growth replace Japan's pruned industries?," Nikkei Weekly, January 16, 1995, p. 8. 23 MITI, Major Reforms in Japanese Research and Development, Research Institute of International Trade and Industry, 1996, p. 138. 24 Electronic Industries Association of Japan, data release April 1998. 25 "Unlike other principal activities of MNEs [multinational enterprises], research and technology development tends to be concentrated in the country of national origin," and "...the available evidence suggests that ...[Japanese and European corporations] conduct similar if not smaller percentages of their R&D overseas than do U.S. firms." U.S. Congress, Office of Technology Assessment, Multinationals and the U.S. Technology Base, OTA-ITE-612 (Washington, DC: U.S. Government Printing Office, September 1994), p. 2. See also Edward B. Roberts, op. cit., p. 55, Figure 13: Internal Sources are Still Primary for Both Research and Development [includes U.S. and Japanese companies]; and D. Hicks et al., op. cit. 26 See Richard Florida and Martin Kenney, "The Globalization of Japanese Innovation: The Economic Geography of Japanese R&D in the United States" Economic Geography (October 1994), 70,4:344-69. See also Dalton and Serapio, op. cit. Japanese corporations spent $1.8 billion on U.S.-based R&D in 1993 up from $307 million in 1987. 27 Dalton and Serapio, op. cit. One committee member cautioned that surveys may tend to overcount the number of facilities. 28 For a discussion of these various viewpoints see Florida, ibid., pp. 8-9. 29 Dalton and Serapio, op. tit. 30 Loring Wirbal and Yoshiko Hara, "Hitachi, TI plan U.S. DRAM fab," Electronic Engineering Times, August 8, 1994, n809, p. 1. 31 Ken Phillips," Motorola to Join Alliance of IBM, Siemens and Toshiba to Develop Advanced Memory Chips," Motorola Press Release, October 25, 1995 32 IBM Press Release, "Toshiba and IBM to Set Up U.S. Manufacturing Joint Venture for Next-Generation Semiconductor Memory Products," August 8, 1995. 33 Yoshiko Hara, "Hitachi turns to IBM, eyes PowerPC," Electronic Engineering Times, May 2, 1994, n795, p. 14. 34 David Lammars, "Toshiba in chartered CMOS pact," Electronic Engineering Times, Nov. 7, 1994, n822, p. 1. 35 Terho Uimonen, "DRAM Demand to Match Supply First in 2001, Dataquest Says," InfoWorld Electric, April 24, 1998. 36 Mark Ferranti, "Hitachi, TI End DRAM Chip Venture," InfoWorld Electric, February 9, 1998. 37 Business Wire, "Micron Completes Acquisition of TI's Memory Business," October 1, 1998. 38 Rebecca Sykes, "Motorola Drops DRAM Business," IDG News Service, Boston Bureau, July 1, 1997. 39 Ron Wilson, "Toshiba Splits with Moto, Siemens On 1-Gigabit DRAM," EE Times, January 21, 1998. 40 For contrasting views of this issue, see Richard Florida, "Technology Policy for a Global Economy," Issues in Science and Technology. Spring 1995, pp. 49-56; and the reply by Alan Tonelson, "The Perils of Techno-Globalism," Issues in Science and Technology. Summer 1995, pp. 31-38. These issues are the central themes in Sylvia Ostry and Richard R. Nelson, Techno-Nationalism and Techno-Globalism Conflict and Cooperation. (Washington, D.C.: The Brookings Institution, 1995). 41 The terms techno-globalist and techno-nationalist are frequently used to describe these two positions and their adherents. While these terms are handy and have their usefulness in debate, they also tend to
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push complex issues and viewpoints into opposing ideological camps rendering subsequent discussion more polemical than enlightening. Therefore, the task force has chosen not to employ such terms. 42 Florida, ibid., p. 50. 43 Ibid. 44 Tonelson, op. cit. 45 Jean M. Johnson, The Science and Technology Resources of Japan: A Comparison with the United States (Arlington, Va.: National Science Foundation, 1997), p. 1. 46 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. 47 Masahiro Hashimoto, "Desirable Form of Academia-Industry Cooperation," Journal of Japanese Trade and Industry, No. 2, 1998. 48 Michiyuki Uenohara has pointed out that although the Japanese government (MITI) protected the infant computer industry in the early stages, since the 1970s it has not provided a substantial amount of subsidies. From Michiyuki Uenohara, "Relevance of Government-Sponsored Corporate R&D Projects to Large Japanese Corporations," a presentation at the bilateral meeting of the U.S.-Japan Corporate Innovation Task Force, Makuhari, Japan, September 11-13, 1994. See also Branscomb and Kodama, op. cit., p. 4. On the other hand, the Japanese government has provided loans at very low rates to encourage new technologies and business alliances through such avenues as the Japan Key Technology Center which is funded through dividends derived from government-owned shares in Nippon Telegraph and Telephone Company (NTT) funneled through the Ministries of Posts and Telecommunications and International Trade and Industry. These funds, which are substantial, are not included in Japanese government budget figures. Also, the Japanese government has provided in-kind services to industry. For example, for years NTT designed the prototypes that later became the products of Hitachi, Fujitsu, and others. 49 See Nihon Keizai Shimbun (American Edition), "Kan-min Kyodo Kaihatsu e Shinkaisha," (New company for public-private joint development), January 14, 1995, p. 1. 50 The report paints a sobering picture of Japanese innovation. See Sangyo Kozo Shingikai Sogo Bukai Sangyo Gijutsu Shoiinkai (Industrial Structure Advisory Committee, Industrial Technology Subcommittee) and Sangyo Gijutsu Shingikai Sogo Bukai Kikaku Iinkai (Industrial Technology Advisory Committee, Planning Subcommittee), Kagaku Gijutsu Sozo Rikkoku e no Michi o Kirihiraku: Shiteki Shisan no Sozo, Katsuyo ni Mukete, (Clearing a Path Toward a Nation Based on Creative Science and Technology; Toward Creating and Utilizing Intellectual Assets), June 1995. 51 See Eamonn Fingleton, "Japan's Invisible Leviathan," Foreign Affairs , Volume 74, No. 2, March/April 1995, pp. 69-85. 52 The Clinton Administration's policy of encouraging greater government-industry cooperation and its intention to devote considerably more federal resources to pre-competitive projects of commercial relevance was first announced in William J. Clinton and Albert Gore, Technology for America's Economic Growth, A New Direction to Build Economic Strength, February 22, 1993. 53 Branscomb and Keller, op. cit. 54 John A. Alic, Lewis M. Branscomb, Harvey Brooks, Ashton B. Carter, and Gerald L. Epstein, Beyond Spinoff: Military and Commercial Technologies in a Changing World (Cambridge, Mass.: Harvard University Press, 1992). 55 National Research Council, Learning the R&D System: Industrial R&D in Japan and the United States, op. cit., p. 13.
Representative terms from entire chapter: