5
Theory and Practice: Developing New Frameworks for Analyzing Systems of Innovation

A number of frameworks have been developed by U.S. and Japanese scholars in recent years in order to improve analysis and understanding of systems of innovation, with implications for individual firms, industries and nations. This chapter addresses several major issues and questions concerning frameworks for research on innovation that are also central to the work of the Joint Task Force.

One area of interest is the concept of national systems of innovation. 1 Are systems of innovation sufficiently different from one country to another and internally coherent to justify the use of the term? If so, what are the appropriate models for evaluating them?2 In what areas are national systems converging or diverging in their essential elements? Another trend has been the increasing focus on the importance of demand aspects of R&D and technology in driving innovation forward. These efforts are aimed at understanding phenomena that are difficult to account for utilizing frameworks that emphasize the supply aspects of national R&D systems. In addition, the trend toward increasing globalization of innovation-related activities, discussed in Chapter 3, has also attracted interest from scholars.

Although the literature in this area is too extensive to review thoroughly in a report of this type, the Joint Task Force discussions highlighted several approaches to the analysis of innovation of particular relevance to the U.S.-Japan dialogue. The Joint Task Force also discussed the issue of whether currently available data are adequate for international comparisons of R&D inputs and outputs, focusing on the United States and Japan. This chapter introduces key methodologies that figured prominently in the discussions.

Demand Articulation

One framework for comprehending the demand aspect of R&D is demand articulation, in which product development challenges at the component and systems levels are addressed in an integrated manner.3 Industry practitioners and academic experts on innovation have long observed the key role played by the demand side in the successful development of new technologies and implementation in specific products.4 Demand articulation represents an attempt to systematize these insights into a comprehensive model.

Demand articulation encompasses straightforward market research at the firm level, mission-oriented science and technology policy approaches at the national level, and the dynamic interaction between market needs, institutional capabilities, and technology development. Several of its key features are best understood by examining specific examples. One important historical case is the impact that shifts in U.S. strategic defense policies had on technology development in the 1950s and 1960s. 5 The shift from a strategic stance emphasizing "massive



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5 Theory and Practice: Developing New Frameworks for Analyzing Systems of Innovation A number of frameworks have been developed by U.S. and Japanese scholars in recent years in order to improve analysis and understanding of systems of innovation, with implications for individual firms, industries and nations. This chapter addresses several major issues and questions concerning frameworks for research on innovation that are also central to the work of the Joint Task Force. One area of interest is the concept of national systems of innovation. 1 Are systems of innovation sufficiently different from one country to another and internally coherent to justify the use of the term? If so, what are the appropriate models for evaluating them?2 In what areas are national systems converging or diverging in their essential elements? Another trend has been the increasing focus on the importance of demand aspects of R&D and technology in driving innovation forward. These efforts are aimed at understanding phenomena that are difficult to account for utilizing frameworks that emphasize the supply aspects of national R&D systems. In addition, the trend toward increasing globalization of innovation-related activities, discussed in Chapter 3, has also attracted interest from scholars. Although the literature in this area is too extensive to review thoroughly in a report of this type, the Joint Task Force discussions highlighted several approaches to the analysis of innovation of particular relevance to the U.S.-Japan dialogue. The Joint Task Force also discussed the issue of whether currently available data are adequate for international comparisons of R&D inputs and outputs, focusing on the United States and Japan. This chapter introduces key methodologies that figured prominently in the discussions. Demand Articulation One framework for comprehending the demand aspect of R&D is demand articulation, in which product development challenges at the component and systems levels are addressed in an integrated manner.3 Industry practitioners and academic experts on innovation have long observed the key role played by the demand side in the successful development of new technologies and implementation in specific products.4 Demand articulation represents an attempt to systematize these insights into a comprehensive model. Demand articulation encompasses straightforward market research at the firm level, mission-oriented science and technology policy approaches at the national level, and the dynamic interaction between market needs, institutional capabilities, and technology development. Several of its key features are best understood by examining specific examples. One important historical case is the impact that shifts in U.S. strategic defense policies had on technology development in the 1950s and 1960s. 5 The shift from a strategic stance emphasizing "massive

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retaliation" in the Eisenhower Administration to the Kennedy Administration's goal of achieving capabilities for "flexible response" put a premium on precision delivery of nuclear weapons, and highly survivable systems, including missiles and command and control systems. The resulting "articulated demand" for miniaturization and reliability in missile control systems went beyond what was possible using vacuum tubes or transistors, the available technologies at the time. Although they did not receive direct government funding for their work, Texas Instruments and Fairchild responded to this military demand in developing the first integrated circuits. In addition to the development of national-level technology agendas and constituent needs, demand articulation also involves the less formalized process of market-led improvement and adaptation of existing technologies. RCA first demonstrated prototype display systems using liquid crystals in the late 1960s, but the technology was not a practical alternative to the cathode ray tube in home television applications. However, for Sharp Corporation of Japan, one of the leading manufacturers of electronic calculators, liquid crystal displays (LCDs) had important advantages, chiefly lower power consumption.6 In adopting LCDs in its calculators Sharp not only achieved effective demand articulation for the technology, but subsequently became the technology and market leader in LCDs. During the 1970s and 1980s, Sharp and other Japanese companies made a number of improvements in LCDs, and they are now a widely used high value added component of portable electronic products such as laptop computers. The demand articulation framework includes both the sources of the drive for new technology and its diffusion and adaptation. It emphasizes the integration of the pieces of the system, both institutions and markets, and does not assume that any one initiative triggers innovation. By emphasizing the importance of developing R&D agendas in response to demands articulated by markets or policymakers, the concept highlights one of the main strengths of Japanese corporate innovation practice. As pointed out in a recent survey, European and American corporate executives, like their Japanese counterparts, are giving much more emphasis to this aspect of innovation.7 Changes in the business and technological environment and corporate responses in areas such as outsourcing will influence how the concept of demand articulation is seen in the future. Indicators of Japanese and U.S. Technology Resources and Assets Comparisons of Japanese and U.S. technology resources and assets are frustrated by the absence of defensible means for converting data on R&D investments in different countries to a common base. Comparisons of U.S. and Japanese R&D investments are strikingly different, depending on whether one uses market exchange rates (MER) (which depend on foreign trade, while most R&D is domestic) or GDP-based purchasing power parity (PPP) (which depends on consumer costs). Thus, when measured by MER, the U.S.-Japan gap in R&D spending is largely closed, but not in PPP (see Figure 5-1). Neither method, moreover, properly reflects the collection of costs inherent in performing R&D. Although the development of R&D cost deflators for various countries could partly address this problem, this effort is unlikely to be taken up any time soon by government statistical agencies or the relevant international

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Figure 5-1 U.S. vs. Japan R&D, purchasing power parity vs. market exchange rates. NOTE: Data are in current U.S. dollars.  SOURCE: Organization for Economic Cooperation and Development, Main Science and Technology Indicators, 1996. organizations such as the United Nations and the Organization for Economic Cooperation and Development (OECD). Until better indicators are developed, the Joint Task Force believes that comparisons of R&D resources will be more useful if side-by-side reporting of MER and PPP figures becomes standard practice. Corporate Technology Stock Model One possible method of placing financial value on R&D activities is to treat R&D as an investment rather than an expense.8 One approach to this is the corporate technology stock model. It requires knowledge of depreciation times and quantified risk factors. If such a system could be developed and accepted by the accounting profession it might make business judgments about R&D investment more consistent with the economists' computation of private returns from R&D. However, it might also have a less desirable effect if taxation authorities used this method to require firms to capitalize R&D rather than expense it. At present, no companies in Japan or in the United States are known to be employing this method, except in the case of U.S. firms which, under special rules, are allowed to capitalize all or some of their software development efforts.

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Innovation-Mediated Production and the Role of Knowledge One possible framework for comprehending the emerging patterns in the process of the globalization of innovation is the concept of innovation-mediated production, which highlights the increasing role of knowledge and ideas as a source of value across the production chain from the R&D laboratory to the factory floor.9 This model for post-mass production industry has five key aspects: (1) a shift in the main source of value creation from physical labor to intellectual capabilities, (2) the increasing importance of collective intelligence as opposed to individual knowledge, (3) accelerated technological innovation, (4) the increasing importance of continuous improvement at the point of production, and (5) the blurring of the lines between the R&D laboratory and the factory. The Toyota Production System, which is based on continuous improvement and the active participation by workers in problem-solving, is an example of the new paradigm. Others have advanced concepts of the knowledge-based economy and the knowledge-creating company to capture aspects of this transformation. 10 This shift to innovation-mediated production and knowledge-based economic activity can be clearly seen in the globalizing patterns of Japanese companies.11 These shifts have important implications. On the one hand, on an international scale, there is the growing decentralization of R&D activity, referred to as global localization, to support global production operations and harness off-shore sources of knowledge and ideas. On the other hand, on a regional scale, knowledge is often concentrated in regional networks or complexes of human talent and expertise. Notes and References 1   Nelson, op. cit. 2   Lynn, op. cit., observes that most writing on Japanese innovation by both Japanese and foreign scholars has been more concerned about what is good or bad about the system than with accurate descriptions. Also, evidence linking some attribute to a Japanese national innovation system is more often a result of deduction rather than of demonstrated causal relationships. Often such deductive reasoning leads to opposite conclusions depending on the evidence cited. He calls for developing a theoretical framework to understand Japan's system of innovation. 3   According to the more formal definition, demand articulation is "a dynamic interaction of technological activities that involves integrating potential demands into a product concept and decomposing this product concept into development agendas for its individual component technologies." Fumio Kodama, "National System of Demand Articulation and its International Implications," a presentation made at the bilateral meeting of the Task Force on Corporate Innovation, Makuhari, Japan, September 12-13, 1994. A fuller discussion of demand articulation may be found in Fumio Kodama, Emerging Patterns of Innovation: Sources of Japan's Technological Edge (Boston, Massachusetts: Harvard Business School Press, 1995). 4   For example, see Eric A. von Hippel, "Has a Customer Already Developed Your Next Product?" in Edward B. Roberts, ed., Generating Technological Innovation (New York: Oxford University Press, 1987). 5   OECD, "Case Study of Electronics with Particular Reference to the Semiconductor Industry, Joint Working Paper of the Committee for Science and Technological Policy and the Industry Committee on Technology and the Structural Adaptation of Industry, Pads, 1977, pp. 133-163. 6   Fumio Kodama, Analyzing Japanese High Technologies (London: Pinter Publishers, 1991).

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7   Edward B. Roberts, "Benchmarking the Strategic Management Of Technology, Part 2," Research-Technology Management, March-April 1995, p. 19. In his recent book, Emerging Patterns of Innovation: Sources of Japan's Technological Edge (1995), Professor Kodama provides a detailed account of his theory of demand articulation. He addresses questions as to how it differs from technology-push vs. demand-pull analysis and how it can be used as an analytical tool. 8   This concept was described by Sei-ichi Takayanagi at the meeting of the U.S.-Japan Corporate Innovation Task Force (September 11-13, 1994) in a paper entitled Corporate Technology Stock Model: Determining the Corporate R&D Expenditure and Restructuring R&D Organization. This paper was based on Dr. Takayanagi's original publication "Research and Development Reviewed from the Viewpoint of Assets" (in Japanese) from the keynote speech of the Proceedings of the Symposium of the Japan Society for Science Policy and Research Management, June 4, 1993, pp. 3-6. Also, the Bureau of Economic Analysis of the Department of Commerce has created a test account which treats R&D as an investment. See Department of Commerce, "A Satellite Account for Research and Development," Survey of Current Business, November 1994, pp. 37-71. 9   Martin Kenney and Richard Florida, Beyond Mass Production: The Japanese System and Its Transfer to the United States (N.Y.: Oxford University Press, 1993) 10   Peter F. Drucker, op. cit. and Nonaka and Takeuchi, op. cit. 11   Richard Florida, "The Globalization of R&D: Results of a Survey of Foreign-Affiliated R&D Laboratories in the USA," Research Policy , v. 26, 1997, pp. 85-103.