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THEORY AND PRACTICE: DEVELOPING NEW FRAMEWORKS FOR ANALYZING SYSTEMS OF INNOVATION 40 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
