2
Science, Technology, and Innovation in Japan

SUMMARY POINTS

  • Scientific and technological relations between the United States and Japan have been extensive for over 100 years. The historically predominant pattern of interaction has involved a predominant flow of technology and expertise from the United States to Japan, mainly through industrial and business relationships but also through interactions involving government laboratories and universities.

  • During the postwar period, Japan refined its government and private-sector approaches that had been developed earlier to lower the prices of and maximize the inflow and diffusion of foreign technologies. The government's control over trade and foreign direct investment allowed a coordinated industry-government approach to obtaining technology from foreign companies in exchange for limited market access and licensing fees.

  • The acquisition, effective adaptation, and improvement of technologies from abroad by Japanese industry served as the basis for Japan's rapid economic growth and international competitiveness in a wide variety of manufacturing industries. The Japanese government's role in the acquisition and diffusion of technologies complemented the development of superior production and enterprise systems by Japanese industry.

  • Asymmetrical market access—limited access by U.S. companies to the Japanese market juxtaposed with open access by Japanese companies to the U.S. market—had a long-term, negative impact on the competitiveness of several U.S. industries and the market positions of specific companies.

  • But conditions are now changing. Japanese industry and government have less leverage to extract technology from foreign companies than they once did, and there is less scope for low risk borrowing. Japan is renewing efforts to build greater domestic capabilities for generating fundamental innovations and new approaches to international cooperation.

THE DEVELOPMENT OF JAPANESE CAPABILITIES IN SCIENCE, TECHNOLOGY, AND INNOVATION

The key elements underlying Japan's industrial and technological rise have remained remarkably consistent over time. They include (1) central government policies that encourage the adoption and diffusion of foreign technologies through lowering private-sector risks, stimulating demand, and providing educational and other infrastructure; (2) a diffuse base of entrepreneurial vitality and a strong competitive private-sector that is receptive to new technologies and capable of improving them; and (3) a political and ideological climate that generally allows for consensus on national imperatives and flexibility in policy approaches to meeting them.



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Maximizing U.S. Interests in Science and Technology Relations with Japan 2 Science, Technology, and Innovation in Japan SUMMARY POINTS Scientific and technological relations between the United States and Japan have been extensive for over 100 years. The historically predominant pattern of interaction has involved a predominant flow of technology and expertise from the United States to Japan, mainly through industrial and business relationships but also through interactions involving government laboratories and universities. During the postwar period, Japan refined its government and private-sector approaches that had been developed earlier to lower the prices of and maximize the inflow and diffusion of foreign technologies. The government's control over trade and foreign direct investment allowed a coordinated industry-government approach to obtaining technology from foreign companies in exchange for limited market access and licensing fees. The acquisition, effective adaptation, and improvement of technologies from abroad by Japanese industry served as the basis for Japan's rapid economic growth and international competitiveness in a wide variety of manufacturing industries. The Japanese government's role in the acquisition and diffusion of technologies complemented the development of superior production and enterprise systems by Japanese industry. Asymmetrical market access—limited access by U.S. companies to the Japanese market juxtaposed with open access by Japanese companies to the U.S. market—had a long-term, negative impact on the competitiveness of several U.S. industries and the market positions of specific companies. But conditions are now changing. Japanese industry and government have less leverage to extract technology from foreign companies than they once did, and there is less scope for low risk borrowing. Japan is renewing efforts to build greater domestic capabilities for generating fundamental innovations and new approaches to international cooperation. THE DEVELOPMENT OF JAPANESE CAPABILITIES IN SCIENCE, TECHNOLOGY, AND INNOVATION The key elements underlying Japan's industrial and technological rise have remained remarkably consistent over time. They include (1) central government policies that encourage the adoption and diffusion of foreign technologies through lowering private-sector risks, stimulating demand, and providing educational and other infrastructure; (2) a diffuse base of entrepreneurial vitality and a strong competitive private-sector that is receptive to new technologies and capable of improving them; and (3) a political and ideological climate that generally allows for consensus on national imperatives and flexibility in policy approaches to meeting them.

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Maximizing U.S. Interests in Science and Technology Relations with Japan A number of the critical environmental factors that have favored Japanese industries during the postwar period have shifted over the past decade and a half. Other nations are seeking to build industrial and technological strength by utilizing approaches similar to Japan's, with some measure of success. Japanese government and industry continue to make adjustments aimed at increasing national capabilities to produce fundamental innovations and establishing new mechanisms for tapping foreign capabilities. PRE-WORLD WAR II LEGACY The foundation for Japan's assimilation of technologies from abroad for rapid industrialization was clearly present in 1853, when the West's challenge to the isolation policy of the Tokugawa shogunate appeared in the form of Commodore Perry's ''black ships." Decentralized political power and economic competition between feudal domains led to the emergence of a large class of skilled crafts workers dispersed throughout the country and receptive to applying new innovations. 1 Further, Japan had developed a complex commercial economy prior to industrialization, including a national distribution system for marketing a wide variety of goods between numerous urban centers. 2 The national security crisis brought on by the black ships helped consolidate support for the importation of foreign technologies and industrialization to meet the Western challenge. 3 Under the government of the Meiji Restoration, established in 1868, regional programs to import and assimilate foreign know-how were enhanced by national-level initiatives to promote the development of modern industries central to arms making and military capability through government investment and ownership. 4 Foreign experts were typically hired during the start-up phase and then dismissed when the necessary expertise had been absorbed by the Japanese. From the early 1880s, these companies were sold to entrepreneurs, with several developing into zaibatsu (industrial-financial groups), which played an important role in Japan's industrial and technological development. In addition to its direct role in launching enterprises, the central government established engineering faculties in the new imperial universities and other educational institutions to train engineers in the new techniques. Japan's industrial and technological development accelerated through the early twentieth century. Extensive importation of foreign technologies continued, with important transfers occurring through the formation of joint ventures and other direct investments by foreign multinational corporations such as Western Electric, General Electric, and Ford Motor Company. 5 At the same time, the Japanese industrial sector was growing and evolving rapidly, with the spread of modern management and the emergence of large-scale corporations. 6 The zaibatsu, such as Mitsui and Mitsubishi, developed from an initial focus on nonmanufacturing industries into highly diversified conglomerates. Non-zaibatsu manufacturers, such as Hitachi, Takeda Chemical Industries, Kikkoman, and Ajinomoto, grew up in urban and rural areas. Partly 1   Tessa Morris-Suzuki, The Technological Transformation of Japan: From the Seventeenth to the Twenty-First Century (Cambridge, U.K.: Cambridge University Press, 1994), p. 54. 2   W. Mark Fruin, The Japanese Enterprise System: Competitive Strategies and Cooperative Structures (Oxford, U.K.: Clarendon Press Oxford, 1992), p. 65. 3   Richard J. Samuels, Rich Nation, Strong Army: National Security and the Technological Transformation of Japan (Ithaca, N.Y.: Cornell University Press, 1994), Chapter 2. 4   Morris-Suzuki, op. cit., pp. 62-66, and Samuels, op. cit., Chapter 3. 5   Mark Mason, American Multinationals in Japan: The Political Economy of Japanese Capital Controls, 1899-1980 (Cambridge, Mass.: Harvard University Press, 1992), Chapter 1. 6   Fruin, op. cit., pp. 76-77.

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Maximizing U.S. Interests in Science and Technology Relations with Japan because of rapid economic growth, Japan's industrial development was marked by firm specialization, nonintegration of production and distribution, and extensive utilization of intercompany links, rather than by vertical integration in the pursuit of scope economies in production. 7 Along with the emergence of large companies, there remained considerable scope for technology-based entrepreneurial activity, supported by growing innovation networks built around industry associations; prefectural laboratories; technical colleges; and national technological institutions such as the Institute for Physical and Chemical Research (Riken), established in 1917. 8 The growing availability of formally trained engineers was critical to the continued accumulation of technological capability and the process of enterprise development. The number of trained technicians employed by private enterprises grew from 700 in 1900 to 2,500 a decade later, and exceptional companies like Hitachi had begun to organize research divisions. 9 By the late 1920s, Japan possessed a considerable industrial and technological infrastructure. One Western observer rated the country as fourth in the world in the organization and scope of its research activities. 10 Through the 1930s and during World War II, government involvement in the Japanese economy and innovation increased in such areas as economic planning and control, the formation of cartels, growing limitations on and eventually expulsion of foreign companies, and policies designed to encourage innovation. These developments left a mixed but mainly positive legacy for postwar innovation and economic growth. The bureaucratic industrial planning structure set up in the Ministry of Commerce and Industry (MCI) beginning in the late 1920s is the predecessor of the postwar Ministry of International Trade and Industry (MITI). 11 The expulsion of foreign capital prior to the war set the stage for strict controls over trade and foreign direct investment after the war. Industry and government gained experience in implementing collaborative technology development programs. The war itself forced Japan to accelerate the pace of investment in science and technology, as access to foreign technology was shut off. 12 This isolation meant that Japan fell considerably behind the technical levels of other advanced 7   Ibid., Chapter 3. 8   Although Riken was founded as a government-industry institution to perform advanced research, by the late 1920s it had begun a very successful effort to launch startup companies in Japan, Manchuria, and Korea to commercialize its innovations. Morris-Suzuki, op. cit., pp. 126-129. 9   Morris-Suzuki, op. cit., p. 108. Hitachi also tended to rely more on reverse engineering and scanning foreign technical literature than companies with formal links to foreign multinational companies and therefore developed more extensive operations for these activities earlier than its rivals. 10   Maurice Holland, "From Kimono to Overalls: The Industrial Transition in Japan," The Atlantic Monthly, October 1928. 11   There is debate over how much influence MCI/MITI has had. The issue will be taken up again in the next section and other parts of the report. Chalmers Johnson, in MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975 (Stanford, Calif.: Stanford University Press, 1982), argues that the government apparatus has wielded considerable power as the headquarters for Japan's "developmental state." Others, including David Friedman, in The Misunderstood Miracle: Industrial Development and Political Change in Japan (Ithaca, N.Y.: Cornell University Press, 1988), assert that the government bureaucracy has always been more or less co-opted by industry and that, while government initiatives have often led to unanticipated positive results, government has been ineffective in achieving its stated goals. See also Daniel Okimoto, Between MITI and the Market: Japanese Industrial Policy for High Technology (Stanford, Calif.: Stanford University Press, 1989), and Richard Samuels, The Business of the Japanese State: Energy Markets in Comparative and Historical Perspective (Ithaca, N.Y.: Cornell University Press, 1987). 12   Japan's German allies proved much more reluctant to transfer technology to Japan than the U.S. MNCs that were being expelled during the 1930s. See Morris-Suzuki, op. cit., p. 145.

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Maximizing U.S. Interests in Science and Technology Relations with Japan countries during the war, but it led to larger-scale R&D efforts on the part of industry and a large jump in the proportion of young people receiving technical training. 13 Nearly all the political-economic factors underlying Japan's industrial and technological ascendancy in the postwar period were in place when the war began, most notably: (1) government policies (often shaped by industry) that encouraged innovation through procurement, support for technology development, creation of a favorable environment for the importation of foreign technology and the provision of infrastructure for technical human resource development; (2) a technologically savvy industrial sector largely focused on serving smaller scale, specialized demands rather than mass markets, and implementing flexible innovation and manufacturing strategies through focal factories and extensive utilization of subcontracting and corporate networks; and (3) a set of "bridging" public-private institutions (such as Riken, industry associations, and extension services for small-and medium-sized firms) that helped to diffuse technology and other forms of knowledge. Although Japan's ascendancy was not based on defense technology as such, these public and private approaches were shaped by an overarching focus on national security. SCIENCE, TECHNOLOGY, AND THE POSTWAR MIRACLE A Favorable International Environment: The U.S. Occupation and Alliance The U.S. occupation and its aftermath ushered in several important changes with mainly positive impacts on Japanese innovation and industrial development. 14 Several U.S. occupation policies had a major long-term effect. Early on, initiatives such as land reform, the breakup of the zaibatsu, the expansion of educational opportunities, and the promulgation of a new constitution facilitated movement toward greater democratization and egalitarian income distribution. With the "reverse course" in occupation policy brought on by the onset of the Cold War, and the new imperative to encourage Japan's emergence as a U.S. strategic ally in Asia, the United States began to take active measures to promote reconstruction of Japan's industrial capability. These measures included "special vehicle procurement" by the U.S. military during the Korean War, which jump started the Japanese auto industry, and efforts to spread U.S. management and manufacturing techniques to Japanese industry through study missions. Many of Japan's engineering and technological capabilities that had been focused on the war effort were now diverted to commercial industries. 15 The U.S.-Japan alliance also served as the foundation for a favorable international environment for Japan's industrial rise. Not needing a large military establishment, Japan has 13   This was due to generous funding and the exemption of science students from military duties that was maintained until the last stages of the war. 14   Perhaps the main difficulty in "explaining" Japan's economic and technological success is overdetermination Japan had so much going for it that it is nearly impossible to isolate one or another dependent variable as being decisive. This point is made regarding the high-growth Asian economies in general by the World Bank in The East Asian Miracle: Economic Growth and Public Policy (New York: Oxford University Press, 1993), p. 6. This account is necessarily selective and focuses on technology. 15   See Nihon Gakujutsu Shinkokai, Sentan Gijutsu to Kokusai Kankyo Dai 149 Iinkai (Japan Society for the Promotion of Science (JSPS), Committee 149 on Advanced Technology and the International Environment), Gunji gijutsu kara minsei gijutsu e no tenkan (Conversion of military to civilian technologies) (Tokyo: JSPS, 1994). The founders of Sony began their engineering careers performing research at the Imperial Naval Air Arsenal. See Samuels, op. cit., p. 50.

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Maximizing U.S. Interests in Science and Technology Relations with Japan concentrated its resources on commercial industries and technologies. 16 The open international trading environment, characterized by gradual liberalization over the postwar period, is largely a result of U.S. initiative and leadership. Because of relatively free access to global markets, Japan has been able to invest at an internationally competitive scale in several industries—such as steel—where Japanese companies had been held back before the war. 17 Of course, the generally favorable environment for trade and economic growth of the postwar period was not an advantage enjoyed uniquely by Japan. Several additional factors allowed Japan to take better advantage of this environment than other large economies. Government Role in Facilitating the Importation and Diffusion of Critical Technologies A unifying thread in Japan's postwar industrial success stories has been the effective utilization and improvement of technology acquired from abroad. Although Japan is now generally acknowledged to be a techno-industrial superpower, none of the most significant "hard" technologies on which this achievement is based were originally developed in Japan, notwithstanding Japan's formidable accomplishments in incremental improvements, commercialization, and developing new markets for imported technologies, as described below. The most important Japanese innovations have come in such areas as management and systems techniques. These "soft" technologies are embodied in the Toyota Production System and are comparable to the management innovations associated with mass production that the United States pioneered in the late nineteenth and early twentieth centuries. 18 The shipbuilding industry was an early postwar success story for Japan, which had developed impressive capabilities prior to the war. Shipbuilding was one of the industries initially targeted by the Japanese government for preferential treatment in the form of access to scarce foreign exchange and low-interest policy financing. 19 Advanced structural welding and "block" construction techniques—key process technologies—were acquired when the Japanese government allowed the U.S. shipbuilder National Bulk Carrier Company to temporarily use the former Japanese navy yard at Kure in return for unrestricted access to manufacturing technologies by Japanese shipbuilders. 20 Building on these foreign techniques, the Japanese shipbuilding industry launched a series of collaborative research projects and developed further innovations. With this solid technological base, Japanese companies were able to take advantage of a favorable domestic and international market environment and by 1965 were producing 65 percent of the world's shipping tonnage. 21 The Japanese government played a key role in brokering industry access to fundamental foreign technologies at favorable prices during the 1950s and 1960s. In the case of the steel 16   According to one estimate, between 1981 and 1994 the United States spent $3.5 trillion on defense, or $14,000 per capita, while Japan spent $2,500 per capita. See Ernest J. Oppenheimer, "The War Against Ourselves: Unequal Defense Costs Are the Villain in U.S.-Japan Trade Saga," Barron's, May 29, 1995, p. 43. 17   During the early postwar period, Japan also reasserted itself in industries that had been globally competitive before the war, such as textiles. 18   It is important to keep in mind that a great deal about Japanese innovation is not yet well understood. See Leonard H. Lynn, "Japan's Systems of Innovation: A Framework for Theory-Guided Research," Research in International Business and International Relations, vol. 6, 1994. 19   Perhaps more important, the shipbuilders' customers were one of the primary targets of preferential government financing. See Kent E. Calder, Strategic Capitalism: Private Business and Public Purpose in Japan's Industrial Finance (Princeton, N.J.: Princeton University Press, 1993), p. 106. 20   Morris-Suzuki, op. cit., pp. 187-189. 21   Ibid.

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Maximizing U.S. Interests in Science and Technology Relations with Japan industry, the basic oxygen furnace, developed in Austria in the early 1950s, was much more rapidly incorporated in Japan than in the United States, even allowing for the more rapid buildup in Japan's capacity. 22 As was the case in the shipbuilding industry, the process of importing and improving this critical technology was characterized by an active government role in organizing the importation process and negotiating favorable licensing arrangements. R&D collaboration between companies in developing complementary technologies, active promotion by industry associations, and fierce competition between firms in implementation improved efficiency and speeded adoption of the technology. In both steel and shipbuilding Japan dispelled the notion that possession of raw materials is a prerequisite to leadership in finished goods. In contrast to shipbuilding and steel, where foreign innovators were more or less willing to license their know-how, computers and microelectronics are important examples of industries in which Japan confronted multinational corporations desiring access to the Japanese market. In these cases the government's leverage came from the Foreign Exchange and Foreign Trade Control Law of 1949 and the Foreign Investment Law of 1950. The latter provided the framework for government approval of foreign direct investments as well as technology agreements lasting for more than one year. 23 The formal requests for permission for direct investments or technology imports were submitted to the Ministry of Finance, which referred them to the agency with jurisdiction over the industry or technology—almost always MITI and often one or more additional economic ministries—for review. The experiences of U.S. companies that sought to gain access to the Japanese market through exports or direct investment during the 1950-1980 time frame illustrate how Japanese industry and government worked together to gain access to foreign technologies while limiting access to the Japanese market. 24 IBM, Texas Instruments, and a few other companies with very strong patent positions were able to negotiate restricted access to the Japanese market through wholly owned subsidiaries after protracted negotiations, conditional on widespread licensing of their basic technologies to Japanese competitors. Companies in an intermediate position, such as Du Pont, were able to access the market but were steered into joint ventures that involved technology transfers to Japanese partners and often left control of critical customer interfaces with those partners. Companies in a weaker position, like Fairchild, were left with licensing their technology as the only viable option. 25 Beginning in the late 1960s, Japanese restrictions on foreign investment and foreign exchange were gradually liberalized. Although informal market and investment barriers still impede foreign access to some of Japan's high-technology markets, the government's direct role in acquiring and diffusing foreign technology has declined. Yet the importance of this mediation in accumulating the technological foundation for Japan's growth is clear. Some point to the delay experienced by Sony when it sought permission from MITI to license the transistor from Western Electric in the early 1950s as a counterexample to show that the Japanese government's role was not always favorable to innovation. Closer examination reveals, however, that the actual delay 22   Leonard H. Lynn, How Japan Innovates: A Comparison with the U.S. in the Case of Oxygen Steelmaking (Boulder, Colo.: Westview Press, 1982). 23   Leonard H. Lynn, "MITI's Successes and Failures in Controlling Japan's Technology Imports," Hitotsubashi Journal of Commerce and Management, December, 1994. 24   See Mark Mason, American Multinationals in Japan: The Political Economy of Japanese Capital Controls, 1899-1980 (Cambridge, Mass.: Harvard University Press, 1992), particularly Chapters 4 and 5, and Marie Anchordoguy, Computers Inc.: Japan's Challenge to IBM(Cambridge, Mass.: Harvard University Press, 1989). 25   Fairchild licensed Japanese rights to the planar process—a fundamental semiconductor manufacturing technology—to NEC, which in turn licensed the know-how to other Japanese companies. See Mason, op. cit., pp. 195197.

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Maximizing U.S. Interests in Science and Technology Relations with Japan was just a few months, during which Sony had an internal team working on the technology. 26 As is the case for a number of the examples of failed or counterproductive industrial policy during the high-speed growth period, Sony's transistor licensing experience shows that the influence of the Japanese government on all aspects of Japan's industrial development, while considerable, was not rigid enough to impede companies with good ideas and the energy to pursue them. Indeed, industrial policy was often formulated or co-opted by industry. 27 The transistor case also illustrates another key feature of Japanese innovation: creativity by industry in the application and modification of basic technologies imported from abroad. U.S.-Japan cooperation in defense production and defense technology has also contributed to the capabilities of Japanese companies, particularly in the aircraft industry. 28 Licensed production of U.S.-developed aircraft has represented an important business base for the aerospace divisions of Japan's heavy-industry firms, and the basic technologies for several specific commercial products in which Japanese companies hold global leadership were originally transferred in military programs. Ishikawajima-Harima Heavy Industries, particularly its success in producing long shafts for commercial jet engines, is one example. Industry Creativity in Applying and Modifying Foreign Technologies As is well known, Sony first utilized the transistor to make small radios, an application that had not been pursued by American inventors. This is by no means an isolated case—developing new applications and markets for imported technologies, modifying technologies for new applications, and rapidly moving forward with complementary innovations have been hallmarks of the companies in most of Japan's internationally competitive industries. At the aggregate level, a late 1980s study showed that Japanese firms tend to develop and introduce new products and processes based on external technology more quickly and economically than U.S. companies do. 29 Starting with the transistor, several examples can be drawn from consumer electronics. In the late 1950s the importation of new commercial video recorders by Japanese government broadcaster NHK from U.S. inventor Ampex alerted MITI and led to a systematic effort to import the basic technology. 30 Several years later Sony developed a much smaller machine that could be used to show movies in commercial jet aircraft, and in 1969 it introduced the U-Matic, which reached a large industrial market. 31 Sony and Matsushita later developed video cassette recorders for home use, the Matsushita standard eventually winning out to achieve enormous commercial success around the world. Japanese companies have continued to rapidly introduce new electronics technologies into consumer electronics products. For example, the first microprocessor was developed by Intel in 1969 in response to the request of Busicom, a Japanese calculator maker. 32 Flat panel displays 26   Lynn, op. cit., pp. 27-30. 27   This is one of Friedman's main points. 28   Many of the developments in this industry are more recent, although cooperation dates back many years. Samuels, Rich Nation, Strong Army, op. cit., and National Research Council, Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force (Washington, D.C.: National Academy Press, 1995). 29   Edwin Mansfield, "Industrial Innovation in Japan and the United States," Science, September 30, 1988, pp. 1769-1774. 30   Morris-Suzuki, op. cit., p. 195. 31   Morita, op. cit., p. 111. 32   Initially believing that the new invention had little application apart from calculators, Intel gave Busicom a monopoly on the original microprocessor—the 4004—in return for the Japanese company's agreement to pay for the entire cost of development. Several years later Intel was able to buy back the rights when Busicom ran into difficulties. See Gordon Moore, "Intel Chief Recalls Japanese Connection in Development of Microprocessors," Nikkei Weekly, May 8, 1995, p. 4.

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Maximizing U.S. Interests in Science and Technology Relations with Japan utilizing liquid crystals were first developed by U.S. companies in the 1960s, which conceived of the technology as a possible long-term replacement for cathode ray tubes, but did not persist in developing it to the point where it could be incorporated into marketable products. In contrast, Sharp Corporation introduced liquid crystal displays (LCDs) into its calculators in the early 1970s. Sharp continued to improve and develop LCDs as it diversified into other product lines, establishing a leading position in the technology that has continued to the present. 33 Consumer electronics markets that Japanese companies either pioneered or took from U.S. rivals have been a powerful vehicle for the development and refinement of new electronics component technologies. 34 A prominent nonelectronics example is the machine tool industry. Japan's success in this industry has been largely due to the utilization of numerical control (NC) technology in small, general-purpose tools. 35 In the United States, where NC technology was developed at the Massachusetts Institute of Technology with U.S. Department of Defense funding, industry mainly applied the advances to high-end applications—the potential market for general—purpose NC tools was not appreciated. As a result of their success in developing general purpose NC machine tools for smaller Japanese manufacturers, Japanese toolmakers achieved great export success in the 1970s and 1980s. Japanese industrial organization practices have encouraged the creative adaptation of technology. Even as greater opportunities to pursue mass markets grew during postwar economic growth, Japanese industries generally did not pursue vertical integration and rigid production and management systems. Rather, interfirm networks of various types have proliferated and evolved. The business and technology focus of even the largest Japanese firms remained with product centered factories integrating the activities of numerous subsidiaries and suppliers. 36 Another aspect of Japan's capability to innovate has been the relative success of large Japanese companies in diversifying into new technologies and businesses. This has been particularly true in the electronics industry. The relative disaggregation of Japanese companies like Hitachi and Matsushita—where the main company focuses on technology development, final assembly in core businesses, and corporate staff functions, while distribution, components manufacture, and peripheral businesses are spun off to subsidiaries—may be partly responsible for this flexibility. The human resource policies of Japanese companies have served to reinforce and perpetuate this disaggregation. With emphasis on entry-level hiring over mid-career hiring, lifetime employment, and wage differentials determined largely by seniority, rewards in large, prestigious Japanese companies are standardized across functions, providing a strong incentive to spin off noncore activities to subsidiaries with lower salary structures. 37 This standardization of rewards encourages other management practices associated with superior product development 33   U.S. Department of Defense, Building U.S. Capabilities in Flat Panel Displays: Report of the Flat Panel Display Task Force, September 30, 1994, pp. VI-18-VI-19. 34   Photographic equipment is another startling example. Japanese companies were the first to replace mechanical components with electronic ones and quickly captured a major share of the global market from German and U.S. companies. 35   Friedman, op. cit. 36   See Fruin's discussions of Toshiba and Toyota, op. cit., Chapters 6 and 7. Also see Ken-ichi Imai, "Japan's Corporate Networks," in Shumpei Kumon and Henry Rosovsky, eds., The Political Economy of Japan Volume 3: Cultural and Social Dynamics (Stanford, Calif.: Stanford University Press, 1993). 37   D. Eleanor Westney, "The Evolution of Japan's Industrial Research and Development," in Masahiko Aoki and Ronald Dore, eds., The Japanese Firm: The Sources of Competitive Strength (New York: Oxford University Press, 1994), p. 172.

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Maximizing U.S. Interests in Science and Technology Relations with Japan performance, such as movement of technical personnel between research, product development, and manufacturing. 38 This flexibility in human resource utilization also allows for movement between divisions, such as movement between commercial and military aircraft production. Infrastructure for the Development of Technology-Based Industries Several additional factors have contributed to Japan's industrial and technological development. The first is the rapid expansion of higher educational opportunities in Japan over the postwar period. Engineering education has been a major focus—today Japanese and American institutions award a similar number of engineering bachelor's degrees, despite the fact that the United States awards many more degrees overall and has twice Japan's population. 39 Other aspects of government industrial and technology policy are more difficult to evaluate in a general way. Policies toward industrial finance, regulation, market development, and technology development have had a significant impact on several specific industries at particular times. The contribution of Japanese trade policy to the development of the auto industry is one example. Although the Japanese auto industry did not receive direct government assistance on the scale of some other manufacturing sectors, imports were restricted through the use of quantitative limits and high tariffs. 40 This discouraged foreign manufacturers from entering the Japanese market and allowed the Japanese auto industry to develop its manufacturing and technological capabilities in a protected domestic market. The semiconductor industry provides another example of a Japanese industry that was able to accumulate experience and raise productivity under the umbrella of trade protection. 41 Export promotion has played a role as well. Japan's general trading companies predated World War II and provided an important institutional foundation for Japan's exports, particularly during the period before Japanese manufacturers had become large enough to establish their own distribution channels overseas. The MITI-affiliated Japan External Trade Organization (JETRO) is widely regarded as a highly effective conduit of market and other information to Japanese businesses. There are no U.S. institutions comparable to the trading companies or JETRO. Although some critics have focused on the utilization of predatory dumping strategies by Japanese manufacturers, these have had a major impact in only a few specific cases, most notably the domestic price maintenance cartel organized by Japanese television manufacturers in the 1960s and the MITI-financed export of machine tools in the early 1980s. 42 As noted above, the key developments that led to Japanese ascendancy in those industries had occurred earlier over a 38   D. Eleanor Westney and Kiyonori Sakakibara, "The Organization and Careers of Engineers in the Computer Industry in Japan and the United States," Massachusetts Institute of Technology Working Paper, 1985. Another possible factor contributing to effective innovation strategies is the often-heard claim that Japanese CEOs and other top managers are more likely to have technical backgrounds than their U.S. counterparts. See, for example, Hiroyuki Odagiri and Akira Goto, "The Japanese System of Innovation: Past, Present and Future," in Richard R. Nelson, ed., National Innovation Systems: A Comparative Analysis (New York: Oxford University Press, 1993). 39   National Science Board, Science and Engineering Indicators-1993 (Washington, D.C.: U.S. Government Printing Office, 1993). If one compares the combined number of natural science and engineering bachelor's degrees, this seeming "gap" is less pronounced. 40   Odagiri and Goto, op. cit., p. 100. 41   Laura D'Andrea Tyson, Who's Bashing Whom? Trade Conflict in High-Technology Industries (Washington, D.C.: Institute for International Economics, 1992), Chapter 4. 42   Clyde V. Prestowitz, Jr., Trading Places: How America Allowed Japan to Take the Lead (Tokyo: Charles E. Tuttle, 1988), pp. 203 and 223. Dumping has also been implicated in Japanese gains in semiconductors, motorcycles, textiles, and photographic film.

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Maximizing U.S. Interests in Science and Technology Relations with Japan considerable period, although the loss of U.S. competitiveness became apparent over a short time span because of the flood of Japanese imports. Industrial policy measures to develop domestic markets, mainly financing incentives for customers of emerging industries, were also important to several industries. For example, large amounts of policy finance directed to merchant shipping companies allowed them to increase purchases from Japan's shipbuilders. The MITI-financed Japan Electronic Computer Corporation, which purchased and leased Japanese computers to domestic users, was a key factor in the growth of Japan's computer industry during the 1960s and 1970s. 43 A financing program intended by MITI to encourage consolidation of small manufacturers was co-opted at the local level and mainly used to purchase sophisticated machine tools. 44 Technology development programs also have had a positive impact in a few specific industries. 45 Unlike the United States, where a number of technologies underlying major industries have been developed with government funding, Japanese government funding has not yet yielded significant breakthroughs. However, most analysts agree that the extensive network of national laboratories, local and regional institutions for manufacturing and technology extension, and government-sponsored R&D consortia have played a positive, but mainly supportive, role in Japanese innovation. Japan's government-supported R&D consortia have attracted the most attention from abroad and have spurred a certain degree of imitation in the United States. 46 In the 1960s the Japanese government established a special funding program to support industrial consortia. During the 1970s and 1980s, overall funding and the number of consortia increased, the most important being those targeting semiconductors and computers. Japan's early computer consortia were aimed at catching up with the innovations developed by IBM in the 1960s, and some observers credit them with supplementing corporate efforts to prevent falling irretrievably far behind. The Very Large Scale Integration program of the late 1970s is often given credit for enhancing Japan's competitive prospects in semiconductors and semiconductor equipment, since the end of the project coincided with a market share surge by Japanese companies. In addition to helping device makers and equipment manufacturers gain familiarity with the latest chipmaking manufacturing technologies, providing a base for their subsequent advances, the VLSI project and other consortia have encouraged the formation of information networks among researchers, helped companies maintain R&D funding oriented toward long-term goals, and delivered other benefits apart from actual research results. 47 RECENT CHANGES AND CURRENT CHALLENGES Over the past 15 years or so, a number of changes have occurred in the environment for Japanese government and industry strategy building toward technology and industrial development. One example is the gradual lowering of formal trade and investment barriers that occurred during the 1970s. As a result, the Japanese government's direct role in facilitating 43   Anchordoguy, op. cit. 44   Friedman, op. cit., p. 167. 45   Okimoto, op. cit., and David Cheney, "Japan's Technology Policy: What's the Secret?" (Washington, D.C.: Council on Competitiveness, 1991). 46   Gerald J. Hane, "The Real Lessons of Japanese Research Consortia," Issues in Science and Technology, Winter 1993-94, pp. 56-63, and National Research Council, R&D Consortia and U.S.-Japan Collaboration: Report of a Workshop (Washington, D.C.: National Academy Press, 1991). 47   One issue on which there is some disagreement is the extent to which Japanese consortia have involved fundamental research and the trends.

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Maximizing U.S. Interests in Science and Technology Relations with Japan technology access and diffusion has been greatly diminished. The aircraft industry is one important exception to this general trend. 48 In addition, as a natural consequence of success, by 1980 Japanese industry had reached the technical frontier in a number of manufacturing industries, decreasing the scope for continued low-risk borrowing from abroad. The upward valuation of the yen during the late 1980s and the early 1990s also had an impact on Japan's competitive advantage, especially for industries that were labor or energy intensive or that relied heavily on exports or domestically produced basic materials. Finally, the costs of overprotection of domestic industries and restrictions on new entry are increasingly apparent, particularly in the wake of the "bubble economy." The response by Japanese government and industry to these changes in the science and technology area has involved two main thrusts. The first has involved efforts to improve Japan's level of basic scientific and engineering research, with a focus on particular fields with perceived potential for wide commercial application. The second thrust has been the development of new mechanisms for tapping foreign science and technology more appropriate to the changed environment, such as overseas R&D laboratories and international R&D programs funded by the Japanese government. At this time it is difficult to say whether these changes have made a great difference in the way Japan innovates. Efforts to Improve Fundamental Research Capabilities A number of MITI reports from the late 1970s and early 1980s emphasized the importance of increasing Japan's capability to develop original technology and introduced concepts such as gljutsu rikkoku (technology nation building or techno-nationalism) and the "advanced information society." 49 MITI launched a series of new programs to fund research in areas relevant to industry. In 1981 the Next Generation Basic Technology project was established as a new funding pool for industrial consortia. The project selected microelectronics, new materials, and biotechnology as technical focus areas for collaborative R&D by teams of industry, government, and university researchers. By the mid-1980s the program was scaled back somewhat due to budget concerns and the reluctance of companies to participate in many of the projects. 50 Also announced in 1981 was the Fifth Generation Computer Project, a 10-year program of advanced computing research with a budget of $450 million. Although the ambitious project raised concerns in the United States that Japan would leapfrog ahead in computer technology, the technical goals were later scaled back, and by the time the program was completed in 1992 its sponsors were emphasizing the training of young researchers and other intangibles as the most important benefits, since no commercially significant technologies emerged. 51 Another MITI initiative started during the same period is the Technopolis project, which involves targeted tax 48   See Samuels, op. cit., and National Research Council, High-Stakes Aviation, op. cit. 49   Morris-Suzuki, op. cit., pp. 209-219. Translating gijutsu rikkoku as "techno-nationalism" is controversial, as noted here and by Samuels, op. cit., p. 48. 50   Morris-Suzuki, op. cit., p. 214. More recently, MITI's consortia funding mechanisms and the Agency for Industrial Science and Technology laboratories were reorganized in 1993. 51   For a discussion of the training benefits of Japanese consortia, see Hane, op. cit. One of the early assessments that predicted great success for the program was that of Edward Feigenbaum and Pamela McCorduck in The Fifth Generation: Artificial Intelligence and Japan 's Computer Challenge to the World (Reading, Mass.: Addison-Wesley, 1983).

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Maximizing U.S. Interests in Science and Technology Relations with Japan breaks and infrastructure building for high-technology manufacturing and R&D in designated cities throughout Japan. Here, too, the results appear to be less than spectacular. 52 Another round of MITI initiatives began in the mid-1980s, including the Key Technology Center, a funding program for industrial technology consortia and telecommunications demonstration projects run jointly by MITI and Ministry of Posts and Telecommunications, utilizing proceeds from the sale of Nippon Telephone and Telegraph stock to the public. Typically, a research organization is formed to oversee the work, with 70 percent of the funding provided by the Key Technology Center and the other 30 percent by participating companies. A number of the projects appear to be linked to larger industrial and competitiveness goals for the industry involved. 53 The Japanese government is reportedly launching a review of the Center's activities, following public criticism of the program's effectiveness. 54 Besides MITI, several other agencies launched R&D support programs to encourage higher levels of fundamental research and intersectoral collaboration, including the ERATO (Exploratory Research for Advanced Technology) program of the Science and Technology Agency. The kakenhi system for industry-university collaboration was established earlier by the Ministry of Education, Science, and Culture but attracted increasing participation in the late 1980s. Despite a number of initiatives by several agencies to encourage more fundamental research, what had conspicuously not emerged in Japan until recently was a commitment to substantially increase funding for basic science and engineering research and to implement structural changes at Japanese universities. Much more conspicuous than developments in universities has been the growth of Japan's national technology projects in space (the H-II rocket), energy (development of fast breeder reactors), and defense (the FS-X). With the Basic Law on Science and Technology passed by the Diet in 1995 and the Science and Technology Basic Plan released in July 1996 (see Box 2-1), it appears that improvement of fundamental research capabilities has moved to the forefront as a major national priority in Japan. Although a number of excellent Japanese university researchers and groups are pursuing cutting-edge research, the primary university role in Japanese innovation has until now been education at the undergraduate and master's levels. In addition to a major increase in funding for basic research, the plan seeks to address structural impediments to invigorating Japanese research. Changes also have occurred in Japanese industrial R&D. Corporate R&D investments grew rapidly from 1979 through the early 1990s. 55 A number of large Japanese companies, led by the electronics giants, such as Hitachi, NEC, and Toshiba, established ''fundamental" research labs during the mid-and late 1980s. There are indications that Japanese companies tried to protect their fundamental research efforts as they cut back on overall R&D spending during the recent post-bubble recession. 56 Still, despite visible efforts to build research organizations with greater 52   Morris-Suzuki, op. cit., p. 226, reports that few of the designated regions had reached goals for high-technology job creation. Tsukuba Science City had been established much earlier and only began to attract a critical mass of industrial labs in the mid-to late 1980s. Another hotbed of high-technology activity—the Atsugi area in Kanagawa Prefecture, west of Tokyo—emerged without the designation. 53   See discussion of aircraft-related Key Technology Center projects in Samuels, op. cit., p. 282. The research results of 14 of the projects launched between 1986 and 1991 are reported by the Japan Key Technology Center in Research Results of Investment Projects (Tokyo, 1996). 54   See Asako Saegusa, "Japanese technology fund faces ministry criticism," Nature, April 3, 1997. This criticism has reportedly emerged from the Ministry of Finance. Critics point out that over $1.5 billion has been spent on the program since 1985, but that only $10 million or so in royalties have been collected on technologies developed through the program. The article speculates that this criticism may be part of a backlash against the large increases in science and technology funding currently planned. 55   Westney, op. cit., p. 154. 56   See "Science in Japan," Science, November 18, 1994, p. 1170.

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Maximizing U.S. Interests in Science and Technology Relations with Japan Box 2-1 Japan's Science and Technology Basic Law and Basic Plan With passage of the Science and Technology Basic Law by the Diet in 1995, Japan established a new framework for development of its science and technology policies. The Basic Law states that Japan will promote diversified R&D in a balanced way, secure and train researchers and technicians, improve research facilities, promote information intensive research, and promote R&D exchanges. 1 The Basic Law also provides for the formulation of a Science and Technology Basic Plan by the government through consultation with the Prime Minster's Council for Science and Technology. The Science and Technology Basic Plan was announced in 1996. The Basic Plan states that Japan should take the initiative in advancing the frontiers of science and technology. The Basic Plan also notes that Japanese science and technology have been in an "uneasy situation" in recent years, due to declining investment in R&D, a continued low percentage of R&D funded by government relative to other advanced countries, and declining flexibility and competitiveness in Japan's R&D system. 2 The plan provides a guiding framework for policies and programs during the 1996-2000 fiscal years. The Basic Plan outlines a number of specific budget and structural goals aimed at improving the environment for fundamental research in Japan. One goal is to increase the number of postdoctoral researchers to 10,000 by 2000 from about 6,000 as part of efforts to encourage greater mobility between institutions. Another is to increase the ratio of research support personnel to researcher t 1:1 at national research institutes and to 1:2 at universities as soon as possible. The Basic Plan also calls for the introduction of systems for impartial evaluation of projects and institutions in government and universities, and increased use of competitive funding mechanisms. The Basic Plan's most well known goal is to increase government R&D spending over the 1996-2000 fiscal years by 50 percent to 17 trillion yen compared with the previous five years. The Basic Plan also sets out an ambitious agenda for international cooperation. Post-doctoral fellowships for foreign researchers supported by the Japan Society for the Promotion of Science and the Science and Technology Agency (STA) are expected to more than double to 1,050 and 1,000, respectively, by 2000. The Basic Plan also seeks to open Japan's universities and research institutions to foreign researchers. As of 1993, there were only 25 tenured foreign professors in Japan's 100 national universities. 3 Several new multi-agency research programs have been launched along with the Basic Plan. One example is the Brain Science Research program, which involves STA; the Ministry of Health and Welfare; the Ministry of Agriculture, Forestry and Fisheries; the Ministry of International Trade and Industry; and the Ministry of Posts and Telecommunications. The program is budgeted at almost 15 billion yen (about $135 million) for fiscal year 1997. Both foreign and Japanese observers note that effective implementation of the Basic Plan involves many long-term challenges and major changes in Japan's R&D culture. As a comprehensive outline of broad national goals and the barriers that need to be overcome, the Basic Plan represents an impressive agenda. 1   "Outline of the Science and Technology Basic Law,” Law 130 of 1995, English translation,1995. 2   Government of Japan, Basic Plan for Science and Technology, English translation, July 2,1996 3   Andrew Pollack, "Japan is Planning Vast Increase in Science Research Budget New York Times, July 2, 1996.

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Maximizing U.S. Interests in Science and Technology Relations with Japan capability for achieving breakthrough innovations, to date it has been difficult for Japanese industry to modify traditional patterns of research and innovation. 57 New Mechanisms for International Cooperation and Foreign Technology Acquisition The focus for Japan's activities in science and technology cooperation and technology acquisition has remained the United States. The Japanese government, mainly MITI, launched a number of R&D programs starting in the mid-1980s in which foreign participation was sought (see Box 2-2). For example, several of the Key Technology Center projects invited participation by foreign multinational companies, including IBM's membership in the International Fuzzy Engineering Research Lab. 58 The Human Frontier Science Program (HFSP), a joint MITI Science and Technology Agency effort to fund international teams doing basic research in life sciences, was first proposed by Prime Minister Nakasone in 1987, and a significantly scaled back version of the plan has been operating for a number of years. The Supersonic/Hypersonic Technology Program was launched in 1989 as a $200 million, eight-year project to develop a scale prototype turbo-ramjet, Mach 5, methane-fueled engine. 59 Participation by the world's leading jet engine companies is an integral aspect of the program, which aims to position Japanese jet engine makers for participation in a future international effort to develop an engine for the next generation supersonic transport. 60 Starting with the Intelligent Manufacturing Systems (IMS) program in 1989, MITI proposed several large-scale initiatives for collaborative R&D involving foreign companies and universities in fields with large commercial potential. The original IMS proposal, in which MITI and Japanese companies would have linked directly with U.S. companies and universities in research on advanced manufacturing, was derailed by U.S. concerns that it would result in Japanese commercialization of U.S.-developed fundamental technologies. The U.S. government brought the program development effort under the U.S.-Japan Science and Technology Agreement and brought other countries into the process. After protracted government-to-government negotiations, a two-year feasibility study involving Japan, the United States, and other regions was undertaken, and a framework for continued cooperation was ratified in 1995. 61 Following on the heels of IMS were the Real World Computing, Micromachine, and Atomic Manipulation collaborative R&D programs. In one sense, the Real World Computing program is the successor to the Fifth Generation Computing project, with a focus on parallel processing and optical computing technologies. Following an initial effort to directly involve U.S. universities in a major role and U.S. government resistance similar to what occurred with IMS, MITI revamped its plans for foreign participation. A joint prototyping service for optoelectronic devices and 57   This is not to say that they will not do well using or modifying those traditional patterns. 58   National Research Council, R&D Consortia and U.S.-Japan Collaboration, op. cit., p. 15. 59   Testing of several components of the engine has been ongoing, and development of other components is being completed. The current plan is to complete testing of the demonstration engine in 1998 (communication from GE Aircraft Engines, March 1997). 60   Foreign companies receive 25 percent of the funding, with Japanese participants Ishikawajima-Harima Heavy Industries, Mitsubishi Heavy Industries, and Kawasaki Heavy Industries splitting the remaining 75 percent. The foreign participants are the Pratt & Whitney division of United Technologies and GE Aircraft Engines of the United States, Rolls Royce from the United Kingdom, and Snecma from France. See National Research Council, High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft (Washington, D.C.: National Academy Press, 1994). 61   A great deal of information on IMS is available on-line at the IMS World Wide Web site (http://www.ims.org).

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Maximizing U.S. Interests in Science and Technology Relations with Japan Box 2-2 Japan's International Science and Technology Initiatives Human Frontier Science Program The Human Frontier Science Program (HFSP) was first proposed by Prime Minister Nakasone at the 1987 G-7 Economic Summit in Venice. Japan would fund the lion's share of a major program of international collaboration in basic life sciences research. There was some suspicion on the part of western scientists and governments that the program was aimed at gaining access to fundamental research outside of Japan. After two years of international discussions, the program was launched at a smaller scale than originally envisioned. HFSP funds international collaboration in research on brain functions and molecular level approaches to basic biological functions. The program emphasizes support for intercontinental collaboration, interdisciplinary projects, and younger researchers. The main mechanisms of support are grants, fellowships, and workshops. 1 The program's budget is about $46 million per year, with Japan providing about 80 percent The United States contributes $4 million through the National Science Foundation and the National Institutes of Health. Canada, several European countries, and the European Union also contribute. The program is managed by a secretariat located in Strasbourg, France, and the proposals are internationally peer reviewed. One early success for the program was an effort by 16 teams to turn hospital magnetic resonance imaging into a research tool. 2 Over the years of its existence, the program has gained a great deal of favorable recognition from scientists, including a glowing endorsement from an international review panel in 1996. Despite this widely recognized scientific success, future prospects for the HFSP are uncertain. Japan has been aiming to shift the program toward more balanced funding. In 1992, the participating countries agreed to move toward a target of 50 percent funding from Japan and 50 percent from other partners, but not much progress has been made. Japan is becoming more vocal in prodding the other members to contribute more, particularly the United States, whose researchers receive much more from HFSP than what the U.S. government contributes. 3 A tight science funding environment in most member countries is seen to be the major barrier. Intelligent Manufacturing Systems The Intelligent Manufacturing Systems program (IMS) was unveiled by Japan's Ministry of International Trade and Industry (MITI) in the autumn of 1989 as a 10-year, $1 billion international research program to systematize knowledge about manufacturing, standardize future technical approaches, and promote international cooperation. 4 MITI established the IMS Promotion Center as a coordinating body for Japanese members and approached a number of U.S. private sector institutions to enlist participation. The Society of Manufacturing Engineers was designated as U.S. secretariat and several U.S.-based companies and universities expressed interest in participating. The size of the program, the relevance of the announced themes to large future markets, and the aggressive launch of the program featuring direct approaches by MITI to U.S. organizations raised concern among U.S. and European government officials. Advanced manufacturing had been designated as one of the potential technical focus areas under the U.S.-Japan Science and Technology Agreement only a year before. In the spring of 1990, the U.S. government invoked the agreement to call for a moratorium on IMS activities, and designated the Department of

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Maximizing U.S. Interests in Science and Technology Relations with Japan Commerce (DOC) as the lead agency to work with the U.S. private sector, MITI, and other foreign governments to decide how to proceed. The next steps proceeded along two tracks. At the international level, representatives from Japan, the United States, Australia, Canada, the European Union, and the European Free Trade Area met several times during 1990 and 1991. An International Steering Committee (ISC), International Technical Committee, and International Intellectual Property Rights Committee were formed, and guidelines for a two-year feasibility study were finalized in late 1991. 5 In the United States, a series of symposia and meetings with interested government industry, and university representatives was organized by DOC to develop a U.S. response. An Ad Hoc Industry Group made up of about a dozen U.S. companies was formed to refine industry views. Later in the process, a Coalition for Intelligent Manufacturing Systems was formed. These U.S. discussions provided feedback and ideas for the ongoing international negotiations. A two-year feasibility study was launched in 1992, to test both the feasibility of meaningful international collaboration on advanced manufacturing research as well as the feasibility of international management of the formation of consortia. In January 1993 five test cases and one study project were endorsed by the ISC. Although collaboration involved some difficulties, such as asymmetries in availability of funding for participants from different countries, and the costs involved with international travel, in early 1994 the ISC recommended that a full-scale IMS be launched. 6 The program would run for ten years, with a review after seven years. As of May 1997, 10 IMS projects were operating, including four from the initial feasibility study. Sixteen additional projects were in various stages of formation. 7 Despite the delays and misunderstandings that were encountered, the task force sees IMS as a positive example of how a decentralized system such as the United States can formulate a coherent national approach to international science and technology cooperation through public-private consultation. Real World Computing Program The Real World Computing Program (RWC), was launched by Japan in 1992 as a 10-year, $500 million effort to develop theory and related applications associated with "flexible information processing”. 8 RWC's major research areas are theoretical foundations, novel functions, neural systems, massively parallel systems, and optical systems. Research is managed by MITI's Electrotechnical Laboratory and the Real World Computing Partnership (RWCP), a consortium of 16 Japanese companies and four foreign research institutions. Part of the research is contracted to public research institutions. RWCP has set up the Tsukuba Research Center as a central lab for coordinating and integrating the distributed work. Intellectual property rights are jointly owned by the Japanese government and RWCP. Updated information about RWC and research results is available on the RWCP home page. 9 RWC plans to hold large international meetings every two or three years. The United States and Japan collaborate in one aspect of the RWC, known as the Joint Optoelectronics Program (JOP). JOP is a jointly run broker service that links designers of advanced systems for computing requiring optoelectronic devices and modules with suppliers of these components. The Japanese broker is the Optoelectronics Industry and Technology Development Organization. The U.S. broker team consists of the Optoelectronics Industry Development Association, the Microelectronics and Computer Technology Corporation, and the MOSIS service of the Information Sciences Institute of the University of Southern California. 10

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Maximizing U.S. Interests in Science and Technology Relations with Japan The JOP is currently operating on a trial basis until 1998. As of May 1997, 12 transactions had been completed or were in process. 1   Human Frontier Science Program, HFSP Activities, March 1997. 2   Nigel Williams, "Funding Inequality Threatens Novel Bioscience Program," Science, December 13, 1996. 3   Ibid. 4   George R. Heaton, Jr., International R&D Cooperation: Lessons from the Intelligent Manufacturing Systems Proposal, Manufacturing Forum Discussion Paper No. 2 (Washington, D.C.: National Academy Press, 1991). 5   U.S. Department of Commerce, IMS: Final Report of the International Steering Committee (Washington, D.C.: U.S. Government Printing Office, 1994). 6   Ibid. 7   See the IMS home page on the Word Wide Web, at <http://www.ims.org>, for updated information. 8   See David J. Kahaner, ONR Asia, "Draft of R&D master plan for Real World Computing Program January 1992, and "Real World Computing, Symposium and Projects,'' June 1994. At different stages of development, the project has been known formally or informally as the New Information Processing Technology Development Program, the Sixth Generation Computer Program, and Four Dimensional Computing. The last is the English translation of the official Japanese name. 9   See RWCP home page on the World Wide Web at http://www.rwcp.or.jp 10   See Joint Optoeletronics Project home page on the World Wide Web at http://www.OIDA.org/JOP. modules was launched in 1994 under a U.S.-Japan agreement, while the bulk of the Real World Computing program is being conducted as a Japanese national project, with informal small-scale foreign participation. The Micromachine and Atomic Manipulation consortia have been organized as national projects, and each has several foreign participants with critical expertise. No new MITI proposals for large international R&D programs have emerged in the past several years as Japan's approaches toward international science and technology cooperation have shifted. In recent years MITI has launched smaller-scale international technology initiatives in Asia, such as a center to demonstrate environmental technologies in China, and has proposed collaborative R&D projects under the Asia Pacific Economic Cooperation forum. 62 At the same time, Japanese companies also undertook their own extensive efforts to tap foreign technological capabilities during the 1980s and 1990s, including overseas R&D facilities, collaborative R&D with foreign universities, particularly U.S. ones, and acquisition of foreign high-technology start-ups. These linkages also raised concerns in the United States. Although the number of new investments and programs has fallen in the past few years, anecdotal evidence indicates that at least some Japanese companies are continuing their focus on international collaboration in fundamental science and engineering research related to their core businesses. 63 62   For a summary of Japanese government efforts in this area, see National Science Foundation Tokyo Office, "Japan's Technical Cooperation with Asian Countries," Report Memorandum #96-17, July 1996 63   There are no comprehensive reliable data on foreign corporate funding of U S university research. A 1993 report by the Office of Technology Assessment contains a conservative estimate that Japanese companies fund perhaps $50 million of U S. university research per year, representing about two-thirds of all foreign corporate funding and less than 5 percent of the total industry support See U S Congress, Office of Technology Assessment, Multinationals and the National Interest Playing by Different Rules (Washington, D C U.S Government Printing Office, 1993), pp 108109 Although Japanese companies are gradually expanding research ties with Japanese universities as well, foreign institutions often are more capable and flexible See "Universities and Companies Learn Benefits of Teamwork" in Science, op. cit, pp 1174-1175 There are also indications that Japanese companies are stepping up efforts to establish R&D facilities overseas, after a lull of several years. See "Kenkyu kyoten, kaigai ni" (Establishing research facilities abroad), Nihon Keizai Shimbun, June 1, 1995, p. 1.

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Maximizing U.S. Interests in Science and Technology Relations with Japan The results or long-term impacts of these efforts by Japanese companies are still difficult to assess. Investments in foreign high-technology start-ups or universities involve higher technological and business risks than traditional patterns of arms-length licensing of proven technologies. Still, there have been significant changes in how Japanese companies approach international collaboration. The best examples perhaps come from the semiconductor industry, where many observers in Japan and the United States believe that U.S.-Japan corporate alliances have become more reciprocal and balanced in recent years, particularly in terms of expanding opportunities for market participation, and in some cases more symmetrical in terms of technology flows. For example, the foreign share of the Japanese semiconductor market rose from 8 percent in 1986 to over 30 percent in 1996. 64 Another factor that has had an influence across a number of high technology industries is change in intellectual property rules, particularly in the United States. 65 New Challenges In recent years, Japanese companies in several industries have been challenged by resurgent U.S. companies and companies based in Asia. Despite industry and government initiatives designed to improve Japan's capability to independently generate fundamental innovations and effectively access foreign innovation, results have been slow to appear. Recent Japanese success stories—LCD displays and video games are perhaps the best examples—have been built on traditional patterns of technology importation and modification for novel applications. Although Japan faces challenges, the institutions and capabilities underlying Japanese innovation possess deep strengths, which the task force believes will reassert themselves in perhaps unexpected ways. 66 One critical question is how the accelerating movement of manufacturing activities offshore by Japanese companies will affect their long-term technological capabilities and competitiveness. 67 Also, the Science and Technology Basic Law and Basic Plan are evidence of renewed efforts to build a stronger basic research base and to reduce dependence on U.S. fundamental research. The long-term impact of these measures will ultimately depend on the 64   There is considerable disagreement over the role that the U.S.-Japan Semiconductor Trade Agreement played in this shift. The agreement was signed in 1986 and renewed in 1991. In 1996, the agreement was replaced with an industry-to-industry agreement and a joint government announcement. For positive analyses of the agreement's role, see Laura D'Andrea Tyson, Who's Bashing Whom? Trade Conflict in High-Technology Industries (Washington, D.C.: Institute for International Economics, 1992) and The American Chamber of Commerce in Japan, Making Trade Talks Work: Lessons from Recent History (Tokyo: ACCJ, 1997). For analysis that argues that the agreement had a marginal or negative impact, see Bryan Johnson, "Let the U.S.-Japan Semiconductor Agreement Expire," Heritage Foundation, May 1996. 65   The basic differences between U.S. and Japanese intellectual property protection regimes and enforcement are fairly well known. It remains relatively more difficult for inventors to protect intellectual property in Japan than in the United States. Still, strengthening of U.S. intellectual property protection over the past 15 years, combined with the ability to exclude imports that infringe on U.S. patents, has given U.S. innovators greater leverage in dealing with Japanese companies than was the case in the past. See National Research Council, Corporate Approaches to Protecting Intellectual Property (Washington, D.C.: National Academy Press, 1994). 66   Chapter 5 contains review and analysis of these strengths on a sectoral level. 67   Eileen M. Doherty, ed., Japanese Investment in Asia: International Production Strategies in a Rapidly Changing World (Berkeley, Calif: The Asia Foundation and Berkeley Roundtable on the International Economy, 1995).

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Maximizing U.S. Interests in Science and Technology Relations with Japan capacity of Japanese government, industry, and universities to change their habits, relationships, and technical culture.