International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings (1997)

John P. Stern

Asian Technology Information Program

The Congress, the administration, and the American electronics industry arguably have a bright future together—if we can only figure out what it is. Perhaps by engaging in a dialogue, we can avoid the mistakes of the past—mistakes in technology policy that have cost Americans jobs, prestige, and control of their future.

Before this essay takes up the framework for government support of information technology in Japan, it might be useful to review why Tokyo remains an instructive case for Washington. After all, we have been told that Japan is financially crippled and afflicted with backward technology and that it is shrinking in influence compared with the emerging markets of Asia.

Jack Welch, the Chairman and CEO of General Electric, has cautioned American businessmen against "believing their own press clips." In 1994, Welch observed:

To those who believe that the Japanese electronics industry is mired in recession, a few facts are in order. The major Japanese electronics companies closed their worst year in recent memory on March 31, 1994. Even during this nadir of financial performance, NTT recorded over a billion dollars of profit, and Hitachi, Toshiba, and Matsushita over $500 million.² When an American information technology company is in dire straits, it loses a billion dollars, yet somehow the media convinced Americans that Japanese companies were in deep financial trouble even as they continued to record profits. Since then, financial performance, and more importantly, morale, among Japanese information technology companies has improved. True, American stock analysts may be unimpressed, and there are many medium-and long-term business issues besetting Japanese information technology companies, but they will be around for a long time.

What about the notion that the United States enjoys a huge technological lead over Japan in all the right areas of information technology? Of course, even if the United States were ahead in, for example, signal processing, Japan can and does recruit that talent in America's open job market. Nevertheless, when advocates of American technical superiority focus on particular products, they often point to semiconductors. It is true that, in 1993, the U.S. share of the $77 billion world semiconductor market was larger than Japan's. But not by much: in 1993, the U.S. share by revenue was 43.4 percent, whereas the Japanese share by revenue was 40.1 percent, according to the World Semiconductor Trade Service, less than a 4 percent lead. So the United States is ahead by a nose. That is more encouraging than the 1990 ratio, in which the Japanese semiconductor industry had more than a 10 percent lead. But it is nowhere near the 53 percent of the world market that the U.S. semiconductor industry enjoyed in 1984.

If we consider the "food chain" leading up to the highest value-added information technology in which the United States excels, the situation is more disturbing. As a result of technological dependency on Japan, the United States was unable effectively to punish a company that sold missile parts to Iran and perhaps Iraq; the U.S. semiconductor industry was panicked by a sudden shortage of epoxy resin for semiconductor packaging resulting from an accident; and the U.S. computer industry has been unable at times to offer customers better or lessexpensive products.

Significant progress has been made in promoting U.S. sources of supply for certain critical technologies, but very little progress has been made in countering the growing ideological influence of Japan. Japan is an attractive model of economic success for the rest of Asia. The U.S. press often describes the Japanese consumer as downtrodden. Yet in 1960, Japan had a per capita gross national product (GNP) of only $477, barely 20 percent of that of the United States. By 1990, Japan's per capita GNP exceeded that of the United States, and had multi-

plied nearly fiftyfold. The Council of Competitiveness found that Japan's standard of living showed 77 percent real growth between 1973 and 1993, compared with only 29 percent real growth for the American standard of living.³ Many countries in Asia look at Japan's demonstrated success, consider the alien nature of many U.S. notions of economy, society, and development, and conclude that the way to riches is to close one' s domestic market and export to America.⁴ The United States is wrong to assume that it can decline to compete with Japan in markets and negotiations and still win the minds and purchase orders of non-Japanese Asia.

Social structure is the foundation on which the legal structure of a nation's technology policy is built. It is not generally appreciated how different Japan's philosophy is on certain key social issues. For example, Japan does not have a ''Who Is Us?" debate. Although many information technology companies in Japan, including Hitachi, Toshiba, and others, are trying to restructure, the popular press attacked only the foreign-capital companies. An example is an article from a weekly magazine entitled "American-Style Firing Lands in Japan: The Panic of Japanese Employees in Foreign-Capital Firms" (Shukan Asahi, 1993). One of the firms is NCR Japan, which was incorporated in Japan in 1920 and is the oldest U.S.-capital electronics company in Japan.⁵ Even after 74 years, even with thousands of Japanese employees and factories in Japan, the company is not treated as fully Japanese.

Japanese companies may advertise in the same American news media that vaunt the "borderless economy" inhabited by the "global corporation," but their leaders do not believe that the ownership of manufacturing capacity is irrelevant. The best put-down of these arguments that I have seen is a comment by the president of Honda Motors on hearing the news that the British car company Rover had been acquired by BMW. Honda had a 20 percent stake in Rover and a long-standing relationship with the British company that was suddenly upset by the BMW acquisition. Britain, like Japan, is an island nation, but unlike Japan, is one that has allowed dominant foreign investment in its key technology sectors. The president of Honda, Nobuhiko Kawamoto, commented:

Domestic manufacturing in particular is viewed as vital to the national economy. Manufacturing technology is what raised Japan's standard of living, because one can get foreigners to pay Japanese for manufactured exports. In contrast, service industries are harder to export, typically employ fewer subcontractors, and inevitably involve the rendering of services by non-Japanese employees overseas. When 25.4 percent of the graduates of the elite University of Tokyo's Engineering Department entered the financial services industry in 1988, it was such a cause for alarm that the president of Fujitsu was called in by the Ministry of International Trade and Industry (MITI) to head a commission to stem Japan's drift away from manufacturing talent.⁶ It is believed that manufacturing has led to Japan's world economic power because only manufacturing allows a nation to resist being the pawn of foreign nations. A 1991-1992 nationwide six-hour television series on how electronics built post-war Japan⁷ included a patriotic scene from the yearly get-together of the engineers and officials in charge of Japan's VLSI [Very Large-Scale Integrated Circuits] semiconductor technology project of the 1970s. Keep in mind the standard line in Japan is that Japanese actions in the fall of 1941 were triggered by a desire to avoid economic encirclement by the Western powers.

To avoid technological encirclement, Japan monitors its competitors' research. The "not invented here" syndrome is rare in Japan. A single Japanese organization, JETRO [Japan External Trade Organization], that is affiliated with MITI is said to have a budget of $80 million and a staff of 80 people for its New York office alone.⁸ Part of JETRO's role is to report on American technological developments that affect Japanese companies. The United States has at least 10 government organizations in Japan monitoring Japanese technology.⁹ Unfortunately, many of these organizations have not identified the demand for, or usefulness of, the information they collect to potential users in industry, according to a recent report by the U.S. General Accounting Office. In addition, "the U.S. organizations' efforts are limited by the lack of. . . coordination of activities among the various. . . offices."¹⁰

It follows that if manufacturing technology is the way to trade up the standard of living ladder and guarantee national security, one should not lightly transfer technology. Japan's reluctance to transfer technology is a standard complaint of Japan's potential competitors in Singapore, Korea, China, and Taiwan. This

reluctance has so damaged Japan's relations with Asia that there is actually a Japanese corporate tax credit for technology transfer to prod companies to share privately developed technology with their Asian neighbors, provided those Asian neighbors pay in currency other than yen.¹¹ Currency-induced and stock-market-induced changes in the financial situation of Japanese information technology companies are causing some of them to consider licensing recent-generation technology for additional revenues.

The situation for Japanese government-owned intellectual property is different. Under Japan's National Property Law,¹² any fruit of research funded with Japanese government money is owned by the Japanese government. It is wholly owned if the researcher is a government employee, which includes national university professors and national laboratory staff, and jointly owned if the research was done by private industry with government money. Policy on the proper use of government property is determined by the National Property Study Council (Kokuyu zaisan shingikai), a statutory advisory group under the Ministry of Finance. The law was passed to prevent the abuse or waste of government property, and has been amended frequently to make sure that government-funded research remains attractive to Japanese industry and relevant to technology trends. Nevertheless, the practical effect, as many American companies have found out to their chagrin, is that if one does research in a Japanese government project, typically one ends up with a Japanese ministry as the joint owner of any patents that emerge from the research. The official in charge is sure to investigate the competitiveness of Japanese industry in the technology concerned before signing off on a license of the technology to foreign companies. Even for those technologies developed entirely by Japanese government laboratories without private industry participation, and freely listed as being available for license (e.g., through the Japan Industrial Technology Association [Zaidan hojin Nihon sangyo gijutsu shinko kyokai]) at a fee set according to standard royalty tables, there is a requirement that the technology be used for manufacture in Japan.

The Japanese school house is the stuff of legend. We have all heard that little Taro excels at mathematics and listens obediently to his teacher's lectures. Commentators in the United States and Japan have suggested that rote learning has stunted Japan's capacity for software development, but why has it not similarly stunted Indian and Chinese software engineers? Perhaps Japan's lack of venture capital is more properly to blame. At any rate, few commentators have stressed that the Japanese school house also inculcates a strong sense of community with other Japanese. When an American boy learns about trains, he learns about the engineer. When a Japanese boy learns about trains, he learns that the train only runs if everyone does their job well—not merely the engineer, but the conductor,

the switchman, the maintenance workers, even the janitorial staff who clean up at the end of the day. As a result, Japanese are reluctant to beggar their Japanese neighbors: A poll released in January 1994 by the Prime Minister's Office showed that 41.5 percent of Japanese surveyed worried that "price buster" discounted goods would hurt Japanese manufacturers.¹³ The Japan Fair Trade Commission pilloried Nippon Denchi, a battery maker, for failing prominently to label its car battery as "Made in Taiwan," since it found that 45 percent of Japanese consumers are concerned about the country of origin if it is not Japan.¹⁴ As a result, there is considerable popular support for government assistance to Japanese manufacturing, particularly if it is threatened by foreign competitors.

The fact is, most Japanese government officials do not believe they exist to help the private sector. They exist to help Japan, to promote national goals and the common good. Some Japanese government officials, even in ministries in charge of industry, are contemptuous of businessmen. They realize, however, that in the course of its operations, Japanese business creates technology, jobs, and manufactured exports, and that these attributes of business are useful to national security, national prestige, and the national standard of living.

Most Japanese government officials also believe that their training and neutral position allow them to take a broader view of where an industry should be going than is afforded to a company involved in the daily fluctuations of commerce. It is commonly said in Washington that this leads to Japanese government officials "picking winners and losers." This is wrong: The French pick winners and losers. The Japanese government, in my experience, reduces business risk by fostering discussion of technology trends, developing support for technologies in the Japanese press and in the Japanese legislature, promoting standardization, blunting foreign competition, and supplying seed funding. Not everything the Japanese government promotes leads to success: Japan has dumped billions of dollars in national funds into its software industry, to be sucked up by many of the larger Japanese computer firms. Japan's packaged software industry is still less competitive than that of the United States, in part due to the dominance of the very same hardware firms that take advantage of Japanese government largesse.

As the Ministry of Finance is faced with a variety of social costs in an aging Japan, it has become more reluctant to give money to the private sector to develop technology than it was 20 years ago. Government officials have bred a wide variety of fund-raising creatures to bear the financial burden. These include legalized motorboat gambling, a portion of the proceeds of which funds the development of ships powered by superconductivity; and legalized bicycle race gambling, a portion of the proceeds of which funds publication of telecommunications technology standards. Considering that Americans spent an estimated

$16 billion on gambling in 1993, perhaps the solution to our advanced technology funding problems is to locate a flat-panel factory on an Indian reservation! Government guarantees or bonds for infrastructure investment are common, but have to be carefully structured: The Ministry of Finance has repeatedly refused to fund Japan's version of the information superhighway with bonds, stating that they can only be used for bricks and mortar construction, not network construction.

Japan's Telecommunications Business Law, in force since April 1, 1985, left large sections of the domestic telecommunications market dominated by the former monopoly carrier, NTT. This situation is being revisited by the Ministry of Posts and Telecommunications, but in the meantime, the 65 percent government-owned NTT has continued to function as a laboratory for Japan's progress in information technology research.

Japan also funds targeted research through precise research and development tax credits and depreciation schedules. In addition to a general research and development credit for, say, a new kind of ketchup, Japan defines over 130 specific technologies that will qualify for a credit. In addition, Japanese depreciation schedules frequently encourage the immediate introduction of new equipment—such as semiconductor production equipment, telecommunications switches, and mobile radio equipment—by offering accelerated depreciation that is greatest in the year in which the tax law first comes into effect.¹⁵ As a result, information technology infrastructure is funded indirectly by the government from taxes forgone.

In the United States, any person can start a trade association or foundation. In Japan, under Article 34 of the Civil Code, only the ministry in charge of the proposed association's activities can grant the tax-free spark of life that transforms articles of incorporation into an approved nonprofit organization. The ministry continues to approve the organization's financial statements, often places a retired ministry official in charge, and tries to control the organization's activities. Some nonprofit organizations in Japan, particularly foundations (zaidan hojin) focus money from industry on research problems in such areas as telecommunications and optoelectronics. Occasionally, the activities of major foundations, such as the Key Technology Center, will be funded by government sources such as the Japan Development Bank and the dividends from NTT stock held by the Ministry of Finance.

Perhaps the most pervasive method of funding Japanese research is for the Japanese government to buy primarily from Japanese manufacturers, even if they are less competitive. An American currency-counting equipment manufacturer, whose products are used in 37 countries, once tried to sell to the Bank of Japan. They were reportedly told, "We've been buying from a Japanese company for 30 years, and we will continue to do so even if your products were better and less

expensive." Since the Bank of Japan was left out of the Tokyo Round GATT Procurement Code, there was no recourse for the U.S. company. But even given GATT, there are many ways in which the Japanese government provides a safe harbor for domestic industry. For example, when a U.S. company will supply equipment inside a special structure, one can make the construction costs of the structure exceed the cost of the equipment, call the resulting contract a contract for construction services instead of a contract for "goods," and argue that GATT codes do not apply. Or one can limit procurement of airport control software to companies with a "Class A Electrical Manufacturer's License" in Japan, thereby cutting out every American company without a factory in Japan, and every American software company by definition.

Japan's system of promoting information technology research faces challenges due to a variety of global and domestic forces. But so long as there is at least a majority opinion on the desirable social and economic fabric of Japan, and a recognition that government and industry play different roles toward the common goal of promoting the general welfare, Japan can continue to respond rationally to those challenges. This National Research Council project is fundamentally not about how to promote the technology America wants, it is about how to promote the kind of nation America wants to be.

"American-Style Firing Lands in Japan: The Panic of Japanese Employees in Foreign-Capital Firms." Shukan Asahi, February 26, 1993

Asahi Shimbun. June 14, 1990

Byrnes, M., Australia and the Asia Game. Paul and Co., New York, N.Y., 1994

Council on Competitiveness, Challenges. Council on Competitiveness, Washington, D.C., July 1994 International Herald Tribune, February 22, 1994

The Japan Times, January 16, 1995

Nikkei Sangyo Shimbum, August 26, 1992

Sangyo zeisei handbook (Handbook of industrial taxes), Tsusho sangyo chosa kai, Tokyo, 1994

Stern, J.P., "Technotaxes—Japan's Subtle Competitive Weapon," Global Competitor vol. no. 1, 1993

Stern, J.P., Technotax: How Japan's Tax System Spurs Technology. Unpublished manuscript, Asian Technology Information Project, Tokyo

Stern, J.P., "Between Bureaucrat and Buyer" in The Bureaucrat's SuperPower. Kodansha, Tokyo, 1996

Stern, J.P., "Engineering in the Regulatory Environment," in Alinn, (ed.), The Business Guide to Japan. Butterworths-Heineman Asia, Singapore, 1996

U.S. General Accounting Office, Foreign Technologies: Collection and Dissemination of Japanese Information Can be Improved. GAO/NSIAD-93-251, Washington, D.C., 1993