How Japan Innovates

Mark Jarrett, Renee Wu, Sam Olson, Robby Gottesman, and Keita Yagi (The Great) 354: Economics of Science and Technology

How Japan Innovates

Market Structure and Innovation

Japanese culture highly discourages startups. People are more risk averse and it is more punishing socially to fail. Most Japanese people also believe in serving for one company for life. There is also a bias against software, which is what most of the startups are about today. The government is trying to improve on that and the preference for hardware against software is softening. But this is the status quo right now.

The economy is dominated by oligarchic international technological corporations, especially in manufacture and electronic industries. The competition is fierce and it encourages R&D expenditure in business sector, which explains why Japan has more private sector R&D expenditures than most western countries. 

Despite the cultural difficulty, people are becoming more accepting of startups in Japan. The big difference between Japan startups finance and America startups finance is that for Japanese companies, IPO comes much later compared to IPO of American firms. It makes entrepreneurship harder. That’s also a major game changer. It changes the venture capital schemes. Most of startup firms look to Corporation when they need investment because the cost of venture capital is higher than US. Corporations have incentives to buy out startups as part of their R&D.

Facilitating financial intermediation and supporting startups are in the New Growth Strategy, an economic plan for Japan that the government publishes every few years. Hopefully it would shift the structure of financing startups and encourage more startup innovation.

International Trade and ​Leading and Lagging Industries

Japan’s foreign direct investment is rather lackluster due to a sluggish economy and contributes little to innovation [3]. Japan has very little with regard to formal barriers to trade, but has more informal trade barriers. Government guidelines and Japanese consumer preferences generally prevents totally free trade. Japan has a $81.6 billion trade surplus, and is apprehensive about any possible drop in export value. As a result, Japanese industries are incentivized to innovate to retain export market shares. This innovation can either be imitated or researched. The following table outlines Japan’s major trading partners.

Exports (as % of total export value)	Imports (as % of total import value)
United States: 19%	China: 26%
China+Hong Kong: 22%	United States: 11%
South Korea: 6.6%	Australia: 5.2%
Thailand: 4.4%	South Korea: 4.3%

Table 1

Japan has one of the world’s most advanced automotive industries (accounting for 19% of exports), and adopts the most advanced techniques possible to stay ahead. Japan has an indigenous semiconductor industry that was a huge share of the innovation in the economy in the past, but is generally less important today (7% of exports). Japan also imports a fair amount of raw materials that are processed into different industrial materials like copper and steel (14-15% of exports).

Despite this, Japan produces almost no raw materials, Textiles, and few Medical supplies\chemicals (these represent 15%, 6%, and 9.1% of imports). Japan is an excellent innovator and imitator in its leading industries, but is heavily reliant on trade to make up for its deficiencies in lieu of imitation.

Japan makes it very difficult to import through tough standards, quotas, and domestic consumer preferences. Japan’s trade policies change more through international pressure than domestic incentives . This has allowed them to open japan to more and more trade since the 1960’s. Overall, export markets incentivize innovation in Japan’s advanced industries, but not much in other fields.

Government Policies Toward Innovation

 

Figure 1

One of the more recent and prominent pieces of legislation to address innovation in Japan is the Basic Energy Law of 1995, which was passed to create a higher standard of science and technology. The Basic Energy Law of 1995 clarified the role national and local governments in developing science and technology and the general promotion research, along with suggesting the availability of combining applied and basic research into one step. The law also highlighted the importance of cooperation between national research institutes, universities, and private sectors agents for the purpose of accelerating development. Following the passage of this law in 1995, Japan set out on to pursue its first S&T five year plan in 1996. During each of the five year plans, Japan sets a number of abstract and concrete goals for the development of science and technology, while also highlighting future challenges that will continue to persist for longer periods of time. Once a five year plan concludes, another is drafted and released publically. Currently Japan is in the midst of their 5th S&T five year plan, which which spans from FY2016-2020. 

There are also structural aspects of Japan’s political structure to consider as they relate to government innovation policies. The general bureaucratic structure begins with The Council for Science and Technology Policy (CSTP), which was set up in the

Cabinet Office as one of the policy councils during the reorganization of government ministries and agencies in January 2001. Under the leadership of the Prime Minister (“Great Abe”) and the Minister of State for the S&T Policy, the Council functions as the centralized office to promote the S&T policy. Members include academics and business leaders. 

Generally moreover, Japan has highlighted the importance of international research initiatives. This includes both regional and general international science development. The most prominent research cooperative with Japan is the United States. Japan has also recently noted the importance of working within the Asian country cohort for greater regional economic integration via ASEAN. There is also some note of Japan’s interest in integrating European and Japanese research, though this is much less prominent than either Asian or North American research developments. 

The Japanese government is seen as adopting three types of general policy types to encourage innovative activities. The first is for the central government to encourage the adoption and diffusion of foreign technologies through “lowering private-sector risks, stimulating demand, and providing educational and other infrastructure”. Other policies focus on inspiring entrepreneurial activities to have the resources and skills to reappropriate new technologies, along with finding potential improvements to previously existing technologies by utilizing a new technology. These all speak to a greater goal of Japanese innovation policy: creating a political and cultural climate to adapt in technological adoption while being open to new approaches towards innovation. 

At the same time, Japan’s government has highlighted a number of areas for policy to explicitly focus on. These most notably include addressing societal problems, specifically those associated with the demographic shift and issues surrounding its aging populace, and strengthening the public research system. While the S&T five year plans have attempted to introduce legislation to address the latter, the former also has seen concrete legislation for remedying the issue. The most notable legislation to address the former issue highlighted is in the ​Shokuiku ​Promotion, which establishes an a​wareness of the sustainability and environmental aspects involved with food and nutrition.​ This point rubs against the opinion of whether improved nutrition directly aids in increasing innovative activities, but the people of Japan are regarded as holding the two closely together - even if by a weak association. Though not directly related to innovation policy, the aim of these laws is to promote well-being, which indirectly allows members of the populace to contribute more meaningfully and sustainably to society.

Regional Issues

There is a limited literature on specific regional issues related to Japanese technology. Those few resources mentioned the contribution of universities and large corporations in innovations and how uneven distributions of those facilities can cause an unbalanced structure of innovation, favoring the Kanto region. 

Tsukuba university located in Kanto region and the city around it is referred to as a “technology city” by Japanese people. There have been some questions about the real effect of having this city in the region, especially those questioning whether the university actually facilitates the innovation. Nonetheless the Kanto region is known to be one of the largest research and technology centers in Japan. Although some refer to this region as the Silicon Valley of Japan, the research in Tsukuba is largely dominated by public sector research. 

Innovation Infrastructure

 

The infrastructure of Japan gives a wide availability of different methods of transportation, while at the same time allowing greater ease of communication and internet-related activities. Simply put, Japanese infrastructure is generally more developed than a majority of countries from around the globe. To first address the most prominent feature of Japanese infrastructure, internet is widely available, including most public areas. Furthermore, Japan has an efficient public transportation network that allows ease of access for tourists and locals alike. This includes high performance trains along with the standard fare of buses, taxis, and alternative transportation methods. As of late, Japan has even begun more development of their railways. Recent initiatives have been set to build maglev train networks connecting major metropolitan areas such as Osaka and Kyoto. 

While the development of communications and internet infrastructure has enabled Japan to be connected to global networks at seemingly anytime and anywhere, it has some drawbacks. The wide availability of connectivity in Japan blurs the line between leisure time and work time, especially for internet-related activities. This has consequently lowered the productivity of workers - such as Keita - which in turn has negatively impacted the innovative activities of Japan’s workforce. 

Telecommunications in Japan align with the available technology composing internet and transportation infrastructure, inasmuch as its highly developed and widely available to its populace. In fact, Japan is regarded by a number of sources as having one of the most developed telecommunications industries. However, one of the main issues associated with the telecommunications industry in Japan is outward reach.

There are a number of Japan-only success stories, which has brought about the use of the term “Galapagos-issues” to describe domestic success and international failure. These issues have subsided some since the term was initially used, notably through the development of smartphone technologies, including nationally recognized and affiliated apps. 

Intellectual Property Regime

 

The Japanese patent system is a lot like the American one, but with a few notable changes. People apply for patents on new inventions that last 20 years from the filing date. The claims in the application are evaluated by the Japanese Patent Office and are either granted or denied. Interestingly, the system also includes another type of patent called a utility model. Utility models are minor upgrades to existing inventions that provide some benefit (say, a clip on a pen that allows it to hold onto your pocket) that do not qualify for a full patent on their own. This patent type lasts only 10 years, but has less stringent requirements than a full patent. A design patent can also be obtained to protect the external characteristics of an item, essentially protecting its “aesthetic.” These protections last 20 years and can be used to protect marketing campaigns and specific product incarnations. Trademarks are also protected for a period of 10 years, but this protection can be expanded indefinitely as long as continuous use is proved and a new trademark application is filed. 

The Japanese patent system was laxly enforced compared to typical international standards until major reforms came in the 1990’s. Under a joint agreement with the United States in 1994, Japan agreed to more strictly enforce patent infringements and to increase the breadth of patent rights. Additional reforms in 1998 and 1999 allowed patent holders to base damages on the sales of the patent infringer with reference to the holder’s profit margins and strengthened holders abilities to collect evidence for patent trials. Software was allowed to be patented during this time as well due to a slight change in definitions that came with patent reform. Overall, the patent system seems generally in-line with the American and European systems, but there also seems to be less enforcement, but more breadth due to the patentability of utility models and designs. 

Financing of Innovation

Like most industrialized nations, Japan rewards innovation by granting monopoly rights to inventors that publicly share their knowledge and creations through the patent system. The government also tries to encourage innovation through direct funding to universities, corporations, and grantees that solve problems the government is looking to fix. The Science and Technology Policy Council in coordination with the cabinet of the Prime Minister sets a basic plan for types of innovation they’d like to encourage and funding schemes. These plans are then passed on to the different governmental ministries and agencies that relate to fulfilling the goals. The agencies then determine specific ways to dole out the money to the universities, companies, and independent administrative agencies that carry out the research. 

However, 77% of total Japanese R&D is carried out by businesses themselves. Much of this research is funded by semi-formal groups known as ​keiretsu​. These arrangements involve companies sharing parts of their stock with each other to hedge against takeovers or other economic downturns. The group also agrees to collectively fund long-term innovation projects that help move the industry forward. These groups have dominated the Japanese economy since the fall of family-owned vertical monopolies known as ​zaibatsu ​since the end of the second world war. Largely thanks to this system, Japan ranks 3rd in the OECD for its R&D/GDP ratio and first in its patents/GDP ratio. 

Structure of R&D activity

Japan is characterised by highly developed private sector research structures and strong international technological cooperation. Japan’s spending (as percentage of GDP) on innovation is top three among OECD countries. The government plan is to increase both private and public sector spending on research to over 4% of GDP by 2020. The following innovation I’m going to talk about is STI innovation, despite the fact that Japanese companies are known for their openness to customers’ suggestions.

For Public Sector, Japan’s public research system is strongly oriented toward applied and experimental science. The university research and basic research in general don’t show strong advantage. It underperforms among the OECD countries. In the New Growth Strategy published in 2010, the plan is to triple the amount of investment from corporations to universities and research institutes. The plan also claims that Japan will build five new world-class research center. 

The private sector plays a greater role in R&D investment in Japan than in major Western countries. That’s because Japan’s defense-related research is relatively small.

98% of R&D research in business sector in Japan is self-financed. 

Start-ups in Japan are highly discouraged, due to the risk averse culture and high intolerance of failure.

In general, business sector R&D composes the majority of innovation. It’s partially due to the competitiveness of the market. It is also partially due to the weakness of public research system. 

University System 

Although the university system is the main part of the Japan’s national innovation system, there has been several studies indicating that the quality of the patents from universities is low. By 2008, the aggregate profit from patents owned by Japanese universities is less than any one U.S. university. Although the aggregate number of patent applicant from Universities has been increasing per year, it seemed like their strategy was quantity over quality. 

Interestingly, many universities topping the list on quantity of patents (552 for

Kyoto university) are not those that have the highest revenues coming from patents. The largest patent profit taker is nagoya University, and it raises 164000000 Yen) This means there is a little correlation between number of patents held by an university and the profits raised.  According to the article, most of those R&D part of the universities are actually losing money by innovating. (The cost of applying for patent and managing the process is greater than the profit.) As a result, most of colleges end up trying to hire better scientist but, it does not work out well because of the new law of 2002 and 2004. Those laws set the university as a default patent holder, so scientists felt less incentivized to innovate. Some university return the patent rights to researcher (like Yamagata Univ) and those universities tend have higher patent revenues. One of the article talked about the tendency for Japanese professors to research on something that is not market beneficial and how that is related to the lower revenue to patent ratio. 

According to the further research, those conditions have improved in the last few years. By 2013, aggregate revenue from patent has increased to 2000000000 Yen.  There has been an increasing tendency of universities to work together with the corporation to increase the revenue (20% increase since 2008, as of 2013.) There is also an increasing movement of selecting for a patent within the university before formally applying to cut the cost of application. As the result, aggregate number patent application by universities has been constant for recent years. (The author referred to this as a shift in notion of Universities to Quality heavy patents.) Although those improvements have been made, statistically many universities still lose money by innovating. Most of their spending is on the consumable items, but the ratio of money spent on the facility is also greater than most other nations.

 

Figure 2

Japan is represented with the most left bar on the graph. The vertical axis represents a hundred millions of yen. Blue color in the column represents man cost, red is the cost of durable goods and the green is the facilities’ cost. The countries listed are Germany, China, France, Italy, Spain, Korea, Netherlands, Australia, Taiwan, Swiss and Belgium. The data for Austria and Swiss is from 2008, all other countries’ data are from 2009. 

Social Norms, Customs, and Institutions

According to the recent survey conducted by the Japanese government, more than half of the populations (62.3%) are interested in engaging in patenting activity and 64.2% of the corporations consider the innovations to have a positive contribution to their revenues. However, it has been revealed by the same survey that most of the possible research funds hosted by governments are unknown to the population. Most of the funding had less than 50% of the population recognition rate. 

Different sets of surveys showed that smaller companies tended to care more about innovation when asked, “How much do you care about the innovation in your company?” Smaller companies were 20% higher than the average sized or large companies. Suggesting possible difference in research incentives depending on the size of firms. 

The national government has set up an easy access for a general population to look up a patent on their site. There are two databases of patent knowledge. The first is easily accessible, and the second, more substantial but harder to use, is the internet library. There are several “start up” guide books for Japanese patent system suggested in their main site. The cover of one such guidebook is shown in Figure 3. It is possible that the Japanese government is trying to inform Japanese population more on their patent systems to incentivize the innovation. 

 

Figure 3

Bibliography: 

Market Structure and Innovation

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International Trade and Leading and Lagging Industries

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Regional Issues

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Innovation Infrastructure 

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Financing of Innovation

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Structure of R&D activity

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University System 

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