Innovation in Japan
What makes innovation in Japan so distinctive in comparison to other Asia-Pacific economies?
1.Introduction
It is commonly believed that the leading role in East Asian economy which has played by Japan since 1960s is largely attributed to its in-depth and wide-ranging innovation system. Its original production system, innovative product development, restless improvement philosophy, orchestrated internal management approaches and strong inter-firm relations continue to characterize the distinctiveness of Japanese innovation system and set the benchmark of innovation for other East Asian states. Even in the hard time of economic development during the ‘bubble burst’ time of 1990s, Japanese large manufacturers still remained competitive internationally in innovation and product development capabilities. The national expenditure on research and development (R&D) in Japan has continued to increase since 1980s and its R&D expense has long been at the top among Asian countries. In 2003, the proportion of R&D expense in Japanese GDP accounted for 3.35%, even far exceeding 2.61% in US and 1.93% in EU (Ministry of Education, Culture, Sports, Science and Technology, Japan, 2005)
As the globalization trend and the emergence of East Asian economies constantly challenged Japanese previous dominant and prominent industries, this essay will try to explain what makes the distinctiveness of Japanese innovation system that enables it to keep its lead in innovation under such challenge. This essay will first give an overview of the development process of Japanese innovation system from Meji Restoration to the 1990s. Two distinctive features of Japanese innovation system can be identified from this process: large corporation domination and regional concentration. Then the emerging pattern of Japanese innovation system which features a triple-helix network between government, universities and industries will be analysed. With the reference to the surging life science industry in Japan, this concept will be further illustrated. The essay will be concluded by comparing innovation system in China to Japan. Some distinctive features of Japanese innovation system will be addressed again.
2. The Development of Japanese Innovation System
When Japan opened its door to the world in the Meiji Restoration after more than two hundred years of isolation, it realized its large distance with Western countries in terms of science and technology. Therefore, the Japanese government made great efforts to ‘modernize’ the country in order to catch up with the Western Countries. It ‘imported superior technology, hired engineers form abroad, educated its people, and encouraged the entrepreneurs to assimilate foreign technologies and apply them in Japanese factories.'(Odagiri & Goto, 1993, P.76)The establishment of University of Tokyo in 1887 together with other national universities which was founded later became the embryo of Japanese innovation system. At that time, the Japanese government emphasized pragmatic education in the universities and expect universities to spread their knowledge to industry. Many graduates from those universities later became the founder of Japanese major manufacturing companies. Moreover, the establishment of Japan Society for the Promotion of Science (JSPS) was approved by Japanese Diet in 1932 to further promote the development of science and technology, and in order to strength the linkage of innovation between universities and industry, a University-Industry Cooperative Research Committee was launched the next year(Edgington, 2008, P4).
However, during the World War II, the Japanese economy was devastatingly destroyed and the innovation activities were also seriously affected. After the war, in order to recover from the massive damage and revitalize its economy, the Japanese government, especially the Ministry of International Trade and Industry (MITI) chose certain key civilian technologies as strategic priority and orchestrated work on them and that this, together with strong inter-firm cooperation, led to a powerful and efficient national innovation system which was later even referred by European countries and US (Nelson & Rosenberg, 1993, P.17).
Under this system, some distinctive features emerged in Japan by the end of 1980s. One was featured by large companies which had gradually developed into strong competitors in technology-intensive products had also taken a major role in the national innovation system. During 1970s and 1980s, large manufacturing companies adopted the strategy of imitating technologies and processes from Western countries and adding incremental improvement to them to increase their international competitiveness. Besides the lifelong employment system encouraged the large companies to train their own researchers and engineers to carry out R&D activities. Unlike the Silicon Valley model which characterized by a large size of start-ups and dynamic interaction between researchers and firms, although Japan has the highest proportion of small and medium-sized enterprises (SMEs) and employment among all the major industrialized countries, they were hardly provided preferential policies to support their innovation(Edgingto, 2008, P.5). Most of the privileged policies and R&D budget were skewed toward large companies, and between large firms, they were often closely connected by inter-firm ties. Accordingly, the large companies see little need to seek for collaboration with universities in term of product innovation.
Another feature during this time was the over-concentration of industrial production in the Kanto (centred on Tokyo and the surrounding Keihin industrial district), Chubu (concentrate on Nagoya and Aichi prefecture) and Kansai (Osaka, Kyoto and Kobe as its centre) region which led to the growing disparity among regional economies. The benefits of closeness to the national government, the easier access to information and technology, and the concentration of promising research personnel in Tokyo and other large cities continue to attract industries when locating their new companies. In order to develop the economy of peripheral regions, MITI launched a Technopolis program in 1983.
MITI designated 26sites for high-technology production decentralized throughout Japan based on new legislation. In each case, local government were asked to build up their strengths and mobilize local resources as far as possible to attract new industries and develop high-technology manufacturing complexes. Most of these were based around local universities or research institutes. (Edgington, 2008, P6)
Under this situation, the linkage between university and industry was again tightened in response to government strategy which linked the technology development together with the policy goals aiming at promoting regional economy.
Since the early1990s, the Japanese economy was trapped in the stagnation brought by the ‘bubble burst’ started in the real estate and stock market subsequently extended to its financial sector and other industries for over a decade of time. During the 1990s, the appreciation of yen to dollar greatly damaged the exports of Japanese large manufacturers and at the same time the domestic demands also shrank sharply. Meanwhile, the manufacturers of other East Asian state such as South Korea, Taiwan and China gradually became more competitive in the global market. Even though their product may be considered inferior to Japanese products initially, the open technology environment and gaining experience from the surging domestic market enabled then to improve quality of their products rapidly. This drastically challenged the advantage of Japanese manufacturers in global market share. This caused the significant decline of the profit in hitherto competitive industries such as electronic and automobile manufacturing. Although the input of R&D investment was still increasing and Japan still ranked among the top states in term of R&D input, the companies began to have difficulties in making profit from the output of R&D.
SMEs were enduring even more pains during Japanese economic stagnation. New firm growth fell from 7% in 1960s and 1970s to less than 4% in early 1990s, hitting the bottom of its growth rate in around 25 years (Edgington, 2008, P7). After Asian financial crisis in 1997, the SMEs were facing more sever competition to survive. Numerous firms were shut down as city banks and regional banks sharply cut down the loans to SMEs in order to keep their financial health. Consequently, a large amount of companies went bankruptcy during this time.
Moreover, the Technopolis program had not achieved the expected result as MITI originally designed, for the inherent bias in most MITI’ post-war policies which largely favoured large corporations. Small firm which was established in the high-technology sites still hardly received the policies incentives from the government. Their connection with local universities remained weak for the insufficient support mechanism on technology transfer. Professors in the universities were prohibited to engage into business activities while universities were lacking of initiatives to creating of venture firms from their research to foster the local economy.
These facts suggested that the hitherto successful innovation system had met its bottleneck to lead the Japanese economy out of its stagnation. Accordingly, large Japanese firms felt it necessary to start innovation at the early stage of technology development rather than adding incremental improvement to existing technologies to create and keep their competitive advantages. At the same time, the success of US policy reforms which was designed to encourage commercial activities by universities such as the Bayh- Dole Act provided Japanese policymakers a model to reform the Japanese innovation system (Sunami, 2001). Therefore, both the government and companies felt that the linkage between universities and industries needed to be further strengthened to achieve substantive innovation, and a strong intellectual property (IP) system should be build to promote basic research carried out by universities to be commercialized by industry. Policy inclination towards university start-ups and SMEs were also demanded in order to create a more entrepreneurial business environment.
3. The Emerging Pattern of Japanese Innovation
From the mid-1990s, a series of reforms was designed to establish a new institutional framework for national innovation. The passage of Science and Technology Basic Law in 1995 by Japanese Diet and the launch of the first Science and Technology Basic Plan under this Law set up the basic strategies for technology and innovation polices during the period of 1996-2000 which aimed at committing to construct an advanced science and technology oriented nation, strengthening the budget and infrastructure of public research, promoting technology development and economic growth in part though university, industry and government cooperation (Government of Japan, 1996) However, the lack of organization and coordination between policy-related ministries and agencies undermined the effectiveness and efficiency of these policies. Therefore, the Council of Science and Technology Policy(CSTP) , which was set up in the Cabinet Office with the aim of reorganizing government ministries and agencies, was inaugurated in January 2001.Under the leadership of the Prime Minister, the Council serves as the commend office for the national promotion of science and technology. It overlooks the formulation of all science and technology policies, and ensures the overall coordination of implementation, especially between the Ministry of Economy, Trade and Industry (MITI) and the Ministry of Education, Culture, Sports, Science and Technology (MEXT). The priority fields that promoted by CSTP were life science, information and technology, environmental sciences, and nanotechnology and new material while the other promoted areas include energy, Monodzukuri (integration of skill, technology and science), social infrastructure and frontier. (Council of Science and Technology Policy, 2008)
Improving the cooperation between university and industry was an important feature of government policies during this period of time. In 1998 the enactment of the Law of Promoting Technology Transfer from University to Industry approved the establishment of Technology Licensing Organizations (TLOs), signifying a more active intellectual property strategy adopted by the government. On one hand, researchers were able to obtain patents on their inventions through these university afflicted TLOs. On the other TLOs assisted the researchers to commercialize their scientific and technological approaches by licensing their inventions to private firms. TLOs may be set up inside universities to represent a specific university or outside to represent several universities or other public research institutions. Hence, they were not part of the universities but often initiated by faculty of universities. Besides, the patent fees for approved TLOs were greatly reduced. The Japanese Bayh-Dole Act -the Law of Special Measures for Industrial Revitalization enacted in 1999, making it easier for firms to obtain license to the intellectual property rights of publicly funded researches. In 2000, the Law of Strengthen Industrial Technology legalized paid consulting for university professors and allowed them to take management positions in university start-ups or advisory position in external firms with the intention of commercializing their own research achievements. It also approved TLOs to use national university facilities free of charge. As a result of these policy changes, by 2005, 41 TLOs was established to represent almost all the research universities, and the number of patent application, grant and licensing also increased significantly (Ysuda, 2007. During Prime Minister Koizumi’ administration, he emphasised on strategic importance of protecting and utilizing achievements in research and creative activities as the intellectual property in order to strength the international competitiveness of Japan (Koizumi, 2002).The Japan Patent Office was established to execute fast and accurate examination and grant of patent, and to protect intellectual property right (IPR) domestically and overseas. Finally, in 2004, the 87 national universities (including the leading universities as Tokyo, Kyoto and Osaka universities) became independent legal entities of National University Corporation. This incorporation of national universities enabled universities to claim the ownership of all faculty inventions and research discoveries, which made system of IP ownership in Japan very close to that in US.
As a result of efforts made by government to enhance the linkage between universities and industry, professors were given more opportunities to engage in to real business and consequently many of them started up their own business later. Besides, government also wanted to make academic staff become more entrepreneurial in order to promote the efficiency and effectiveness of resource utilization in higher education system. In 2001, Hiranuma Plan was launch by MITI in order to encourage the start-up activities of academic staff, which set a target of establishing 1000 university start-ups over the following three years by budgeting over 150 billion yen to foster the progress of the plan. In 2002, existing laws were revised to allow university-based venture companies to use national university facility, and the role of TLOs expanded from solely assisting technology transfer to supporting start-up actives. Consequently, the number of university start-up surged during a short time, and about 1500 new start-ups were created by 2005 (National Institute for Educational Policy Research, 2007)
Besides the promotion of university-industries cooperation and commercialization of research results of universities, the government also designed polices aiming at promote innovation in SMEs. The Small and Medium Enterprise Basic Law was amended in 1999 to centre on the promotion of innovation in SMEs and establishment of new start-ups. The launch of Small Business Innovation Research Program at the same year permitted SMEs to get access to the provision of incentives and support which were only available to large companies.
Important changes in policies focusing on regional development and innovation had also taken place. The Technopolis Program was abolished for the government shifted its policy toward promoting science and technology in each region. More autonomy and responsibilities were decentralized to the regional and local governments to build ‘regional innovation systems’ (Odagiri & Goto, 1993). Reorganized from MITI, the METI established nine regional bureaus to implement industrial policies from central government in regional area, establish coordinative network with regional and local governments and firms, and support prefectures development within the region. Since the end of 1990s, the ‘local cluster strategies’ was implemented to promote inter-firm and inter-organizational exchanges at local and regional level, and emphasising university’s role as key player in improving regional competitiveness. Recent evolution of cluster policies included 17 Industrial Cluster Initiative promoted by METI and 18 Knowledge Cluster Initiative promoted by METX. The former aimed to revitalize the regional economy by nurturing horizontal relationship between local firms, universities and public institutions, and especially to focus on promoting cooperation between new start-ups and existing industry complexes to development local technological strength, while the later concentrating on developing distinct innovation focus for each region to encourage based on the collaboration between university in the region and the emerging industry..
The above fact suggested that a new pattern of Japanese innovation system which features a triple-helix network between government, university and industry has emerged both at national and regional level during the past decade. Through the collaboration of government, university and industry, not only innovation activities in universities and industries (especially in SMEs and university start-ups) were encouraged, but large sum of revenues were generated though the commercialization of achievements from these activities which partly in return contributed to the further research and development of science and technology. Moreover, the effective application of this model in regional areas has to some extent developed the regional economy.
4. Innovation and Life Science Industry
The 21st century is often referred as a ‘Century of Life’ for a thorough understanding of the nature of life is expected to revolutionize the human health, propel more healthy, vigorous and comfortable lives and lead to the solutions for global issues as food shortage and environmental problems. Global governments, companies and researcher have devoted unprecedented enthusiasm into the research and development of life science. In a society of growing aging population and declining birth rate as Japan, the demand for biopharmaceuticals, health-care products and medical instruments has increased at rapid pace.
The global life science industry is currently leading by the United State both in research programs and venture business activities. But the life science industry in Japan is also developing speedily. Since the end of 1990s, increasing number of researchers in universities, private research laboratories which funded by large corporations and governmental research institutions has committed themselves into the research and development of life science, which leads to generate a great number of high quality research achievements in this field. To a large extent, Japanese life science industry embraced large sum of established corporations in various sectors as biotechnology, pharmaceuticals and chemicals. However, in major Japanese pharmaceutical and biotechnology companies, it is a common practice for them to license technologies from the US companies rather than to invest on their own frontier R&D. This fact has driven the Japanese government to take a more proactive role to promote the commercialization of their own life science research. On the other hand, the government also hope the commercialization of life science research can propel the innovation in life science in return.
Recognizing the importance of life science, the Japanese government targeted it as the policy priority to promote science and technology innovation. In the Second Science and Technology Basic Plan (2001-2005), life science was designated as one of the four priority field to conduct R&D and national resources would be allocated into this field intensively. The Law of Promoting Technology Transfer from University to Industry which approved the establishment of TLOs created a more formalized channel to assist the research result of life science to be transferred from universities to industry, also enabled universities to profit from their faculty developed IP. After the incorporation of national universities, professors were no longer civil servants and universities were granted the patent right of all inventions made by their staff. Besides, METI and METX provided various incentives to encourage formation of technology incubators which served as an important conduit between university researchers and the industry. These policies changes encouraged professors and universities to take a more active role in commercializing their research results in life science.
In addition to cooperate with existing firms, universities also served as the hotbed for entrepreneurial start-ups. Although in Japan, mainstream of biotechnology companies tend to originate from large companies rather than universities, the university-born biotechnology companies were also growing at a dramatic speed. By 2004, there were over 1500 university start-ups in Japan with biotechnology topped all types of start-ups comprising nearly 38 percent of all university start-puts, and most of them were established after 2000 (METI, 2005). Particularly at research universities, such as Tokyo, Kyoto and Osaka Universities, majority of new university start-ups were related to life science. Large sum of financial support has poured into university start-ups of life science industry such as government subsidies and venture capitals. Up to new only a few of university start ups in life science industry have been listed in stock market, but those that have attracted much attention of investors were able to raise a considerable sum of money.
In Industrial Cluster and Knowledge Cluster projects which was initiated by METI and MEXT respectively with the aim of supporting regional projects and actors in order to promote regional innovation in specific field, many regional clusters has a strong focus in life science. These clusters were especially effective at producing start-ups working in the field of convergence technologies, such as bio-pharmaceuticals and nano-biotechnology. Geographically, Kanto and Kansai were two major regions of life science start-ups largely due to its grouping of leading universities and research institutions in these regions. In these clusters, new life science start-ups can rely on advanced scientific and technological infrastructures which were produced by universities in the region and existing firms of all size and establish networks with these already successful start-ups in the region.
Under the model of government, university and industry cooperation, innovation in life science industry has been considerably improved. In recent years, Japan has been churning out even more patents than the US with a significant growth in life science patents, which makes it to be recognized as the world’s most innovative country (The economist, 2007)
5. Conclusion
The success of implementation of government-university-industry collaboration in Japanese innovation system in recent years has become the benchmark for the innovation in other East Asian countries including China.
China is aiming at building an innovation-oriented country by 2020. In the strategic tasks plan launched in 2006, the triple-helix innovation networks between government, university and industry was promoted, with the government playing a leading role in the scientific and technological innovation and companies playing a principal part in the innovation while research institutes and universities across the country assuming a key and leading role in the innovation (The Chinese Central Government, 2006)But when comparing the implementation of this model in these two countries, some distinctive differences are still able to be identified.
First difference lies in the role that is played by government in the national innovation system. In Japan, the government served as a strategic partner for universities and companies. The Japanese government tends to promote national innovation through policy changes and providing incentives to universities and companies. By contrast, the Chinese government is more like a dominator of innovation system who directly commands the execution of scientific and technology innovation in universities and industries.
Second difference is China lacks of effective and efficient mechanism as the TLOs in Japan to commercialize the discoveries of their research. Many researchers in China prefer to establish direct links with companies to commercialize their research achievements and seem to be either reluctant to patent their discoveries or sceptical about the usefulness of official channels as technology transfer offices. Therefore, they prefer to publish their results which can bring higher and more immediate rewards for them.
Third, the Japanese companies have much higher innovation capacities than their Chinese counterparts. As a tradition, Japanese large corporations feature high innovation capacities for their large R&D input. In recent year the innovation capacities of SMEs has been greatly strengthen because of preferential government policy, close collaboration with universities and creation of university start-ups. Although in China many university-born companies have been established to promote commercialization of science and technology achievements of the univeristies, such as Unisplendour Corporation, Tsinghua Tongfang Corporation and Founder Group, the overall linkage between university and industry is still weak. The lacking of mutual trust between companies and universities often leads to the failure of their cooperation. This is largely due to the complicated cooperation process with the universities and difficulties in risk management. Therefore the majority of Chinese companies are still weak in their R&D capacities.
From this essay, we can see that Japanese innovation system features many distinctive characteristics, such the high input in R&D, strong inter-firm relations and unique innovation management and more recently the triple-helix networks between government, university and industry. The triple-helix model which characterized by supporting university researchers to commercialize their discoveries, encouraging innovation in SMEs and promoting construction of regional innovation system, has largely improved the national innovation capacity in Japan especially in some frontier science and technology field as life science. Whereas in fact, it is the continuous improvement of the Japan innovation system, which can be referred as the restless ‘innovation’ of the innovation system that actually makes innovation in Japan so distinctive.