Annals of Business Administrative Science 9 (2010) 1–12
Available at www.gbrc.jp

Online ISSN 1347-4456 Print ISSN 1347-4464©2010 Global Business Research Center

Licensing Strategy of Japanese Firms andCompetitive Advantage
Naoko KISHI and Nobuo TAKAHASHI†

Abstract: This study defines inventions traditionally regarded as mere fruits of R&D as“internal inventions,” and inventions resulting from other factors collectively as “non-internal
inventions.” The objective is to show that firms make inventions not only on technologicalfactors. Also, a rough analysis method is proposed to identify how many non-internal
inventions are filed for patents, and the case study clarifies the promoting factors. This study
aims to demonstrate that the perspective of licensing business, completely distinct fromscience and technology, is also an adequate explanation of firms’ behavior in relation toinventions and patent filing.
Keywords: patent, licensing strategy, case study

Introduction
The usual approach to inventions and patents is implicitly led by a science and technology perspective. However,almost all actors who are applying for patents (on inventions) are definitely doing so with a business perspective in
mind. In fact, if we could hire a good patent attorney, turning ideas and inventions into patents would become“technically” feasible (Takahashi, 2002). So what drives a firm to get patents?
Traditionally, inventions are regarded as simple fruits of R&D; we call them inventions for technological strategy. In
contrast to these, there exist inventions resulting from other factors, which are collectively defined as inventions forpatent strategy. Then, for the top sixteen US and Japanese semiconductor manufacturers, our analysis separates out the
number of inventions motivated by technological strategy within the whole set of inventions.
The “licensing business” perspective is completely distinct from the science and technology perspective (Saotome,
1987). We think that Japanese firms’ behavior is better explained from a licensing business perspective. The analysis
on actual usage of patents in licensing business will show the factors that promote inventions for patent strategy. We
use Nichia’s blue light emitting diode (LED) as a case, as it was one of the most successful semiconductor products inthe twenty-first century.
It must be noted that the firm’s competitive advantage cannot depend on only patents. For example, theresource-based view (RBV) of management strategy explains the (i) generation and (ii) sustainability of competitive
advantage in relation to the characteristics of the firm’s resources. RBV was first advocated by Rumelt (1984) andWernerfelt (1984). The basic structure of RBV can be simplified as follows (Takahashi & Shintaku, 2002):(i) Resource heterogeneity of the firm to generate Ricardian rents, and(ii) Mechanisms to sustain the heterogeneity of the firm.

†School of Economics, Meiji Gakuin University, kishi@mail1.meijigakuin.ac.jp
Graduate School of Economics, the University of Tokyo, nobuta@e.u-tokyo.ac.jp
1Kishi and TakahashiPeteraf (1993) concluded that the resources fulfilling these basic conditions could yield sustainable competitive
advantage. These basic conditions describe the case of Nichia’s blue LED, in which patents form only a small part ofthe competitive advantage.
Engineers and researchers are generally quite aggressive and prefer to take straight actions against clear-cut matterssuch as patent infringement. However, these actions constitute a part of strategy. If the legal costs would exceed thedamages, a firm would not file a patent infringement lawsuit. Alternatively, even if a firm receives a patent
infringement warning, the firm has the option to obtain counter patents through their own R&D or M&A. A patent is atool for licensing negotiation. The inventions for patent strategy would be produced on such licensing business soil.

Inventions for Patent Strategy
Patent citations
There are not only inventions for technological strategy, but also inventions for patent strategy. The genesis of thisidea came from analysis of patent citations. Just as an academic paper cites existing papers, existing patents are cited infiling a patent. For example, in Figure 1, there are four U.S. patents relating to semiconductors, which have citing andcited relationships with each other. In each circle (ellipse), (i) patent owner, (ii) grant year, and (iii) registered patent
number are noted. Look at the centrally located patent #5,818,077 (hereafter referred to as “patent 077”; likewise, theother patent numbers are abbreviated to their last three digits). This patent 077 was issued by NEC in 1998, and thefollowing can be observed:(1) Patent 077 “cites” patent 452 of the Hughes Aircraft Company.
(2) Patent 077 is “cited” by patent 512 of Tyco Electronics Logistics AG.
(3) Patent 077 is also “cited” by patent 827 of NEC itself. This type of citation is called a self-citation.

The data
This study focuses on US patents. US patent data are issued by the United States Patent and Trademark Office(USPTO). These data show the relationships of the citing and cited information. The data of three million patents
issued by the USPTO between 1963 and 1999 are provided in an organized form on the webpage of the National
1

2

Bureau of Economic Research (NBER) and in a CD-ROM appended to a book by Jaffe and Trajtenberg (2002).
Figure 1. The relationships of citing and cited patents

Source: Created by the authors based on data from the USPTO.
1
2

http://www.nber.org/patents/
The data was republished by Bronwyn H. Hall at http://emlab.berkeley.edu/users/bhhall/bhdata.html
2

Licensing strategy of Japanese firms

The data set contains the following basic information: Patent number, grant year, grant date (number of days elapsed
since January 1, 1960), application year (starting in 1967), country of the first inventor, state of first inventor (if U.S.),
assignee identifier (starting in 1969), assignee type (individual, corporate, or government; U.S. or non-U.S.), main
3

U.S. patent class, and number of claims (starting in 1975).

4

The data set of this study contains the US patents registered from 1990 to 1999; classified into USPTO primaryclasses 257, 326, and 438, defined as “semiconductor devices” by Hall, Jaffe, and Trajtenberg (2002); and filed by the
top sixteen US and Japanese semiconductor manufacturers ranked by sales.
The sixteen semiconductor manufacturers consist of six US firms: Advanced Micro Devices (AMD), IBM, Intel,
Micron Technology, Motorola, and Texas Instruments (TI); and ten Japanese firms: Fujitsu, Hitachi, Panasonic,
Mitsubishi, NEC, Rohm, Sanyo, Sharp, Sony, and Toshiba.
Self-citation ratios
Table 1 shows the number of patents, the number of citations, and the number of self-citations by each firm. The
self-citation ratio is derived by dividing the number of self-citations by the number of citations for each firm.
In table 1, the firms are arranged in descending order by the number of patents for each country. This also puts theself-citation ratio of US firms into descending order. However, for Japanese firms, this is not so. In particular, thetop three Japanese firms in terms of numbers of patents—Toshiba, NEC, and Mitsubishi—have an average self-citation
ratio. In order to explain this phenomenon, we propose a hypothesis.

A Hypothesis about Inventions for Technological Strategy
Table 1. Self-citation ratio by firm

TI

1,418

Number ofcitations
10,546IBM

1,331

13,691

2,534

0.19

Motorola

1,303

9,084

1,333

0.15

Micron Technology

1,168

12,709

1,888

0.15

AMD

802

6,886

730

0.11

Intel

320

2,517

177

0.07

Toshiba

1,729

9,609

1,370

0.14

NEC

1,722

8,186

743

0.09

Mitsubishi

1,670

8,792

1,078

0.12

Hitachi

907

5,340

912

0.17

Fujitsu

813

4,580

403

0.09

Matsushita

560

3,204

186

0.06

Sony

557

3,278

213

0.06

Sharp

440

2,208

169

0.08

Rohm

191

795

26

0.03

529

24

0.05

Number of patents

AmericanfirmsJapanese
firms

Sanyo
112
Source: Created by the authors based on the data of NBER.

3

Number ofself-citations
2,196

Self-citation
ratio
0.21

Moreover, the data includes information derived from the above basic information: technological category/ sub-category, numberof citations made, number of citations received up to December 2002, percent of citations made by this patent to patents granted
since 1963, measure of generality of a patent (how commonly it is cited), measure of originality of a patent (how often it is citedin specific field), mean forward citation lag, mean backward citation lag, percentage of self-citations made, upper and lower
bounds.
4
In December 1999, USPTO launched the Patent Application Information Retrieval (PAIR) system, which makes it possible forapplicants and their designated agents or attorneys to access patent application data quickly. This study focuses on the data before
this system became available. Press release #99–50.
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Kishi and Takahashi

In Japan, the contents of a patent are not open to public inspection in the patent gazette until eighteen months after
patent filing. The United States has also introduced a system that lays open the contents of the patent when eighteenmonths have passed since the patent filing date, for patents filed on and after November 29, 2000. US patents filed onor before November 28, 2000 were disclosed at the grant. It took two years on average from application to grant (Hall,
Jaffe, & Trajtenberg, 2002). Thus, the time lag to disclose the contents is considered to be the same in Japan and in US.
Therefore, during this time period of about eighteen months to two years, only the applicants know the patentcontents. This time lag to patent disclosure has great meaning if R&D breakthroughs occur and many inventions takeplace continuously one after another in a short time period. Without knowing the latest other firms’ patents, andwithout citing them, inventions are created endogenously and intrinsically in a chain reaction within alaboratory. Therefore, most of the citations would probably be self-citations.
This study refers to these inventions as “inventions for technological strategy.” If inventions for technologicalstrategy are born in a chain reaction under closed conditions in a firm without knowing about other firms’ patents,
this should increase the proportion of self-citations. Using this self-citation concept, the following hypothesis can beconstructed in relation to these inventions for technological strategy.
Hypothesis:
For a period when a firm generates inventions for technological strategy, the higher the frequency of patentfiling, the higher the self-citation ratio of the patents filed.
However, given the complicating factors, we can also easily imagine that not all the inventions are generated fortechnological strategy. Therefore, the purpose of this study is not only to confirm this hypothesis, but also to specify
outlying firms, which are likely to generate “inventions for patent strategy.”

Analysis
It must be noted that the greater number of patents granted during a specific period (from 1990 to 1999) implies ahigher frequency of patent filing. The number of patents and self-citation ratio in table 1 are graphed as points in the (x,y) plane, to produce the scatter diagram of figure 2. In this figure, the firms are plotted on the coordinate system with
the number of patents as the horizontal axis (x-axis) and the self-citation ratio as the vertical axis (y-axis).
In the coordinate plane, the black dots “●” represent US firms, and the hollow dots “○” represent Japanese firms. In
figure 2, the relationship may be clear from the plot of the data. The three Japanese firms on the right side of thecoordinate plane—Toshiba, NEC, and Mitsubishi Electric—are clearly outliers. The other thirteen firms excludingthese three fall nearly along a straight line. The most widely used method for fitting lines to data is the least-squares
regression analysis. Using the self-citation ratio as a dependent variable y and the number of patents as an independent
variable x, a regression analysis gives the following result (Kishi & Takahashi, 2008),
y = 0.000120x + 0.0161

Adjusted R2= 0.8453.

Adjusted R2 is 0.8453, which is significant at a level of 0.1%. In other words, the self-citation ratio increases inproportion to the number of patents during a specific period. This supports the hypothesis, that is, these thirteen firms
are considered to generate mainly inventions for technological strategy.
Of these thirteen firms, US firms show a tendency to have both a high number of patents and a high self-citation ratio,
except for Intel. By contrast, Japanese firms show a tendency to have both a low number of patents and a low
self-citation ratio. Therefore, compared with Japanese firms, US firms probably have a higher rate of R&D, which
results in a higher self-citation ratio. Generally speaking, a high self-citation ratio implies a quick pace of R&D.
On the other hand, the three Japanese firms, Toshiba, NEC, and Mitsubishi, having the greatest numbers of patents infigure 2, are actually outliers. They are nearly equal in terms of the greatest numbers of patents, but their self-citation
ratio is not particularly high. This characteristic strongly suggests the possibility of inventions for patent strategy being
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Licensing strategy of Japanese firms

Figure 2. The relationship between the number of patents and the self-citation ratio

0.30
Japanese firms

0.25

American firms

self-citation ratio

TI
0.20

IBM
HitachiMicron0.15

Motorola

Toshiba
Mitsubishi
NEC

AMD
0.10
0.05
0.00

Sharp
Intel
Sanyo

FujitsuSony
Matsushita

Outliers

Rohm
0

500

1000

1500

2000

Number of patents

generated by these firms. The deviation from the regression line in figure 2 could show that patents filed by these threefirms are probably patents of “inventions for patent strategy.”
Therefore, a follow-up interview was conducted on two of the three outlying Japanese firms. The inquiry revealed
that during the sample period, management urged the R&D department to increase the number of patent filings andassigned a quota for the number of patent applications for each researcher.
In the next section, the factors used to promote inventions for patent strategy are identified through the case of
Nichia’s blue LED.

Patents as a Tool for License Negotiation
When a firm requires a license, the simplest and easiest way is to pay for the patent rights held by anotherfirm. However, this type of peaceful license negotiation is extremely rare. This is because a typical license negotiation
begins with a patent infringement warning. If a firm receives a patent infringement warning and is pressured for adecision on whether or not to accept the licensing, then the firm should consider the following costs (Takahashi &Nakano, 2007a):(a) The costs of R&D to avoid that patent. For example, the firm must consider how much of its R&D budget shouldbe allocated to get around that patent within a fixed time limit.
(b) The cost of submitting an appeal-for-invalidation claim about that patent.
(c) The legal costs needed when the patent owners file a patent infringement lawsuit.
If these “avoidance costs” for the patent would be more than the license fee, the firm should decide to accept
licensing. Otherwise, the firm should promote inventions for patent strategy in order to slip through the existing
patents.
Alternatively, as seen in the consumer electronics industry, multiple patents, including other firms’ patents, areneeded to manufacture one product. It is usual and inevitable that the manufacturers in the same market will make thesimilar products, infringing on competitors' patents mutually. Thus, other factors also promote inventions for patent
strategy. In this type of industry, agreements to mutually use multiple patents are made, or firms commonly pursue
cross-licensing agreements in order to cancel out mutual licensing fees.
At the time of negotiating a cross-licensing agreement, the number of patents filed by firms becomes important. In
5

Kishi and Takahashi

each case, the negotiating firms count the respective numbers of patents and charge license fees based on the differencein those numbers. Of course, many firms not only count the number of patents, but also consider the number of journal
papers and academic reports. Some firms enter the partner’s research laboratory to evaluate the researchcapabilities. However, the number of patents keeps the importance in negotiations. As a result, when the number ofpatents exceeds a certain range, the license fees often cancel each other out and become close to zero. The
cross-licensing agreement is like a “mutual nonaggression treaty” in the context of a legal battle.

Patents abandoned after the conclusion of a contract
Moreover, if the first priority was to complete a cross-licensing contract, after the conclusion of the contract, there isan option on abandonment of patents except for key patents. An impressive example is the so-called “patent 404,” or“method of growing a semiconductor crystalline film of nitride compounds” (Japanese patent number 2628404,
hereafter referred to as patent 404). The “blue LED lawsuit” fought over this patent commanded public attention from2004 to 2005. One of the inventors of the blue LED, Shuji Nakamura, sued his former employer, Nichia Corporation(hereafter Nichia), in August 2001. On January 30, 2004, the first trial in Tokyo District Court awarded the incredible
amount of 60.4 billion yen as compensation for the invention and ordered Nichia to pay Nakamura the entire amount of
the 20 billion yen he claimed.
Nichia attacked the judgment of the Tokyo District Court and appealed to the Tokyo High Court.5 One of the authors
submitted an opinion document from the Nichia side (Takahashi, 2005a; 2005b). The court advised both sides tocompromise, and on January 11, 2005, Nichia agreed with Nakamura to pay 840 million yen, including a 600 million
yen inventor’s reward, to settle out of court. The news of the day described that the amount of the inventor’s award wassettled as one percent of the 60.4 billion yen sentenced by the Tokyo District Court.6
The story does not end here. Almost one year after the settlement, on March 8, 2006, Nichia officially announced
that it would abandon all rights to patent 404. According to Nichia, not only patent 404, but all patents without the needfor further maintenance have lapsed or were abandoned for the purpose of cost reduction in its business practice ofpatent management.7 In 2005, Nichia abandoned 50 patents, including national and international patents.
The management decision about whether or not to sustain patent rights is a business decision independent of thescientific value of the invention, and it is nothing more than a problem of balancing (1) the need to maintain the patentright and (2) the cost of maintenance. In fact, this was well described in the explanation of the official announcement by
Nichia (Takahashi, 2006).
The need to maintain the patent right. Nichia itself had entirely ceased use of patent 404 by the first half of 1997, andit was confirmed that the four counterpart firms, which Nichia had cross-licensed in or after 2002, Toyoda Gosei,
Osram, and Lumileds, and Cree, were not using patent 404 in the manufacture of blue LEDs. Moreover, the blue LEDs
manufactured without using patent 404 became brighter than ones using patent 404. In the case that patent 404 wasabandoned, it was hard to believe that the other firms would use patent 404.
Also, the cost of maintaining rights in Japan, the United States, Germany, the United Kingdom, France, theNetherlands, and Italy from 2005 to the patent expired would be a total of 5.19 million yen. The total maintenance cost
would be double or triple the amount including the costs of other patents associated with patent 404.
Therefore, as long as a cross-licensing agreement is reached, there is no surprise in patent abandonment except for
key patents.

Patent applications abandoned after filing
The case of Nichia shows that it is reasonable not to make costly requests for examination of pending patents except
5

Nakamura also appealed to the Tokyo High Court against Nichia, claiming an additional 100 million yen on top of the initial 20
billion yen.
6
However, it must be noted that the subject of dispute in this lawsuit was patent 404 only. Based on the settlement recommendation,
the inventor’s compensation for this patent 404 was said to be worth 10 million yen at most. From a licensing business perspective,
the out-of-court settlement amount of 600 million yen covered the 191 patents registered (including patent 404) and 112 patentapplications in Japan for inventions independently or jointly invented by Nakamura, four registered utility models, and thecorresponding foreign patents and foreign patent applications, as well as internal know-how left unfiled for confidentiality.
7
In Japan, there were about one million patents at the end of 1999, but only one third of them were carried out.
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Licensing strategy of Japanese firms

for key patents. In fact, all patents filed are not examined. The Japan Patent Office examines only those patentapplications that have been requested to be examined with the charge of examination by the applicant or a third
party. The request for examination can be made by anyone at any time in three years after the filing date (within sevenyears from the date of patent filing for applications on or before September 30, 2001). During this period, almost allpatents become unnecessary after concluding cross-licensing agreements. In respect of patent applications required
just to make up the numbers to negotiate a cross-licensing agreement, it is a reasonable option to neglect the patentapplications without examination due to the much higher cost of the request for examination.
In fact, the cost of filing is no more than several hundred thousand yen, whereas the cost of requesting examination
and registering a patent, especially as an international patent through the Patent Cooperation Treaty (PCT), is at least
ten times more. Therefore, it is a smart business option to use many patent applications of little value as a tool only tocancel out cross-licensing fees. Thus, once a cross-licensing agreement is reached, it is reasonable to abandon patentapplications without requesting costly examination except for key patents. In other words, when entering into across-licensing agreement, it is a legitimate business option to encourage hair-splitting inventions that slip between
existing patents (and therefore have a low self-citation ratio) for the principal purpose of canceling out license fees.

Patents needed for a lawsuit
Still, there is a question. As described above, although it was a reasonable choice to abandon patent 404, why did
Nichia fight in court with Nakamura regarding the ownership of patent 404?
There was a bitter dispute about the patents of the blue LED between Nichia and Cree. Cree had backed up the trialof Nakamura. If Nakamura had ownership of patent 404, it was highly likely that the patent right would be transferred
to Cree. If that happened, Nakamura would file lawsuits to get patents for his other inventions one after another.
However, before the Tokyo District Court ordered Nichia to pay Nakamura 20 billion yen on January 30, 2004, it
issues an “intermediate” decision that Nichia had the ownership of patent 404 on September 19, 2002. This
intermediate court decision did not give the ownership to Nakamura. In response to this decision, Nichia and Creemade a cross-licensing agreement on November 6, 2002, regarding the patents for gallium nitride optoelectronic
technology. They reached an amicable settlement of the dispute between them (Takahashi, 2006).
This is why there was no other option but to fight for ownership, even if patent 404 was not needed
technologically. Nichia could abandon patent 404 soon after the agreement on this cross-licensing contract. However,as long as a supplementary lawsuit remained over the inventor’s compensation, abandonment of patent 404 would raise
the risk that the judge would suspect that Nichia had abandoned the patent in order to reduce the sentenced 20 billion
yen. Hence, Nichia had a long wait for abandonment of patent 404 until the out-of-court settlement on January 11,2005.

Sources of Competitive Advantage Other than Patents
Cornerstones of competitive advantage
The ownership of patents does not promise perfect monopolistic profits. In fact, it is difficult for a licenser to bind alicensee with only the patent rights or a license contract. This is one of the most important motives to choose advanced
alliances or capital tie-ups to bind licensees (Takahashi & Nakano, 2007b).
In 1984, two memorable papers in strategic management were published (Rumelt, 1984; Wernerfelt, 1984). The
performance is known as the resource-based view (RBV). RBV attempts to explain the competitive advantage from theresource side of the firms (Takahashi and Shintaku, 2002). In the field of strategic management, a “rent” is anabove-average return. Before RBV, the rent was considered to be produced by monopolies and oligopolies in themarket, as was suggested by economists (Porter, 1980, etc.). This “monopolistic rent” is created (1) when industrial
concentration progresses and firms intentionally reduce output to create an artificial scarcity, and (2) whenmonopolistic profits are made through government regulation and by firms’ mutual agreement.
Demsetz (1973) showed the evidence that a rent was not a result of monopoly, and termed such a rent, created from7

Kishi and Takahashi

Figure 3. Cornerstones of competitive advantage

Note: Additions made by the authors to Peteraf (1993).

the uniqueness of a firm, “Ricardian rent.” While monopolistic rents are created by suppression production, Ricardian
rents are created by the possession of resources of exceptional value and the unavailability of such resources due totheir inherent scarcity (Ricardo, 1817).
Researchers have begun to search for rent sources that are not in the market but within firms. Lippman and Rumelt(1982) sought the creation of rents in “uncertain imitability.” They stated that uncertainty creates initial heterogeneity
and, at the same time, prevents homogeneity due to imitation; they believed that this is what creates rents. Moreover,Rumelt (1984) termed the mechanisms that sustain these rents “isolating mechanisms.” According to Rumelt (1984),
isolating mechanisms work as barriers to entry at the industrial level as well as at the corporate level. Moreover, they
serve to prevent imitation and substitution of unique resources held by a firm. The isolating mechanisms also maketheir appearance in a variety of areas of literature: management strategy, economics of organizations, and industrialorganizations (Mahoney & Pandian, 1992).
Based on these debates, the basic structure of RBV can be simplified as follows (Takahashi & Shintaku, 2002): (i)resource heterogeneity of the firm to generate Ricardian rents, and (ii) mechanisms to sustain the heterogeneity of the
firm. In sum, the sustainable competitive advantage results from these factors. Peteraf (1993) proposed points (b) to (d)as the mechanisms of (ii) and organized them in the following manner:(a) resource heterogeneity of the firm that creates rents;(b) ex ante limits to competition, or the securing of resources, whether by foresight or good fortune, by a firm
without prior competition, allowing it to gain above-average profits;(c) ex post limits to competition, or the sustenance of rents secured by a firm by subsequent limitations oncompetition, a concept similar to uncertain imitability (Lippman & Rumelt, 1982);(d) imperfect resource mobility, or the assurance that rents will remain with a specific firm (Teece, 1980).
Peteraf (1993) concluded that the resources fulfilling the characteristics of the abovementioned four cornerstones(basic conditions) could yield sustainable competitive advantage, as shown in figure 3. In other words, firms that areable to fulfill these four conditions can enjoy sustainable above-average profits.

The Nichia Case
These four cornerstones (a) to (d) illustrate the case of Nichia’s advantage in the blue LED market. It can be8

Licensing strategy of Japanese firms

concluded that Nichia’s competitive advantage was only partially supported by patents, that is, the possession of asingle patent right cannot secure the future sales and profits of a firm.

(a) Heterogeneity
First, in Nichia’s case, circumstances were not yet anticipated when patent 404 was invented, such as (i) the
explosive popularity of mobile phones with color liquid crystal displays, (ii) the phosphor technology in which Nichia
had traditionally been strong leading to the development of the white LED, and (iii) the subsequent demand for the
inclusion of white LEDs in mobile phones, which created excess sales and profits. The development of the white LED
is the key to the above. A common understanding was that a white light is made from the three primary colors of light:
red, blue, and green LEDs. The invention of the blue LED was thus awaited. However, the idea behind Nichia’s white
LED was as simple as the idea in Columbus’s egg story, or to make a white light from the blue LED andyellow-light-emitting phosphor. This is a unique product (invention) that only a phosphor manufacturer could
develop. The development of the white LED can be judged in terms of the RBV as a typical example of mechanism (a),namely, the uniqueness and heterogeneity of resources that create rents.

(b) Ex ante limits to competition
Next, Nichia’s foresight or luck in being able to target its R&D investments on gallium nitride must be
acknowledged, while other competitors were still focusing on zinc selenide for development. This led to the second
cornerstone (b), namely, ex ante limits to competition. This provided Nichia with the first-mover advantage to enjoy
the resulting profits even though it had been said to be impossible to commercialize during the twentiethcentury. However, this is only one side of the coin; the other is the considerable business risk that Nichia took inchoosing to follow this course of action.
Furthermore it cannot be emphasized enough that an important prior investment had been made: the clean buildingof the semiconductor factory. Since LEDs are small, the machines to make small LEDs are also small. A machine on
casters is very easy to move and make. However, a clean building for semiconductors in which such machines are
installed requires a lengthy period of construction. Nichia proceeded and built it at a time with uncertain demand. The
president of Nichia put his house into security of a debt and raised the construction fund of a factory building. Thisprior investment enabled Nichia to catch up with explosively growing white LED demand from the market of color
liquid crystal cellular phones. As a result, Nichia could cover the white LED demand monopolistically, and that led toits overwhelming share of the white LED market.

(c) Ex post limits to competition
Moreover, in the field of engineering invention, a pioneer patent is usually not enough to succeed in business. Evenif patent 404 is a pioneer patent, as the Tokyo District Court declared in its decision, related patents and improvement
patents must guard the pioneer patent, and other business resources must be mobilized in support of the pioneer patent,
in order to create conditions in which business opportunities brought about by the pioneer patent can be put to effective
use. In the cases of the white and blue LEDs, Nichia’s advantage in the market is not solely supported by patentrights. The manufacture of such products is made feasible only with various forms of know-how. In this regard, we
identify the third cornerstone (c), uncertain imitability.

(d) Imperfect resource mobility
Furthermore, by building its own blue LED chip manufacturing facilities, Nichia was able to create (d),non-transferability. This is extremely important in the semiconductor industry. Although it was at one time a world
leader, the Japanese semiconductor industry has over the years lost its edge. One of the reasons for its downfall isbelieved to be that semiconductor manufacturers did not build their own semiconductor manufacturing facilities, andinstead, for example, relied on steppers supplied by outside manufacturers such as Nikon Corporation and Canon
Inc. When these manufacturers sold the same types of machines to Korean and Taiwanese semiconductor
manufacturers, the advantages that had been enjoyed by the Japanese manufacturers quickly disappeared. Therefore, it
9Kishi and Takahashi

is natural to assume that the fact that Nichia made its own manufacturing facilities for the blue LED chip by itself,
regardless of the business risks, which helped it sustain its advantage in the market more than the patent rights did.

Conclusions
After World War II and until the 1970s, Japanese firms were more than eager to incorporate foreign technologies; inparticular, the period from 1955 to 1964 was an era of fierce competition for foreign technology imports. There were
two reasons for such fierce competition (Wakumoto & Nakano, 2005).
The first was that there was a vacuum in the civilian technologies in Japan due to the concentration of development
in military technologies during the war, while the United States had extremely advanced civilian technologies. This
fact led to the conclusion that the ability to import superior US technologies during this era would directly increase
competitive advantage in Japan.
The second was that during this period, imports of foreign technologies were regulated by the Act on Foreign Capitaland had to be individually reviewed by the Foreign Investment Council before being approved. This was because thelevel of foreign currency reserves in Japan was not high at the time, and the Ministry of International Trade andIndustry set guidelines to regulate technology imports; for example, one firm could receive a license for 60-cycle
power generators, and two firms for 50-cycle models. The mere existence of these regulations encouraged even greater
competition with respect to the introduction of foreign technologies.
In such cases, an effective strategy is to establish a business alliance with the foreign firm and to compete with otherJapanese firms in their own market. In fact, this strategy is said to have been considerably popular among Japanesefirms in the past. However, Japanese firms came to compete in the overseas market, and this strategy has alreadybecome less effective. Instead, it is necessary to make up a new strategy for dealing with patents.
Engineers are generally quite aggressive and prefer to take straight action in clear-cut matters such as patent
infringement. However, it is a part of the strategy to consider whether to issue an infringement-warning letter. In
addition, if the legal costs would exceed the damages, a firm would not file a patent infringement lawsuit.
Wakumoto and Nakano (2005) referred to a case in which Toshiba experienced difficulties in the 1980s for its
magnetic resonance imaging (MRI) business of medical equipment. At that time, Toshiba was a world-class player inthe medical equipment industry and was regarded as the biggest opponent by General Electric Company (GE) and
Siemens AG. There were very few firms engaged in the MRI business, and Toshiba and GE were each other’s maincompetitors. At that time, Electrical and Musical Industries, Ltd. (EMI), GE, and others held the key patents relating to
MRI, but EMI’s MRI business had been unsuccessful and they had already exited from the business. The license for the
key patent held by GE was thought to be indispensable for manufacturing MRIs. However, Toshiba was not licensed by
GE.
Toshiba had never received any infringement warning from GE, and was planning to acquire US firm called
Diasonics Inc. (Diasonics) whose patent was strong enough to be effective against GE’s patent. Toshiba’s American
subsidiary, Toshiba America Medical Systems, Inc., bought the MRI Division of Diasonics and established Toshiba
America Medical, Inc. Although the main purpose of this acquisition was the reinforcement of its American MRI
business, Toshiba was able to obtain a powerful patent as a result. In short, if GE had issued an infringement warning toToshiba, Toshiba would already have possessed the ability to issue a counter-infringement warning to GE. Toshiba andGE were both aware of the possibility of infringement but did not take any actions to correct it, including
cross-licensing negotiations.
Patents act as a deterrent even without the rights being exercised. There are some cases in which patents do not
become a subject of dispute at court and are not used in license negotiations, and no warnings are even issued for
infringement, but they still serve as a deterrent to contain the enemy’s attack. This is because infringement warnings
often claim everything possible and waste expensive legal costs and time in beating back a counterattack against patentvalidity. Neither party wants to suffer injuries to their key patents in cross-licensing negotiations. Nevertheless, newcross-licensing complicates a relationship with existing licensees and may bring very little profit to either side if they
conduct business operations on the almost similar scale.
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Licensing strategy of Japanese firms

Even if a firm receives a patent infringement warning, it has the option to obtain counter patents through its own
R&D or M&A. A patent is a tool of the licensing business. Inventions for patent strategy can be produced on suchlicensing business soil.
This study examined the hypothesis that the higher the frequency of patent filing, the higher the self-citation ratio in
the patents filed for a period in which a firm generates inventions for technological strategy. Furthermore, it became
clear from the follow-up research that the outliers in figure 2 may well be engaged in inventions for patent strategy. The
primary factor in promoting inventions for patent strategy is to prepare for cross-licensing negotiations, whereas
cross-licensing negotiations are normally carried out in secret. However, our analysis may probe effectively into thissecret activity.
Moreover, the increase in the number of patents over a certain period is accompanied by an increase in the
self-citation ratio. From the regression analysis of figure 2, if inventions are generated at a frequency of 8,000 cases
over 10 years (a pace of 800 cases per year), then almost 100% of the citations will be self-citations. This tendency
indicates that the internal capacity and resources of the firm impose severe constraints on inventions whendevelopment is accelerated. In the semiconductor industry, the internal resources were critical when the speed ofinnovation was high. In fact, Stuart and Podolny (1996) proved that R&D depended on the existing technologicalposition in the accumulative and complicated semiconductor technology. In such an industry, communication withother firms may influence performance relatively less than internal resources, as suggested by RBV. On the other hand,
if the speed of innovation is relatively slow, communication with other firms may become the critical factor insucceeding. These considerations have important implications in innovation research. In the latter half of the 1960s, it
became common to take up the pursuit of all success factors through the “grand approach.” Since the latter half of the
1970s, the “focus approach,” has developed, which concentrates on a specific aspect of innovation such as thecommunication research initiated by Allen (1977) (Takahashi, Kuwashima, & Tamada, 2006).
Brown and Eisenhardt (1995) suggested three classifications as trends of product development research: a rationalplan, a communication web, and disciplined problem solving. In the research on communication webs, Allen has
actually depicted the network of engineers in the research laboratory and found the “gatekeeper” who plays a central
role in the network and is the key person for external communication. However, as shown by our study, the high speedof innovation reduces the external communication effects on performance. In other words, this might imply that thedata must be controlled by the pace of development and the frequency of patent filing in order to obtain a causal
relationship between external communication and innovation.

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[Received August 21, 2010; accepted October 31, 2010]

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ABAS: Annals of Business Administrative ScienceVol. 9 December 2010

CHIEF EDITOR

Junjiro Shintaku, the University of TokyoEDITORIAL BOARD

Makoto Abe, the University of Tokyo
Takahiro Fujimoto, the University of Tokyo
Makoto Kasuya, the University of Tokyo
Nobuo Takahashi, the University of Tokyo
Technical Editor: Maki Nishida, Global Business Research Center

ABAS: Annals of Business Administrative Science is published annually by Global
Business Research Center, Hongo, Bunkyo-ku, Tokyo, JAPAN. http://www.gbrc.jp