Development Bank of Japan
Research Report
No. 53

Japan's Innovative Capacity and Policies forCommercializing New Technologies:
Using Carve-Outs to Create New Industries

May 2005

Economic and Industrial Research Department
Development Bank of Japan

This report was originally published in Japanese as Chosa No. 67
in August 2004.

Contents
Summary ........................................................................................................................................

iii

I

1
1
1
1
2
3
3
3

Japan's Innovative Capacity.................................................................................................
1. Modern Innovation Theory and the State of Innovation Today .......................................
1.1. What Is Innovation?................................................................................................
1.2. The Innovator's Dilemma .......................................................................................
1.3. What Constitutes a Productive Environment for Innovation? ................................
1.4. Conditions Determining Innovative Capacity ........................................................
2. Japan's International Competitiveness and Blind Spots in its Innovative Capacity.........
2.1. Definition of International Competitiveness ..........................................................
2.2. Japan's International Competitiveness and Blind Spots in
its Innovative Capacity ...........................................................................................
2.3. Investment in Knowledge Creation ........................................................................
2.4. Patent Trends ..........................................................................................................
2.5. R&D by Medium and Small Business....................................................................
2.6. Venture Capital Investment as a Percentage of GDP..............................................
2.7. International Comparison of Technology Trade Balances......................................
2.8. Change in Contribution of High-Technology Industries to the Trade Balance.......
2.9. Import Penetration and Export Ratio......................................................................
2.10. True State of the Technology Gap with China........................................................

4
4
7
7
8
8
9
10
12

Strategies for Commercializing Technology .......................................................................
1. Policies and Strategies for Successfully Navigating the "Darwinian Sea" ......................
1.1. Innovation and the "Darwinian Sea" ......................................................................
1.2. Policies for Successfully Navigating the Darwinian Sea........................................
1.3. Market Failure ........................................................................................................
1.4. A Process for Supporting Commercialization of Technology ................................
2. Management of Technology (MOT) ................................................................................
3. Technology Transfers: The Steinbeis Foundation's Pioneering Efforts ...........................
4. Evaluation and Circulation of Technology ......................................................................
5. Mentoring of Technology.................................................................................................
6. Technology Financing......................................................................................................
7. Promoting Commercialization of Technology .................................................................

15
15
15
16
17
17
18
20
21
23
24
25

III Using Carve-Outs to Create New Industries.......................................................................
1. Corporate Venturing.........................................................................................................
1.1. Core Enterprises .....................................................................................................
1.2. In-house Venture Programs.....................................................................................
1.3. Independent Ventures..............................................................................................
1.4. Spin-Outs................................................................................................................
1.5. Spin-Offs ................................................................................................................
1.6. Carve-Outs..............................................................................................................
2. Recent Developments around Spin-Offs and Carve-Outs ...............................................
2.1. Developments at the Government Level Etc. .........................................................
2.2. Business Corporation Support for Spin-Offs and Carve-Outs................................
2.3. Actual Cases of Spin-Offs and Carve-Outs ............................................................

27
27
28
28
28
29
29
30
32
32
34
35

II

Development Bank of Japan Research Report/ No. 53

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3.
4.

A Realistic Strategy for Japan: Use Carve-Outs to Create New Industries .....................
Challenges to Promoting Carve-Outs and How to Meet Them .......................................

38
40

References ......................................................................................................................................

44

ii

Development Bank of Japan Research Report/ No. 53

Japan's Innovative Capacity and Policies for Commercializing
New Technologies:
Using Carve-Outs to Create New Industries
Summary

search and development.

1. While China is making rapid economic
strides and the United States is undergoing a dynamic transformation, Japan faces the prospectof dwindling birth rates and a graying population; hence it will not be easy for the country toachieve ongoing growth by enhancing its innovative capacity and commercializing potential
technologies. In this connection Professor Clayton Christensen of Harvard University observes
that small, autonomous organizations independent of existing firms are effective in making a
break with the successes of the past -- the innovator's dilemma -- and nurturing new innovations
and markets.

4. On the path from invention to commercialization lies what has been described as either the"Valley of Death" or the "Darwinian Sea," where
market failure occurs due to, among other things,
asymmetry of information between entrepreneur
and investor. Successfully navigating such difficulties and completing the process of commercializing technological "seeds" requires: (1)management of technology (MOT), (2) technology transfers, (3) evaluation and circulation oftechnology, (4) mentoring of technology, and (5)technology financing.

2. There are a number of indicators that can beused to gauge Japan's innovative capacity andlevel of international competitiveness. Examining these to determine Japan's position internationally reveals that it languishes in the middle of
the OECD nations by such measures as investment in knowledge creation, R&D by medium
and small business, venture capital investment asa percentage of GDP, and technical trade balance.
In an opinion survey about the technology gap
with the US and China, 36% of respondents who
saw the US as having the edge said they expected the gap to grow in the future. As for
China, while 79% of respondents answered thatJapan still has the edge, 85% of those respondents said that the gap is shrinking. Thus Japan's
technology gap with the US is widening even as
China surges up from behind.
3. Ever since the Young Report appeared in
1985, the US has been pursuing ambitious innovation policies in line with it and later the
Nanotechnology Initiative and the Palmisano
report. Japan too is beginning to take the required policy steps, including crafting its own
version of the Bayh-Dole Act, formulating an
industrial cluster plan, and cutting taxes on re-

5. With TLOs being established at universities,
the infrastructure is now being put in place tofacilitate technology transfers. But the most important thing is to adopt a "needs"-oriented approach, rooted in the viewpoint of the corporate
user that is the customer, rather than a"seeds"-oriented approach that gives priority to
the university's wants. Germany's Steinbeis
Foundation serves as an instructive model in thisregard.
6. Japan too is beginning to witness the emergence of businesses active in the field of evaluation and circulation of technology. These can bebroadly classified into: (1) evaluative agencies
primarily involved in distribution and trading oftechnology in an auction-type format; (2) evaluative agencies that perform evaluations by tapping
a network of technology evaluators with expertise in specific fields; and (3) evaluative agencies
that appraise the value of technology using real
option theory or the like.
7. As for the issue of financing technology, theUS has a generous funding system in place: theATP, SBIR, and STTR programs all provide
R&D funding. Germany for its part makes
available abundant risk money through publicfinancial institutions such as the tbg and KfW.

Development Bank of Japan Research Report/ No. 53

iii

8. The creation of new venture-type businesses
by big corporations and middle-tier firms is generally referred to as corporate venturing. These
ventures can be broadly divided into such categories as in-house venture programs, spin-outs,
spin-offs, and carve-outs. Inspired by the ventureboom of a few years ago, many companies haveestablished their own in-house venture programs,
but true entrepreneurship has failed to flourish.
Such ventures often end up being regarded by theoutside world as mere subsidiaries, so that sales
to the outside fail to take off as expected.
9. A spin-out is where technologists leave acompany to set up their own independent business, and in many cases the venture maintains noties whatsoever with the parent company. In theUS, such spin-outs have played a major role in
the formation of industrial clusters in the true
sense of the term. However, when promoting
spin-outs in Japan, the first priority should be to
set up some kind of shelter, such as an NPO-typeagency to facilitate mobility among technologists.

iv

Development Bank of Japan Research Report/ No. 53

10. A carve-out is a type of venture in which
management "carves out" a portion of the company's business as a management strategy andinvites third-party evaluation and investment.
This type of arrangement is well suited to commercializing R&D and endowing it with corporate value under conditions such as Japan's,
where relatively large manufacturers engage in
R&D, possess the seeds of new technologies, andhave skilled technologists on staff. Independentventures alone will not be enough to trigger the
emergence of robust new industries in Japan;
also needed is a flurry of carve-outs by big corporations and middle-tier firms that conduct extensive R&D and have large numbers of eliteengineers on staff. That would reinvigorate Japan's big corporations and middle-tier firms,
which easily get trapped by the "innovator's dilemma" because of their successes in the past,and by extension greatly help to economically
reinvigorate Japan as an innovator nation.
[Yutaka Kijima (E-mail: yukijim@dbj.go.jp)]

IJapan's Innovative Capacity11.

Modern Innovation Theory and the Stateof Innovation Today

With China catching up from behind and theUnited States resurgent, it goes without sayingthat Japan's only option is to become a breakthrough innovator. But, while China is making
rapid economic strides and the US is undergoing a
dynamic transformation, Japan faces the prospectof dwindling birth rates and a graying population;
hence it will not be easy for the country to achieve
ongoing growth by enhancing its innovative capacity and commercializing potential technologies.
First let us analyze, from several angles, what innovation means and the state of Japan's innovative
capacity.
1.1. What Is Innovation?
Schumpeter defined the capitalist economy as adynamic development process driven by entrepreneurial innovations in technology. The essenceof capitalism is the process of "creative destruction," which constantly shatters the old and gives
birth to the new, thereby revolutionizing economic structure. The key player in this process ofcreative destruction is the entrepreneur. The innovations in technology referred to here constitute,
to use Schumpeter's exact terminology, "newcombinations." A new combination refers to achange in the way that materials and energy are
combined, whether in a product or in a method of
production. In other words, it means an alterationin production function in the broad sense of theterm. New combinations, Schumpeter argued,
occur as a result of:
1. The production of a new good
2. A new method of production or a new commercial technique
3. The opening of a new market
4. The acquisition of a new source of supply for
raw materials or components
1This chapter incorporates the results of an analysis of theinternational competitiveness and innovative capacity ofJapan and the US conducted by the author in 2002 and 2003
as a guest researcher at Harvard University (see Yutaka
Kijima, Industrial Competitiveness Policy and Innovation
Strategy in the United States and Japan, Harvard University
USJP Occasional Paper, 2003).

5. The emergence of a new organization (either
the achievement of monopoly status or theoverthrow of a monopoly)2
Schumpeter focused on changes in technology and company organization, which had until
then been taken as givens in a static economy.
These, he contended, are the main factors driving
economic development, for, unlike cyclicalmovements and motion processes that tend toequilibrium, they alter the course of cycles andcause shifts in equilibrium. The chief player inthis process of economic development is the entrepreneur, as Schumpeter called him, who pursues new combinations (i.e., innovations).
Schumpeter postulated a principle of dynamic
markets that can be schematized thus: equilibrium→ new combination → equilibrium → new combination. The creation of credit by banks, he explained, performs the function of facilitating thetransition from state of equilibrium to new combination; hence the banker is the true capitalist inthat he is indispensable to making new combinations possible. However, it might better suit thepresent state of the Japanese economy to talk of"providers of risk money" or "venture capitalists"rather than bankers, given the country's predicament: financial institutions have their hands full
disposing of bad debt, and they are unable tomove beyond the practice of only providing loansthat are backed up by real estate and thus guaranteed to be repaid.
1.2. The Innovator's Dilemma
When The Innovator's Dilemma 3 by Clayton
Christensen of the Harvard Business School appeared in 1997, it immediately became a nationwide bestseller in the US. This work is a highly
thought-provoking read for anyone interested in
the question of modern innovation strategies.
Christensen uses the term "the innovators dilemma" to describe the phenomenon whereby
great firms that were once industry leaders have,on account of their very success, failed miserably
in their attempts to defend their position uponcoming face to face with certain types of changes
in markets or technology. Success today can be
2

See J. A. Schumpeter's The Theory of Economic Development (1934) and other works.
3
Clayton M. Christensen, The Innovator's Dilemma (Harvard Business School Press, 1997).
Development Bank of Japan Research Report/ No. 53

1the cause of failure tomorrow: if a successful
business model is structured simply to ride thetide of the times, the company in question could
end up on the losing side should the tide shift. So
Christensen demonstrates, citing such cases as
how those firms that made a successful businessof vacuum tubes lagged behind when it came todeveloping transistors, while companies that
achieved success with transistor technology fellbehind in developing semiconductors. He classifies new technologies into "sustaining technologies" and "disruptive technologies."4 Sustaining
technologies are technologies that improve performance along the dimensions of performancethat mainstream customers in major market havehistorically valued. But occasionally disruptive
technologies emerge, which bring with them avery different value proposition from that available previously. It is these disruptive technologies that precipitate the failure of great firms thathave been successful in existing markets. In the
short term, disruptive technologies result inworse product performance, at least in mainstream markets, and they offer features that a few
fringe, and generally new, customers value;
hence they do not dovetail with the growth needsof large firms and do not appeal to mainstream
customers. And because no market exists forthem, they defy analysis and render existing organizational capacity ineffective. And so theycause even outstanding companies to stumble.
Professor Fujio Masuoka of Tohoku University, the developer of flash memory, sued his
old company, Toshiba, for one billion yen ascompensation for surrendering his patent. As one
commentator has noted, "The difficulty of evaluating disruptive technology, and the fact that
[Masuoka] left Toshiba on the grounds that thecompany, being wary about commercialization,
lacked the insight to recognize future potential:that is what lies at the root of the case. DRAM
formed the mainstay of Toshiba's semiconductorbusiness at the time, and disruptive technology
can render existing technologies obsolete; hence
the company hesitated to commercialize the new4
Christensen presents a wealth of examples: mainframe
computers vs. minicomputers, copy center copiers vs. desktop copiers, silver film vs. digital photos, power utilities vs.
distributed power sources, general securities firms vs. online
brokers, central processing units vs. microprocessors, etc.

2Development Bank of Japan Research Report/ No. 53

technology, allowing Intel to surge ahead."5
Christensen identifies the following strategies for successfully handling disruptive technologies:(1) If managers align a disruptive innovation
with the "right" customers, customer demand will ensure that the innovation getsthe resources it needs.
(2) Leave development of disruptive technologies to organizations small enough to get
excited about small wins.
(3) Develop markets for disruptive technologies
through repeated trial and error.
(4) Do not apply the processes and value standards of mainstream organizations to disruptive technology projects.
(5) When commercializing disruptive technologies, find new markets that value the attributes of the disruptive products.
As the speed of innovation picks up, suchdisruptive technologies will emerge with proportionately greater frequency, making it more vitalthan ever to come to grips with them. As will be
examined in greater detail in Chapter III,
"spin-offs" and "carve-outs" from large corporations have been growing in importance of late inJapan as elsewhere, demonstrating the soundnessof Christensen's argument.
1.3. What Constitutes a Productive Environment for Innovation?6
The above account provides a general idea ofwhat innovation means and its nature in themodern economy. But does there exist a set of
conditions that determines what constitutes a
productive environment for innovation? If not,then innovation should be able to take place
anywhere, as long as there are abundant researchfunds available, along with researchers and entrepreneurs to boot. One scholar who has attempted to answer this question is Professor Michael Porter, also of the Harvard Business5

See Nihon Keizai Shimbun, Mar. 4, 2004, "Kison jigyo
obiyakasu shingijutsu no hyoka" (Evaluating new technologies that threaten existing business).
6
See Yutaka Kijima, Wataru Kurosawa, Yasuhisa Yamaguchi and Norihisa Shimozawa, Kakkoku no Sangyo Kurasuta no Genkyo to Keisei Shien Saku (State of Industrial
Clusters in Different Countries and Policies to Support
Their Formation). DBJ Industry Report, Vol. 12, 2003.

School.
Michael Porter's theory of clusters originallygrew out of his work on developing a theoreticalframework on corporate competitive strategy. In
his 1980 book Competitive Strategy, which issomething of a business classic, Porter identified
five factors determining corporate competitiveness:(1) New entrants(2) Substitute products(3) Bargaining power of buyers(4) Bargaining power of suppliers(5) Rivalry among firms
Porter argued that formulating a strategy forachieving preeminence in these five areas was
crucial to profitability and competitive strategy.
Later, in The Competitive Advantage of Nations(1990), he came to stress the overriding importance of the environment in which firms operate,
which provides a dynamic stimulus both throughcompetition, as comprised of the above five factors, and through the support mechanisms available there. He hinted at the importance of focusing on the interaction of four determinants:7(1) Firm strategy, structure, and rivalry(2) Factor conditions(3) Demand conditions(4) Related and supporting industries
It was in this book that the concept of "clusters" also first appeared, as a way of characterizing the immediate environment in which firms
operate.8 Later, in On Competition (1999), Porter contended that in modern society more thanever, with globalization of the economy progressing and information and communications
networks spreading, geographical conditions andthe immediate external environment in which
companies operate, paradoxically, hold the key
to innovation and competitive success. He identified the following effects that clusters exert oncompetition. First, they boost the productivity ofcompanies headquartered in the region in question. Second, they have an impact on the direction and pace of innovation. That underpins fu7
Porter formulated a model of how the four determinants
affect one another, which he schematized in the form of adiamond (this being his so-called diamond theory).
8
Clusters are the manifestation of the diamond theory inpractice. Proximity -- the presence of companies, customers,
and suppliers in the same region -- ratchets up the pressure
to innovate and improve, according to Porter.

ture gains in productivity. Third, they stimulate
the emergence of new enterprises, a process thatin turn strengthens the clusters themselves. Thus
clusters enable the companies and organizations
that form part of them to enjoy the kinds of advantages (external economies) that they could
otherwise only obtain if they were larger in sizeor concluded formal alliances with other firms.
1.4. Conditions Determining Innovative
Capacity
Based on the above analysis, we can now summarize the key factors for creating and commercializing innovations as follows:(1) Research and development activities that
unleash creative destruction(2) Risk money to fund those activities(3) Implementation of management of technology and formation of small, autonomous
organizations, both for the purpose of commercializing innovations(4) Network and coordination functions along
the lines of industrial clusters
The organic integration of these factors iswhat produces innovation. The next section will
examine Japan's innovative capacity and competitiveness from a variety of angles.
2. Japan's International Competitivenessand Blind Spots in its Innovative Capacity
2.1. Definition of International
Competitiveness
The term international competitiveness is definedin many different ways depending on who is using it.9 The focus of present debate on international competitiveness can be summed up in
three questions:(1) Who are the actors that determine a country's international competitiveness? (Arethey defined by nationality, in which caseeven companies operating abroad would becounted, or are they defined by national
borders, in which case all companies operating within a country would be counted,
9
The OECD defines competitiveness as "the degree towhich a country can, under free and fair market conditions,produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term."

Development Bank of Japan Research Report/ No. 53

3regardless of nationality)?
(2) What are the indicators of international
competitiveness? (RCA index, export share,
trade balance, RIC coefficient [=(value ofexports - value of imports)/value of production], international competitiveness coefficient [=(value of exports - value of imports)/(value of exports + value of imports)],labor productivity, unit labor costs, totalfactor productivity, etc.)(3) What is international competitiveness?
With regard to the last question, Paul
Krugman of Princeton University points out thatthinking in terms of national competitiveness has
risks, for it can result in mistaken policies that,among other things, waste government funds,
lead to protectionism, and reduce the quality of
public policy. He asserts that, as far as people's
standard of living is concerned, the important
thing is not international competitiveness but
rather, in the first place, (a) raising productivity,
as well as (b) income distribution, and (c) unemployment. On the other hand, Professor MichaelPorter of Harvard University defines international competitiveness as anything that leads toimprovements in productivity. He observes thatenhancing national productivity requires individual companies to keep improving themselvesby, for example, raising the quality of theirproducts and boosting efficiency. The kind ofdesirable trade mix that results from competitionand pressure from overseas rivals as a consequence of international trade, as well as fromshifting production to more productive industries,
can make a major contribution in this regard,
according to Porter. Thus he recognizes to somedegree the importance of international competitiveness.10
With these points of view in mind, let us
turn now to analyzing blind spots in Japan's innovative capacity and assessing its international
competitiveness.
2.2. Japan's International Competitivenessand Blind Spots in its Innovative Capacity
When the subject of national competitiveness10

See Yutaka Kijima and Daisuke Asaoka, U.S. Competitiveness Policy since the Young Report and its Implications
for the Hollowing out of Japan's Manufacturing Industry,
DBJ Industry Report Vol. 3, 2001.
4

Development Bank of Japan Research Report/ No. 53

comes up, one well-known indicator that is frequently cited is the World Competitiveness
Yearbook issued by the Swiss business school
IMD. In the 2003 survey, which ranks countries
and regions separately depending on whether
their population is over or under twenty million,
Japan places eleventh overall among the thirty
countries and regions with a population of overtwenty million. In the 2004 edition it places ninth.
But one need not be overly pessimistic: overall
ranking is determined based on a potpourri combining statistical data with questionnaire-type
data, and the way in which the indicators aremeasured is somewhat arbitrary. In terms of scientific infrastructure, which is closely related toinnovative capacity, Japan ranks second after the
US (see Figure 1-1). That relates in large part tothe fact that the country ranks No. 1 in the world
in R&D expenditures as a percentage of GDP,the percentage of the population engaged in
R&D activities, and the number of domesticallyregistered patents. Is it fair to conclude on thatbasis that Japan's innovative capacity and competitiveness are, for the time being, fine? Or are
there blind spots? That is the question to which
we turn next.
2.3. Investment in Knowledge Creation
Comparing figures on research expenditures between countries is not an easy task, since the nature of the statistics and the survey methods useddiffer from country to country. One indicatoroften used to determine general trends is the ratioof research expenditures to gross domestic product (GDP). Japan is in the top rank globally interms of R&D expenditures as a percentage ofGDP, as the FY 2003 White Paper on Scienceand Technology also shows. This is a reliableindicator for estimating Japan's potential innovative capacity. R&D investment in the future generates innovations and drives up a country's GDP
through the process of commercialization andproduct development. However, when considering knowledge creation, it is misleading to lookat R&D investment alone. One also needs to take
into account expenditures on higher educationand software. As Figure 1-2 shows, Japan is a
big spender on R&D, in which it invests over 3%
of GDP, but it is stingy when it comes to expenditures on higher education and software. OverallNational competitiveness (overall ranking) as per old benchmarks
0

2

3

4

Rank as per new benchmarks adopted 2003
0

4
17

20

20

24

24

Rank

Rank

10

26

40
'94

'95

'96

Japan

'97

'98

US

'99

'00

'01

Finland

China

'99

2

Rank

5

5

20
'00

'01

'02

'03

'04

Government efficiency

Economic conditions

Business efficiency

Scientific infrastructure

11

'01

'02

Japan
China

'03

S. Korea'04
TaiwanRanking of major economies (2004)
1. US 2. Canada 3. Australia 4. Taiwan 5. Malaysia
6. Zhejiang 7. Germany 8. UK 9. Japan 10. China
11. Thailand 12. France 13. Spain 14. India 15. S.
Korea 16. Maharashtra (India) 17. Colombia 18.
Sao Paulo (Brazil) 19. S. Africa 20. Russia 21. Italy
22. Philippines 23. Brazil 24. Romania 25. Turkey
26. Mexico 27. Poland 28. Indonesia 29. Argentina
30. Venezuela

5

6

10

'99

'00
US
Thailand

2

9

10

20

'02

Japan's rank in four categories
0

9

10

30

30

'93

10

10

Japan ranks top in: Number of patents, R&D unit costs,
density of roads, etc.

Source:Compiled from “IMD 2004.”

Figure 1-1. Present Level of Japan's National Competitiveness (IMD analysis)
R&D
9.7

6.1

SoftwareHigher education%

8

Average annual economic
growth rate, 1992-2000

8.8
n.a. 4.0

6
4.0

7.6

4.5

4.3

6.0

3.4

4.6

n.a. 5.0

4.5

4.2

6.7

6.8 n.a.

4
10.8 3.4

Greece ('99) *2

Polandn.a. n.a.
8.8

Mexico ('99)

Italy

8.3

Portugal

Slovak Republic ('99)

Spain

Hungary

IrelandCzech Republic

Austria

NorwayEU *6*7

Australia

UK

FranceBelgium ('99) *5

Japan *1

Netherlands

Germany

Denmark ('99) *2

OECD ('99) *3 *4

Canada *1

Switzerland

S. KoreaFinlandSwedenUnited States *1

6.4 n.a. 1.8

20Notes: 1. Higher education includes programs at technical colleges upon completion of secondary education.
2. Average annual economic growth rate is for 1992-99.
3. Excluding Hungary, Poland, and the Slovak Republic.
4. Average annual economic growth rate is for 1992-99 except in the case of Belgium, the Czech Republic, Hungary, S. Korea, Mexico, Poland, and the Slovak Republic.
5. Expenditure on higher education includes direct public spending only.
6. Excluding Belgium, Denmark, and Greece.
7. Average annual economic growth rate is for 1992-99 except in the case of Belgium.
Source: Compiled from OECD, “Science, Technology and Industry Scoreboard 2003.”

Figure 1-2. National Expenditures on R&D, Software, and Higher Education,
as a Percentage of GDP (2000)
Development Bank of Japan Research Report/ No. 53

5

200,000

Number

180,000
160,000
140,000Japan
US
Germany
FranceUK

120,000
100,000
80,00060,00040,00020,00001975

Notes:

Sources:

1980

1985

1990

1995

2000

1. Figures for 1975-1995 are taken from Source (1), those for 2000 from Source (2).
2. The figures in (2) include designated patents applied for under the Patent Cooperation Treaty(PCT) and in Europe.
(1) WIPO, “Industrial Property Statistics.”(2) Japan Patent Office, “Japan Patent Office Annual Report 2003.”

Figure 1-3. International Comparison of Number of New Patents Registered(by nationality of patent holder)
1991

1998

4.3

United States

5.4

EU

2.0

Japan

6.3

Germany

1.9

Average annual

4.9

growth rate,

12.7

FranceUnited Kingdom
Sweden1991-1998

2.2

Switzerland

4.1

Netherlands

0.9

Italy

8.2

Canada12.4

FinlandMagnified

6.9

Belgium

21.6

Australia

Korea

7.4

Austria

Australia

5.5

Denmark

Austria

10.0

NorwayDenmark

Spain

9.7
5.1

New Zealand

Spain

6.5

Hungary

Ireland

9.4

Luxembourg

New Zealand

1.9

MexicoHungary

11.0

Iceland

Luxembourg

Greece10.5

Portugal

Greece0.5

Slovak Republic

PolandTurkeyCzech Republic

6.0

Notes:

IcelandCzech Republic

9.2
-0.4

40

MexicoPoland20.4%

NorwayIreland

%
0.8

0.6

0.4

0.2

Portugal

0.0

n.a.

Slovak Republic

40.2

Turkey
30

20

10

0

1. The figures next to the name of each country represent average annual

economic growth rate, 1991-98.
2. All percentages are estimates calculated by grouping together patents
Source:registered in the US (USPTO), Japan (JPO), and the EU (EPO).
OECD, “Science, Technology and Industry Scoreboard 2003.”

Figure 1-4. Share of Patent Families by Country, and Fluctuation Therein (1991-1998)
6

Development Bank of Japan Research Report/ No. 53

tor, patents would need to be grouped and thencompared on that basis. That involves some difficult questions. How exactly should they begrouped? How should peripheral patents be handled? Still, accurately assessing developmentswith respect to the "seeds" of technology willdefinitely require analyzing trends in basic patents and patent families.

it falls beneath the OECD average, a fact best
kept in mind.
2.4. Patent Trends
One key measure of a country's innovative capacity is the number of new patents registered.
Figure 1-3 shows trends in number of patents
among the major economies. Japan overtook the
US in the early 1990s to take the No. 1 spot
worldwide, and by 2000 it held some 190,000
patents. However, 60.3% of its patents are registered domestically, and world patent applications
account for a lower percentage than in the caseof other countries.
The OECD statistics given in Figure 1-4 arefor patent families (a set of patents filed in several countries for a single invention). This comparison more accurately reflects the real situation.
As the chart shows, Japan holds the second largest number of patents after the US, but its sharedeclined between 1991 and 1998.
One thing should be noted here: this comparison takes absolutely no account of the qualityof the patents. Japan has a reputation for owning
many peripheral patents but relatively few corepatents. In order to take due account of this fac-

2.5. R&D by Medium and Small Business
As Figure 1-5 shows, Japan ranks at the bottomof the OECD in percentage of private-sector
R&D expenditures accounted for by medium andsmall business. In Italy, Greece, and Ireland, medium and small business is the locomotive of
R&D-driven innovation. By contrast, while Japan is at the top of the global rankings in percentage of private-sector R&D expenditures, thechart suggests that virtually all that spending isby big corporations. Medium and small business's low level of R&D explains why not many
medium- and small-sized firms have emerged in
the technology sector, and why research and development by venture businesses is not that vigorous. In the past in Japan medium- andsmall-sized firms could get away with just obeLess than 50 employees%

50-249 employees

100

80

60

40

Notes:

Source:Japan

SwedenFrance (2000)

Turkey (2000)

United States (2000)

OECD

Germany (1999)

Austria (1998)

Netherlands (2000)

EU

Finland

Korea

Canada (2000)

Portugal

Czech RepublicHungary

Switzerland (2000)

Denmark (1999)

Spain

United Kingdom

PolandAustralia (2000)

Slovak Republic

New Zealand (1999)

Ireland

NorwayItaly (2000)

0

Greece (1999)20

1. Data are for the year next to the name of the country, if indicated; otherwise they are for 2001.
2. For the Netherlands and Norway, the categories are less than 50 employees and less than 200 employees.
For New Zealand, the categories are less than 50 employees and less than 100 employees. For Japan and S.
Korea, a single category, less than 300 employees, is used.
OECD, “Science, Technology and Industry Scoreboard 2003.”

Figure 1-5. Percentage of Private-Sector R&D Expenditures Accounted forby Medium and Small Business, by Country (2001)

Development Bank of Japan Research Report/ No. 53

7tance to innovation, yet it is always in short supply. Hence in the US the federal government taps
public funds for risk money, and public financial
institutions at the state level dish it out as well.
Similarly, in Germany both the federal and state
governments supply public risk money. The justification for such policy measures is the thesisthat the supply of risk money to fund innovation
is a case in point of "market failure," since innovation will not get the funds it requires if left
solely to the market -- say Wall Street or the City.
The correctness of this thesis will need to be further verified, but at any rate the wellsprings offuture innovation will gradually dry up unless
Japan hikes the amount of risk money it spends,
as a percentage of GDP, to a level comparablewith that of the other developed economies.

diently manufacturing whatever they were told toon subcontract from a major corporation, but
now the order of the day is aggressive researchand development, including development of new
products. The implication of this is that mediumand small-sized firms do not currently havemuch of a stock of technological "seeds." With
the sole exception of R&D ventures, it is perhaps
going to take time for Japan's numerous mediumand small-sized firms to eliminate their relianceon subcontract work from big corporations andfind products unique to themselves. To put it theother way round, this could end up being Japan's
Achilles' heel now that the speed of innovation ispicking up, for, as Christensen described in The
Innovator's Dilemma, small organizations are thebest breeding grounds for disruptive technologies.

2.7. International Comparison of Technology Trade Balances
The size of a country's technology trade surplus
or deficit is also useful in determining its innovative capacity. Royalty income from the supply oftechnology to other countries climbs in proportion to the number of cutting-edge innovations
that are commercialized, resulting in a surplus.
Conversely, if a country is dependent on othercountries for basic technologies, it will in manycases find itself stuck in the red as far as royalty
payments go, even if it enjoys a surplus in tradein goods. In that sense the technology trade balance is a useful measure of the outcomes of in-

2.6. Venture Capital Investment as a Percentage of GDP
The benchmark illustrated in Figure 1-6 is also avital measure of a country's innovative capacity.
Annual venture capital investment in Japan
represents less than 0.1% of GDP, placing thecountry near the bottom of the OECD heap. In
light of that fact, and of medium- and small-sized
firms' low share of R&D spending, it would befair to describe Japan as something of a global
laggard when it comes to venture-driven innovation. As will be examined in greater detail below,
the availability of risk money is of vital impor0.5

Early stages%

Expansion

0.4

0.3

0.2

Note:
Source:Japan

Slovak Republic

Austria

GreeceHungary

Portugal

New Zealand

Italy

Czech Republic

PolandDenmark

Switzerland

Spain

Australia

IrelandFranceNorwayEU

Germany

Finland

Korea

Belgium

SwedenNetherlands

OECD

CanadaIcelandUnited States

0.0

United Kingdom

0.1

Average level of annual investment for 1998-2001, shown as a percentage of GDP.
OECD, “Science, Technology and Industry Scoreboard 2003.”

Figure 1-6. Annual Venture Capital Investment as a Percentage of GDP
8

Development Bank of Japan Research Report/ No. 53

1-7 shows, Japan ranks near the bottom of theOECD by this measure. For all its reputation as ahigh-technology giant, Japan's volume of technology trade as a percentage of GDP is extremely low, though it does enjoy a surplus.

novative capacity. However, it should be kept inmind that, when companies shift their production
hubs overseas, they will often charge those hubs
for operational know-how, which amount is included in the technology trade surplus. Much ofJapan's surplus, characteristically, is from transactions between parent companies and subsidiaries in the automobile industry, and the amount ofpure royalty income in the biotechnology andsimilar sectors is small.
As the international comparison in Figure%
3.0

2.8. Change in Contribution ofHigh-Technology Industries to the Trade
Balance
Figure 1-8 illustrates trends in competitivenessamong high-technology industries, which is one

Payments as a % of GDP Exports

8.5

Receipts as a % of GDP Imports

2.0

MexicoNew Zealand ('99)

Australia ('98)

Spain ('98)

Japan ('00)

FranceSlovak Republic

Canada ('00)

Czech Republic

Italy

United States

Korea ('99)

Poland ('00)

Finland

Portugal

Norway ('00)

Hungary ('99)

Denmark ('99)

Germany

United Kingdom

Switzerland

Austria ('00)

Ireland0.0

Belgium

1.0

Data are for the year next to the name of the country, if indicated; otherwise they are for 2001.
OECD, “Science, Technology and Industry Scoreboard 2003.”

Note:
Source:Figure 1-7. Value of Technology Exports and Imports as a Percentage of GDP (2001)
10

1992

%

2001

5
0
-5

Notes:New Zealand

Iceland

Australia

TurkeyGreecePolandFinland

NorwayPortugal

Italy

CanadaSpain

Netherlands

Belgium

Czech Republic ('93)

Denmark

SwedenAustria

Korea ('94)

FranceHungary

United Kingdom

Germany

Ireland

MexicoUnited States

Japan

-15

Switzerland-10

1. Data are for the year next to the name of the country, if indicated, and for 2001; otherwise they are for 1992 and 2001.
2. Amount contributed by sector = sectoral trade balance - overall manufacturing trade balance X total value of imports andexports in sector / total value of imports and exports, manufacturing industry overall.

3. Contribution (%) = amount contributed by sector / overall manufacturing trade balance.
Source: OECD, “Science, Technology and Industry Scoreboard 2003.”

Figure 1-8. Contribution of High-Technology Industries to Overall Manufacturing
Trade Balance

Development Bank of Japan Research Report/ No. 53

9chemicals excluding pharmaceuticals; transport
equipment; and machinery and equipment. Note
how Japan has experienced the largest decline inshare, followed by Germany, France, and Italy.
Japan's high-tech industries, which as of 1992
were among the most competitive in the OECD,
have rapidly lost their dominance as the US, theEuropean countries, Mexico, Canada, and South
Korea have closed the gap.

of the outcomes of innovation and is directly
linked
to
it.
The
OECD
classifies
high-technology industries into five categories:
aircraft and spacecraft; pharmaceuticals; office,accounting and computing machinery; radio,
television and communication equipment; andmedical, precision and optical instruments.
Comparethecontributionof
those
high-technology industries to the overall manufacturing trade balance in 1992 with the same
benchmark for 2001, and one can see how thehigh-technology sector has weakened considerably in Japan. By contrast, in the US, Ireland, andthe UK it has grown more robust. That fact suggests that the international competitiveness ofJapan's innovation-spawning industries has declined rapidly over the past decade. Electricalmachinery and motor vehicles are classified as
medium-high-technology industries, and a different classification might lead to a different
conclusion; nonetheless, the situation is cause forconcern.
Figure 1-9 shows the percentage by which
each country's share of the total value of OECDtechnology industry exports increased or decreased between 1992 and 2001. The term technology industry here refers to the fivehigh-technology industries listed above, plus themedium-high-technology industries of electricalmachinery and apparatus; motor vehicles;
%

19.9
2

4.6
7.4 0.7 4.0 0.8 3.7
100 0.0 0.1 0.1 0.4 0.2 0.4 3.8 0.3 2.4 0.9 0.5

07.5 4.9 2.4

1.7 0.9 1.4 0.4-2

Notes:

Source:Ireland1.

The increase/decrease is for the period next to the name of the country, if specified; otherwise it
is for 1992-2001.
2. OECD totals exclude the Czech Republic, South Korea, and the Slovak Republic.
OECD, “Science, Technology and Industry Scoreboard 2003.”

Figure 1-9. Increase or Decrease in Share of Total Value of OECD
Technology Industry Exports

10

United States

CanadaKorea ('94~'01)

Belgium

Hungary

Czech Republic ('93~'01)

PolandUnited Kingdom

Spain

FinlandTurkeyPortugal

Netherlands

GreeceAustralia

New ZealandOECD

Iceland

Austria

NorwaySwedenDenmark

Switzerland

Italy

FranceJapan

Germany

12.8

Slovak Republic ('97~'01)

Share of total value of OECD technology industry
exports, by country (2001)

15.7
-4
-6

4.3

2.4

Mexico4

2.9. Import Penetration and Export Ratio
Next we turn to discussion of the international
competitiveness of individual industries. A wide
range of possible indicators are available for
gauging the international competitiveness of anindustry, among the most straightforward ofwhich are import penetration in the industry, andthe industry's export ratio; these are also relatively easy to quantify. Figures 1-10, 1-11, and1-12 rank industries in Japan, the US, and the EU
respectively in descending order of level of import penetration. As can be seen, Japan generally
excels in manufacturing but has a weak primarycommodities sector. The sectors with the lowest
level of import penetration and the highest export
ratio, which can be assumed to be the most internationally competitive, are, in the case of Japan, such industries as electrical machinery, machinery and equipment, motor vehicles, andDevelopment Bank of Japan Research Report/ No. 53

shipbuilding, as shown in Figure 1-10. But examine this chart more closely in conjunction with
Figures 1-11 and 1-12, and it is striking how
much weaker the Japanese aircraft industry iscompared to its US and EU counterparts -- a factthat can be attributed to the industry's connection
80

banned. Note too how marked the gap is be
tween strong industries, like motor vehicles andshipbuilding, and weak industries, like foodstuffs
and pharmaceuticals. Japan also stands out
among the advanced countries for the diffuse
distribution of its strongest industrial sectors.
Import penetration%

Export ratio

60

40

Notes:

Source:Paper, printing

Shipbuilding

Metal products

Rubber, plastics

Non-metallic minerals

Motor vehicles

Basic metals

Machinery, equipment

Other manufacturing

Pharmaceuticals

Petroleum refining

Total manufacturing

Electrical machinery

Food, drink, tobacco

ChemicalsRadio, TV, comms.

Wood

Computers

Textiles, clothing

Aircraft0

Scientific instruments20

1. Data are for 1999.
2. Export ratio = value of exports (X) / GDP (Y)3. Import penetration = value of imports (M) / (GDP (Y) - value of exports (X) + value of imports (M))
4. In Japan, "automobiles" includes other transport equipment.
OECD, “Science, Technology and Industry Scoreboard 2003.”

Figure 1-10. Import Penetration and Export Ratio by Industry (Japan)

80

Import penetration%

Export ratio

60

40

Note:
Source:Paper, printing

Shipbuilding

Food, drink, tobacco

Metal products

Petroleum refining

Rubber, plastics

Non-metallic minerals

Wood

Pharmaceuticals

Chemicals

Basic metals

Other transport

Scientific instruments

Total manufacturing

Machinery, equipment

Aircraft

Motor vehicles

Other manufacturing

Radio, TV, comms.

Textiles, clothing

Electrical machinery

0Computers

20

Data are for 1999.
OECD, “Science, Technology and Industry Scoreboard 2003.”

Figure 1-11. Import Penetration and Export Ratio by Industry (US)Development Bank of Japan Research Report/ No. 53

11Figure 1-13 plots export ratio minus importpenetration in each industrial sector in the orderJapan, the US, and the EU. The chart highlights
the strengths and weaknesses of each economy insuch sectors as shipbuilding, motor vehicles,
computers, pharmaceuticals, and aircraft.

2.10. True State of the Technology Gap
with China
The Chinese manufacturing industry devotes itself primarily to assembly, the lowest part of theso-called "smile curve" representing value added(see Figure 1-14). That has led many economists
to argue that China is beginning to catch up toImport penetration%

80

Export ratio

60

40

Paper, printing

Metal products

Non-metallic minerals

Food, drink, tobacco

Rubber, plastics

Petroleum refining

Wood

Motor vehicles

Chemicals

Shipbuilding

Total manufacturing

Pharmaceuticals

Basic metals

Machinery, equipment

Other manufacturing

Other transport

Electrical machinery

Textiles, clothing

Scientific instruments

Aircraft

Computers

0Radio, TV, comms.

20

1. Data are for 1999.
2. Percentages represent overall totals for Austria, Denmark, Finland, Germany, Ireland, Italy, Portugal, Spain, Sweden, and the UK.
3. Intra-EU trade is excluded.
OECD, “Science, Technology and Industry Scoreboard 2003.”

Notes:

Source:Figure 1-12. Import Penetration and Export Ratio by Industry (EU)
%

Japan

55.6

United States

EU

30
20
10
0
-10

AircraftWood

Textiles, clothing

Food, drink, tobacco

Petroleum refining

Pharmaceuticals

Paper, printing

Other manufacturing

Metal products

Non-metallic minerals

Basic metals

Total manufacturing

Chemicals

Computers

Rubber, plastics

Electrical machinery

Scientific instruments

Radio, TV, comms.

Machinery, equipment

Motor vehicles-30

Shipbuilding

-20

Note:
All data (Japan, US, EU) are for 1999.
Source: OECD, “Science, Technology and Industry Scoreboard 2003.”

Figure 1-13. Export Ratio Minus Import Penetration, by Sector: Japan, the US, and the EU

12

Development Bank of Japan Research Report/ No. 53

In the face of overheated competition and deteriorating earnings, major
local Chinese firms are shifting to a new business model (the Samsungsof tomorrow).
→ Buying up Japanese firms' technology, hiring Japanese engineers,
joint research with universities, competing over international standards(wireless LANs etc.)
Design and components(procured from Japan andelsewhere)↑
Value added (highlow)

Sales, service, solutions

Assembly(Chinese firms)

Manufacturing process (components → assembly → sales and service)
Source:Compiled by the author.

Figure 1-14. The Value-Added “Smile Curve”
Japan on the high-technology front only because
it copies Japan and infringes intellectual property
rights; control intellectual property rights more
rigorously, therefore, and Japan's technologicallead will be unassailable. Noting how Japanesemanufacturers have been flocking home fromabroad of late, newspapers and magazines, too,feature frequent commentary to the effect that
the Japanese manufacturing industry has made afull comeback and has nothing to fear from the
Chinese. But is such confidence really justified?
In the face of overheated competition and deteriorating earnings, major local Chinese firms are
now trying to make the shift from the kind of
business model illustrated below to a higher
value added one. To that end they are making
systematic moves: buying up Japanese firms withthe goal of acquiring their technology, hiring
Japanese engineers, collaborating with China's
leading universities such as Tsinghua University,and competing over international standards for
wireless LANs and the like. They are poised to
become the Samsungs of tomorrow.
Figure 1-15 summarizes information

gleaned from a series of interviews on the current
state of China's high-tech industries that I conducted with the Shanghai Semiconductor Industry Association and others in February 2004. One
got a real sense of how the semiconductor industry, traditionally one of Japan's fortes, is growing
by leaps and bounds in China. The talk of how
China has only managed to produce low-tech,labor-intensive industries is completely off themark.
As Figure 1-16 on the next page shows, theChinese government has, in its Tenth Five-Year
Plan, committed itself to nurturing the high-techand semiconductor industries, and those sectors
are steadily growing. In today's China evenhigh-value-added, cutting-edge industries growin the wink of an eye the instant they get an infusion of advanced technology. The upper echelonsof these advanced industries are almost completely dominated by managers with a background in Silicon Valley or an American orEuropean MBA. Once they acquire technology
from, say, Alcatel, NEC, or Philips, China's corporate managers, recently back from studies

Development Bank of Japan Research Report/ No. 53

13• The Mecca of the Chinese semiconductor industry (location, concentration, water supply, demand)• Shanghai Semiconductor Industry Association (270 firms)
Fablesses (1,000), many launched by returnees from studies abroad, Material manufacturers (54), Wafer
production (9)NEC Huahong(China's first 8-inch chip, Jiang Zemin project, foundry setup, NEC's newest plant,
one of the seven managers from NEC)Shanghai Belling(makes ICs for Shanghai Telecom, locally affiliated, uses Alcatel technology)
Advanced Semiconductor Manufacturing Corporation of Shanghai(38% owned by Philips, analog foundry, air bag drive systems etc., 40% profit rate)
SMIC, GSMC, Shin Shin, Huahong Group, etc.
113 foreign-owned independent corporations, 80 local firms, 47 cooperatives, 24 privately run firms
Total investment $14.4 bn, 63,000 employees incl. 23,000 engineers

Source:Compiled from documentation of the Shanghai Semiconductor Industry Association et al.

Figure 1-15. The Rise of the Shanghai Semiconductor Industry• Tenth Five-Year Plan (2001-2005)
Communications industry: Business revenues of ¥13.8 tr, growth of 23.4% p.a.
Mobile communications: 290 m users, 40 m computers linked to Internet (200 m users)
Electronic information product manufacturing: Business revenues of ¥37.5 tr, growth of 20% p.a.
20 bn IC wafers, 18 m PCs, 100 m mobile phones
Software industry: Business revenues of ¥3.75 tr• Forecast growth in the Chinese semiconductor market
2000: ¥1.7 tr 2005: ¥5 tr 2010: ¥13 tr (of which 4 tr made domestically)→ "Grafted" industries are growing rapidly in China, even in high-value-added sectors

Source:Compiled based in interviews with the Chinese government et al.

Figure 1-16. Outlook for the Chinese IT Industry
abroad and far more flexible and far-sighted thantheir Japanese counterparts, work frantically tojoin the top ranks of global industry, and they are
one step ahead of the rest of the world in the way
they do business. In the past a graft from a Japanese apple tree crossed over to China to produce
what is now a thriving industry. If outstanding
technology can be grafted in the same fashion at
the incubation stage, there is a good chance thathigh-value-added, cutting-edge industries willquickly blossom in China. As the example of theautomobile's internal-combustion engine shows,
high-value-added industries take time to mature

14

Development Bank of Japan Research Report/ No. 53

technology and integrate it with artitecture;
hence they are hardly able to grow into
world-class players overnight. But "grafted" industries such as just described may be able tobecome competitive with the world's best in almost an instant, as long as there is technology
available to be grafted and outstanding management to oversee it.
The following chapters examine the question of what action Japan should take to remedy
these blind spots in its innovative capacity anddeal with its changing level of international
competitiveness.

II Strategies for Commercializing
Technology
1.

Policies and Strategies for Successfully
Navigating the “Darwinian Sea”

1.1. Innovation and the “Darwinian Sea”
In the Ministry of Economy, Trade and Industry(METI) and the Council for Science and Technology Policy, there has been much interest oflate in the concept of the "Valley of Death,"
which we now examine. The Valley of Death is
the well-known idea propounded by American
Congressman Vern Ehlers to describe the valley
through which entrepreneurs must pass on thejourney from invention to innovation. This valley
is conceived of as barren territory, as illustrated
in Figure 2-1.
However, the diagram in Figure 2-2 on thefollowing page, illustrating the difficulty of raising money, strikes more of a chord in Japan. This
image appeared in a report unveiled in February

2002 by U.S. Secretary of Commerce Don Evans,which proclaimed the need for an ATP programand mapped out the direction of reform.11
The "Valley of Death," as the Department ofCommerce uses the term, refers to the time period prior to the demonstration of the economic
and technical feasibility of a new technologicalconcept, being the stage when the risks are highest due to uncertainty and complexity. Transcending the valley in the shortest time is the key
to success in exploiting the new technology inthe marketplace. The ATP program reduces thislead time by at least half, according to the Commerce Department.
Lewis Branscomb, Professor Emeritus atHarvard University, has, with a colleague, recently argued that a more accurate metaphor exists for the innovation process than the Valley ofDeath, namely the "Darwinian Sea." Researchfindings wade into this "Darwinian Sea," which
teems with numerous life forms struggling tosurvive, but only those ideas that, in the courseof evolution, prove strong enough to fight off

Source: US Department of Commerce, “The advanced technology program:
Reform with a purpose (February 2002).”

Figure 2-1. The “Valley of Death” Image I

11

US Department of Commerce, The advanced technology
program: Reform with a purpose (February 2002).

Development Bank of Japan Research Report/ No. 53

15

Source: US Department of Commerce, “The advanced technology program:
Reform with a purpose (February 2002).”

Figure 2-2. The “Valley of Death” Image II
sharks and other deadly enemies and withstandthe raging storms (i.e., technical hurdles andrisks of commercialization) reach the opposite
shore, where innovation and new business thrive.
This Darwinian Sea is illustrated in Figure 2-3 on
the next page.12
This image more aptly portrays the journeyfrom invention to innovation than does that ofthe "Valley of Death." Between one safe shore
where research and invention take place and the
opposite shore where innovation and new business can proceed in security lies an ocean, wherea struggle to survive unfolds among ideas andcommercial opportunities. The "Valley of Death"and the "Darwinian Sea" are both of course
metaphors, but the "Darwinian Sea" surely better
captures the way in which fertile waters nurturein abundance the evolution of technologies andinventions, with those that triumph in the struggle to survive eventually thriving in the form of
new products and businesses.13
There are three major obstacles in the Dar12

Lewis Branscomb and Philip Auerwald, Between Invention and Innovation. USA: NIST, 2002A.
13
In Japan both the Valley of Death and the Darwinian Sea
are often described as barriers. Similar characterizations arefound in accounts of the ATP program in the EU and elsewhere.
16

Development Bank of Japan Research Report/ No. 53

winian Sea. The first obstacle is insufficient incentives for scientists. Not many scientists arewilling to spend time and effort on the verification work needed to commercialize an invention
that has emerged from their academic research.
The second obstacle is the disjuncture between
technologist and business manager. Success isdifficult unless both sides can communicate effectively. The third obstacle lies in raising funds
and securing human resources. It is easy to findfunding at the basic research and development
stage and again at the stage where a valid business model is already in place. In between, however, there are few sources of funding available.
There also tends to be a shortage of human resources capable of providing the required technical support for commercialization.
1.2. Policies for Successfully Navigating the
Darwinian Sea
Harvard's Professor Branscomb contends that, inorder to help businesses that are struggling in the
Darwinian Sea, steps are needed to (1) reduce
technical risk, (2) identify markets that do not yet
exist, and (3) match up people and money fromdisparate sources. To help firms on the "researchand invention" shore, meanwhile, there is also a

An alternative metaphor for the invention-toinnovation transition: the Darwinian Sea

Source: Lewis Branscomb and Philip Auerwald, “Between Invention andInnovation.” USA: NIST, 2002A.

Figure 2-3. The Image of the “Darwinian Sea”

need for (4) technology push policies. And to
those already on the other bank, where new
businesses and industries are born, policymakers
should provide (5) incentives for risk taking.14
1.3. Market Failure
Even in the US, market failure is an acknowledged threat at the early stage of the journeyfrom invention to commercialization. Uponcompleting basic research, entrepreneurs find it
difficult to scrape together enough money to create a viable business model, yet as of 2002 over
$70 billion remained undisbursed from venture
funds. Memories are still fresh of how several
American venture capital firms prematurely returned money to investors to reduce the size of
their funds. The reason for this state of affairs isthat, when the time comes to allot risk money toearly-stage technology ventures, the financial
markets per se fall victim to market failure. Afterall, investors lack the basic ability to conduct afair assessment of the return on their investment
at the early stage. Another reason lies in asymmetry of information between investor and en14

Lewis Branscomb and Philip Auerwald, Between Invention and Innovation. USA: NIST, 2002A.

trepreneur. At the early stage, not only are therisks great; so too are the technological uncertainties, and investors have no effective means ofdealing with these. Some of today's new technologies have the potential to engender whole
new product categories, but by the same token
they can cause discontinuities in commodity
markets and aggravate market uncertainty. In thehigh tech world with its increasingly complex
technologies and markets, it is becoming evermore difficult to provide documentation thatmeets the level of due diligence that investors
require, complete with the data to back it up.
Then there is the venture capital gap: there is areluctance to cough up the $200,000-$2,000,000
in risk money required at the early stage, in part
because "hands-on" investment involves a lot ofwork for a venture capital firm.
1.4. A Process for Supporting Commercialization of Technology
Innovation is generally said to pass through thefollowing phases:
Phase I.
Basic research, research based on an
innovative idea
Phase II. Proof of technical concept (so-called
invention)
Development Bank of Japan Research Report/ No. 53

17

ing: (1) management of technology, (2) technology transfers, (3) evaluation and circulation oftechnology, (4) mentoring of technology, and (5)technology financing. The following sections
examine these in order.

Phase III. Early-stage technology development,
establishment of markets and production methods, verification ofbusiness model
Phase IV. Product development (so-called innovation), initial production andmarketing, procurement of necessary
outside funds
Phase V. Full-scale production and marketing,recovery of investment begins
Of course, this is the classic linear innovation model; in many cases one or another step isskipped through M&As or purchase of technology. Plus in a growing number of instances thetechnology commercialization process itself
skips stages or backtracks (marking the emergence of a nonlinear model). Nonetheless, it isself-evident that, in commercializing an innovation, one must pass through a number of steps
fraught with difficulty.
The preceding analysis leads to the conclusion that the process of commercializing technological "seeds" cannot be successfully completed
without proper implementation of all of follow-

2.

Management of Technology (MOT)Management of technology (MOT) is receiving a
lot of attention these days, for it is of growing
importance to smooth implementation of innovation, including selecting R&D fields likely to
produce seed technologies and deciding how
much to spend on R&D.
As Figure 2-4 shows, in a questionnaire
76% of firms responded that they had R&D projects that they had never commercialized. When
asked what had happened to that uncommercialized R&D, 68% of those firms replied that it was"Lying dormant in house." Effectively tapping
such R&D is thus a task of the greatest urgency.
However, consider the changes that took place incommercialization of R&D findings in the 1980s
and 1990s as illustrated in Figure 2-5.

ある
Have

76%
76%

Don't have
ない

24%
24%
0%
0%

20%
20%

40%
40%

60%
60%

80%
80%
Percentage回答率
of respondents

Lying
dormant in house
社内に眠らせている

68%
68%

Sold
or transferred to another
関心を有する他の事業者にinterested firm
売却・譲渡した

15%
15%

Commercialized
externally under
社内ベンチャー制度によってan in-house
venture program
社外で事業化した

2%
2%

Other
その他

15%
15%
0%
0%

Source:

20%
20%

40%
40%

60%
60%

Compiled based on Japan Research Industries Association, “Corporate Questionnaire on Technology
Development Capacity, June 2001.”

Figure 2-4. Uncommercialized R&D

18

80%
80%
回答率
Percentageof respondents

Development Bank of Japan Research Report/ No. 53

panies' reasons for failing to commercialize R&D.
Seventy-seven percent of respondents cited thereason "Anticipated results failed to materialize
during research, and we realized that R&D
would be more difficult than first thought"; 66%
cited the reason "The prospects of commercialization vanished due to changes in user needs orother economic circumstances." It is becoming
more difficult than ever to reform managementof technology and implement it efficiently.
One approach that is emerging is getting
another firm in the same group to screen which
research projects to pursue: for instance, Mitsubishi Chemical Corporation spun off the core of
its R&D arm in July 2003.15 Innovative US firms
hire "futurists" for top dollar to divine which way
the winds of technology are blowing. The moreinnovative a company aspires to be, the more it

Ninety-five percent of respondents admitted being "Unable to adapt due to the emergence of
new circumstances to which the traditional linear
innovation model does not apply"; 66% cited a"Mismatch between the size of new markets andthe size of the firm." That means they are in thesituation that Christensen described in The Innovator's Dilemma, as recounted in Chapter I. The
key to success in extracting themselves from thatpredicament will be to use small organizations tomanage technology flexibly.
Skilful management of technology requiresthat the people doing the managing have in mind
a more or less concrete roadmap of the technology. But with "disruptive technological innovation" accounting for such a large share of innovation these days, it is extraordinarily difficult toformulate such a roadmap. Figure 2-6 lists com-

Until mid '80s

Late '80s - mid '90s

13.2

Have cut back on investment in basic andapplied research and on HR funding (N=114)

25.4
78.1

25.8

Difficult to undertake major R&D projects
destined for commercialization (N=97)

23.7
75.3

13.4

Difficult to commercialize research findings(e.g., investment in production facilities,
development of markets) (N=82)

30.5
80.5
0.0

Unable to adapt due to the emergence of new
circumstances to which the traditional linear
innovation model does not apply (N=82)

15.9
95.1

21.4

Mismatch between the size of new markets
and the size of the firm (N=70)

52.9
65.7

35.9

R&D findings fail overall to translate into
new business (N=117)

67.5
69.2

69.4

No real problems; R&D findings lead effectively
to emergence of new business (N=72)

41.7
22.2
0

Note:

Source:Mid '90s - present

20

40

60

80

100
%

The questionnaire was administered to 370 central and divisional research labs run by 161 firms, each a major
R&D investor in its industry. The survey was conducted in August 2003; replies were received from 156 labs
representing 113 firms.
“Fact-finding Survey on Industrial Technology Development Capacity in Japan (FY 2003),” a survey conducted
on behalf of METI.

Figure 2-5. Changes in Commercialization of R&D Findings in the 1980s and 1990s

15

See Nihon Keizai Shimbun, Dec. 31, 2004.

Development Bank of Japan Research Report/ No. 53

19

0%

20%

40%

60%

80%

Anticipated results failed to materialize during research,
and we realized that R&D would be more difficult than first thought

76.5%

T he prospects of commercialization vanished due tochanges in user needs or other economic circumstances

65.7%

Large profits could not be expected due to the small sizeof the market for the new business

43.0%

Profitability would be low because of intense competitionin the market for the new business

34.5%

T he project lost all meaning while still at the research
stage due to, e.g., the appearance of a promising alternative technology

24.5%

Failure to achieve safety and reliability

12.6%

Difficulty of raising the funds and developing the infrastructure needed to open
up markets and establish sales channels

11.4%

Difficulty of raising funds to invest in the production facilities
needed for commercialization

9.9%

Difficulty of raising funds to invest in the additional
research facilities needed in the run-up to commercialization

9.3%

Users wanted the new technology to have a track record of use

4.1%

Risks were high because there were few precedents for the new business among
overseas firms or other companies

3.9%

Note:

Source:100%

The questionnaire was administered to 2,310 companies, some listed on the First and Second Sections of theTokyo Stock Exchange, others being OTC companies or unlisted firms. They include Japan's top fifty spenders
on R&D. The survey was conducted in February 2003. Respondents were asked to select up to three answers
from the choices provided.
“Survey on State of Research and Development Activities in Japan (FY 2002),” a survey conducted on behalf of
METI.

Figure 2-6. Reasons for Failing to Commercialize R&D
will need to take such steps.
Now is the time for the captains of Japaneseindustry to give serious thought to training world
leaders in technology, who truly understand how
to harness MOT in implementing innovative medium- to long-term technology strategies thatboldly take risks. It is to them that the next generation of corporate leadership should be entrusted. MOT can make or break a company's
competitiveness, and it is of great urgency to findand train the kind of people who can effectively
oversee it. That means people capable of aggressively planning and deciding on investments inhigh-risk technologies, while making occasionaluse of alliances with carve-outs, spin-offs, andventure firms -- on which more below. The current practice of providing MOT training that is amere extension of existing lectures and classroom instruction at the university and postgraduate level will not be good enough. More practical
MOT training programs will need to be developed, which are more than a mere extension of

20

Development Bank of Japan Research Report/ No. 53

academia as heretofore. Special instructors will
have to be recruited and trained, and companies
in completely new fields will need to enter the
arena.
3.

Technology Transfers: The Steinbeis
Foundation's Pioneering Efforts

The most frequently debated topic when it comesto technology transfers is the question of how totransfer to industry the seeds of technologies incubated at universities and other institutions.
When companies were asked in a questionnaire
what wants they had vis-à-vis universities, many
chose such answers as "Endow students with theability to think," "Evaluate cognitive abilities
from a wide range of angles," and "Give fullconsideration to actual ability at matriculationand graduation." TLOs are being established tofacilitate technology transfers. But what is above
all required is a shift in thinking away from a"seeds"-oriented approach, which focuses on li-

censing inventions made at universities andsimilar institutions, to a "needs"-oriented approach, which involves asking what needs exist
and what research and development programs are
required to meet them. The Steinbeis Foundation
may be cited here as a pioneering example of an
institution that performs needs-oriented technology transfers. 16
The Steinbeis Foundation is an NPO that
arranges partnerships between industry and academia in support of technology-based firms(TBFs). It was founded in 1971 to bridge the gap
between the scientific and economic communities. In the 1970s Germany lagged behind in theshift to electronics that was sweeping across theglobe; nonetheless, world-class high-tech firms
like Daimler-Benz, Porsche, Carl Zeiss, andBosch, which were based in the state, started implemented the shift to electronic technology on
their own. However, many technology-based
firms (TBFs) found themselves in a state of crisis
because they had fallen behind as technologicalinnovators. It was these circumstances that led tothe creation of the Foundation as an agency designed to mobilize universities and research institutions in providing technical backing to technology-based firms (TBFs). The Foundation isnamed after Ferdinand von Steinbeis, who as
trade representative in the mid nineteenth century
promoted technology transfers and did much tobring about the industrialization of the Kingdomof Wurttemberg, as well as establishing a vocational training system combining theory andpractice.
The Foundation, headquartered in Stuttgart,has about twenty full-time staff, some of them
being generalists who act as project managers,
while others administer personnel and accounts.
The actual technology transfers are implementedby Steinbeis Transfer Centers (STCs), which operate in 470 locations throughout Germany, andby outside free-lance expert consultants and project managers. The Foundation handles some
20,000 projects a year.

16
For details see Yutaka Kijima, Nihon Keizai Kasseika no
Tame no Risuku Mane Kyokyu to Inobeshon Jitsuyoka
Hosaku (Risk Money Supply and Innovation Commercialization Strategies for Invigorating the Japanese Economy),
DBJ Industry Report, Vol. 7, 2002.

4.

Evaluation and Circulation of Technology

Evaluating technology is another issue fraught
with difficulty. As Figure 2-7 on the next pageshows, when venture capital firms were asked
about their methods of evaluating technology andits marketability, 10% said they "Have experts
on staff to evaluate technology," and only 7%
said they "Have an evaluating body including
recognized experts from outside." It seems
hardly likely that technology can be properly
evaluated under such circumstances. No doubt
all too many technologies that, given the chance,
would achieve recognition on the market failever to see the light of day for lack of financing.
Again, when asked about their investment
screening criteria (see Figure 2-8), 89% of respondents cited "Background of CEO" and awhopping 92% cited "Character of CEO." A
mere 24% cited "Joint research with a university,
public agency, major corporation or the like."
Certainly, a venture company's viability is ultimately determined by the enthusiasm and personal qualities of its CEO, but a more sophisticated investment screening process would be inorder, one that involves a somewhat morein-depth assessment of the technology itself.
In this regard, Japan too is beginning towitness the emergence of businesses active in thefield of evaluation and circulation of technology.
Until the number of such businesses grows, andthey become full-fledged in both qualitative andquantitative terms, little progress will be made in
fostering evaluation and circulation of technology in the true sense of the term.
Organizations involved in evaluation andcirculation of technology can be broadly classified into three categories. yet2.com is a brokerage site for buying and selling patents on theInternet. It was established in 1999 by Chris De
Bleser, originally with Polaroid Co., and Ben duPont of the Du Pont Family, and enjoys thebacking of such global corporate heavyweights
as 3M, Agfa, Arther D. Little, Asahi Glass, andBASF. The first category, then, comprises such
evaluative agencies that are primarily involved in
distribution and trading of technology in an auction-type format, such as over the Internet.
VentureLabo Inc. was established by Tadayoshi Yamanaka, a former bureaucrat with

Development Bank of Japan Research Report/ No. 53

21Have experts on staff to evaluate technology
Have an evaluating body including recognized experts from outside
Do not give priority to technological evaluation

Staff concerned perform their own assessment
Consult as needed with recognized experts from outside
Other

Overall (N=400)
Securities-firm owned (N=108)
Major bank-owned (N=43)
Local bank-owned (N=67)
Life/non-life insurance firm-owned (N=21)
Business corporation-owned (N=23)
Foreign-owned (N=3)
Independents (N=61)
Investment & consultation firms (N=64)
Other (N=10)0%

Source:

20%

40%

60%

80%

100%

Japan Small and Medium Enterprise Corporation, “Survey of the Direct Finance (Investment) Environment for
Venture Firms at Home and Abroad (FY 2001).”

Figure 2-7. Methods of Evaluating Technology and its Marketability

N=206
Certification under Law for Promotion of Creative
Business Activities of Small and Medium Enterprises

33 (16%)18 (9%)

Certification under Law for Facilitating Creation of New Business
Financial guarantees by VEC

9 (4%)

Investments/loans from a venture foundation

8 (4%)
27 (13%)

Investments/loans from (other) VCs
Target of investment by small/medium business
investment & consultation firm

8 (4%)

Joint research with a university, public agency,
major corporation or the like49 (24%)

Track record of business dealings with affiliatedfinancial institutions/firms

45 (22%)175 (85%)

Novelty of business idea
108 (52%)

Ownership of patent or utility model
5 (2%)

Land, buildings, or other fixed assets owned by firm

183

Background of CEO

189 (92%)

Character of CEO
3 (2%)

Fixed assets personally owned by CEO

48 (23%)Other
0

Source:

50

100

150

200

Japan Small and Medium Enterprise Corporation, “Survey of the Direct Finance (Investment) Environment for
Venture Firms at Home and Abroad (FY 2001).”

Figure 2-8. Investment Screening Criteria

22

(89%)

Development Bank of Japan Research Report/ No. 53

METI. It consists of a network of over 200 individuals, including former employees from suchmajor firms as Matsushita Electric, who assess
the future potential of technologies in their respective fields of expertise using radar charts andthe like. VentureLabo declares that, if it ranks atechnology above a certain level, its affiliatedventure capital firm is ready to fund it; in thismanner it takes clear responsibility for its technology evaluation decisions. The second category, then, comprises organizations like this that
perform evaluations by tapping a network oftechnology evaluators with expertise in specificfields.
The Patent & License Exchange (PL-X),
which assesses patents and conducts market research, was established in 1999 under the leadership of Dr. Nir Kossovsky, then assistant professor at UCLA, with venture capital firm involvement.17 PL-X also evaluates technology
based on, among other criteria, real options andthe share prices of companies with similar technology. This is certainly an interesting way ofpricing patents, but using the same approach toassess the value of technology probably has its
limits. The third category, then, comprises organizations that appraise the value of technology
in line with a specific theory.
Each of these methods of evaluation has its
advantages and drawbacks, and some organizations employ a combination of several. Objectively evaluating technology is an extraordinarily
difficult enterprise, and further discussion will beneeded on the issue.
5.

Mentoring of Technology

Places like Silicon Valley are fully equippedwith the infrastructure to support venture firms.
Mechanisms are in place to back up venture entrepreneurs, with cadres of experts in such fields
as marketing, accounting, and law playing therole of tutors. They propose business plans andparachute in CEOs or CFOs as needed. In Silicon
Valley this approach is known as mentoring.
Outstanding venture capitalists play the role ofcoordinator and dish out risk money as appropriate.
17

The Japanese company pl-x changed its name to Intechstra, Inc. in April 2004.

Just as Japan has manufacturing hubs (industrial clusters) in areas such as Tokyo's Ota
Ward, Silicon Valley is a hub for nurturing ventures. Israel is famous for producing large numbers of technological ventures, but because theIsraeli market is so small, many entrepreneurs
with technology will from the start formulate abusiness model that sets its sights on the US
market, and move to Silicon Valley. In rapidly
advancing fields like biotechnology, more andmore Japanese too are relocating to Silicon Valley to launch businesses, taking just their R&D
findings with them.
Social Capital
Silicon Valley's role as a hub as described above
can be further clarified using the concept of "social capital." Its main proponent, Robert Putnam,
sees social capital as contributing to the comfort
and safety of the community. He stresses theimportance to the formation of social capital ofseveral factors: education, a lifestyle where people live near their workplace, building a community where mutual trust prevails, the Internet as ameans of supporting face-to-face communication,
hobbies and artistic and cultural activities, andgreater decentralization in politics and government.18 Putnam argues that social capital canonly be built up gradually, over the course of along history; it cannot be artificially createdovernight.
In interviews, venture capital firms in Silicon Valley and along Route 128 in Boston spokeof a "five mile rule": they will only invest in
businesses within a five-mile radius of themselves. This is because so-called "hands-on" investment, which involves sitting on the board of
the company you are investing in and giving itmarketing advice, is only feasible at such proximity. So-called angels are even more restrictivein the geographical scope of their investments
than are venture capital firms, making them thebest choice as the source of early-stage investment. The environment that exists in Silicon
Valley and along Route 128, with local investors
skillfully nurturing inventions and innovations, isthe quintessential example of social capital. That
18

Robert Putnam, Making democracy work. USA: Princeton
University Press 1993.
Development Bank of Japan Research Report/ No. 53

23

environment is the key to the success ofearly-stage technology ventures. Not only isthere an abundance of venture capital and "angels" (individual venture capitalists); generous
support is normally also available from so-called
corporate ventures and at the state level. Areas
well stocked with social capital typically have aricher supply of "auxiliary infrastructure" thanexists elsewhere: cumulative R&D, risk capital
networks, legal and accounting firms specializingin the venture business. The industrial clusters
referred to earlier too need to be understood inlight of the concept of social capital.
Early-stage technology is, as mentioned
above, vulnerable to market failure. In that regard national and local governments have a vitalrole to play. The US in general shows little enthusiasm for industrial policy, yet in this particular field the federal government's programs -- theATP, SBIR, and STTR19 -- are even more thoroughgoing than those of Japan. It is true that little support exists at the state level in Silicon
Valley and along Route 128. But those regions
have since the 1950s had the technological seeds,
networks, and social capital required to drive
innovation, in part thanks to spillover from military R&D.
In other states, meanwhile, frantic efforts

Company and personnel
Company format
Amount of capital
Size
Workforce
Management
Professionals
Pay
Venture investments
Regarded as
Source of earnings
Investment format
Size of investment
Expected return
Main investment target
Source:are under way to create the right environment for
innovation, with state officials themselves often
taking the initiative.
6.

Technology Financing

Finally we come to the question of what form
technology financing should take. As alreadymentioned, availability of risk money is indispensable to commercializing inventions andtechnology, yet that money cannot be raised onfree financial markets due to market failure. Realizing that, countries such as the US and Germany have set up special programs. The funding
shortage is particularly severe at the early stage:even in the US the supply of cash is fairly limited
at that point. American venture capital firms
have a reputation for being more enthusiastic
early-stage investors than their Japanese counterparts (see Figure 2-9); still, in absolute terms
there is an undeniable cash shortfall. While precise statistics are hard to come by, the early stage
is the one area where even venture capital firms
are reluctant to commit themselves; the role of"angels" and governments is thus commensurately greater. According to the analysis by Harvard University's Professor Branscomb, funding
to early-stage technologies totals some $5.4 bil-

Japan

US

Financial institution subsidiary
Small (¥1 billion range)
Large relative to amount of capital
Retirees from parent firm
Primarily on loan (approx. 3 yr. stint)
Low + performance bonuses meager

Independent
Large ($1 billion range)
Small relative to amount of capital
Renowned figures + well-known capitalists
Business corporations + MBAs
High + performance bonuses hefty

Peripheral to financial institution's operations
Liquidity gap between open and private
markets (IRR declines as gap shrinks)
ShotgunSmall
Small (2-3 times)
Priority on potential for going public →Invests in pre-IPO low-tech firms

Major field of investment
Gain in value of companies invested in
Hands onLarge
Large (5-10 times)
Priority on growth potential → Invests earlyin high-tech firms“Survey on State of Activities by Japanese Venture Capital Firms (FY 2002),” a survey conducted on behalf of
METI.

Figure 2-9. Venture Capital Firms and Venture Investments: Japan and the US Compared19

See the next section for details.

24

Development Bank of Japan Research Report/ No. 53

lion on a conservative estimate; that amountbreaks down into $1.4 billion from the federal
government, $1.5 billion from angels, and $1.7
billion from business corporations, as opposed toa paltry $200 million from venture capital firms.
Branscomb characterizes this state of affairs as adefinite case of market failure.20 The ATP, SBIR,and STTR programs described next are cases inpoint of the concrete role that the federal government plays in providing funding at the earlystage, which accounts for 20% of the whole.
7.

Promoting Commercialization ofTechnology

As the preceding account demonstrates, there are
all kinds of obstacles to commercializing tech-

nology, and failure to clear any one of themdooms the commercialization process. Hence acomprehensive package of measures is needed.
As Figure 2-10 shows, when private-sector firms
were asked what forms of support they wanted
from the government in the area of research anddevelopment, the list was topped by "Fundlong-term basic research that is too risky for theprivate sector alone." The amount of venture
capital that Japan invests is minuscule comparedto the US and Germany. The analysis in the preceding pages suggests that further stimulating
commercialization of technology in Japan will
require carefully crafting policies in each of fiveareas: (1) management of technology, (2) technology transfers, (3) evaluation and circulationof technology, (4) mentoring of technology, andFund research that will have immediate benefits in stimulating the economy andpromoting jobs
Fund long-term basic research that is too risky for the private sector alone

National R&D projects should be 100% government-funded

OverallNational R&D projects should be partially funded by participating firms

Manufacturing, overall
Non-manufacturing, overall

Funnel corporate subsidies and grants in substantial amounts into research likely
to produce results¥1 billion - ¥5 billion¥5 billion - ¥10 billion

Distribute corporate subsidies and grants piecemeal among a wide range of
research designed to nurture the seeds of future technology

Over ¥10 billion

Invest substantial amounts in immediately commercializable research by
universities, national research institutes, independent corporations, etc.
Invest piecemeal in a wide range of original research by universities, national
research institutes, independent corporations, etc., such as is not being
performed abroad
Provide support through R&D tax cuts rather than by funding specific research
Set up a system allowing company researchers to do research on their own
projects for a set period at universities, national research institutes, independent
corporations, etc.
Government support is not needed; companies can perform R&D on their own
0%

Source:

20%

40%

60%

80%

Ministry of Education, Culture, Sports, Science and Technology, “Survey Report on Research and Development
by Private Firms (FY 2002).”

Figure 2-10. Government Support for Private-Sector R&D

20

Lewis Branscomb and Philip Auerwald, Between Invention and Innovation. USA: NIST, 2002A.
Development Bank of Japan Research Report/ No. 53

25

(5) technology financing. Failure to fulfil any
one of these five essential conditions will very
likely derail any effort to commercialize a technology. Therefore efforts will be needed, both on
the part of corporations and at the national and26

Development Bank of Japan Research Report/ No. 53

local government levels, to accurately determine
which of these five essential conditions are notbeing well enough addressed and implement
adequate measures in response.

III Using Carve-Outs to Create
New Industries
No one would dispute that providing support toventure firms that emerge out of the university
environment or elsewhere is vital to creating new
businesses and industries. However, in the caseof Japan, it would be expecting a bit too much tovest the task of implementing bold economic
structural reforms and creating new industries toventures launched purely by individual entrepreneurs. Brilliant minds and outstanding technologies lie dormant in Japan's major corporations
and middle-tier firms; spinning them off to fuelthe emergence new industries would make agreater contribution to Japan's overall GDP.
Then there is the question of management oftechnology (MOT) discussed in the previous
chapter. Today the tempo of innovation is constantly accelerating, and big corporations findthemselves with less and less lead time to consider how best to distribute resources. The hierarchical structure of the big corporation is too
often unable to keep up with the increasing sophistication and diversity of rapidly changing

market needs. What is needed is a shift to a newmodel -- a network-type corporate grouping thatenables specialization in specific fields. The
logical conclusion is to utilize corporate venturing in the broad sense of the term, which includes setting up firms in house. The following
pages examine forms of corporate venturing andhow best to take advantage of them.
1.

Corporate Venturing

The creation of new venture-type businesses andindustries by big corporations and middle-tierfirms is generally referred to as corporate venturing. Corporate venturing can be broadly divided into two categories: working with venturefirms to establish new businesses and enterprises,and promotion by big corporations and middle-tier firms of in-house ventures, spin-outs,
spin-offs, and carve-outs.
Figure 3-1 is a conceptual diagram of therelationship among types of corporate venturing.
The horizontal axis indicates technology commercialization potential. The potential declines
as one goes to the right, or, to put it another away,
the risks of technology commercialization grow.

Independent
ROI large

With technological seeds ← Independent ventures →Without technological seeds

Spin-outs

Support from parent
company (intellectual
property, humanresources, purchasing,etc.)
Return on investment

Spin-offs
Carve-outs
In-house ventures

Supported
across board
ROI smallCore enterprises

High (risk low)

Source:Technology commercialization potential

Low (risk high)Compiled by the author.

Figure 3-1. Conceptual Diagram of Relationship Among Types of Corporate Venturing

Development Bank of Japan Research Report/ No. 53

27

The vertical axis represents level of support fromthe parent company in the form of intellectual
property, human resources, purchasing, investment, etc. Support from the parent company decreases and independence increases the higher
one goes. The vertical axis also indicates returnon investment (ROI), though this is not identical.
A venture firm launched by an independent individual starts out from absolutely zero, so it canlook forward to handsome returns as long as it
receives investment from, say, a venture capital
firm at the early stage and sticks it out until it canmake its initial public offering (IPO). By contrast,
if the enterprise is in the company's core business,
it can tap into existing personnel, intellectual
property, and organizational structures, and it
will receive maximum input of resources frominside the company; hence its chances of successincrease, but in many cases it will accomplish no
more than pushing up the total value of the company's stock as a whole by, say, boosting existingsales. In that sense it is a low-risk, low-return
proposition. Through the diagram runs a dottedline at a 45˚ angle; above this final returns are
positive, regardless of whether the enterprise ishigh-risk, high-return or low-risk, low-return.
1.1. Core Enterprises
Core enterprises naturally have the best chanceof success, since they receive intensive input of
personnel, intellectual assets, brands, and funds
from the parent firm. However, today, with thepace of innovation accelerating, a company's
flagship division can end up becoming a poor
revenue generator due to a slight turn of events.
This casts the importance of management oftechnology (MOT) in a new light. For corporate
managers, resting on the laurels of their flagshipdivision is to endanger the company's very survival; it is vital to develop the seeds of newtechnologies and cultivate new fields, and there
MOT holds the key. Moreover, in the US the1990s witnessed a series of changes in the practice of conducting R&D and pursuing commercialization primarily at central research labs.
Decentralization and multitracking are becoming
increasingly the norm in conducting R&D andcommercializing technology, making it more andmore difficult to keep a firm hand on the tiller.

28

Development Bank of Japan Research Report/ No. 53

1.2. In-house Venture Programs
Inspired by the venture boom that started a decade ago, many big corporations have establishedin-house venture programs. However, in the caseof many such programs run by big corporations,the parent firm looks after most of the funding,helps with marketing the product, and evenguarantees employees' jobs should the venture
fail. That is hardly the way to create true entrepreneurs willing to take risks and stake theirlivelihood on a business. A flurry of in-house
ventures were launched during the fleeting boom,with people being recruited from the company's
own ranks, but not many have proven successful.
In many cases all that has ended up being accomplished is the establishment of a kind of firm
within a firm. In some companies employees
view in-house venture programs as a
nice-sounding way of restructuring people. Interviews with several in-house ventures elicited
views like: "Our parent company has put up virtually 100% of the funding, so we're regarded asa mere subsidiary and can't take orders freely.""Few of our staff show the backbone to fight likethey've got their backs to the wall, since they'reon loan and have few incentives." "Our parent
company thinks of us as a subsidiary, so they tell
us how to do every last thing." "When things
don't go well we're left twisting in the wind, andwhen they do start going well the business wingtries to hog the new product."Some companies are implementing reforms
to better enable entrepreneurship to flourish.
Matsushita Electric's Panasonic Spin Up Fund
encourages selection and advice by outside institutions. Ricoh's Ricoh Challenge 21 requiresthat the proposer himself quit the company andput up his own money.
1.3. Independent Ventures
In the US, independent venture firms have become the driving force behind innovation, creating a major portion of new jobs. In Japan, too,
the important role that ventures play in innovation hardly needs mention. But because they are
high-risk, high-return, access to venture capitalor some other form of risk money is vital. Nonetheless, in interviews, several venture capitalists
expressed the view that investing in ventures that

have solid technological seeds and can alreadybank to some extent on a market is rather a"middle-risk, high-return" proposition. The ability to accurately assess technologies and markets
in this fashion will become crucial to ensuringthat overall returns are positive.
1.4. Spin-Outs
A spin-out occurs when technologists performing,say, R&D work with a firm leave it to set up
their own independent business. It involves amore decisive break than does a spin-off. Inmany spin-outs, the company that has split off
and the original company cease to have any
connection. Spin-outs are the norm in the US.
When Silicon Valley was still in its early days, agroup of eight individuals spun out from
Shockley Semiconductor Laboratory to set up
Fairchild, from which in turn Robert Noyce, thescientist who actually invented the IC, andGordon Moore spun out in 1968 to found Intel.21
Spin-outs are the driving force behind the formation of such industrial clusters in the true senseof the term. That applies not only to Silicon Valley but also to the bio-cluster in San Diego,
California. San Diego is home to the Universityof California at San Diego (UCSD) as well assuch Centers of Excellence (COEs) as The
Scripps Research Institute and the Salk Institute.
Venture firms have sprung up in the area inquick succession as researchers working at these
institutions have spun out on their own. One ofthose firms is Hybritech, which has in turn generated more than fifty other companies throughspin-outs by engineers. These companies, scattered throughout the San Diego area, form a trueindustrial cluster that breeds innovation throughloose ties of cooperation and interchange of information.22
However, it would be dangerous to import
the American spin-out model direct to Japan.
Whether in Silicon Valley or San Diego, there
are support mechanisms in place for technolo21
Hiroshi Toyoda, Amerika Hatsu Bencha Tokuden (Ventures: A Special Report from America), Toyo Keizai, 1996.
22
See Yutaka Kijima, Wataru Kurosawa, Yasuhisa Yamaguchi and Norihisa Shimozawa, Kakkoku no Sangyo Kurasuta no Genkyo to Keisei Shien Saku (State of Industrial
Clusters in Different Countries and Policies to Support
Their Formation). DBJ Industry Report, Vol. 12.

gists who want to go independent and set up theirown business, with cadres of experts in marketing, accounting, management, and law ready totake aspiring entrepreneurs by the hand andmentor them. In the absence of such mentoring
infrastructure, it would be brutal to push technologists to strike out on their own. The first stepthat should be taken in promoting spin-outs inJapan is setting up an NPO-type agency to facilitate mobility among technologists,23 such as
illustrated in Figure 3-2 on the next page. Once
this infrastructure is in place, it has the potential
to become a more powerful catalyst for innovation than the spin-offs and carve-outs to be described below, for it will enable entrepreneurshipto blossom to the full.
Note that some scholars and economists use
the term "spin-off" as a blanket term for bothspin-outs and spin-offs, the latter of which will
be examined below. In colloquial usage the twoterms are synonymous, referring to quitting one's
company to set up one's own business. According to Professor Ian MacMillan of The Wharton
School of the University of Pennsylvania, a
spin-out is where the parent company wants tohave nothing more to do with the division that isbeing spun out and the people leaving with it; aspin-off is where the company wants to maintainsome kind of a link. Among the disadvantages ofa spin-out (in the narrow sense of the term) is thepossibility of disputes over ownership of intellectual property and inventions made on the job;
especially in Japan, it may also happen that theparent company prohibits all contact with thespin-out and thus obstructs its business.
1.5. Spin-Offs
Like spin-outs, spin-offs involve quitting one's
company to launch one's own business, but loose
ties still tend to be maintained with the parent
company despite the break.
In its report, METI's Spin-Off Study Teamdefines a spin-off as "neither a subsidiary under
the control of the parent company nor an independent venture that has been spun out, butrather something between the two: technology,
23

Yutaka Kijima, Yusuke Shoji and Hiroki Takemori, Nihon Seizogyo no Fukkatsu no Senryaku (Strategy for Reviving the Japanese Manufacturing Industry). JETRO Publishing, 2003.

Development Bank of Japan Research Report/ No. 53

29

Spin-out/industrial cluster support fund
Fund of funds set up jointly by local govts, private firms

Local govts etc.

Supplies funding

Sets up local corporations

Set upSupplies funding

Local hands-on VCs

VCs from majorcluster overseas→ Nurture true industrial clusters

Utilize entrepreneurial infrastructure
Acquire cutting-edge global info
Invests
Sets up businesses
directly in Silicon
Valley, San Diego,
Munich, etc.

Launches businesses locally

Local firms,
angelsSet upAgency (NPO) to facilitate mobility among technologists
Support measures by private firms
Relax work rules
Clarify status of inventions on job
Make pensions portable
Do business with spin-outs(6) Unemployment
safety net(5) Temporarily/
permanently
transfer to agency(4) Due diligencevis-à-vis parent
body(3) Enterentrepreneurial
contests(2) Expert advice

Expert mentoring and spin-out support
Payment for services in shares as way of nurturing researchers into
entrepreneurs
Temporary shelter between quitting company and setting up own business(1) Present business
plans

Support measures by govt. etc.
Revise labor regulations
Revise progressive income tax
Develop safety net(Spin-out support law)

People with technological seeds at big corporations, middle-tier firms, research institutes

Source:Compiled by the author.

Figure 3-2. Conceptual Diagram of a Support Mechanism for Spin-Outs
human resources, capital, and other business resources spun off by the parent company in theform of a venture. For a big corporation, aspin-off makes it possible to boost earnings ratio
by focusing resources on the core business, andto develop new business domains by compensating for weaknesses, such as lack of mobility; forthe spin-off venture itself, it makes it possible torun business in the autonomous fashion that is an
essential characteristic of a venture company butwith fewer start-up risks, since it is supported by
the technical infrastructure that lies dormant
within the larger corporation. The spin-off is a
way of creating a new type of venture independent of the parent firm; these ventures have thepotential to become the driving force behindgroundbreaking innovation and new businesscreation, and could prove the key to stimulating
the Japanese economy."24 The conceptual diagram of the spin-off mechanism formulated by
the Study Team is reproduced below. (Figure
3-3)
24

Spin-Off Study Team, Spin-Off Study Team Report. April
2003.
30

Development Bank of Japan Research Report/ No. 53

The definition in Figure 3-3 covers both"carve-outs" (see below) and "spin-offs" (in the
narrow sense) as the author defines those terms.
The government and METI make no clear distinction between "spin-offs" and "carve-outs,"
treating the two as identical concepts. In the US,
the term "tax-free spin-off" sometimes refers
only to cases where the new company's sharesare allocated to those of the parent firm.25
1.6. Carve-Outs
A carve-out is a type of venture by a large corporation or middle-tier firm, in which management "carves out" a portion of the company's
business as a management strategy, with theventure receiving third-party input in the form ofevaluation, investment, etc. The most salientfeature of a carve-out is that it is made withstrong support and collaboration from the parent
company, including a certain amount of funding.
25

In 1998, Collagen Corporation spun off the shares of its
100%-owned subsidiary Cohesion Technologies, transferring ownership without receiving payment. Such a spin-off
constitutes a tax-free distribution of dividends.

Raising funds

Finding buyers
Arranging
licensing
Etc.

Can venture maintain ties with parent?

Subsidiary

Anyone ready totake up the gauntlet
faces these hurdles:

Yes= Traditional model(Parent picks up bill)= Cooperativemodel

Essentially a subsidiary that operates within theframework of the parent firm.
E.g., in-house venture program
Mechanism for guaranteeing the venture's autonomy

Win-win model↓"Spin-off"Parent firm incorporates into its business strategy aventure launched by employees who have gone
independent. Few examples in Japan.
"Spin-outs" become "spin-offs"

No= No-ties model↓

Generally puts up its own capital. Typical
pattern for ventures.

"Spin-out"

Source:Spin-Off Study Team Report (April 2003)

Figure 3-3. Conceptual Diagram of the Spin-Off Mechanism Formulated by
METI's Spin-Off Study TeamIn many cases the aim is to get listed on the stock
market, making outstanding enterprises a potential candidate. As a rule employees are permanently transferred to the new venture. This typeof arrangement is well suited to commercializing
R&D and endowing it with corporate value under conditions such as Japan's, where relatively
large manufacturers actively engage in R&D,
possess the seeds of new technologies, and haveskilled technologists on staff.
Carve-outs have these and other advantages:(1) They have the potential to speed up the pacewith which a new business evolves (e.g., commercializing what Christensen calls "disruptive
technologies"). (2) They free one from thetrammels of existing business (facilitating sales
to outside customers). (3) They capitalize on
business divisions and intellectual property (IP)that do not match the existing business portfolio(they are well suited to the IP licensing businessand to enterprises that aim to establish de facto
standards through alliances). (4) They guarantee
the enthusiasm of new business operators (byavoiding big company ills and providing incentives that unleash entrepreneurship). (5) They
have access to the parent firm's various forms ofinfrastructure. NTT's launch of NTT DoCoMo
can be described as a type of carve-out, even if
the shoe does not quite fit as far as sheer size
goes and from the strict perspective of corporate
venturing. There has long been a strong urge

among Japanese companies to get their subsidiaries listed on the stock market, and in 1999 thenumber of listed subsidiaries reached 291; hence
there should not be that much reluctance to carveout ventures and ultimately see them make their
IPO.
Extensive use is made of strategic
carve-outs in North America and Europe. Someof the best-known examples are: (1) GM's
carve-out of Electronic Data Systems, the world's
biggest data processing company; (2) GM's
carve-out of Delphi, the world's biggest car parts
division; (3) Ford's carve-out of Visteon, its biggest parts division; (4) AT&T's carve-out of Lucent, its communications equipment manufacturing arm; and (5) Ericsson's carve-out of Enterprise Solutions, its cell phone manufacturingarm. All these carve-outs proved effective in enhancing global competitiveness and corporate
value.26
The above-quoted definition formulated by
the Spin-Off Study Team does not draw a clear
distinction between a "carve-out" and "spin-off."If however one insists on making a distinction, a"spin-off" may be described as a loose partnership with the parent firm, while a "carve-out"
involves the parent firm to some extent main26
See Shintaro Hori, Nihon Kigyo Shinka no Joken (Conditions for Evolution of the Japanese Corporation), Toyo
Keizai, 2002.

Development Bank of Japan Research Report/ No. 53

31

taining an actual stake in the venture, say byowning stock. The ideal would be if, rather thana single firm launching a carve-out on its own,
two or more firms were to join together in carving out divisions that have a synergistic relationship and merge them. The parent firms would
each make a commensurate investment, and acarve-out fund or the like would also put up
money while monitoring potential and the technology's marketability from a third-party perspective. Eventually the venture, having evolved
into a global leader, could make its IPO. It is tobe hoped that many such ventures will emerge.
In sectors such as IT, electronics, and machinery,
there are many areas where it would be possible
for two different companies to carve out promising divisions that together would be able toachieve an unassailable technological position on
the global stage. The fact is that too often a newtechnology with potential to become a major
revenue source ends up never being commercialized, either because the parent company
holds back on R&D spending or because thetechnology is too unstable when only a single
company is involved. Plus, as Christensen points
out in The Innovator's Dilemma, "disruptive
technologies" have an adverse impact on a big
corporation's existing profitable businesses, so
intra-company dynamics sometimes result in
failure to commercialize a great technology.
Carve-outs would be highly effective in a caselike this.
Furthermore, Japanese electronics manufacturers have until now been too ready to sign
cross-licensing agreements. In consequence, before a manufacturer that has developed a new
product on its own even has the chance to reap
the rewards, similar products will appear on themarket, leading to rampant price competitioneven though the item is brand new. That is one
reason that the rate of profit on sales has remained so low. Cross-licensing has helped Japanese manufacturers raise their technology standards and offer a comprehensive lineup. But if
companies want to pursue effective managementof technology -- in other words, develop new
breakthrough products and make items that othercompanies do not -- then a different approach
will be more effective: either monopolize thenew product technology, or have each manufac-

32

Development Bank of Japan Research Report/ No. 53

turer carve out the division involved as a
joint-development enterprise with the goal ofestablishing a de facto standard.
Many Japanese electronics firms and automobile companies have highly competitive parts
manufacturing divisions or device divisions.
Carving them out, just as GM carved out Delphi,
could facilitate sales to outside clients and boost
the total share value of the group as a whole.
In the US, a normal equity carve-out is afrequently used way of coaxing value out of a
100%-owned subsidiary, with a portion of theshares owned (usually around 20%) being publicly offered. This is a flexible technique in that itleaves the parent company with additional opportunities to sell. For example, in the US a
two-stage approach is often to be observed: an
initial sale is made to ordinary investors when
the subsidiary's shares go public, then the rest arelater sold off to existing shareholders in aspin-off. For the parent company, this approach
has an advantage over making a public offeringof all the shares it owns in that it does not completely relinquish control of the business.
2.

Recent Developments around Spin-Offs
and Carve-Outs

Japan too is gradually starting to witness developments in the area of spin-offs and carve-outs.
The government and METI tend to use the term
"spin-off" indiscriminately to refer to either aspin-off or a carve-out, but at any rate the subject
is coming to garner broader interest. Here we
describe recent developments.
2.1. Developments at the Government
Level Etc.
• The report of METI's Spin-Off Study Team
(April 2003) and the spin-off subsidy program
Consisting of twenty expert members plus observers, the study team compiled a report recommending promoting spin-offs as a way to foster innovation. (The team was chaired by Professor Takeru Oe of Waseda University's Graduate School of Management). In parallel with the
team's deliberations, METI also set up a program
to subsidize commercialization efforts byspin-off ventures (this provides a subsidy of¥100 million a year to spin-off ventures, for amaximum of ¥200 million over two years).
• METI hosts the Spin-Off Venture Promotion
Forum (in Tokyo in November 2003 andOsaka in March 2004)
This forum was organized to ponder the sourcesof Japan's industrial growth to date and engendera new type of venture -- one that is not of the"catch-up" type -- as a locomotive for new
growth. It was inspired by the belief that an extremely potent means for Japan to beef up its
industrial competitiveness would be to spin off
the technological seeds, R&D, and human resources that lie dormant in big corporations andnurture them into new ventures under a system ofpartnership with parent companies. The forum
presented the spin-off venture as a new Japanesemodel for how businesses can evolve in partnership with their parent companies, in a win-win
relationship with big corporations. It showcased
this model as the key to innovation as corporate
Japan recovers.
• METI formulates a New Industry Creation
Strategy (May 2004)
METI oversaw compilation of the New Industry
Creation Strategy, which was referred to theCouncil on Economic and Fiscal Policy in May
2004 and ultimately incorporated into the government's so-called "large-boned" policy blueprint. One of the recommendations was to "provide consistent growth support to R&D ventures,
including spin-offs from large corporations, fromthe applied R&D stage through to commercialization."• Cabinet Office's Council for Science andTechnology Policy: R&D Ventures Project
Team (May 2003)
In May 2003 the team, chaired by Professor Matsuda of Waseda University, submitted its proposal, "Creating and Nurturing R&D Ventures:
A Way of Tapping Japan's Latent Strengths inTechnology." This recommended providing
support to ventures spun off from large corporations and touched on the subject of reforming
pensions to that end.

• Japan Productivity Center for Socio-Economic
Development: Practical Research Group on
Corporate Venturing (May 2003)
The Group examined strategies rooted in the"open innovation" approach, such as harnessing
external resources, as a means of overcoming certain obstacles that are constant concerns to Japanese corporations when developing new businesses and opening up new fields; these include
friction with a company's existing business, andthe dilemma created by conflicts with its current
direction. Specifically, the Group studied the efficacy of strategic corporate venturing, including
spin-off ventures and carve-outs as well as the
traditional in-house venture. At the Conference on
Promoting Collaboration between Industry, Academia, and Government in June 2003, the Group
recommended promoting spin-offs through MOT
as a way of stimulating development of new
business by large corporations.
• Study on carve-outs by the Japan
Techno-Economics Society (February 2004)
The Japan Techno-Economics Society, an association of chief technology officers (CTOs) fromJapan's leading manufacturers, has also been
compiling recommendations and research on
carving out R&D-driven businesses.
• The Industrial Technology Utilization Center,
an NPO, is slated for launch in September
2004
Preparations are currently afoot to launch an
NPO that will assist in efforts to make effective
use of the technological seeds that large corporations possess and provide comprehensive support
to spin-outs and spin-off ventures. Among theorganizers are Professor Takeru Oe of Waseda
University's Graduate School of Asia-PacificStudies and Professor Akio Nojiri of the University's Advanced Research Institute for Scienceand Engineering. Waseda University graduate
students and MBA students will provide technology commercialization support services aspart of their practical training. The Center will
implement technology commercialization support programs in conjunction with such outside
partners as venture support agencies, regional
industrial promotion bodies, and public financial
institutions.

Development Bank of Japan Research Report/ No. 53

33• Special Forum: The Kanagawa "Business
Launch Support" Caravan (January 2004)
Organized by the Kanagawa Federation of Small
Business Associations, this event featured discussion on the efficacy of spin-offs and the like.
It included a panel discussion on the subject"Spin-off ventures will change Japan!" withguest Professor Noboru Maeda of the Graduate
School of Osaka City University.
• Discussions of the Limited Liability Company(LLC) format
The LLC is a form of company organization thathas been attracting much interest recently as amechanism for R&D-driven corporate value
creation. It is also compatible with spin-offs andcarve-outs. Consisting of a body of individuals
possessing a high level of expertise and subject
to limited liability, the LLC has tax benefits forthe investing parent firm thanks to conduit tax
treatment. Extensive use is made of LLCs in
North America and Europe, which have beendeveloping the necessary legislative infrastructure since the 1990s (the US has around one million LLCs, as opposed to ten million joint-stockcompanies). The LLC gained the spotlight as a
powerful tool for conducting joint R&D following the success of EUV-LLC, an LLC set up to
develop the next generation of extreme ultraviolet (EUV) lithography technology for semiconductors.27 In Japan too discussion has gotten under way on the subject. In May 2003 the report"Creating and Nurturing R&D Ventures" wassubmitted to the Council for Science and Technology Policy, and in November 2003 a "Proposal on a New Form of Organization for Harnessing Human Resources" was presented to
METI; both included mention of adopting the
LLC format. In the US it is becoming increasingly common to use the LLC format to implement projects in secondary core businesses forwhich it is hard to attract sufficient funds -- asopposed to projects in the company's core busi27

The company was established in 1997 by a private-sector
industry consortium led by Intel, Advanced Micro Devices,
Motorola, Micron Technology, and Infineon Technologies.
Working with several Department of Energy research laboratories, it developed extreme ultraviolet (EUV) lithography
technology designed to boost semiconductor function. It
plans to use that technology to manufacture a 10 GHz microprocessor in 2005-2006.
34

Development Bank of Japan Research Report/ No. 53

ness that can be commercialized in a short time.
2.2.

Business Corporation Support for
Spin-Offs and Carve-Outs

An increasing number of companies announce
support for spin-offs and carve-outs on their web
sites and elsewhere. Here is a rundown.
• Nikko antfactory K.K.
A business corporation 96% owned by the Nikko
Cordial Group. It works with large corporations
and middle-tier firms in providing support togroup subsidiaries and business divisions.
• Technology Alliance Group, Inc.
A business corporation established and 100%
owned by Mitsubishi Corporation. It focuses on
carve-outs of business divisions.
• Leading Innovation, Inc.
Supports the creation of new businesses within
existing companies and helps with the launch of
unique venture businesses, both of which will be
indispensable to the successful pursuit of innovation by Japanese industry. It was a pioneer inrecommending the spin-off venture format toJapanese industry, and since FY 2002 it has beenpromoting such ventures under contract fromMETI.
• Japan Industrial Partners, Inc.
An investment firm owned by Mizuho Securities
Co., Ltd., Bain & Company Japan, and NTT
Data Corporation. It promotes establishment ofbranch companies in support of business reconstruction, restructuring, and renewal (in otherwords, reconstructive carve-outs). It also provides funding support to companies striving toadapt to the market climate by switching business formats.
• Works Capital Inc.
An investment firm 75% owned by Mitsubishi
Corporation. It supports growth firms in carving
out independent ventures and launching newcompanies through, e.g., capital participation.

• Feature on carve-outs in the Nikkei Business
Daily
This feature described ADTX Co., Ltd., launchedwhen IBM Japan carved out its hard disk drive
division, and Accela Technology Corporation,
launched when NEC carved out its data retrieval
technology and automatic Japanese-English
translation server divisions. It also referred toSony Corporation: "The entrepreneurial spirit of
Masaru Ibuka and Akio Morita still lives on unbroken, and the company is pursuing a carve-out
strategy designed to capitalize on the independent spirit of its employees."28• ADTX Co., Ltd.
The carve-out of IBM Japan's hard disk drive
division. Its areas of business include disk drive
arrays and system solutions.

2.3. Actual Cases of Spin-Offs andCarve-Outs
The following is a list of actual examples ofspin-offs and carve-outs, some identified by
METI or at the Second Conference on Promoting
Collaboration between Industry, Academia, andGovernment,29 others identified by the author. As
already mentioned, the government and METI do
not distinguish between spin-offs and carve-outs;
here therefore they are enumerated without distinction, being listed in the Japanese equivalentof alphabetical order.

• Alpha Electronics Corp.
Independent offshoot of TDK. It has the biggest
share of the domestic market for ultra-precision
metal foil resistors and is also a supplier toNASA.

• Accela Technology Corporation
The carve-out of NEC's data retrieval technology
and automatic Japanese-English translation
server divisions. It develops and sells the eAccela text retrieval, translation, and sorting software for business.
• Axell Corporation
Independent offshoot of Nippon Steel Corp. It
develops semiconductors for computer games andother amusement equipment, its flagship products
being graphics and sound LSI and ASIC.
• Askul Corporation
Originally launched in 1993 as a business division of major stationery manufacturer PLUS
Corporation, Askul was carved out in 1997.
Among other things, it conducts mail-order salesof office supplies.
28

Nikkei Sangyo Shimbun, April 2-3, 2003.
In the speech by Professor Noboru Maeda of the Graduate
School of Osaka City University.
29• Advics Co., Ltd.
This carve-out was established in 2001 with joint
funding from Toyota, Aisin Seiki, Denso, andSumitomo Electric Industries. It develops andsells brakes for automobiles. The company aims
to achieve ¥250 billion in annual turnover by FY
2005 from sales of braking systems to Toyota
and other automobile manufacturers.

• Itochu Techno-Science Corporation
Carved out by Itochu Corporation in 1972 tostrengthen its presence in the information systems field. It creates total solutions in system
consultation, integration, administration, andmaintenance. It also provides educational services and sells network equipment.
• Incs INC.
Independent offshoot of Mitsui Mining andSmelting. It manufactures metal molds using 3D
CAD.
• Internet Initiative Japan Inc.
A spin-off from the Japan Management Association. An Internet provider, it is setting up a
communications firm specializing in transmission of business data with Toyota and Sony.
• ST LCT Corp.
A joint carve-out set up by Sony Corporation andToyota Industries Corporation. It caters to thegrowing market for low-temperature polysilicon
TFT liquid crystal displays, which are in increasing demand for use in video cameras, digitalstill cameras, personal digital assistants (PDAs),and cell phones. Its aim is to become the world's
No. 1 LCD manufacturer by combining Sony's
superlative R&D with Toyota's prowess in
manufacturing technology.

Development Bank of Japan Research Report/ No. 53

35• S-LCD Corporation
This carve-out was jointly launched by Sony
Corporation and Samsung Electronics Co., Ltd.
in 2004. It is building an assembly line to manufacture the seventh generation of amorphous TFT
liquid crystal display panels, chiefly for use inlarge-size TVs. It plans to spend around US$2
billion on installing this seventh-generation
manufacturing facility.
• NEC Plasma Display Corporation et al.
Carve-out of NEC's plasma display set and module division. Another carve-out is slated for September 2004: NEC will grant Pioneer Corporation ownership of all the shares of NEC Plasma
Display, which it owns, along with its intellectual property rights in the field of plasma displays.
• NEC Laser Automation Co., Ltd. et al.
Established as a branch firm within the company
in 1985 to manufacture and market laser equipment. In 2004 it merged its laser processing division with those of NEC and NEC Robotics Engineering Ltd. Now a new company is to belaunched in a joint carve-out with funding fromJapan Industrial Partners, Inc. and Cyber Laser
Inc. This company will capitalize on future synergies with a broad-range of next-generation
light-source technologies, starting with thestate-of-the-art femtosecond laser light-source
technology owned by Cyber Laser. And it willboldly expand business under swift, dynamic
management. The aim is thus to help beef up thecompetitiveness of the Japanese optics industry.
• NTT DoCoMo, Inc.
This ultra-blue-chip company was carved out in1991 in accordance with the government's policyof splitting off NTT's mobile communications
arm in order to improve service.
• OMviro Co., Ltd.
Established in 2004 as a joint carve-out in thebusiness of manufacturing and selling catalysts
for comprehensive treatment of flue gas. These
catalysts, which incorporate technology developed by Mitsubishi Heavy Industries, Ltd. andOsaka Gas Co., Ltd., also simultaneously remove
sulfur oxides.

36

Development Bank of Japan Research Report/ No. 53• Optware Corporation
Independent offshoot of Sony. It develops,
manufactures, and sells super-high-capacity
memory devices. It is developing a one-terabyte
optical disk read/write device that melds holographic memory technology with optical disk
technology and is upwardly compatible with CDs
and DVDs.
• Crystage Incorporation
Independent offshoot of Hosiden and Philips andMatsushita Electric Industries. It develops andmanufactures next-generation liquid-crystal devices and provides consulting services. It also
develops equipment for manufacturing active
matrix organic EL panels.
• SAMCO International Research Laboratory
Independent offshoot of NASA. It develops,
among other things, compound semiconductor
manufacturing equipment and semiconductor and
LCD manufacturing equipment.
• Cybozu, Inc.
Independent offshoot of Matsushita ElectricWorks. It develops groupware for the Internet.
• THine Electronics,Inc.
Independent offshoot of Toshiba. It conducts
system LSI design and designs signal processing
for liquid crystal displays.
• ZaxelIndependent offshoot of Sony launched in Silicon Valley. It develops 3D video film equipment
and software.
• Seven-Eleven Japan Co., Ltd
In 1973 Ito-Yokado Co., Ltd. founded
York-Eleven, which was carved out by a grouparound Toshifumi Suzuki, then a section manager with Ito-Yokado.
• Sony Computer Entertainment Inc.
Plans, develops, produces, and sells home video
game equipment and software for PlayStationand such. Sony originally carved out the company as a secondary core business, but then it
became its biggest revenue generator, and in1999 Sony did a "spin-in" by performing an eq-

uity swap, turning it into a 100%-owned subsidiary.
• Sony Ericsson Mobile Communications Japan,
Inc.
Sony Ericsson Mobile Communications AB wasestablished in London in 2001 as a joint venture
between Ericsson and Sony Corporation in themobile phone handset business. Both firms
carved out their mobile phone handset divisions,the goal being to seize the No. 1 spot in the multimedia communications terminal market within
the next few years.
• Digital Fashion Limited
Independent offshoot of Toyobo Co., Ltd. It supplies software and hardware for digitally supporting the fashion industry. It also uses computer graphics to perform fashion design andconsulting.
• NuCore Technology Inc.
Independent offshoot of Intel Japan and Hitachi
Medico, founded in Silicon Valley. It designs
semiconductors for high-speed image processing
in digital cameras. It is currently developing an
81-megapixel-per-second digital image processor,
as well as the next generation of analog image
processors.
• North Corporation
Independent offshoot of Sony. It manufacturesand develops semiconductor components andprinted-wiring assemblies. Its fortes are techniques for connecting copper in air and 3D
mounting technology.
• Novus Flash Media Co., Ltd.
In 2003 Toshiba Corporation and Hagiwara
Sys-Com jointly carved out their respective
NAND flash memory products divisions. The
focus of the new company's business is planningand promoting sales of applied products that takeadvantage of the features that NAND flash
memory offers. The aim is thereby to foster morewidespread use of NAND flash memory.
• Pado Corporation
Independent offshoot of Ebara Corporation. This
planning company edits and publishes commu-

nity information magazines that are home-delivered for free. It produces information magazinesthat serve as a newsletter for the local community, as well as information magazines for salarymen and female office workers.
• Pixera Corporation
Independent offshoot of Toshiba founded in
Silicon Valley. It develops, manufactures, andsells high-resolution digital CCD camera equipment for microscopes.
• Fujitsu Limited
Fuji Communications Equipment ManufacturingCo., Ltd., the predecessor of Fujitsu, waslaunched in 1935 when Fuji Electric Co., Ltd.
carved out its telephone division.
• Fanuc Ltd.
In 1956 Fujitsu began developing servomechanisms with NC, and in 1972 Fanuc was carved
out of Fujitsu's Numerical Control Division.
• Fab Solutions Company Limited
Independent offshoot of NEC. It develops andsells e-beam-based semiconductor inspection
equipment. (The company receives funding fromIT venture capital firms.)• PharmaDesign,Inc.
Independent offshoot of Yamanouchi Pharmaceutical and pioneer in the field of genomic drug
development ventures. It supplies pharmaceuticalfirms with experimental data to help with development of new drugs, and designs low-moleculardrug compounds tailored to target drugs.
• Progressive Pictures Co., Ltd.
Independent offshoot of Victor Company of Japan. It performs digital cinema planning andproduction, supplies shooting and editing technology, and also advertises distribution.
• Frontier Carbon Corporation
Carve-out of intellectual property and production
technology in the possession of the Mitsubishi
Corporation and Mitsubishi Chemical Corporation Group. It manufactures carbon nanotubes offullerene and similar materials and develops fuelcells etc. using them. It receives funding from

Development Bank of Japan Research Report/ No. 53

37

Nanotech Partners, an investor in the nanocarbon
field.
• Protein Wave Corporation
Independent offshoot of Sumitomo Metal Industries. It develops chips for analyzing the structureof proteins and the like. It is attracting the limelight with protein analysis technology, the next
big wave in biotechnology after genome analysis.
• Future System Consulting Corp.
Independent offshoot of NTTPC Communications, Inc. It builds management strategy information systems for the distribution and financeindustries, as well as providing consulting services.
• Ball Semiconductor
Independent offshoot of Texas Instruments Japan,
established in Dallas, Texas. It is developing thetechnology to build integrated circuits on thesurface of spherical semiconductors. The company receives funding from such investors as
Kyocera.
• MegaChips Corporation
Independent offshoot of Ricoh. A fabless company specializing in system LSI design and R&D.
It also provides security monitoring services andsells film system software.
• UKOM
Independent offshoot of Sony, established in
Silicon Valley. It is developing semiconductor
technology to replace the conventional tuner thatconverts radio waves to a program signal. It has
an alliance with IBM.
• Yozan Inc.
Spin-off from a consultant. It develops semiconductors and system software for mobile multimedia equipment.
• Lattice Technology, Inc.
Independent offshoot of Ricoh. It develops andproduces technology for radically reducing theweight of 3D data.
• Land Solution Corporation
Kurita Water Industries carved out its soil con-38

Development Bank of Japan Research Report/ No. 53

tamination division and launched this company
in 2001 in partnership with Dowa Mining and theDevelopment Bank of Japan. It provides totalsolutions in the field of soil contamination.
• RealVision, Inc.
Independent offshoot of NEC. It designs and develops LSI for 3D image processing, which
technology has been adopted for use in NEC
workstations.
3. A Realistic Strategy for Japan: Use
Carve-Outs to Create New Industries
Many an in-house venture was born back in thedays of the "in-house venture boom," but few
really succeeded. A spin-out has the advantagethat it paves the way to success by drawing out
the potential of the individual: an entrepreneur
bursting with independence leaves the company
to set up his own business. However, in manycases there are serious obstacles in terms of therelationship with the parent firm, such as clarifying who owns intellectual property rights, orthe imposition on the new venture of a duty not
to compete with its parent. And if the spin-out
involves a parting of the ways with the parent
firm, the new company will find itself shut out of
doing business not just with the parent firm itself
but, in some cases, also with anyone else towhom the parent firm has ties. In that regard a
spin-off has the advantage that, by maintaining
loose ties with the parent firm, it can tap into thecredibility that the parent has built up, gain access to resources, and expand sales channels. A
carve-out, in which the parent firm to some extent maintains a stake by owning shares orwhatever, will find it even easier to obtain the
support of the parent company in terms of raisingfunds, developing sales and supply channels, andgaining access to human resources and intellectual property.
Big corporations and middle-tier firms fortheir part should have less of an antipathy tocarve-outs than to spin-outs and spin-offs.
Though not realistic in a company's core business, carve-outs should proceed fairly smoothly
in secondary core businesses or in areas that havethe potential to become part of a firm's corebusiness in the future. If pioneering Japanese bigand sketches the outlines of a carve-out fund,which would be valuable to achieving this goal.
According to Professor Noboru Maeda of
Osaka City University, by 2010 450 high-tech
ventures that are spin-offs in the broad sense (i.e.,
including carve-outs) will be listed on the stock
market, and 80,000 engineers will be associatedwith them.30 That figure -- 450 -- represents 10%of the listed companies in Japan. If businesses
are launched at that rate, it is not beyond therealm of possibility that Japan could come tolead the world as an innovator nation, as both the
big corporation and the venture firm are transformed into something radically different fromwhat they are today.
Figure 3-5 summarizes the characteristics,
advantages, and disadvantages of in-house ventures, spin-outs, spin-offs, and carve-outs ascorporations and middle-tier firms are able tocreate some carve-out success stories, that might
unleash a whole wave of carve-outs, with hugeramifications for the Japanese economy as awhole. The setting up of independent venturebusinesses alone will not be enough to trigger the
emergence of robust new industries in Japan;
also needed is a flurry of carve-outs in promisingbusiness fields, launched by big corporations andmiddle-tier firms that conduct extensive R&D
and have large numbers of elite engineers on
staff. That would reinvigorate Japan's big corporations and middle-tier firms, which easily gettrapped by the aforementioned "innovator's
dilemma" because of their successes in the past,and by extension help economically reinvigorate
Japan as an innovator nation. Figure 3-4 presents
a possible mechanism for supporting carve-outs

Advisory committee on commercializing technology(former company chief engineers, venturecompany presidents, etc.)

Investors
Fund managers
Parentcompanies ofcarve-outs

Angels,institutional
investors

Financial
institutions etc.

- Manage investments, coordinate investors- Due diligence by carve-outs, talks with parent- Support and coordinate commercialization(parachute in CEOs, marketing strategy, etc.)

External agencies
Work
together

Carve-out fund

- Technology evaluation agencies- Marketing agencies- Think tanks, consultants- Universities, local govts., etc.

Invests and supports operations

Carve-outs

Supplies IP,
technology
Technology,
peopleIn-house venture
Technology,
peopleSecondarycore business

Parent companies

Source:Compiled by author.

Figure 3-4. Conceptual Diagram of a Support Mechanism for Carve-Outs
30

See Noboru Maeda, Supinofu Kakumei (The Spin-Off
Revolution), Toyo Keizai, 2002.
Development Bank of Japan Research Report/ No. 53

39

This is the first priority in the case of Japan. Ventures should have an impact on GDP.
1. In-house ventures
The parent company puts up most of the capital and helps sell product etc. Even if the venture fails, the employees' jobs are guaranteed.
→ Such ventures fail to create true entrepreneurs willing to take risks and stake their livelihood on a business. All that is accomplished is the establishment of a firm within a firm.
2. Spin-outs
Technologists performing R&D work with a firm leave it to set up their own independent business.
Essential condition for development of true industrial clusters (e.g., San Diego's Hybritech)→ In the case of many spin-outs, no links whatsoever are maintained between the technologists who strike out on their own and thecompany they leave. There may also be disputes over, e.g., ownership of IP.
3. Spin-offs
The same as a spin-out insofar as technologists leave a firm to set up their own business.
(Spin-off is sometimes used as a blanket term for spin-outs and carve-outs.)→ A spin-off tends to maintain loose ties with the parent company despite the break.
4. Carve-outs
A venture by a large corporation, in which management "carves out" a portion of the company's business as a management strategy,
with the venture receiving third-party input in the form of evaluation, investment, etc. The carve-out is made with support and collaboration from the parent company, including a certain amount of funding.
→ This type of arrangement is well suited to commercializing R&D under conditions such as Japan's, where large corporations actively engage in R&D, possess the seeds of new technologies, and have skilled technologists on staff. It also has advantages forthe parent firm (upside risk, spin-ins).

Source:Compiled by the author.

Figure 3-5. Methods of Harnessing the Technological Seeds that Lie Dormant in
Big Corporations
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)

Gain the understanding and support of the parent firm
Create a win-win situation for both parent firm and new investors
Formulate a clear exit strategy and enshrine it in the shareholders' agreement
Encourage mobilization of intangible assets including human resources
Provide hands-on support to carve-outs
Provide risk-money support in the form of carve-out funds etc.
Train coordinators capable of winning over the top brass of big corporations and middle-tier firms
Clarify working conditions and overhaul severance pay and the pension system etc. to accommodate permanent staff transfers(9) Streamline and standardize rules for on-the-job inventions, as well as confidentiality agreements andnon-compete requirements

Source:Compiled by the author.

Figure 3-6. Challenges to Promoting Carve-Outs and How to Meet Themmethods of harnessing the technological seeds
that lie dormant in big corporations.

4.

Challenges to Promoting Carve-Outs and
How to Meet Them

Let us end this paper by examining what challenges exist to promoting carve-outs and how tomeet them. The nine main points are summarized
in Figure 3-6.
(1) Gain the understanding and support of theparent firm
The first condition is to get people within thecompany, especially at the management level, to40

Development Bank of Japan Research Report/ No. 53

understand that carve-outs are an effective way
to commercialize technology, and that, with thepace of innovation picking up speed, conducting
commercialization completely in house will result in lost business opportunities. Even if people
in the company's in-house ventures coordination
section or business planning arm make up theirminds to launch a carve-out, the idea may be rejected during the company decision-making
process. Vague hopes that what is merely a secondary core business today could eventually develop into something valuable may engender
opposition to such a bold step as a carve-out.
Japan's corporate captains are all unanimous
about the importance of MOT in principle, butwhen it comes to specifics they tend to hesitate.
As already noted, the Japan Techno-Economics
Society, an association of chief technology officers (CTOs) from Japan's leading manufacturers,
has been discussing the subject of carve-outs as ameans of promoting R&D, and METI has organized a Spin-Off Study Team. The need forcarve-outs and spin-offs is thus slowly but surely
coming to be acknowledged, and the idea needs
to be promoted over a broad front. The New Industry Creation Strategy, which was referred to
the Council on Economic and Fiscal Policy in
May 2004 and ultimately incorporated into thegovernment's 2004 "large-boned" policy blueprint, also calls for promoting ventures andspin-offs (including carve-outs) by large corporations. The idea will, it is hoped, percolate
throughout Japanese society.
(2) Create a win-win situation for both parent
firm and new investors
The parent firm should consider strategies for
ensuring the management autonomy of the company that it carves out, and for guaranteeing thatit has the freedom to develop its own sales channels. One way to accomplish that would be forthe parent firm to own less than a 50% stake.
Tapping outside capital and investment funds
would be an effective means to that end. Conceivable sources of such new investment might
include industrial investors with connections tothe carved-out business, funds such as carve-out
funds, companies in a similar line of business,and client firms. Thus what is needed is amechanism that creates a win-win situation forboth the parent firm that makes the carve-out andthose who newly invest in it.
(3) Formulate a clear exit strategy and enshrine
it in the shareholders' agreement
In the case of a venture fund or private equity
fund, the exit strategy -- where the venture ends
up upon success -- is relatively clear, typicallyentailing either an IPO or M&A. A carve-out, too,has a good chance of ending in an IPO or M&A,
but another major option in terms of exit strategy
is a "spin-in" or "buy-back" -- i.e., the parent
firm reacquires the carve-out. In such cases thegeneral practice would be to conduct the
buy-back at the current market price. In somecases, however, one option might be for the parent firm and the fund (or whatever) to conclude ashareholders' agreement at the time of thecarve-out that presupposes a spin-in or buy-back.
(4) Encourage mobilization of intangible assets
including human resources
Today many Japanese companies try to mobilize
assets as a way of tapping into their fixed assets
and accounts receivable. It is becoming common
for companies to transfer ownership of buildingsin their possession to a special-purpose company(SPC) registered in, say, the Caymans as a wayof getting those assets off their own balance
sheet and thus improving their ROE and ROA. It
is also common to mobilize assets upon ensuringthat conditions of true sale and bankruptcy remoteness are fulfilled. Carve-outs can be analyzed on the same analogy. As hardly needs
pointing out, mobilizing intangible assets like
intellectual property (IP) and human resources
like engineers will enable more effective use to
be made of the IP and engineers that lie dormant
inside big companies, which in turn will help
reinvigorate the Japanese economy. The
carve-out is a tool for accomplishing that end. It
is to be hoped that, just as big corporations haveused mobilization of assets and asset finance astools for improving management efficiency, they
will now take aggressive steps to mobilize theirintangible assets. Indeed, if mobilizing intangible
assets comes to be seen as the next big tool in
improving management now that mobilization of
fixed assets has run its course, a wave of it could
instantly sweep across Japan. In asset finance,
certain terms and conditions are order-made infavor of the originator (the firm from which theventure stems), such as right of first refusal; developing new financing techniques similarly
customized to the wants of the parent firm would
be one way to help promote carve-outs.
(5) Provide hands-on support to carve-outs
As a rule, what is carved out from the parent firm
consists mainly of IP and the team of engineersthat developed it. Naturally, marketing staff andmanagement are usually not included in thecarve-out, so they need to be supplied by thefund (or whatever) instead. Many a spin-out ormanagement buyout (MBO) in Japan has, despite

Development Bank of Japan Research Report/ No. 53

41

vestment; that would give a stimulus tocarve-outs per se. In that regard support fromgovernment and the like would also help due tothe risk of market failure.
Figure 3-7 gives amount of risk money supplied in financial support of innovation as a percentage of GDP, as calculated by America's
Babson College et al. Chapter I presented asimilar comparison made by the OECD, and theresults are similar. These percentages do not takeaccount of all forms of risk money: for example,
in-house financing and indirect financing are notcounted. Nonetheless, one general pattern isclear: Japan suffers a particular shortage of therisk money so vital to innovation. That is one
reason why it would be a good idea to establish acarve-out fund or the like to ensure the smoothsupply of risk money. Public support should also
be provided as needed, since at the initial stage
there will be limits to how much the private sector can put up on its own.

going independent with great technology, failed
because it was not market-oriented, or ceased to
be viable as a company in the absence of proper
management. A marketing strategy for commercializing outstanding technology in a manner
tailored to the market is vital, as is indeed an
overall business strategy. Business is more likely
to grow if the carved out staff are permanently
transferred to the new firm and an adequate system of stock options and other incentives is set
up. In order to provide hands-on management
support, it would also be a good idea to develop
an environment where access is available whenever necessary to advice from presidents of ventures that themselves have spun out or spun off
from big corporations and have after much toil
ultimately achieved success.
(6) Provide risk-money support in the form of
carve-out funds etc.
Availability of risk money is of course vital tounleashing the technologies and engineers thatlie dormant in big corporations. The total amountof money held by venture funds and the like intoday's Japan is fairly small as a percentage ofGDP. As the analysis is the previous section
demonstrated, a carve-out is a middle-risk, middle-return proposition compared to a venture investment. That being the case, funds that cannot
be risked on a venture investment but are still
looking for a certain level of upside risk could bechanneled into carve-outs as an alternative in-

1999

2000

2001

2002

Chile

Domestic risk money investment as percentage of GDP

US(7) Train coordinators capable of winning over
the top brass of big corporations and middle-tier firms
In the case of a carve-out, winning over the parent firm and reconciling interests with it are vital.
It would therefore be a good idea to have coordinators capable of providing advice from thestandpoint of someone who can be trusted to acertain extent by the parent firm as well.

1.2
1
0.8
0.6
0.4
0.2

Source:Compiled from “Global Entrepreneurship Monitor 2004.”

Figure 3-7. Financial Support for Innovation(Supply of risk money as a percentage of GDP)
42

Development Bank of Japan Research Report/ No. 53

IsraelCanadaFinland

South Africa

Netherlands

UK

Singapore

Spain

SwedenAustralia

IcelandDenmark

FranceItaly

NorwaySwitzerland

China

Ireland

BelgiumBrazilGermany

PolandPortugalJapan

New Zealand

GreeceHungary

Slovenia0(8) Clarify working conditions and overhaul
severance pay and the pension system etc. toaccommodate permanent staff transfers
Since staff are permanently transferred, clarification of working conditions and the question ofseverance pay and pensions are all issues thatwill need to be promptly resolved; these are key
issues in promoting spin-offs as well. In Japan,
anyone who quits his company to start a businessor join another firm will in many cases lose out
on severance pay and pensions. Here, surely, andin the whole Japanese mentality of wanting towork for a big company, lies the reason why few
engineers ever start their own business once theyland a good job with a large firm.
(9) Streamline and standardize rules foron-the-job inventions, as well as confidentiality agreements and non-compete requirements
As exemplified by the lawsuit over blue lightemitting diodes between Professor Shuji Naka
mura of the University of California at Santa
Barbara (UCSB) and Nichia Corporation, inventions made on the job constitute a massive concern. Some companies offer a standard reward of¥50,000 for inventions, while in other cases thecourts may award as much as ¥20 billion in
payment for an invention made on the job, as
happened with Nakamura. Interviews withpresidents of spin-out companies reveal that they
are often expressly prohibited from doing, for atleast a year, any work that would place them incompetition with their parent firm, or instructed
not to take with them any patents for inventions
made on the job. Therefore it would be best to
define clearly what portion of a patent or the likebelongs to the individual; it would also be wise
to formulate a reasonable set of terms and conditions, acceptable to both sides, for confidentiality
and non-compete agreements. As long as suchmatters are left vague, the risk of litigation will
always hang in the air, stifling freedom of corporate activity.
If these challenges can be overcome, thecarve-out and similar tools should prove invaluable as a way for large corporations and middle-tier firms that are losing their mobility andfind themselves slipping into the "innovator's
dilemma" to briskly commercialize their R&D
findings. That in turn will, it is fervently hoped,
contribute greatly to creating robust new industries and reviving Japan as an industrial power.

Development Bank of Japan Research Report/ No. 53

43

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List of Back Numbers (Including JDB Research Report)
No. 53 Japan's Innovative Capacity and Policies for Commercializing New Technologies: Using Carve-Outs toCreate New Industries (this issue)
No. 52 Intelligent Transport System (ITS): Current State and Future Prospects, May 2005
No. 51 Recent Trends in the Japanese Economy: Pause in Recovery, March 2005
No. 50 Corporate Capital Spending Behavior and Innovation Efforts: Findings of Survey on Capital Spending
Behavior (Conducted in November 2004), March 2005
No. 49 Survey on Planned Capital Spending for Fiscal Years 2004 and 2005 (Conducted in November 2004),
January 2005
No. 48 Recent Trends in the Japanese Economy: Medium-term Outlook of Japanese Industrial Structure, January 2005
No. 47 Survey on Planned Capital Spending for Fiscal Years 2003, 2004 and 2005 (Conducted in June 2004),
September 2004
No. 46 Recent Trends in the Japanese Economy: Impact of Rising International Commodity Prices on Corporate Input/Output Behavior, September 2004
No. 45 How Life Cycle Assessment (LCA) Can Enhance the Fight against Global Warming, August 2004
No. 44 Recent Trends in the Japanese Economy: A Medium-term Scenario for the Japanese Economy with
Special Focus on the Flow of Funds and Finance, March 2004
No. 43 Survey on Planned Capital Spending for Fiscal Years 2002, 2003 and 2004 (Conducted in August 2003),
November 2003
No. 42 Promoting Corporate Measures to Combat Global Warming: An Analysis of Innovative Activities in the
Field, September 2003
No. 41 Prospects and Challenges for End-of-Life Vehicle Recycling, May 2003
No. 40 Survey on Planned Capital Spending for Fiscal Years 2002 and 2003 (Conducted in February 2003),
May 2003
No. 39 China’s Economic Development and the Role of Foreign-Funded Enterprises, May 2003
No. 38 Decline in Productivity in Japan and Disparities Between Firms in the 1990s: An Empirical Approach
Based on Data Envelopment Analysis, April 2003
No. 37 Trends in Socially Responsible Investment: Corporate Social Responsibility in a New Phase, March
2003
No. 36 Recent Trends in the Japanese Economy: A Medium-term Scenario for the Sustainability of the Japanese Economy, February 2003
No. 35 Concerns for the Future and Generational Consumption Behavior, February 2003
No. 34 Prospects and Challenges Surrounding Japan’s Electrical Equipment Industry: General Electrical
Equipment Manufacturers’ Restructuring of Operations and Future Prospects, November 2002
No. 33 Survey on Planned Capital Spending for Fiscal Years 2001, 2002 and 2003 (Conducted in August 2002),
November 2002
No. 32 Behavior Trends of Japanese Banks toward the Corporate Sector and Their Impact on the Economy,
October 2002
No. 31 Microstructure of Investment and Employment Dynamics: Stylized Facts of Factor Adjustment Basedon Listed Company Data, October 2002
No. 30 Recent Trends in the Japanese Economy: Globalization and the Japanese Economy, August 2002

No. 29 Corporate Financing Trends in Recent Years: Fund Shortages and Repayment Burden, August 2002
No. 28 Urban Renewal and Resource Recycling: For the Creation of a Resource Recycling Society, July 2002
No. 27 Labor’s Share and the Adjustment of Wages and Employment, June 2002
No. 26 Survey on Planned Capital Spending for Fiscal Years 2001 and 2002 (Conducted in February 2002),
May 2002
No. 25 Environmental Information Policy and Utilization of Information Technology: Toward a Shift in Environmental Policy Paradigm, March 2002
No. 24 The Changing Structure of Trade in Japan and Its Impact: With the Focus on Trade in Information
Technology (IT) Goods, March 2002
No. 23 Microstructure of persistent ROA decline in the Japanese corporate sector: Inter-company disparities
and investment strategies, March 2002
No. 22 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation and Prospects ofEvolution, February 2002
No. 21 Survey on Planned Capital Spending for Fiscal Years 2000, 2001 and 2002, December 2001
No. 20 Current Situation and Challenges for Cable Television in the Broadband Era, October 2001
No. 19 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation, August 2001
No. 18 Introduction of a Home Appliance Recycling System: Effects & Prospects: Progress towards Utilisationof Recycling Infrastructure, June 2001
No. 17 Survey on Planned Capital Spending for Fiscal Years 2000 and 2001, June 2001
No. 16 Revitalization of Middle-aged and Elderly Workers in Japan’s Labor Markets: Requiring the Expansionof the Vocational Training Functions, March 2001
No. 15 Risk-Averting Portfolio Trends of Japanese Households, March 2001
No. 14 Consumption Demand Trends and the Structure of Supply: Focus on Retail Industry Supply Behavior,
March 2001
No. 13 Recent Trends in the Japanese Economy: Weakness of Current Economic Recovery and Its Background,
March 2001
No. 12 Empirical Reassessment of Japanese Corporate Investment Behavior: Features and Changes since the1980s, based on Micro-level Panel Data, March 2001
No. 11 Survey on Planned Capital Spending for Fiscal Years 1999, 2000 and 2001, October 2000
No. 10 Job Creation and Job Destruction in Japan, 1978-1998: An Empirical Analysis Based on EnterpriseData, September 2000
No. 9

Recent Trends in the Japanese Economy: Information Technology and the Economy, September 2000

No. 8

Trend of International Reorganization Affecting the Japanese Automobile and Auto Parts Industries,
June 2000

No. 7

Survey on Planned Capital Spending for Fiscal Years 1999 and 2000, June 2000

No. 6

Current Status and Future Perspective of the Japanese Remediation Industry: Technology and Market
for Underground Remediation, May 2000

No. 5

Recent Trends in the Japanese Economy: The 1990s in Retrospect, March 2000

No. 4

Destabilized Consumption and the Post-bubble Consumer Environment, February 2000

No. 3

The Slump in Plant and Equipment Investment in the 1990s: Focusing on Lowered Expectations, theDebt Burden and Other Structural Factors, January 2000

No. 2

Survey on Planned Capital Spending for Fiscal Years 1998, 1999 and 2000, November 1999

No. 1

Corporate Strategies in Japan’s Semiconductor Industry: Implications of Development in Other AsianCountries, November 1999

JDB Research Report
No. 96 Recent Trends in the Japanese Economy: Focused on Fixed Investment and Capital Stock, August 1999
No. 95 Efforts to Protect the Natural Environment in the United States and Germany: Environmental Mitigation and Biotope Conservation, July 1999
No. 94 Survey on Planned Capital Spending for Fiscal Years 1998 and 1999, June 1999
No. 93 Towards the realization of ‘environmental partnership’: A survey of Japan’s environmental NPO sector
through comparison with Germany, June 1999
No. 92 The Impact of Demographic Changes on Consumption and Savings, March 1999
No. 91 Recent Research and Development Trends in Japanese Enterprises: Technology Fusion, March 1999
No. 90 Recent Trends in the Japanese Economy: Prolonged Balance Sheet Adjustment, January 1999
No. 89 Impact of Asset Price Fluctuations on Household and Corporate Behavior: A Comparison between Japan and the U.S., December 1998
No. 88 Survey on Planned Capital Spending for Fiscal Years 1997, 1998, and 1999, December 1998
No. 87 Foreign Exchange Rate Fluctuations and Changes in the Input-Output Structure, November 1998
No. 86 Structural Changes in Unemployment of Japan: An Approach from Labor Flow, November 1998
No. 85 Recent Trends in the Japanese Economy: Characteristics of the Current Recession, August 1998
No. 84 R&D Stock and Trade Structure in Japan, August 1998
No. 83 Survey on Planned Capital Spending for Fiscal Years 1997 and 1998, August 1998
No. 82 The Significance, Potential, and Problems of DNA Analysis Research: Establishing Public Acceptanceis Essential, May 1998
No. 81 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996, 1997 and1998 Conducted in August 1997, March 1998
No. 80 Recent Trends in the Japanese Economy: Growth Base of the Japanese Economy, January 1998
No. 79 Information Appliances: The Strength of Japanese Companies and Tasks for the Future, January 1998
No. 78 Challenges and Outlook for the Japanese Machinery Industries: Impact of ISO14000 Series and Environmental Cost, January 1998
No. 77 Current Conditions and Issues of Computerization in the Health Care Industry: For the Construction of
a Health Care Information Network, January 1998
No. 76 Household Consumption and Saving in Japan, December 1997
No. 75 The Direction of Japanese Distribution System Reforms: Strengthening the Infrastructure to Support
Diverse Consumer Choices, November 1997
No. 74 Foreign Direct Investments by Japanese Manufacturing Industries and Their Effects on International
Trade, October 1997
No. 73 The Impact of the Changing Trade Structure on the Japanese Economy: With Special Focus on the Effects on Productivity and Employment, October 1997
No. 72 An Analysis of Foreign Direct Investment and Foreign Affiliates in Japan, August 1997

No. 71 Recent Trends in the Japanese Economy: Stock Replacement and New Demand as Aspects of Economic Recovery, August 1997
No. 70 Corporate Fundraising: An International Comparison, June 1997
No. 69 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and 1997
Conducted in February 1997, May 1997
No. 68 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and 1997
Conducted in August 1996, August 1997
No. 67 An International Comparison of Corporate Investment Behavior: Empirical Analysis Using Firm Data
from Japan, France and the US, April 1997
No. 66 Housing in the National Capital: Analysis of the Market for Housing using Micro Data, March 1997
No. 65 The Environment for Locating Business Operations in Major East Asian Cities, January 1997
No. 64 Direction of Reconstruction of Business Strategy in the Chemical Industry, January 1997
No. 63 Reflection on Discussions Concerning Regulation of the Electric Power Industry: Deregulation of theElectric Power Industry in Japan and Implication of Experiences in the United States, December 1996
No. 62 Current Status and Future Perspective of the Japanese Semiconductor Industry, November 1996
No. 61 A Breakthrough for the Japanese Software Industry?: Responsiveness to Users’ Needs is the key, October 1996
No. 60 Recent Trends in the Japanese Economy Focusing on the Characteristics and Sustainability of the Current Economic Recovery, September 1996
No. 59 Analysis of the Primary Causes and Economic Effects of Information: Related investment in the UnitedStates and Trends in Japan, August 1996
No. 58 Selected Summaries of Research Reports: Published in FY1995, June 1996
No. 57 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1995 and 1996
Conducted in February 1996, May 1996
No. 56 Recent Trends in the Japanese Economy, May 1996
No. 55 Issues Concerning the Competitiveness of the Japanese Steel Industry, February 1996
No. 54 Changes in the Financial Environment and the Real Economy, January 1996
No. 53 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994, 1995 and1996 Conducted in August 1995, October 1995
No. 52 Current Economic Trends: Focusing on the Appreciation of the Yen and its Effects, October 1995
No. 51 Problems Concerning the International Competitiveness of the Petrochemical Industry, October 1995
No. 50 An Economic Approach to International Competitiveness, October 1995
No. 49 Selected Summaries of Research Reports Published in FY1994, July 1995
No. 48 Strategies for Improving the Efficiency of the Japanese Physical Distribution System: Part 2, July 1995
No. 47 Issues on International Competitive Strength of the Auto Industry, June 1995
No. 46 Problems Concerning the International Competitiveness of the Electronics and Electric Machinery Industry, June 1995
No. 45 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994 and 1995
Conducted in March 1995, June 1995
No. 44 Strategies for Improving the Efficiency of the Japanese Physical Distribution System, March 1995

No. 43 Capital Spending Recovery Scenario Cycle and Structure, August 1994
No. 42 Progress of International Joint Development between Industrialized Countries on the Private Level,
May 1994
No. 41 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993, 1994 and1995 Conducted in August 1994 , November 1994
No. 40 Selected Summaries of Research Reports Published in FY1993, June 1994
No. 39 Recent Trends in Japan’s Foreign Accounts, April 1994
No. 38 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993 and 1994
Conducted in March 1994, April 1994
No. 37 Economic Zones and East Asia Prospect for Economic Activity Oriented Market Integration, December
1993
No. 36 Japanese Corporate Responses to Global Environmental Issues, December 1993
No. 35 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992, 1993 and1994 Conducted in August 1993, September 1993
No. 34 Structure of Profit to Capital in the Manufacturing Industry, September 1993
No. 33 Comparison of the Japanese and The U.S. Labor Markets, October 1992
No. 32 The Relative Competitiveness of U.S., German, and Japanese Manufacturing, March 1993
No. 31 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992 and 1993
Conducted in March 1993, April 1993
No. 30 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991, 1992 and1993 Conducted in August 1992, December 1992
No. 29 Flow of Funds in the 80s and Future Corporate Finance in Japan, November 1992
No. 28 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991 and 1992
Conducted in February 1992, April 1992
No. 27 An Analysis of Foreign Direct Investment in Japan, March 1992
No. 26 Projection of Japan's Trade Surplus in 1995: Analysis of Japan's Trade Structure in the 80s, February
1992
No. 25 Intra-Industry Trade and Dynamic Development of The World Economy, November 1991
No. 24 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990, 1991 and1992 Conducted in August 1991, September 1991
No. 23 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990 and 1991
Conducted in February 1991, March 1991
No. 22 Trends of the Petrochemical Industry and its Marketplace in East Asia, March 1991
No. 21 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989, 1990 and1991 Conducted in August 1990, September 1990
No. 20 Deepening Economic Linkages in The Pacific Basin Region: Trade, Foreign Direct Investment andTechnology, September 1990
No. 19 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989 and 1990
Conducted in February 1990, March 1990
No. 18 Petrochemicals in Japan, The US, and Korea an Assessment of Economic Efficiency, February 1990
No. 17 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1988, 1989 and1990 Conducted in August 1989, October 1989
No. 16 Impact of the EC Unification on Japan’s Automobile and Electronics Industries, August 1989
No. 15 Industrial and Trade Structures and the International Competitiveness of Asia’s Newly Industrializing
Economies, August 1989
No. 14 The Japan Development Bank Reports on Capital Investment Spending: Survey for Fiscal Years 1988
and 1989 Conducted in February 1989, March 1989
No. 13 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1987, 1988 and1989 Conducted in August 1988, September 1988
No. 12 Growing Foreign Investors’ Activities and the Future of Internationalization, September 1988
No. 11 Futures Tasks and Prospects for the Japanese Machine-Tool Industry, July 1988
No. 10 International Division of Labor in the Machine Industries Among Japan, Asia’s NICs and ASEANCountries, June 1988
No. 9

Trends of the Petrochemical Industry and its Marketplace in East Asia around Japan, May 1988

No. 8

The International Competitiveness of Japan and U.S. in High Technology Industries, April 1988

No. 7

The Japan Development Bank Reports on Private Fixed Investment in Japan, March 1988

No. 6

Economic Projections of the Japan’s Economy to the Year 2000, February 1988

No. 5

The Japan Development Bank Reports on Private Fixed Investment in Japan, September 1987

No. 4

Current Trends in the Japanese Auto Parts Industry in Overseas Production, July 1987

No. 3

Current Moves for Foreign Direct Investment into Japan, May 1987

No. 2

Overseas Direct Investments by Japanese Corporations, May 1987

No. 1

Current U.S. Consumption Trends, May 1987