Hitotsubashi University
Institute of Innovation ResearchSpin-Outs and Patterns of Subsequent Innovation:
Technological Development of Laser Diodes
in the US and Japan
Hiroshi Shimizu
Naohiko Wakutsu

IIR Working Paper WP#17-14

Aug. 2017

Institute of Innovation Research
Hitotsubashi University
Tokyo, Japan
http://www.iir.hit-u.ac.jp

Spin-Outs and Patterns of Subsequent Innovation: Technological
Development of Laser Diodes in the US and Japan

Hiroshi Shimizu
Hitotsubashi University
Institute of Innovation Researchshimizu@iir.hit-u.ac.jp

Naohiko Wakutsu
Nagoya City University
Graduate School of Economics

Abstract
By exploring the technological development of laser diodes in the US and Japan,
this study examines how the existence or absence of an entrepreneurial strategic
choice for spin-outs influences patterns of subsequent technological development.
The results show that spin-outs could hinder the subsequent development ofexisting technology when that technology is still at a nascent level, because thecumulative effects of technological development could disappear if research anddevelopment personnel left their parent firms in order to target different submarkets.

Keywords: innovation, R&D competition, technological trajectory, spin-out,
sub-market, laser diode
JEL:O31, O32, O33, M13, L63

1

1. Introduction
Do entrepreneurial spin-outs promote innovation? This study explores
how entrepreneurial spin-outs influence the ways in which technology with aconsiderable number of areas of application evolves over time, by investigating
the technological development of laser diodes in the US and Japan.
Spin-outs have played a vital role in industry, especially in technologyintensive industries. Internal resources have been spun off from parent firms to
be marketed separately and to generate additional value. Spilling over from
intellectual hubs, numerous engineers have established technology-intensive
businesses. A notable example is Fairchild Semiconductor and its spin-out firmsin Silicon Valley. Spin-outs have an important industrial function of fulfilling
untapped demand by utilizing existing technology laterally. Entrepreneurial
activity based on this pattern of knowledge spillovers is considered to drive
economic and technological development.
Although employee start-ups generate great interest in different fields
such as entrepreneurship, regional clusters, open innovation, and corporate
finance, few studies have considered the impact of employee start-ups on
subsequent technological development. It is reasonable to assume that the
productivity of the parent firm is reduced if skilled personnel leave and launch
start-ups, because a core source of the competitive advantage of a firm in aknowledge-intensive industry is strongly embodied and embedded in the humancapital of its employees. Thus, a society in which we can observe a high level of
employee entrepreneurship and spin-outs can display different technologicaldevelopment patterns from a society in which entrepreneurial spin-outs are
rarely observed.
This study focuses on how entrepreneurial spin-outs influence the ways
in which technology that has the potential to be utilized in a wide variety of
products and processes is developed after its original invention. Since newly
invented technology is at a nascent stage, its subsequent cumulative development
plays a very important role in the full realization of its potential (Nathan
2Rosenberg, 1979). Subsequent cumulative technological development is ofsignificant importance in the case of highly versatile technology, otherwise known
as general-purpose technology (GPT), and can have a critical impact on economic
and industrial growth (Elhanan Helpman, 1998, Richard G. Lipsey et al., 1998,
Richard G. Lipsey et al., 2005).
The laser has generally been considered to belong to the class of versatiletechnologies. 1 The laser diode, which is the most widely used type of laser, is akind of laser that emits a narrow beam of coherent light. Typical examples of thedomains in which laser diodes are used are telecommunications, opticalinformation storage, sensors, pointers, displays, measurements and medicine;and they are also used for pumping other lasers. The laser diode was one of themost important technologies underpinning the dramatic changes that occurredin information technology during the latter half of the twentieth century. As will
be described in Section 3, US and Japanese organizations have been the main
actors throughout the history of laser diode research. Throughout the 1960s and1970s, US and Japanese firms targeted the same markets, encountered the same
technological problems, and aimed to achieve the same goals. However, US
scientists and engineers began to diverge from their Japanese counterparts in the
1980s when they started to leave their parent organizations and launch start-ups,
while Japanese firms continued to compete in the same technological areas(Hiroshi Shimizu, 2010).
Section 2 of this paper reviews the current literature on employee start1

As discussed in Section 2, general-purpose technologies (GPTs) have several positive

characteristics, such as versatility and a high impact on macroeconomic productivity. On
the basis of the four characteristics of GPTs (a wide scope for improvement andelaboration; applicability across a broad range of uses; potential for use in a wide variety
of products and processes; and strong complementarities with existing or potential newtechnologies), it has been suggested that historical patent data should be examined to
explore whether electricity should be considered to be a GPT (Moser, Petra and Tom
Nicholas. 2004. "Was Electricity a General Purpose Technology? Evidence fromHistorical Patent Citations." American Economic Review, 94(2), 388-94. ) The main
purpose of this study, however, is not to explore whether laser diodes are actually GPT.
3

ups, the technological development of highly versatile technology, and patternsof subsequent technological development. Section 3 explains the data andapproach of this study. Section 4 describes the processes of laser diodedevelopment in the US and Japan, and explains the technological developments
in two major applications: optical communications and optical information
storage. Focusing on the research and development (R&D) spin-outs in the US
and the absence of spin-outs in Japan, Section 5 scrutinizes how US firms
withdrew from the subsequent technological development and gainedcompetitiveness in customized and untapped markets, while Japanese firms
continued to compete in the same technological areas. Section 6 discusses how
entrepreneurial R&D spin-outs influence patterns of subsequent technologicaldevelopment. To conclude, Section 7 summarizes the findings of this study,
considers their implications, limitations and suggests directions for future
research.

2. Literature Review
This paper attempts to create a bridge between the literature on employee
start-ups and the literature on innovation patterns. Employee start-ups havebeen one of the most important focuses in innovation studies, and have been
explored from various perspectives such as entrepreneurship, regional clusters,
and knowledge spillover. The main aspects explored by the previous literature on
employee start-ups have been the identification of entrepreneurs (Thomas M.
Begley and David P. Boyd, 1987, Michael J. Crant, 1996), the location of employee
start-ups (Arnold C. Cooper, 1985, David A. Garvin, 1983, AnnaLee Saxenian,1994), the initial market focus of employee start-ups (James J. Anton and Dennis
Yao, 1995, Steven Klepper and Sally Sleeper, 2005, Steven N. Wiggins, 1995), therelationships between employee start-ups and their parent firms, and how theperformance of employee start-ups differs from that of their parent firms(Rajshree Agarwal et al., 2004, Benjamin A. Campbell et al., 2012).
Employee start-ups can be classified into two categories: spin-offs and4spin-outs. The former is where the employee start-up has a capital investment
from its parent firm, which is a type of divestiture. The latter is where theemployee start-up does not have any capital ties with its parent company; thistype is the focus herein. While much of the previous literature on employee startups explores spin-offs, it also provides important insights for spin-outs. 2
The previous literature on the relationship between employee start-ups
and their parental organizations has observed that conflict between the founderof the start-up and the parent firm can be an antecedent of the formation of theemployee start-up (Steven Klepper and Peter Thompson, 2010, Peter Thompson
and Jing Chen, 2011). An employee who plans to spin out tends to transfer as
many tangible and intangible assets as possible (such as his/her specific expertiseand interpersonal networks) to the new workplace (Rajshree Agarwal and David
B. Audretsch, 2001). A negative impact on the parent firm has therefore been
observed because the firm’s capable human resources leave and transfer to
employee start-ups (Benjamin A. Campbell, Martin Ganco, April M. Franco andRajshree Agarwal, 2012). It is assumed that the conflict would be larger in the
spin-out case because a spin-off has support from its parent firm whereas a spinout does not.
The size of the negative impact of the loss of talented personnel on theparent firm depends on the firm’s ability to source replacements with similarskills and other relevant attributes from the labor market or to cultivate such
personnel internally. When firm-specific skills, tacit knowledge, or special
expertize play an important role, and when the pool of talented personnel islimited in the labor market, a firm generally requires time to regain these humanresources (Russell W. Coff, 1997, Harry M. Collins and R G. Harrison, 1975,
Ikujiro Nonaka and Hiro Takeuchi, 1995, Lynne G. Zucker et al., 1998).
Explorations of start-ups in Silicon Valley and observations of employee start-ups
have shown that they contribute greatly to knowledge spillovers and high-tech
2

For a detailed literature review on employee start-ups, see Klepper, Steven. 2001.

"Employee Startups in High-Tech Industries." Industrial and Corporate Change, 10(3),639-74.
5

clustering; the corollary being that they might delay the ongoing R&D projects of
their parent organizations (Richard L. Florida and Martin Kenney, 1990). Even
though these potential delays have been suggested in the extant literature, they
have not been explored in detail.
Further, most of the literature has indicated that employee start-ups
initially tend to target a new sub-market so that they are not directly challenging
the parent firm (James J. Anton and Dennis Yao, 1995, Clayton M. Christensen,
1993, Steven Klepper and Sally Sleeper, 2005, Steven N. Wiggins, 1995). Submarkets are defined as “islands of activity that are insulated from the rest of anindustry on both the demand and supply side.” 3 Sub-markets appeal to different
users and require different knowledge and methods of production from existing
markets (Guido Buenstorf and Steven Klepper, 2010). Sub-markets are areas inwhich new entrants can launch their own businesses by utilizing existing
technology (James J. Anton and Dennis Yao, 1995, Guido Buenstorf and Steven
Klepper, 2010, Clayton M. Christensen, 1993, Steven Klepper, 1996, Steven N.
Wiggins, 1995). For example, by utilizing valuable discoveries and expertize thata founder has accumulated at an incumbent firm, an employee start-up in a hightech industry may produce a product that is sufficiently differentiated not tojeopardize the viability of its parent’s position in a related market in the shortterm (Clayton M. Christensen and Joseph L. Bower, 1996, Steven Klepper, 2001).
This suggests that employee start-ups diffuse R&D resources from existing R&D
projects into different sub-markets. It implies that employee start-ups influence
the subsequent development of existing technology, which has not been exploredin the previous literature on employee start-ups.
The literature on economic history shows that the extent to which theeventual potential of a technology is realized depends on the level of subsequent
technological development (Robert C. Allen, 2009, Joel Mokyr, 1990, Nathan
Rosenberg, 1979). Subsequent technological development is very important,3

Bhaskarabhatla, Ajay and Steven Klepper. 2014. "Latent Submarket Dynbamics

and Industry Evolution: Lessons from the Us Laser Industry." Ibid.23(6), 1381-415.,
p.1381.
6

especially in the case of technologies that can be used in a wide variety of products
and processes, so-called general-purpose technologies (GPTs). A GPT is defined
as “a technology that initially has much scope for improvement and eventuallycomes to be widely used, to have many uses, and to have many Hicksian andtechnological complementarities.” 4 Electricity, the steam engine, lasers, andcomputers are generally regarded as some of the most important GPTs. One of
the reasons why GPTs have received attention is that the occasional arrival of a
new GPT yields large positive externalities on macroeconomic outcomes(Elhanan Helpman, 1998). However, it must be noted that the initial impact of
GPTs on overall productivity growth is minimal. The realization of the eventual
potential of a GPT may take several decades or, even, hundreds of years.
Subsequent technological development has been discussed in two
different streams of research. One research stream is based on the concepts ofparadigms and trajectories. Thomas Kuhn introduced the concept of paradigms
to explain the pattern of development in science (Thomas S. Kuhn, 1962). A
paradigm is rather loosely defined as a distinct pattern of finding, reasoning, andsolving problems in science and technology. Based on Kuhn’s discussion ofparadigms, Dosi defined a technological trajectory as “a cluster of possible
technological directions whose boundaries are defined by the nature of theparadigm itself” (Dosi, 1982, p.154). In other words, the paradigm defines the
direction of subsequent technological advances. Once a certain technologicaltrajectory emerges, it provides the direction for subsequent technologicaldevelopment. Technological trajectories are not created by a single actor. In asimilar way to the normal science paradigm, as described by Kuhn (1962),
technological trajectories emerge through interactions involving several actors.
That is, a certain technological trajectory emerges when the majority of the actors
take a cumulative technological approach to the same technological problem.
The other research stream involves management studies vis-a-vis the4

Lipsey, Richard G.; Cliff Bekar and Kenneth Carlaw. 1998. "What Requires

Explanation?," E. Helpman, General Purpose Technologies and Economic Growth.
Cambridge, Mass.: MIT Press, 15-54., p.43.
7

concept of dominant design. Dominant design is a key technological feature thathas become a de facto standard of industries; it determines the direction(s) ofsubsequent technological development (William J. Abernathy, 1978, Fernando F.
Suárez, 2004, James M. Utterback and William J. Abernathy, 1975). Even though
the interpretations of the concepts, underlying causal mechanisms, and units ofanalysis have varied in the extant empirical literature on dominant design(Johann Peter Murmann and Koen Frenken, 2006), that literature reveals thatseveral new designs and a variety of new materials are created before a dominant
design emerges. After the emergence of a dominant design, the subsequent
technological development becomes incremental, cumulative, and standardized
along a certain technological trajectory.
Even though the research fields and terminologies do not entirely
correspond to each other, both research streams suggest that the subsequent
cumulative technological development will be diminished if the majority of theactors do not invest their resources into the same technological problems with thesame technological approach. While the extant literature on technologicaltrajectories and dominant design describes the pattern of technologicaldevelopment in general, it does not articulate how the pattern varies according to
R&D resource dispersion. Following Florida and Kenney (1988, 1990), it can beassumed that the subsequent development of existing technology is hampered if
the sub-markets are highly cultivated by entrepreneurial spin-outs. However, theimpact of spin-outs has not been explored in the literature in relation to patternsof innovation. Therefore, this paper attempts to shed light on how R&D spin-outs
influence patterns of subsequent technological development.
Bhaskarabhatla and Klepper (2014) take a similar approach and explore
a similar field to this paper. Examining the US laser industry from the 1960s tothe beginning of the twenty-first century, they posit a model of industrial
evolution that features the creation, destruction, and fusing of independent submarkets. Since they describe industrial evolution in terms of sub-markets andthey explore lasers, their paper provides significant insights into this research,even though the research focus is different. The unit of analysis herein is much8

smaller than it was in this comparator study. To elaborate, Bhaskarabhatla andKlepper (2014) lump together different types of lasers such as CO 2 , He-Ne, ion,gas, dye, solid state, and laser diodes, and consider them as a single industry.
However, the performance specifications of these lasers are fairly diverse. Manyof the lasers are used in completely different and independent markets and they
are not technically closely related to each other, even though the fundamental
physics of lasers is shared. This means that the potential for them becoming
substitutes for each other is fairly limited, even if the technology is sufficiently
improved. These different types of lasers are utilized in quite diverse applications,such as compact disk players, missile tracking, welding, and inertial confinement
fusion. Further, even if we focus on just one type of laser, for example the laser
diode, which this paper is exploring, this has been used in very different ways—
for optical communications, optical disks, medical uses, sensors, and printers, forexample. Therefore, if we take all lasers as a single industry and each type of laser
as a sub-market, we may overestimate the number of employee start-ups in thesame industry and underestimate the emergence of sub-markets, because thisoperationalization of the industry and the sub-markets is too large to capture thecreation of sub-markets. By taking a closer look at the laser diode and its submarkets, this paper brings into focus spin-outs in sub-markets and subsequent
technological development.

3. Data and ApproachThis study uses three different types of data. Since each type of data has its
own advantages and disadvantages, multiple data types can reduce the impact
and importance of disadvantages, and shed light on the technologicaldevelopments from spin-outs.
The primary data sources for this study are patents and academic
publications. Patents do not necessarily cover all technological developments,
because not all technologies are patentable; moreover, a firm might strategicallydecide to keep its invention(s) secret (Zvi Griliches, 1990, Adam B. Jaffe and9Manuel Trajtenberg, 2002). However, patents have been widely used to examine
technological change in a particular area of technology or a particular industry
because they provide important information such as the names of the inventors,
the name and address of the assignee, a technological description, and the dateof application. This study examines patents granted by the United States Patent
and Trademark Office (USPTO) and the Japan Patent Office to explore how R&D
has diverged over time in the US and Japan. Patents are categorized into
technological classifications with International Patent Classification (IPC) codes.
This study utilizes the IPC codes to identify laser diode technologies; the detailsof this will be discussed in Section 5. Moreover, by examining changes in theassignees and the addresses of the top inventors, this study examines inventors’
mobility.
In addition to patents, academic studies on laser diodes are explored to
examine the technological performance of firms and research institutions. Sincelaser diodes constitute a highly knowledge-intensive and science-based industry,scientists and engineers in both the US and Japan have published numerous
relevant papers in academic journals. These publications permit a thoroughinvestigation into the performance of laser diodes achieved by the researchgroups, because it is necessary for the authors to report laser diode performance,such as wavelength and power consumption, as well as how this performance wasattained, in their publications. While patents describe manufacturing processes
in detail, they do not necessarily report in detail on the laser diode performancethat can be achieved by the invention. This is because a laser diode cannot workwith a single patent. For instance, several technologies need to be combined tomake a laser diode perform laser oscillation. Therefore, a single patent would notnecessarily report well on laser diode performance. Therefore, by examining theauthors, their affiliations, the year of publication, and the laser diodeperformance reported in individual papers published in specific journals from
1960–2010, this study explores the technological developments in the US andJapan. The journals explored for this study are Applied Physics Letters,

10Electronics Letters, Journal of Applied Physics, IEEE Journal of Quantum
Electronics, and Japanese Journal of Applied Physics. 5
In addition to academic publications, patents, and archival records suchas industrial reports, the authors conducted 165 interviews between September
2004 and June 2015 with scientists, engineers, and corporate managers engaged
in laser diode R&D in the US and Japan. 6 Many of the interviewees are top
inventors selected from the patents and journal publications described above.
This study uses the interviews to supplement the academic papers and patents
and to explore the validity of arguments. Further, the interviews allow us to avoid
a double counting problem.
From this longitudinal exploration of technological development in two
different national settings, this study scrutinizes the extent to which subsequent
technological development may fade away when spin-outs from incumbent firms
to start-ups are active; this cannot be examined if one only studies technologicaldevelopment in one such institutional setting. 7 The longitudinal international
comparison of detailed case studies allows a careful investigation of R&D
activities to be carried out. We show that these activities started almost
simultaneously, and that their results, which have become increasingly divergent
in the two different countries, are highly path-dependent and are embedded intheir institutional contexts.

4. Laser Diodes and Technological Developments
This section briefly describes the technological development of laser
diodes, also known as semiconductor lasers. Among the many varieties of lasers

5

All these journals are recognized as top journals in laser diode research; this was

confirmed by the interviews that were conducted by the authors.
6

The list of interviewees is available on request.

7

We define an incumbent firm as a firm that was already in existence when the first laser

diode was invented in 1962.
11

(e.g., CO 2 , YAG, He-Ne, ruby, and laser diode), laser diodes are the biggest selling
lasers in the world. They have various applications such as biomedical uses, lightfor high-speed cameras, material processing, optical sensors, laser pointers,
measurement, optical disks, printers, barcode readers, and optical fiber
communications. The specifications required (such as wavelength and power oflight) vary depending on the application. The two biggest application areas are
optical communication and optical information storage. Long-wavelength laser
diodes (1300nm–1550nm) are used for optical communication appliances. Shortwavelength laser diodes (470nm–850nm) are used for optical information
storage and processing in equipment such as optical disks and laser printers.
Four American institutions—General Electric (GE), International
Business Machines (IBM), the University of Illinois at Urbana Champaign(UIUC), and Massachusetts Institute of Technology (MIT)—simultaneously but
independently developed the first laser diodes in 1962, their potential being
recognized early by physicists. The laser diodes developed in 1962 functioned
efficiently only at minus 196 degrees Celsius (i.e., the temperature of liquid
nitrogen). Unless laser diodes could operate at room temperature, their potential
would be fairly limited. Therefore, after the invention of the first laser diode, theR&D focus was on developing a laser diode that could operate at room
temperature. Electronics and telecommunications enterprises (such as GE, RCA,
Bell, IBM, Xerox, Hitachi, NEC, and Mitsubishi Electric) competed to develop
such a laser diode.
It took eight years for engineers to solve this technological problem. In
1970, a Bell Laboratory research team developed the first laser diode that
operated at room temperature. They called this new laser diode a doubleheterostructure (DH) laser. Although the laser diode developed by Bell was
unstable, its development was a turning point because it stimulated competition
among many firms to develop reliable and stable laser diodes that could operate
at room temperature.
The only application of laser diodes in the early 1970s was in longdistance telecommunication. Scientists and engineers faced two technological12challenges. One was to extend the longevity of laser diodes. It was necessary forfirms to develop laser diodes with greater longevity because it would be very
difficult, if not impossible, to replace the laser diodes that were installed inmarine cables for long-distance telecommunication. Another challenge was theoscillation spectrum of laser diodes. If the oscillation spectrum was multimode,
the light transmission in the optical fiber would be significantly disturbed; thus,
creating single-mode oscillation was critical. The wavelength at which laser
diodes had minimum energy loss in optical fibers shifted from 800nm to 1300nm
and then to 1550nm as a result of advances in optical fiber technology. Therefore,
firms competed to develop laser diodes to achieve these two technological goals
at the most appropriate wavelength.
Figure1

illustrates

thetechnologicaldevelopmentof

opticalcommunications systems and laser diodes, with a plot of the transmission
capacity and optical communication distance reported in the papers published in
the academic journals described in the previous section. Since increasing
communication capacity and distance was considered the most important goal in
optical communication, all the firms and research institutions that targeted theoptical communication market competed in this field. Long-lasting and reliable
laser diodes have been the most important component in every phase of thedevelopment of optical communication systems. Exploring the papers publishedin the academic journals noted in Section 3, Figure 1 indicates the organizationthat achieved a particular technological development in each phase.
Transmission capability has increased steadily since the 1960s. Figure 1 also
reveals that US organizations took the lead in technological development until
the 1970s, and that Japanese organizations began to dominate after the 1980s.

13Wavelength
(InP)
Bell
Tokyo Inst of Tech (Dynamic Single Mode: DSM)NTTNTT (DSM)
KDD
KDD (DSM)Tokyo Inst of Tech
Bell (DSM)

1600
1500

NEC (Tunable)

1400

Tokyo Inst of Tech (QD)
Fujitsu (QD)

Bell (Cleaved
CoupledCavity)NEC (InP)RCA (InP)

1300

Fujitsu (QD)
Univ of Texas at Austin (QD)
UC Santa Barbara (VCSEL)
Sandia National Lab (Quantum Well VCSEL)
Hitachi Hitachi(GaInNAs)

Bell (InP)

1200

MIT (InP)

1100

NEC (QD)Tokyo Inst of Tech
(Vertical Cavity Surface
Emitting Laser: VCSEL)

Bell (DH)1000

Univ of Tokyo (Quantum Dot: QD)(Distributed Feedback: DFB)
Bell
Bell
Caltech900
800

IBM (GaAs)
GE (GaAs)
MIT (GaAs)Varian Associates

700(Double Hetero: DH)
UIUC (GaAsP)

1960

1965

Bell
(Quantum Well)
Caltech/ Hughes Research Lab (DFB)
Bell (DFB)
Bell (DH)Xerox (DFB)
Hitachi (Buried Hetero)

1970

Theoretical Proposal

1975

1980

1985

Pulsed Operation

Tokyo Inst of Tech (VCSEL)

1990

1995

2000

2005

2010

Room Temperature /Continuous Wave Operation

Parenthesis indicates laser diode material or laser diode structure

Figure 1: Technological development of laser diodes for opticalcommunication
Source: Papers on laser diodes published in Applied Physics Letters, Electronics Letters,
Journal of Applied Physics, IEEE Journal of Quantum Electronics, and Japanese
Journal of Applied Physics during the period 1960–2010.

Other applications of laser diodes were expected to emerge in the mid1970s. While many firms competed to develop a laser diode for opticalcommunication, electronics firms such as Philips, RCA, IBM, Xerox, Mitsubishi
Electronics, Toshiba, Sharp, and Sony began to conduct research on video disks
and compact disks using advances in laser technology. As firms began to commit
to laser diode R&D, it became clear that the laser diode would find applicationsin optical data storage, such as video disks, compact disks, and laser disks.
Moreover, the potential market for short-wavelength laser diodes was expected
to be huge: laser diodes would be utilized in various applications, including
barcode readers, laser pointers, and laser printers. Developing laser diodes withshorter wavelengths was critical because more information could be stored with14

a shorter-wavelength laser diode. The wavelengths emitted by a laser diodedepend on the semiconductor materials used in its layers. Changes in materials
required all the technologies associated with manufacturing and reliability to berevised. On the basis of the wavelength data obtained from the papers publishedin the academic journals, Figure 2 illustrates the technological development oflaser diodes for optical data storage and processing reported in the papers
published in the same academic journals as for Figure 1.
Wavelength900
IBM (GaAs)
GE (GaAs)
MIT (GaAs)

800

MIT (GaAlAs)
Rockwell International (GaAlAs)

Bell (GaAs)
Ioffe Institute(GaAs)

Varian Associates(Double Hetero: DH)

Hitachi (Buried Hetero)
UIUC (GaAsP)

700

NEC (AlGaInP)
Toshiba (AlGaInP)
Sony (AlGaInP)
NTT
NTT (InGaAlP)
NECToshiba (AlGaInP)(AlGaInP)

Sharp(AlGaAs)

Omron (InGaAlP)

600

Sanyo (InGaAlP)
NEC (AlGaInP)

Sony (ZnSe)
3M (ZnSe)

500

RCA (GaN)

Nagoya Univ (GaN)
Nichia (GaN)
Nichia (GaN)RCA (GaN)

400

Philips (ZnSe)

1960

1965

1970

1975

1980

1985

Theoretical Proposal/ Crystal Growth
Pulsed Operation
Parenthesis indicates laser diode material or laser diode structure

1990

1995

2000

2005

2010

Room Temperature Continuous Wave Operation

Figure 2: Technological development of laser diodes for information
storage and processing
Source: Papers on laser diodes published in Applied Physics Letters, Electronics Letters,
Journal of Applied Physics, IEEE Journal of Quantum Electronics, and Japanese
Journal of Applied Physics during the period 1960–2010.

As Figure 2 illustrates, US organizations such as IBM, GE, MIT, UIUC, and Bellbegan to make breakthroughs by 1970. While Japanese organizations made no15

significant breakthroughs in this early phase of laser diode development, they
began to do so with the development of shorter-wavelength laser diodes in the
1980s. Figures 1 and 2 demonstrate that US firms and universities achieved
important results in subsequent technological developments until the 1970s.
However, many US firms seem to have disappeared after the beginning of the
1980s.

5. R&D Spin-outs
In the 1960s and 1970s, large enterprises played an important role inlaser diode R&D in both the US and Japan. Many US electronics,
telecommunications, and computing enterprises (e.g., GE, RCA, Bell, IBM, andXerox) competed to develop laser diodes that could operate with longer lifetimes
at room temperature. Japanese electronics firms (e.g., Hitachi, Toshiba,
Mitsubishi Electric, NEC, and Fujitsu) and telecommunications firms (e.g., NTT
and KDDI) also became involved in laser diode research toward the end of the
1960s. Targeting the same telecommunications and information storage andprocessing applications, US and Japanese firms took the same approach to thesame technological challenges and competed until the 1970s.
However, many leading scientists and engineers in this area began toleave the incumbents to launch or join new businesses in the US from the late1960s onwards. One might suppose that they left the incumbents because the US
consumer electronics industry began to decline, as Chandler indicated (Alfred
Dupont Chandler, 1994). The increased cost of raw materials and production
reduced the profitability of diversified businesses of US electronics firms. The
market share of US electronics in the global market dropped from 71 percent in1960 to 27 percent in 1986 (Chandler, 1994). In this context, RCA, GE, and IBM,the leading firms in laser diode R&D, decided to retreat from or exit R&D
competition in laser diodes.
However, it must be noted that the spin-outs had begun before theleading firms began this retreat. The first major spin-out was Laser Diode16

Laboratories, which was founded by RCA engineers in 1967. Another example ofa spin-out from RCA was Epitaxx, which was a fiber-optic detector manufacturing
start-up launched by a scientist spin-out from RCA in 1984. The founder, Greg
Olsen, initiated another start-up, Sensors Unlimited, in 1992, specializing innear-infrared sensing devices. 8 Lytel, founded in 1984, is another example of aspin-out by a scientist who had worked for RCA. In 1998, its founder launchedanother start-up, Alfalight, which designed and manufactured high-power laser
diodes for industrial, defense, and telecommunication applications. 9 RCA had
actively invested in laser diodes and had been a leading firm in this area until
1986 when it was acquired by GE. Therefore, the reason why these spin-out
scientists and engineers left RCA was not that it had begun to retreat from laser
diode R&D competition.
SDL Inc. was one of the first significant commercial suppliers of quality
high-power laser diodes. The company was founded in 1983 by scientists fromXerox (Ralph R. Jacobs and Donald R. Scifres, 2000). 10 A spin-out scientist fromIBM joined a start-up, Optical Information Systems, which was funded by Exxon,
in 1978. 11 Spin-outs were also formed from Bell Laboratories. Emcore, a leading
supplier of compound semiconductor fabrication equipment and manufacturingservices, was founded by a scientist from Bell Laboratories in 1984. Anotherscientist who had worked for Bell Laboratories and Hewlett Packard joined thestart-up General Optronics when it was founded in 1983.

8

Interview with Dr Greg Olsen, founder of Epitaxx and Sensors Unlimited, on January

12, 2015 in Princeton, New Jersey.
9Interview with Dr Dan Botez, a founder of Lytel and Alfalight on August 7, 2009 in

Madison, Wisconsin.
10

SDL was a spin-off from Xerox and Spectra Physics. SDL bought all of its stocks fromXerox and Spectra Physics eight years after its foundation. Since many of the employee
start-ups observed in the laser diode industry are spin-outs, SDL was an exception in its
relationship with its parent firms. Interview with Dr Donald Scifres, a founder of SDL,
on November 18, 2014 in Pala Alto, California.
11Interviews with Dr Peter Zory, a spin-out scientist from IBM, on September 1, 2010

and August 17-18, 2011 in Gainesville, Florida.
17

These are just a few examples of the numerous start-ups in this area. Dr
Peter Zory has stated that “there are countless examples of start-ups in thisindustry in the US.” 12 Obviously, AT&T’s breakup in 1984 increased the numberof spin-out scientists from the Bell laboratories. There are many more
entrepreneurial start-ups in laser diodes than are listed in this paper. The
following table indicates the numbers of projects and firms that gained SBIR
(Small Business Innovation Research) or STTR (Small Business Technology
Transfer) funding for their laser diode research from 1982 to 2010. The first SBIR
award was given in 1983 and the first STTR award in 1995.

Table 1: Number of projects and organizations receiving SBIR/STTR
awards for laser diode research
Projects
SBIR

Firms

STTR

SBIR

STTR

1982–1989

55

0

23

0

1990–1999

334

0

117

0

2000–2010

178

20

73

11

Total

567

20

179

11

Source: Details of projects receiving awards are obtained from the SBIR/STTR website,
https://www.sbir.gov/

In total, 587 projects received awards for laser diode research between
1982 and 2010. The total number of firms receiving awards between 1982 and2010 reached 190. Since some firms gained SBIR/STTR awards sequentially, asimple aggregation of the number of awarded firms in each year can lead to an
12Interviews with Dr Peter Zory, a spin-out scientist from IBM, on September 1, 2010

and August 17-18, 2011 in Gainesville, Florida.
18

overestimation. Therefore, overlapping awarded firms were identified and arecounted as a single entity so that the number of awarded firms is notoverestimated. Moreover, it must be noted that this figure captures only firms
receiving SBIR/STTR awards. Therefore, the number of start-ups in thistechnological field indicated by Table 1 is, in fact, a modest estimation.
While many entrepreneurial spin-outs emerged in the laser diodeindustry in the US, such spin-outs were virtually non-existent in Japan. In Japanneither a corporate scientist nor a university professor would leave his/her parent
organization to launch a start-up; this phenomenon is reflected more generally
by the low labor mobility in Japan. Dr Tetsuhiko Ikegami, a retired director of
Nippon Telephone and Telegraph confirmed that “such spin-outs were nonexistent in Japan.” 13
Table 2 delineates the mobility of top inventors, based on patent datafrom 1960 to 2010. Mobility was calculated using the following steps. First, basedon the International Patent Classification (IPC) codes provided by the Japan
Patent Office, we collected information about all patents obtained from the US
Patent Office up to 2010. 14 The total number of patents was 14,486. Second, we
computed the H-index for individual inventors, based on the number of backward
citations that each patent received. The H-index is used to measure the quality as
well as the quantity of scientific research (J. E. Hirsch, 2005). Then, by looking
at the patent assignee and the inventor’s address, we examined the mobility ofthe top one percent of H-index inventors. The number of inventors in the top one

13

Interviews with Dr Tetsuhiko Ikegami conducted on June 27, 2012. This view isconfirmed by all the Japanese interviewees.
14

The IPC codes provided by the Japan Patent Office for laser diode technology are

Japanese File Index (FI) =H01S5/00, H01S3/094, H01S3/091, H01S3/096, H01S3/103,
H01S3/133, H01S3/18, H01S3/04, H01S3/08, and H01S3/23. The equivalent US Codes(USC) are 372/43$, 372/44$, 372/45$, 372/46$, 372/49$, 372/50$, and 372/75. The
International Patent Classification (IPC) codes are H01S5/$, H01S3/018, and
H01S3/019. $ indicates truncation of the subclasses. This study uses the USC and IPC
codes for identifying patents on laser diodes granted by the USPTO.
19

percent of H-index inventors is 100 in the US and 90 in Japan. One top inventor
transferred from an organization in Japan to one in the US. He is counted in boththe US and the Japanese figures. No other inventors transferred organizations
between the US and Japan. If an inventor changed his/her assignee once (e.g.,
from Bell Laboratories to SDL), a value of 2 is assigned to the inventor’s affiliation.
If an inventor did not change his/her assignee and address at all over this time
period, a value of 1 is assigned.

20

Table 2: Top 1 percent h-index inventors and mobility
Inventors in US Organizations

Inventors in JPN Organizations

Number of Inventors

100

90

Average Number of Assignees for each Inventor

2.47

1.1

Variance

1.63

0.11

Median2

1

Maximum

7

3

25.74

82.83

Incumbent Firm

1482

Start-up

80

University

40Incumbent Firm

13

5Start-up

41

1

10

1

Incumbent Firm

50Start-up

52

0

3

0

3

0

15

0

5

2

Percentage of Inventors with one Assignee
Affiliation Type of Inventors with one Assignee

Number of Transfers of Inventors with more than two Assignees
Transfer from

To

Incumbent Firm
University/ResearchInstitute

Start-up
University/ResearchInstitute
Incumbent Firm
University/Research Start-up
Institute

University/ResearchInstitute

Source: Patents from US Patent Office, Interviews
21

Table 2 clearly shows that the mobility of top inventors was higher in the US thanin Japan. The average number of assignees of the patents held by the inventors
indicates that star Japanese inventors tended not to change their affiliation, whilestar inventors in the US tended to move once, on average. One might suppose thata change in affiliation does not necessarily mean that an inventor transferredfrom one organization to another. In particular, active mergers and acquisitions(M&A) in the US optoelectronics industry might result in an overestimate of themobility of US inventors. This study, therefore, excluded from the estimation
changes in assignee caused by M&As. The split of Bell Communication Researchfrom Bell Laboratories is also excluded from the estimate of changes in assignee.
Changes in affiliation were confirmed through the interviews. The percentage of
inventors who held patents with a single assignee indicates that 82.8 percent of
the star inventors in Japan did not change their affiliation, while 74.3 percent of
the star inventors in the US changed their affiliation at least once. 15 The relatively
low mobility of talented personnel in Japanese organizations observed in thisstudy is consistent with the findings of previous studies. As prior research on theJapanese labor market has shown (Aoki, 1988; Itoh, 1994), it is relatively rare forscientists to transfer from one company to another in the laser diode industry in
15This trend is reasonably consistent with results reported in the previous literature,

which examined academic papers, and their citations, captured by Web of Science andestimated the mobility of star scientists in this industry by examining changes in theiraffiliation. Authors’ affiliations are better documented in academic papers than inventors’
affiliations are in patents. While this means that there is a clear advantage of using papers
to identify scientists’ and engineers’ affiliations, such individuals do not necessarily
publish papers, especially if they work for firms. Therefore, it is important to compare
these two different data sources. The results for academic papers showed that nearly 62
percent of the top US scientists changed their affiliation at least once, and that 90 percentof the top Japanese scientists did not change their affiliation at all. These trends were
corroborated in the interviews with corporate scientists in Japan and the US. Regarding
the data appearing in Web of Science, see Shimizu, Hiroshi. 2007. Competition,
Knowledge Spillover, and Innovation: Technological Development of Semiconductor
Lasers, 1960-1990. London: London School of Economics and Political Science.
22

Japan.
Table 2 delineates mobility not only in terms of frequency, it also provides
a breakdown to provide other useful information. First, it shows the affiliation of
the top inventors with a single assignee. This indicates that in Japan all suchinventors were affiliated with incumbent firms, while inventors in the US wereaffiliated with incumbent firms, start-ups, and university/research institutes.
Secondly, it provides disaggregated information as follows. If an inventor
transferred from Bell Laboratories to RCA, we assign the number 1 to the “fromincumbent firm to incumbent firm” cell. If he/she transferred from RCA to astart-up, we assign the number 1 to the “incumbent firm to start-up” cell. Again,
if he/she transferred from a start-up to MIT, we assign the number 1 to “fromstart-up to university/research institute”. Since the inventors in Japan wererelatively static, the number of transfers is quite low compared to the numbers
for the US. The figures show that in the US the type of organization to which top
inventors transferred most often is clearly a start-up. Both mobility fromincumbent firms to start-ups and mobility among start-ups are the dominanttransfer patterns in the US. This suggests that the high mobility ratio in the US
reflects the fact that inventors transferred from big businesses to start-ups. Bell
Laboratories and Bell Communication Research (known as Bellcore) were thebiggest incumbent firms from which scientists and engineers left andjoined/launched a start-up. Bell Laboratories and Bell Communication Researchaccount for 24 of the top 1% H-index inventors. Twelve out of 24 of theseinventors joined/launched a start-up after leaving Bell.
The difference in spin-outs from parental firms between the US andJapan has been observed in the previous literature (Masahiko Aoki, 1988, Ronald
Philip Dore, 2000). Much of that literature has explored the factors promoting
spin-outs in the US, such as entrepreneurship, growth of venture capital, theknowledge pool and networks (William D. Bygrave and Jeffry A. Timmons, 1992,
Richard Florida and Martin Kenney, 1988, P.A. Gompers, 1994, Paul A. Gompers
et al., 2010, Jerry Kaplan, 1995, Martin Kenney, 2000, AnnaLee Saxenian, 1994).
The rarity of spin-outs in Japan has been explained by the less developed venture23

capital system, the well-developed in-house labor market, the fact that pay isbased on seniority, the assumption of life-time employment, and the poor
conditions for re-employment (Masahiko Aoki and Ronald Philip Dore, 1994,
Hiroyuki Itami, 1994, Hideshi Itoh, 1994). Even though it is still interesting to
explore how this difference emerged over time, the important point for this study
lies in exploring how the existence or absence of spin-outs influences the patternsof subsequent technological development, given the difference in the occurrenceof spin-outs between the US and Japan.

6. Spin-Outs and Vanishing Technological Trajectory
The difference in spin-outs between the US and Japan has had an impact
on the subsequent technological development of laser diodes and the market
positions of the two countries. An industrial report reveals these trends well. The
report was published by the Japan Technology Evaluation Center (JTEC), which
is supported by US government agencies such as NSF, NASA, the Department ofEnergy, the Department of Commerce, and the Department of Defense, andindicates that start-ups played an important role in technological development in
the US by specializing in untapped markets.
Due to the vibrant entrepreneurial industry base that is an
integral part of the U.S. economy and which is apparently
nearly absent in Japan, numerous small companies havespun-off from their larger, parent companies… These small
businesses, which generally specialize in the manufactureof photonic components, are rarely positioned to compete
head-to-head with the larger, systems-oriented companies;
instead, they tend to specialize by filling narrow niches. As
companies become established, the niches expand with the
manufacture of additional specialized, unique devices
produced to fill the needs of particular subsets of24

customers. 16
Figures 1 and 2 illustrate that US organizations such as IBM, GE, RCA,
MIT, UIUC, and Bell Laboratories made breakthroughs until the beginning of the
1980s. However, US start-ups emerged at the end of the 1970s and targetedcustomized and untapped sub-markets such as those for short-distancecommunications, sensors, and optical pumping, by utilizing laser diodetechnology. Sub-markets appeal to different users, and they require different
knowledge and methods of production (Buenstorf & Klepper, 2010). The submarkets constituted areas in which new entrants could launch their own
businesses by utilizing the existing laser diode technology. These markets tended
to be customized and segmented for two reasons. Start-ups did not usually havehigh-throughput manufacturing facilities in-house, and they expected untappedmarkets or customized markets to be more profitable if the firm was successful.
The risk capital supplied by venture capitalists provided a great incentive to target
such markets. The size of the individual markets was usually smaller than that of
the long-distance telecommunications and information storage markets. Fewer
breakthroughs by US firms appear in the subsequent pattern of technologicaldevelopment, not because US organizations were losing their R&D capabilities,
but because R&D investment in laser diode technology was scattered anddispersed in the various sub-markets in the US as a result of entrepreneurial spinouts. In other words, from the 1980s onwards, US scientists shifted their R&D
focus from being “on trajectory” (Figures 1 and 2) to being “off trajectory.”
Major enterprises such as Hitachi, Mitsubishi Electric, NEC, Fujitsu,
Toshiba, Sharp, Panasonic, and Sony played a dominant role in laser diode R&D
in Japan. Vertically integrated large enterprises tended to target mass markets
because the high fixed costs incurred in building high-throughput facilities

16

Forrest, Stephen R.; Larry A. Coldren; Sadik C. Esener; Donald B. Keck;Fredrick J. Leonberger; Gary R. Saxonhouse and Paul W. Whumate. 1996.
"Jtec Panel on Optoelectronics in Japan and the United States Final Report," Baltimore,
Maryland: Japanese Technology Evaluation Center/ International Technology ResearchInstitute,p.xvii25

demanded a high volume of sales (Chandler, 1994). Greg Olsen, who, as
mentioned above, left RCA in 1984 and launched a start-up to develop
photodetectors (one application of the laser diode technology), wrote: “To RCA
the photodetector was no big deal–just a $1 to $2 million market,” but “To me,
however, a $2 million market didn’t seem small at all” (Olsen, 2009, p.59). 17
Large enterprises developed laser diodes for the growing mass markets such as
those for optical communications, compact discs, DVDs, scanners, and laser
printers. The R&D focus of Japanese scientists remained on the subsequent
technological development throughout the period. For instance, the Japanesefirms competed to develop a shorter-wavelength laser that could handle highvolume information storage, and captured a significant market share in this
sector, as indicated in the JTEC report (Forrest et al., 1996). Their R&D efforts
were concentrated mainly on developing laser diodes for the long-distancetelecommunications and information storage markets. A certain technologicaltrajectory emerged when several firms developed technology for the same goals,
shared a common definition of the relevant problems, and tackled these problems
with the same approach. Since many vertically integrated large firms competed
for the same mass markets, the cumulative effects of incremental innovations inthe subsequent technological development eventually emerged in the 1960s andthe 1970s, as Figures 1 and 2 demonstrate.
Figure 3 illustrates the cumulative number of patents taken out fortechnology related to the basic structure of laser diodes, and their application
years. 18 It shows that US organizations began to apply for patents for their R&D

17

This point was confirmed in the interview with Dr Greg Olsen conducted on January

12, 2015 in Princeton, New Jersey.
18

Basic laser diode technology is identified by the International Patent Classification

number H01S5. H01S5 is given to technology specifically related to laser diodes such as
structure, processes, apparatus for excitation, and arrangements for controlling the laser
output parameters. If H01S5 was assigned as the first IPC for a patent, we regarded it as
an invention related to the basic laser diode structure. H01S5 was introduced in Version
7 of the IPC, which was adopted in 2006. Therefore, H01S5 was not assigned to patents
taken out before Version 7 was introduced. Accordingly, this paper uses the patent26

in the early 1960s. The cumulative number of patents taken out by US
organizations outnumbered that for Japanese organizations until 1984. However,Japanese organizations began catching up from the 1970s onwards, and thecumulative number was greater from 1985 onwards. Figure 3 indicates that thepatterns of subsequent technological development of the basic laser diodediverged between Japan and US from the middle of the 1980s. It is evident thatJapanese firms accumulated their technology on the basic structure from the1970s onwards, while the US firms moved away from the subsequent
technological development from the middle of the 1980s. The divergence frombasic laser diode structure R&D is one of the signs that the US inventors shifted
their R&D focus to other fields in markets that start-ups tried to tap. One of theareas that start-ups targeted was high-power lasers, which was mentioned in theprevious section. High-power lasers have been used in numerous different submarkets such as satellite communication, measurements, and processing, each ofwhich is a highly customized and segmented market, as indicated in the JTEC
report mentioned above. This created “space” for subsequent technologicaldevelopments for Japanese firms, which allowed them to catch up with andovertake the US firms despite the early leadership of US firms. Note, however,that these figures do not necessarily show that the US scientists were losing theirtechnological capabilities. Rather, they were tapping the sub-markets by using
laser diode technology laterally.

database provided by Thomson Innovation, which updated the old IPCs with the current
IPCs.
27

2500

2000

1500

1000

500

0

JPN Total Basic

US Total Basic

Figure 3: Cumulative number of patents in basic laser diodetechnologies
Source: Patents from US. Patent Office

How do different spin-out patterns influence the subsequentdevelopment of a technology? Let us suppose that many of the scientists engaged
in R&D are leaving their parent firms to use their accumulated technologicalknowledge laterally and to launch start-ups that are targeting an untapped submarket. If the supply of skilled scientists is ample, this trend does not have asignificant impact on the subsequent technological development, since theincumbent firms can immediately hire new scientists to fill the vacancies createdby the spin-outs. However, the pool of skilled scientists is not boosted instantly,
since skilled scientists have a high level of knowledge: formal graduate-level
education in physics, and professional R&D experience at a laboratory, areusually necessary before a scientist would be deemed as skilled in this domain.
Therefore, entrepreneurial spin-outs tend to cause a slowdown in subsequent
technological development, relative to the development when there are no28

entrepreneurial spin-outs.
Star scientists usually contribute more to their parent firms’ R&D output.
Moreover, it is difficult to substitute star scientists with other scientists.
Therefore, if star scientists decide to leave their parent firms for entrepreneurial
spin-outs, this has a substantial impact on the subsequent technologicaldevelopment. In fact, in many cases, it was the star scientists who spun out andlaunched start-ups in the laser diode industry, according to the interviews withcorporate scientists. Since the development of technology is cumulative, theearlier the star scientists’ entrepreneurial spin-outs emerge, the more substantial
is their impact on subsequent technological development. Consequently, as
corporate scientists left their parent firms and launched start-ups to target submarkets, the subsequent development of the existing technology vanished.
Suppose that the typical pattern of technological development takes theshape of an S-curve (Richard N. Foster, 1986). As the previous literature discusses,
the S-curve does not necessarily fully account for the complexity of technologicalchange (Clayton M. Christensen, 1992a, b). The thrust of the argument is notwhether technological development is an S-shaped function, but how spin-outs
influence the technological trajectory.
If a firm spins off before time t in Figure 4, it faces huge technologicaluncertainty. This actually happened in the laser diode industry. Utilizing Gallium
Arsenide (GaAs) manufacturing technology, engineers spun off from RCA andlaunched Laser Diode Laboratories, Inc. in 1967. However, since the GaAs
manufacturing technology was immature, the operating life of the laser diode wasshort and it was unreliable. Large enterprises such as Bell Laboratories, RCA,
IBM, NEC, Hitachi, and Mitsubishi were competing to increase longevity and to
improve laser reliability until the middle of the 1970s (Hiroshi Shimizu, 2010).
Therefore, Laser Diode Laboratories, Inc. could not develop its business in theindustrial market successfully because of its immature technology.
Even though it would be rational for engineers or scientists who plan tospin-out from their incumbents, to postpone until technological development has
29matured, the spin-off can occur earlier provided that the expected sizes andprofitability of individual sub-markets are different and the total number of submarkets is limited. In other words, since scientists have to rush to choose apreferred sub-market, the timing of the spin-out can be brought forward from t
to t’’ if limited but promising-looking sub-markets exist. The existence of factors
promoting spin-outs, such as venture capital and a flexible labor market, promotecompetition. The fiercer the competition for filling untapped sub-markets, theearlier the timing of the spin-out.
If many of the scientists engaged in R&D disengage from trajectory
oriented activities to utilize its technology laterally and to launch a start-up, thetechnological trajectory will eventually be under-developed, as depicted for
Scenario B in Figure 4. Spin-outs, which utilize the existing technology laterally
and shift R&D for individual sub-markets, can make the technological trajectory
fade out much earlier and at a lower level than would be seen if no entrepreneurial
spin-out occurred, as depicted for Scenario A. The areas in which technologicaldevelopment occurs are shifted from “on trajectory” to “off trajectory” in theindividual sub-markets.
If many scientists remain engaged in R&D on the current technologicaltrajectory, the aggregate amount of R&D investment in the area gradually
increases. The increase in R&D investment in the existing technological trajectoryenhances the potential for making technological breakthroughs on the one hand,
but lowers the profitability of firms on the other. If many scientists remain
engaged in R&D even after the technology is well developed and the productivityof technological development is diminishing, as depicted by t’ in Figure 4, theprofitability of the firms decreases. This happened to laser diode development inJapan.

30

Figure 4: Spin-outs and subsequent technological development

The existence of sub-markets and institutional conditions thatencouraged spin-outs had a bench-clearing effect for existing technologicaldevelopment. Entrepreneurial spin-outs—which laterally utilize the existing
technology and shift R&D toward individual sub-markets—can cause subsequent
technological development to fade out much earlier than usual and make itremain at a lower level than it would have achieved if no entrepreneurial spin-out
had occurred (as in Japan). If we had explored the technological development
only in one institutional setting, the development pattern that we observed would
have been either Scenario A or Scenario B. In this case, we would not have known
theextent towhich thesubsequent

technological development

wasunderdeveloped or over-developed. In other words, if, for instance, we had
explored the technological development only in the US, we might haveunderestimated the possibility for the subsequent technological developmentthat could have been achieved in a different institutional setting.

7. Conclusions
This study has demonstrated how entrepreneurial spin-outs influencesubsequent technological development, by exploring laser diodes in the US and31

Japan. Prior studies have indicated that progress on the technological trajectoryis likely to retain some cumulative features: the cumulative effect of numerous
small improvements gradually increases productivity (Giovanni Dosi, 1982,
Thomas S. Kuhn, 1962, Nathan Rosenberg, 1979). This study revealed that the
cumulative features of technological development gradually disappeared due tothe surge in entrepreneurial spin-outs in the industry in the US. Subsequent
technological development plays an important role when a technology is still in a
nascent stage. Thus, R&D competition in cumulative technological development
contributes to technological development until the technology fully matures.
According to the technological trajectory perspective, entrepreneurial spin-outs
could hinder technological development when the technology is at a nascent stage,
because the cumulative effects of incremental innovations on the technologicaltrajectory could disappear if the R&D personnel are thinned out to target different
sub-markets.
Of course, severe price competition would result if firms were to compete
in the same subsequent technological development, even when technologicaldevelopment is fully saturated. This occurred in the laser diode industry in Japan,
when the firms targeted the same mass markets and competed in the same
markets, and this ultimately boosted the cumulative technological developmentof laser diodes. Therefore, it is important for firms to utilize technology laterally
in new markets after technological development has fully matured.
The findings of this study explain why Japanese firms were good
imitators and achieved great process innovations, while the US firms weresuccessful in terms of

product innovations, but were poor imitators (Nathan

Rosenberg, 1988). One of the general explanations given for this observation
involves entrepreneurship and cultural differences. However, the findings of thisstudy suggest that factors such as the labor mobility of corporate scientists andre-employment conditions play an important role in establishing or hampering
technological trajectories for the promotion of subsequent cumulativetechnological development.
Since the findings of this study are based on a case study of the laser diode32

industry in the US and Japan, we must be cautious about asserting
generalizations. Moreover, other factors not explored herein could explain theobserved patterns. A classic explanation might be that the Japanese firms tended
to have advantages in incremental process innovations, while the US firms tended
to allocate more resources to radical and revolutionary product innovations. One
could attribute this difference to the cultural differences between the US andJapan. This explanation assumes that the US culture prefers revolutionary
innovation, while the Japanese culture prefers cumulative innovation. The ideal
way to counter the confounding effects would be to give another example for thesame two countries in which the case is reversed. There were industries in which
US firms were the industrial leaders on the basis of cumulative innovations (suchas the gas turbine, automobile, and aerospace industries) and in which spin-outs
for sub-market exploitation were relatively limited. However, it is quite unlikelythat several early spin-outs would be observed in Japan and not in the US,
because active entrepreneurial spin-outs were virtually absent in the knowledgeintensive industries in Japan. Since this study focuses on a longitudinal scrutinyof the laser diode industry and a discussion of the different patterns of innovation
between the US and Japan, and because of space limitations, we have notexplored other examples. However, detailed and longitudinal case studies infuture research could unravel the mechanisms in which the different patterns
emerge, and provide useful comparisons for a better understanding of thepatterns of subsequent technological development.

33

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ACKNOWLEDGEMENTS:
This study was funded by Japan Society for the Promotion of Science (15K03649).

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