MMRCDISCUSSION PAPER SERIES
No. 424

Killing Innovation Softly:
Japanese Software Challenges
Robert E. Cole
Research Associate, ITEC, Doshisha University
Emeritus Professor, UC Berkeley, Haas School of Business
March 2013
Revised June 2013

東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
Discussion papers are in draft form distributed for purposes of comment and discussion. Contact the author for
permission when reproducing or citing any part of this paper. Copyright is held by the author.
http://merc.e.u-tokyo.ac.jp/mmrc/dp/index.html

1

Killing Innovation Softly:
Japanese Software Challenges*
Robert E. Cole
Research Associate, ITEC, Doshisha University
Emeritus Professor, UC Berkeley, Haas School of Business
Revised June 1, 2013
*The author gratefully acknowledges the funding of this research by grants from: the Institute forTechnology, Enterprise and Competitiveness, Doshisha University, Kyoto, Japan; the California
Management Review; and the Garwood Center for Corporate Innovation, Institute for Business
Innovation, at the Haas School of Business, UC Berkeley. I am indebted to the feedback , help, andadvice I received from the following individuals: Takahiro Fujimoto, Shinya Fushimi , Kenji Hiranabe,David Hodges, Toshiro Kita, David Levine, James Mok, David Mowery, Yoshifumi Nakata, Katsutoshi
Shintani, Shinji Takai, Tetsuo Tamai, Hirofumi Tatsumoto and Masato Takeichi.

2This paper aims at solving a puzzle. How do we explain why the world’s third largest
economy, Japan, second only to the U.S. in software sales, nevertheless, lags so significantly inother key measures of software performance. One can measure these lags in its minisculesoftware and information services exports, large software and information services imports,
absence of path breaking software firms, and absence of a large independent software sector. 1
This paper focuses primarily but not exclusively on the role of software in the IT sector. This
sector is seen commonly as encompassing the following industries: computer hardware,
software, electronics, semiconductors, internet, telecom equipment, e‐commerce andcomputer services.
My analysis will document Japan’s software deficits relative to the U.S. and explore
competing explanations for them. Specifically, I evaluate recent research on U.S. and Japanese
IT patents regarding software innovation performance in the IT sector and the consequences ofJapan’s lagging software innovation capabilities. This analysis involves an examination ofembedded, enterprise, and application software. I explore the role of path dependency as afactor limiting Japanese firm transitions from hardware centric to a more software focused
approach. This leads into an examination of the structure of the American and Japanesesoftware industries along with their differential propensity to customize and what that tells us
about management priorities. These priorities impact the status and reputation of software jobs
in firms and society at large and their consequences for attracting the best and the brightest to
software careers.
In July 2010, IBM quietly restructured its Systems and Technology Group (its hardware group)
to report to its software Group‐an extraordinary development seen historically. It was IBM’s
hardware group which initially gave birth to its software group. Software as IBM has now comefull circle. It is as if the grown up child is now controlling its aging parent. IBM’s announcementof this restructuring explained that IBM wanted to bring to market more tightly integrated
packages of hardware/software solutions.2
These developments at IBM capture the broader movement of hardware companies
transforming themselves into software companies or hybrids. Many Japanese observers see thisas a uniquely American phenomenon based on American weakness in manufacturing; American
managers and workers, they believe, don’t have that “monozukuri gene.” It is commonly
believed Japanese among manufacturing personnel that monozukuri is about Japan’s uniqueability and practices for building high quality continually improving precision hardware products.
In this world view, software is simply a facilitator of hardware capability, an assistant and acontroller, not in itself a driver of customer value. Prof. Takahiro Fujimoto has been a major
promoter of monozukuri consciousness from the late 1990s. He adopts an information
processing definition of monozukuri, a short version of which is: “A firm’s products and3processes are artifacts that have been designed. Firm’s manufacturing (monozukuri) capability is
its distinctive ability to effectively and efficiently transform the flow of design information fromand to customers.” This is accomplished through achieving a tight relationship between
organizational capabilities and product architecture.3 There is nothing in that definition which
prohibits seeing software as a designed artifact nor as a driver of monozukuri capability. Yet, thepromoters of monozukuri almost never frame the matter in this fashion. How did monozukuri
get to be seen as primarily a hardware capability?
It is first of all an old concept arising from efforts to capture the virtues of Japanese
craftsmanship, associated with material processing and/or mechanical production activities(typically carried out by smaller firms) in which Japan has excelled. Naturally, software did not
figure into this initial formulation. Secondly, we can learn how the term both evolved and cameback into fashion from observing how U.S. management responded to a major crisis. Neil
Fligstein, in analyzing the response of U.S. business leaders to the crisis of the great depression,notes that initially managers were confused, their old formulas were no longer producing the
expected results. As a response, managers turned to an intensified use of tools in their existingrepertoire. When hit with a threat the magnitude and character of which is not well understand,managers initially will often fall back on familiar solutions.4 What Fligstein found in the case of
the U.S. was that when this approach failed to yield positive results, eventually some firms
took the lead in developing new capabilities and products rather than relying on executing
better its past strong capabilities and skillsets. It was this that gradually led these firms to arenewed prosperity. As Japanese managers began to stumble in IT manufacturing (e.g., loss of
DRAM market to Koreans in 1990s), one can imagine them initially reasoning:
We are having problems because we are not executing very well our standard practices
and approaches that produced success in the past. We need to better execute what are
our core capabilities.
Monozukuri is a concept, and indeed has become a management ideology, whichcharacterizes Japanese manufacturing firm’s core capabilities as they evolved in postwar Japan.
In the late 1990s, Japanese IT firms were faced with a hollowing out of manufacturing
capabilities, loss of key global markets and challenged by the rise of modular production andAsian competitors. It is in this environment that the monozukuri concept was resuscitated andelevated into a national strategy. Various government agencies began promoting monozukuri as
the path to renewed corporate health and Japanese prosperity.
Not having yielded the desired results to date, some are calling for reevaluating monozukuri’svalue. In 2009, Dr. Hidenori Kimura published a book entitled, “Monozukuri Defeat”. He argued
that Japanese firms have excessive confidence in their manufacturing ability (their monozukuri)
and that their belief in the superiority of the quality of their manufactured goods was no4longer justified. In the digital age, the quality of manufactured goods doesn’t differ among firms
as it once did. He argued that what really counts today are software, the ability to make quick
strategic decisions and to go global. It is an argument that stresses conditions have changed andnew capabilities are required. Seen in this light, organizational memory which prioritizes
monozukuri concepts, practices and successes are no longer assets but a barrier to innovationand competitive success.5
The shift to a heightened role for software symbolized by IBM’s restructuring may be
happening early in the U.S. partly because of its competitive weakness in IT manufacturing as
some Japanese say but regardless of the causes, there is reason to believe that it will happen
everywhere. This is because hardware is increasingly a commodity product with low margins, as
so many Japanese manufacturing firms are painfully aware. The reason for the diminishingvalue assigned to hardware, is that more and more of the value in high tech and other products
and services is contributed by software.
Software contributes directly to competitive advantage through its use of an everexpanding array of value‐added applications.6 Software provides more and more functionality
for hardware (through embedded software) and it enables “smart” enterprises (enterprisesoftware). It does this through its expanding role in product design, enabling data aggregation,
integration and analysis, providing data on detailed customer behavior and needs and,facilitating delivery of services. The locus where truly innovative high tech products are being
developed is at the nexus of hardware, software, and services.
At its best, embedded and application software provide a stream of services throughout thelife cycle of manufactured products. The traditional approach to product development focuseson the value of the core tangible product at the time it is delivered to the customer. When you
bought a car in the past, you got access to all its capabilities at once. But products, using
software, can release expanded value over the life cycle of the product. This can ultimately bemuch more important for total customer value. That is what has happened to the mobile phone.
It is starting to happen to TVersus, and to automobiles; this list will only grow.
Software’s role in delivering services and software as a service (SaaS) has seen hugeincreases in recent years. IBM’s service revenues have grown from less than 30 percent ofrevenues to more than 50 percent from 1998 to 2008. Sun Microsystems, Hewlett‐Packard,
Cisco, and even Dell have all greatly increased their delivery of services, as they build on andmodify their hardware past.7 A Dell spokesmen reported that its software increasingly makes its
storage technologies stand apart from competitors. He stated in early 2012 “hardware isbecoming very commoditized. In [Dell] Storage we have more than quadrupled the size of ourengineering team since our recent [software] acquisitions, so now 90% of our engineers aresoftware developers.” 85Japanese IT Firms’ Decline
It is hard to even imagine that just some twenty odd years ago, Americans were being
warned that Japan was positioned to become the next software superpower, following upon its
success in manufacturing. Small fragmented Silicon Valley firms were seen as no match for thecommercialization capabilities and financial resources of large integrated Japanese hi tech
manufacturers. Moreover, the factory approach to software development, favored by large
Japanese firms, was seen as superior to the craft approach dominant in the U.S.9
Notwithstanding these predictions, the last two decades has not been kind to Japanese IT
firms. They have been steadily losing global share in major products. Richard Katz has
documented these developments as follows: Japan’s electronic products output produced inJapan, typically containing embedded software, declined 50% from 2000 to 2011. Electronic
exports are down 37% in that same period. While the global image of Japanese electronics has
been on consumer products, they are increasingly engaged in intermediate goods transactions
producing parts and components for othe manufacturers. Consumer electronic components
and devices accounted for 45% of production in 2000 and rose to 56% by 2011; in the same
period, industrial components rose from 8 to 12%.10 The problem is that the bulk of profits forthese products typically go to sellers of final products, the Apples and Samsung’s of the world,
while parts and components suppliers, excepting those with strong IP, are most likely to be left
with the crumbs. The combined market capitalization of Japanese electronics manufacturers
was more than halved by the end of Dec. 2011 from its year 2000 level. Nor is this decline
simply a reflection of the overall decline in market capitalization during this period; the firstsection (large firms) of the Tokyo Stock Exchange declined just 16% over the same period.11
The IT sector is more than electronics. IT products are included in the Information andCommunication Technology (ICT) sector. Services accounted for 5% of total ICT value in 1996 but
they rose to 22% of the total by 2009. Most of the value of ICT services is contributed bysoftware. Yet, services accounted for a little over 2% of Japan’s ICT exports in 1996, and fell to alittle less than 2% by 2009.12 Clearly, Japan is lagging in the hardware to services transition anda large part of the weakness can be attributed to software.
Finally, with respect to creating and employing state of the art enterprise software to create
smart enterprises ready to take quick advantage of strategic opportunities, Japan is a “third
mover” with its firms belatedly taking many of its cues from American firms. We see this in
their slow and limited adoption of enterprise software (ERP) and even when adopted, fewer
modules are implemented. In particular, in keeping with their commitment to maintaining theirperceived unique monozukuri capabilities, the manufacturing module is seldom adopted.13 The
manufacturing module typically consists of: engineering, bill of materials, work orders,scheduling, capacity, workflow management, quality control, manufacturing process,6

manufacturing projects, manufacturing flow, and product life cycle management. Enterprisesoftware systems integrate internal and external management of information across an entire
organization, thereby enabling the firm not only to be managed more efficiently but alsoenabling information to be better used for strategic purposes. Analysis of comparative survey
data from 2003 suggests that American firms are much more likely to use IT investment for
strategic benefits (e.g., winning new customers, increase in sales, development of high added
value of products/services) than Japanese firms which are more focused on extracting its
operational benefits (e.g., cost reduction).14
Another area where Japanese risk averseness is apparent, is in corporate adoption of agile
development methods. These methods are attractive because of their potential to provide
continuous customer/client collaboration and feedback throughout the software development
process and thereby deliver products more closely attuned to customer needs. They arecharacterized by an iterative approach with frequent “builds” which take changing requirements
into account from the start and potentially enables higher quality. Forrester Research, based on
surveys of U.S. developers in large and small organizations, reports that some 45% of U.S.
software developers in 2010 could be classified as using agile development methods, broadly
defined. The most frequently used aspects of agile were: short iterations, constant feedback,daily scrum meeting (stand up meetings which the team uses to share progress and makedecisions), product owner, and continuous integration and build. Kenji Hiranabe, a leader of
the agile movement in Japan, estimates that the acceptance rate is less than 20% among
Japanese developers.15 Particular concerns include a fear that time to market will increase andthat quality will deteriorate. Promoters like the government agency, IPA, find it useful to use theeuphemism “non‐waterfall methods of software development” in order not to scare off
possible adopters. Neither of these lags bode well for Japan taking a leadership role in a
dynamic area where electronics/software/services are drivers of competitive success.
Japanese firms in IT and software services have almost no presence in global markets.16
Even where Japanese IT firms have strong sales globally, their profit margins, already low
compared to competitors, have fallen even lower in recent years, many now in the 3‐4%
range.17 That means that less funds are available to them for future capital investment than isavailable to many of their foreign competitors with higher margins. To locate the internalsources of these problems, I turn to an examination of software innovation. There are bothexogenous and endogenous sources of Japan’s growing competitive problems in IT software.
The focus in this article is on those endogenous sources arising from an assessment of Japan’s
software innovation capabilities.

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U.S and Japanese IT Firms’ Software Innovation
One can grasp the status of Japanese IT firms by examining the recent results from Arora,
Branstetter and Drev’s recent study of US and Japanese IT patents granted by the U.S. Patent
Office (USPTO) from 1983‐2004.18 The authors examined U.S. and Japanese embedded,
application, system and enterprise application software patents in the high tech sector. They
found first that IT Innovation has become increasingly software intensive. Researchers firstlooked at hardware patents in the high tech sector from 1990‐2003. They found that these
hardware patents increasingly cite software patents. This is true in patents emanating from all
countries including Japan. How big a change has there been? For the total dataset, an IT patent
granted in 2003 was almost 3.2 times more likely to cite a software patent than one granted in
1990. This represents a remarkable shift over just 13 years suggesting the rapidly growing
importance of software.19
Even though this trend is apparent in both Japanese and U.S. patents, the researchers
found that Japanese IT hardware patents were systematically less likely to cite software patents
over time than non‐Japanese firms. Consistent with this finding, they found that Japanese firms
file fewer software patents than their U.S. counterparts and that the difference has grownsteadily since the late 1980s and especially after the mid‐90s. Their findings indicate first that IT
inventions have become much more software intensive over time. Second, U.S. firms haveincorporated more software inventions into their products and services than have their
Japanese counterparts. Even more telling, they find that U.S. firms have improved theirinnovation performance vis a vis Japanese firms in just those IT segments which are mostsoftware intensive (computers and peripherals). The researchers also find that within IT,
Japanese firms are now disproportionately located in less software intensive sectors.20
Innovation performance was measured in a number of different ways , including patentproductivity per dollar invested in R&D. Using these and other measures, they found that thesoftware innovation performance of Japanese IT firms increasingly lags behind that of its U.S.
counterparts, particularly in IT sectors which are more software intensive. They conclude that
their findings are consistent with, and provide a new explanation for the “precipitous global
decline” of Japan’s IT industry in the 1990s.21
These findings are consistent with the data noted earlier that Japanese manufacturers focus
more and more on the components business and are moving away from markets which
demand total solutions and therefore, are likely to be more software intensive. This criticalparts strategy represents a gamble that Japanese IT firms can dominate the global market for
their hardware centric parts, thereby commanding a premium price. Yet, while some willundoubtedly succeed, most will likely end up as commodity suppliers in fierce competition withother Asian producers.

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Sources of the Innovation Gap
The research reported above is, in itself, important. Moreover, it leads to a second
question which is the primary focus of our analysis. Arora and colleagues discuss two possible
sources for Japan’s shortfall in software innovation. First they point to a constrained supply ofsoftware knowledge and skills (human capital) in Japan and second to the slowness of JapaneseIT firms to recognize the transformational nature of software. They set up a test todifferentiate between the two. They reasoned that if Japanese firms are constrained by theirsoftware human resources at home, then they will have the incentive to tap into foreignknowledge and expertise by setting up software intensive R&D facilities abroad (e.g., Silicon
Valley) to further software innovation. The researchers further reasoned if the Japanese
deficit in innovation performance was because the Japanese managers downplay theimportance of software, then the research output of their overseas subsidiaries, like that of
their domestic operations, ought also to be less software intensive than their Americancounterparts. Using the same dataset, they find support for their first hypothesis that Japanesefirms, constrained domestically by their software human resources, further their softwareinnovation in their U.S. subsidiaries; to wit, the share of software patents of total patents
invented and patented in the U.S. by U.S. based Japanese firms is much higher than the share ofsoftware patents of total patents invented in Japan and patented in the U.S. by Japanese parent
firms.
There are, however, problems with this test. The authors assume homogeneity in thepatents Japanese file in the U.S. and Japan by relying on filings with the USPTO to measure both
U.S. and Japanese software inventive activities.22 Yet, it is more expensive to file in foreign
jurisdictions, reflecting the costs of translation, retaining offshore legal talent, etc. Moreover,while standards for review, appeal of reviews, and issue of patents have formally been
harmonized across high‐income economies, differences in all of these persist, further raising
the costs and uncertainty of offshore patent prosecution. Finally, software innovations, unlikein the United States, are not by themselves patentable in Japan. The Japan Patent Office statesthat information processing software is concretely realized by using hardware resources andwhen the software and hardware resources are working together so as to realize arithmetic
operations or manipulations of information. Therefore, software can be patentable only if theinformation processing by the software is concretely realized working in concert with the
hardware. The original specification needs to fully disclose the hardware arrangement of theapparatus to which the software is applied, the specific functions of the hardware, and the9relationship between software and the hardware.23 These requirements further distinguishJapanese corporate approaches to patenting software in the U.S. from their practices in Japan.
For all of these reasons, those conducting empirical analyses of patent data rarely assume
that "home‐base" and "offshore" patent applications are homogeneous." In line with thisthinking, it would be wise to control narrowly for product characteristics. There appears to be a“home country” bias in that U.S. inventors have a home court advantage so that they file more
patents in the USPTO compared to foreign applicants for a given set of inventions.24 The
authors do not consider whether there are alternative explanations for their findings. One
might expect, for example, that Japanese firms likely select the IT patents they choose todevelop in their U.S. subsidiaries and file, from among those with the most promisingexport/sales potential to the U.S and other global markets. This, not implausible scenario, may
lead to the outcomes they found (Japan’s innovation shortfall), an outcome which may havevery little to do with software human resource deficits in Japan.
There are still other problems with the software human resource deficit argument. In
building their case, Arora and colleagues documented Japanese software innovation resource
constraint deficits vis á vis the U.S. in terms of the differences between Japan and the U.S. inannual inflow of domestic IT graduates and immigrant inflows. They found that by 2001 theannual inflows of graduating IT professionals and H‐1B visa entrants (including some hardware
engineers) into U.S. firms had grown to almost 3 times those in the comparable categories inJapan. To be specific, the inflow in the U.S. was running about 165,000 a year versus roughly
58,000 in Japan. They also point out that if one took into further account offshoring, theresource gap between the two countries would be even larger. These differences, they believe,go a long ways to explaining Japan’s software innovation deficit vis á vis the U.S.
If one assumes that that human resource constraints are important factors limiting Japanese
IT software innovation and that Japanese executives were aware of IT software innovation’s
importance for subsequent competitive performance, economic theory would lead us to expectthat they would address these resource constraints over time. Indeed, if past Japanesereactions to important factors contributing to deficits in competitive performance were any
guide, we would see firms and government agencies like the Ministry of Economy, Trade andIndustry (METI) and the Ministry of Education, Culture, Sports, Science and Technology (MEXT)
making strong efforts to eliminate these deficits. As we shall see, their efforts have been lessthan impressive.
Possible avenues to closing the gap would be for firms to raise wages of Japanese software
professionals relative to other technical specialties, and rapidly expand offshoring to match U.S.
firms’ exploitation of this resource. Another option would be for firms to step up their own

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training activities. Such efforts would be especially expected in Japan where large firms have astrong history of developing their own core technologies and doing in‐house training.
There has been a rapid increase in offshoring by the Japanese since 2001. Kojima andKojima estimate their offshoring in 2004‐2005 was roughly 1‐2 billon dollars or roughly 6% thatof the United States.25 Official government estimates suggest that they doubled the value of
their offshore investment from the period 2003‐2004 to 2010.26 This would still leave themwell short of U.S. levels of offshoring, even if U.S. offshoring levels had not grown over thisperiod which they surely did. Moreover, whatever success Japanese firms had in increasing
their offshoring by 2010, they were still left with the huge gap in home base software humanresources.
I used the stock of national software personnel, versus the annual inflows of IT university
software and hardware related graduates plus H‐1B visa entrants used by Arora et. al, toestimate this gap. Labor stock is arguably a better indicator of software resource capabilities,
than labor inflow from domestic university graduates and H‐1B visa since in both Japan and the
U.S., IT positions are often filled by those without IT degrees.27 Unfortunately I was unable tofind labor stock data for 2001. Examining labor stock totals for 2010, however, putting aside
offshoring deficits, the gap in human resource capabilities between the two IT sectors using thisdifferent measure remains relatively unchanged. The U.S continues to record roughly 3 times
more software professionals than Japan.28 See Table 3 below.
I found no evidence that software salaries rose sharply relative to other technicaloccupations or that universities rapidly expanded their capabilities to produce much larger
numbers of high quality software engineers. Given the failure of the Japanese to diminish thelarge gap in domestic software resources relative to the U.S. suggests first that perhaps humanresource constraints were not in themselves critical to the Japanese IT sectors’ deficit insoftware innovation. .
Second, these findings are consistent with the alternate hypothesis rejected by Arora andcolleagues. To wit, that Japanese executives and government officials have demonstrated overa long period a lack of full understanding of the growing importance of software for their firm’s
future competitive performance. The findings are also consistent with the view that asunderstandings of the importance of software did gradually develop, as it certainly has inrecent years among the major Japanese IT companies, they found themselves in a bind. They
don’t know how to proceed without jeopardizing their existing hardware businesses. Many ofthese hardware businesses now manufacture in offshore locations, especially China. They
generate low but consistent profits. They are built on manufacturing strengths associated withhigh quality precision manufacturing. What these products require from their embedded
software is high quality (as measured in minimal if not zero defects) and customized software.

11High quality is needed so as not to jeopardize the hard won high quality reputation of their
manufactured products. Customized software is required to effectively and efficiently transfer
the flow of design information from and to customers (the essence of their monozukuri). From
this perspective, software is simply an assistant and aid to selling superior hardware. Highquality customized software married to high quality precision manufacturing is seen as
essential to maintaining current markets and revenue streams, however meager they often
may be. 29
Japanese manufacturing firms are having trouble reconciling these traditional objectives ofhigh quality, customized software and short time to market as new software products start toinvade their traditional hardware/embedded software products as occurred recently with car
navigation systems. In this case, Android smart phones are being integrated into existingnavigation systems based on hardware and embedded software. At the same time, theJapanese firms lack confidence that they will be able to replace these old advantages with newvalue creation activities arising from innovative software solutions. Rigid quality assurance
practices are not conducive to software innovation. Thus, they have often chosen not toheavily invest in these solutions. It is in this context that many manufacturing firms don’t see
themselves as experiencing significant software human resource constraints. These themes
will be explored further below.
One can pursue the human capital constraints explanation from another angle byexamining the software labor stock relative to the total labor stock available to both U.S. andJapanese firms. As discussed earlier, the U.S. has approximately three times the stock of homebase software engineers than does Japan. One can adjust these numbers to take into accountlabor force size. By doing so, we see that in 2010, the number of software engineers per
100,000 labor force members in Japan was roughly 1,500 versus the U.S. with 2,100. These
adjustments reflect that Japan’s total labor force is only 43% that of the U.S. and its GDP is only
37.5% that of the U.S. 30 Thus, adjusting for size of GDP and total labor stock, makes Japan look
far less of an outlier relative to the U.S. with respect to its software human resources thansuggested by Arora and colleagues. Nevertheless, large differences remain.
Still a numbers gap, while smaller, does persist. Arora and colleagues’ analysis rests on
the assumption that more software talent yields more innovation. Yet, more software
engineers do not, in themselves, equal more productivity or innovation whether in a firm or anindustry sector. 31 Large aggregations of software engineers whether in a firm, region or nation
cannot be expected in itself to yield greater innovation. Innovation in the highest patentyielding regions in the U.S. (San Jose, San Francisco, New York and Los Angeles) benefit frompowerful supporting ecosystems, from high quality engineers and from the embeddedness ofthese engineers in specific kinds of organizations whose objective is to create and market these12

innovations in horizontal markets. Put differently, Japan’s innovation deficit vis a vis the U.S.
may arise less from smaller numbers of engineers but from different organizational andmanagerial capabilities and especially from different strategic choices. It matters for softwareinnovation whether most software engineers are in firms making one product for one customer
or in firms aiming to sell millions of their product to many customers.
University IT Education:
Given the criticality of human capital to software development, we can partially evaluate anation’s recognition of the importance of software in terms of its timing and quality ofinvestment in software education.32 Steinmuller argues that the U.S. software industry’s
advantage over Japan lay in its first mover advantage, one that was enabled by government
R&D policy and the early development of computer science (CS) education at the university
level.33 The latter advantage over Japan and many other nations, as measured in terms of thequality of U.S. CS education and research, persists to this day.
An examination of the formal education of software engineers in Japan and the U.S. reveals
somewhat similar distributions when comparing high school, junior college, and university
graduates. For example, 53% of Japanese software engineers (2007) are reported to be
University graduates versus. 48% in the U.S. (2008).34 The problem with these data is that they
don’t reveal what percentage of these graduates actually had any kind of formal IT education. It
is a widely‐held view among leading Japanese software specialists that well over half ofsoftware engineers have had no formal education in the field but acquired their skills throughcompany training. This is particularly likely to be the case in the lower tiered IT service firms
providing customized software.35 Unfortunately, I have been unable to find comprehensive
data documenting these common views. The number employed in software jobs in the U.S withno formal education in software, has also been large in the past.
Over time, however, those with formal software education have increased. As we shall see
below, those with undergraduate CS degrees have increased rapidly in recent years in the U.S.
but much less so in Japan and they have been in higher demand from industry than has been
the case in Japan. Analysis of NSF data show that as of 2003, 85% of computer software
engineers had at least one Science and Engineering degree, defined broadly as those with
degrees in computer/math sciences, biological, environmental, and life sciences, physicalsciences and social science and engineering. Of these, 41% had at least one degree incomputer/information sciences and those whose highest degree was in computer/information
sciences constituted 38%.36
It is especially revealing that some 20% of software engineers in the U.S. have a graduate
school degree compared to 10% in Japan.37 The gap in PhDs is even larger than suggested by13this 10% difference. Until recently, the majority of Japanese PhDs in engineering were earned
by industrial researchers in Japanese companies (ronbun hakase). These degrees are awarded
by the employees' former university, typically after many years of R&D research. No
coursework is necessary, only submission of a dissertation with some articles published in well‐regarded journals. These PhD degree holders are very unlikely to be on the forefront ofsoftware innovation. These type PhDs are in sharp decline.
Putting aside the ronbun hakase PhDs, most CS (and most Japanese engineering PhDs forthat matter) are earned by those aiming for an academic career. By contrast, most CS PhDs.
from U.S. universities are hired by industry or government.38 A great deal of new value in theprivate sector has been created in the U.S. by PhD and Masters of Science students andengineers. Some 22,000 PhDs have been granted in CS and Information Technology in the
United States between 1978 and 2008.39 Phd students at the best U.S. universities experience
rigorous coursework and practicums and not a few go on to envision and then create andsustain a whole new world, e.g. UNIX, relational databases. Startups founded by those with
PhDs include Adobe, Qualcom, Google, Sun, Cadence, Synopsys, VMware, and Symantec etc.
Still other PhDs like Edgar Codd, with a PhD in CS from the University of Michigan, worked at
IBM but nevertheless inspired startup firms like Oracle to develop commercial productsbuilding on his path breaking research on relational databases. This is where the Americans
have excelled.
One is hard put to compile a comparable list of path breaking equivalents in Japan. It is notuncommon at major U.S. IT companies to see Chief Technology Officiers (CTOs) with PhDs.
Moreover, a comparable list of companies founded by CS graduates with Masters of Science
degrees could easily be compiled. To be sure, the Japanese system is changing: by the period
2007‐2009, the dissertation only degrees declined to some 27 % of all information science andsoftware dissertations but the pace of change is slow and the benefits of the new distribution
yet to be revealed. Behind the limited numbers of Japanese PhDs in software related private
sector jobs is the long term lack of demand by Japanese industry for engineering PhDs and thepaucity of software startups.
There is further evidence of Japan’s lagging status from the 2012 Academic Rankings ofWorld Universities conducted at Shanghai Jiao Tong University. In 2012, some 430 universities
reported their data on students, academic staff and resources. The participating universities
cover 61% of the Top 100 universities and 50% of other Top 500 universities on the Academic
Ranking of World Universities 2012. The data were augmented by data for 1,200 universities
including alumni and staff winning awards and medals, highly cited researchers, and papers inleading journals. The rankings for CS show that U.S. universities captured 20 of the top 24
rankings including the top 9. The only Japanese university in the top 200 universities in CS was

14

the University of Tokyo which ranked between 150‐200. 40 The foregoing rankings are hardly
definitive. In part, they capture globalization of programs which is not equivalent to excellence
per se. Weak English language capabilities and limited numbers of foreign students studying inJapan hold down the Japanese rankings. Nevertheless, the rankings do suggest that Japan is far
from the forefront of CS and information technology education.
More telling has been the long slow process of incorporating software into the technicalcurricula of Japanese universities. It was well recognized by CS professors in Japan in the 1990s
that CS faculties in Japanese universities were weak.41 They relied heavily on U.S. createdstandards of IEEE‐CS (Institute of Electrical and Electronics Engineers‐CS) and ACM (Associationof Computing Machinery), but with long delays.
The 1997 (J 97) standards published by the Information Processing Society of Japan (IPSJ)
were greatly influenced by the U.S. “Computing Curricula 1991” of IEEE‐CS and ACM.42 Thoughthese curricula were already outdated by the time they are were adopted in the U.S., not tospeak of when they were adopted in Japan in 1997, they nevertheless lifted the modest profile
of software in Japanese IT curricula.
Still later, a completely revised set of standards was completed in 2007 (J07); they wereheavily influenced by the CC2001 of IEEE‐CS and ACM. The timing of both Japan revisions
reveals a significant lag from the initial American revisions. To be sure, the J07 standards, whenpublished, incorporated CC2005, but the fact stands that the Japanese educational
establishment has been a slow follower when adopting software curricula.43 Given the rapidlychanging hardware and software technology during these periods, this lag suggests a lack ofappreciation by the Japanese educational establishment of the speed at which the technology
was changing and the importance of quickly accommodating to these changes. Along similarlines, the IPSJ’s accreditation committee criticized Japanese CS and other related curricula forgiving priority to desk study while the American university curricula emphasized software
design (exposing students to experiments and practicums). 44
Critical to the incorporation and communication to students of up‐to‐date curricula is facultywith up‐to‐date knowledge. Here, Japanese universities were at a disadvantage. Much new IT
knowledge was being developed in the U.S, especially with the advent of the PC era in the early
1980s. At the same time, Japanese firms which had achieved significant competitive successthrough modeling IBM’s mainframe architecture, remained committed to building new
generations of still larger mainframe computers.45 This misplaced focus of the incumbents put
them still further behind the U.S. in developing, integrating and deploying new software
knowledge.

15

The expansion of IT departments in Japanese universities in the 1980s was associated with ashortage of CS‐trained faculty. To fill positions, many universities hired “retired” IT executives
from major companies, like NEC, Fujitsu, Hitachi, and Toshiba. It was and still is common for
the Ministry of Education to push new departments in applied fields like technology andbusiness to hire a portion of their faculty from among those with practical experience. These
new academics helped fill out the faculty staffing in IT departments in the 1980s and 1990s.
While they had practical experience in IT business issues and some technical matters, most of
their corporate training and experience was in mainframe hardware and software. In the U.S.
these were quickly being displaced by PCs, workstations, newer programming languages,
networked systems, the Internet, and the like. Most of the Japanese faculty with these
corporate backgrounds, were not competent to teach university students, much less the stateof the art or the state of best practice. Moreover, most of those with corporate backgrounds
were not capable of making major research contribution. This was at a time in which mostly
American research scientists were transforming the field of CS. All this contributed further to
the Japanese falling further behind the US and Europe in software during these formative
years.46
The Education Ministry (MEXT) nominally plays a strong role in the development of
university curricula for both private and public universities. Typically, they approve the plans forthe curriculum of a new department and then monitor performance for some four years until
the new students’ cohort graduate. In practice, the Ministry has relatively little content
knowledge (despite having faculty committee advising the Ministry on proposals for new
schools and departments and monitoring new schools and departments). It left devisingcontent to university departments’ discretion. The Ministry’s monitoring role consists of
insuring that the new department executes the curriculum plan according to what they
promised they would do in their original proposal. In short, they perform typical bureaucratic
scrutiny which insures consistency but limits flexibility and adaptation. Accordingly, while they
were involved in the development of the 1997 standards, they were absent from thedevelopment of the new 2007 software curricula.
Professor Nobumasa Takahashi, a key player in the activities of the Information Processing
Society of Japan, analyzed the national universities which typically set the direction on newtechnical curricul. He observed that the Japanese postwar university departmental structures
were shaped by continual expansion in the fields of civil engineering, machinery, electricalengineering (EE) and chemistry. In many cases, new departments were formed from the
Ministry of Education’s (MEXT’s predecessor) budgetary appropriations demanded by these
existing departments. “As a result, the new departments were created with the strong
coloration of colonies of the old departments.”47 In 1998 at a university/industry meeting,industry people complained that the old disciplines were still casting a long shadow over the

16

new disciplines of CS, software engineering and information systems.48 The clear implication
here is that entrepreneurial initiatives by the new software oriented departments wereconstrained by the old established engineering departments.
Other constraints on the new departments of informatics (roughly equivalent to what
Americans call information science) and CS arose from an unanticipated interaction of two
developments. First, in 1991, a de facto Ministry of Education deregulation of universities took
place which no longer required science and engineering schools as well as other schools to offer
liberal arts for the first two years of undergraduate education. As a result, many technical andscience universities substituted engineering and science courses in their stead. As aconsequence, a large number of redundant faculty were created at these institutions. Since
they could not be fired, they needed to be relocated from their original departments. Second,at roughly, the same time, the Ministry, concerned about declining national birth rates,
imposed limits on the expansion of university departments and faculties. They made a few
exceptions, however, for growing fields of national importance, one of which was for
information technology. The universities took advantage of this exception to “offload” some of
their redundant faculty to these growing fields. Many of the transferred faculty continued toteach their existing specialties despite now being in CS departments.
The net result is that Prof. Masato Takeichi found that the total faculty (2,615) of theJapanese information science departments in Schools of Science and Engineering in 1998 wereconstituted roughly as follow: 30% were core CS faculty whose academic specialties were in CS
and mathematical informatics. Viewing information science more broadly to include system
informatics, electrical informatics and intelligent informatics added another 45%. A remarkable
25%, however, had educational specializations with little or nothing to do with CS.49The
Ministry did nothing to combat this blatant misuse in the filling of the new faculty slots. Ideally,
the new dynamic fields of informatics and CS were expected to make strong contributions tosoftware education and to the economy as a whole. Instead, the Ministry actions and theninactions, at a formative stage in development of these new fields, led to the new departments
being hamstrung and weighed down by excess and irrelevant faculty baggage contributed byredundant faculty from other fields and corporate retirees limited by obsolete mainframe
software expertise. In turn, this meant that students had far less access to up‐to‐ dateknowledge in these rapidly evolving core fields. More subtly, it made it more difficult for CS to
be recognized as a distinctive discipline.50
The latter problem continues to this day. Prof. Fumihiko Kimura, a member of the Science
Council of Japan, at a public forum held at the University of Tokyo in March 2013, stated that
CS (called johoukagaku in Engineering Schools) is still not recognized by most interested parties
in Japan as a clearly defined discipline.51 One measure of a new field’s coalescence into a

17recognized discipline is the willingness of those in established disciplines to contribute to theemerging discipline. This both reflects existing assessments of the emerging discipline andbestows further legitimacy on the new field. In the case of the U.S., both theoretical andapplied mathematicians played a key role in building the new CS discipline. Mathematical logic,
the theorems of Turing and Godel, Boolean algebra for circuit design, and algorithms for solving
equations and other classes of problems in mathematics played strong roles in the early
development of the CS as a discipline.52 Prof. Masato Takeichi, Dean of the Graduate School ofInformation Science and Technology at the University of Tokyo from 2004‐2007, reports thatmathematicians have not been as drawn to the new IT fields in Japan as was the case in the U.S.
He attributes this to CS not being seen a distinct discipline in Japan.53 Contributing to thisweakness, Japanese CS researchers tend to focus on applied rather than basic research.
Indicative of the early recognition of CS in the U.S. was the formation of CS departments andsometimes equal partnership in joint EE&CS departments as at MIT and UC Berkeley. Stanfordand UC Berkeley established their respective current CS departments and partnerships with EE
in 1965. MIT recognized the growing CS activity within its EE Department and in 1975 changed
its name to EECS. However, the Laboratory for CS (LCS) was founded in 1963. Originally known
as Project MAC (Multiple Access Computing and Machine‐Aided Cognition), its mission was todevelop a computer system accessible to a large number of people, and to exploit thecomputer as an aid to research and education. LCS members and alumni have since been
important contributors to the development of the ARPANET, the Internet, Ethernet, the World
Wide Web, time‐shared computers, RSA encryption and dozens of other technologies.
The contrast with Japan is striking. At the University of Tokyo, The Information Engineering
Department was established in the Graduate School of Engineering was established in 1972 but
the Department of Information and Communication Engineering for undergraduates was notestablished until 1991.54 The Department of Information Science in the Faculty of Science (mostcomparable to CS departments in the U.S.) started in 1975 as an augmented successor to the
Information Science Laboratory, and has since offered undergraduate and graduate degree
programs.
CS still has relatively low status in the hierarchy of engineering related fields in Japan andtheir graduating students are not in high demand in industry. The most common explanation
given for the reluctance of Japanese firms to hire CS graduates is that they do not havesufficient domain knowledge.55 Given the history of Japanese manufacturing firms in providing
domain specific training, it seems an odd explanation. Still another problem reported byknowledgeable software specialists is that the quality and quantity of Japanese high school
students choosing to study software fields at the university level is declining. Students appear
less interested in IT than in the past and the reason appears to arise from the structure of the18industry with its heavy domestic outsourcing of customized software development and limited
opportunities for employees to develop and capitalize on specialized skills.56
This description greatly contrasts with trends in the U.S. CS enrollments hit their peak in theyear 2000 and then suffered a sharp decline after the dot.com collapse in 2001‐2002, with the
decline continuing through 2007. Most recently however, CS has exploded in popularity.57 This
growth is driven by perceived entrepreneurial opportunities and also by growth in overall
corporate demand for the services of graduates of such programs.
The acceleration of enrollment growth in CS can be seen at Stanford University, one of the
U.S.’s premier engineering schools. Those undergraduates graduating in EE (EE) total 50 a year
and the number has been stable for some time but the number of those graduating with CS
degrees has been on a sharp upward trajectory in recent years. In 2012, some 250 students
graduated with CS majors, five times more than EE majors. Even more telling, CS is now thelargest undergraduate major at Stanford across the whole university.58 The same trend isevident at UC Berkeley. CS in the College of Letters and Science is the second fastest‐growing
large major. Its numbers more than doubled, from 138 to 357 (159 percent) from 2010 to2013.59 Moreover, its combined EE and CS Department in the Engineering College projects thatits undergraduate upper division courses will have a ratio of roughly 3:1 in favor of CS for 2013‐2014. 60 This acceleration of growth is in line with national data showing undergraduate
enrollment in CS recovering from a low point in 2007 and then growing sharply for five years ina row from 2008 through 2012.61
At the leading U.S. engineering schools, those departments like CS, which experience sharp
growth, drawing on a highly qualified applicant pool, have the discretion and strong incentives
to grow their department. Faculty can be motivated to “put their brand on” a new generationof smart young people and they also use growth to claim greater departmental resources. The
incentives for faculty growth are on display at MIT. In their combined EE (EE) and CS (CS)department in early 2012, the percentage split between EE and CS faculty was 54% to 46% infavor of EE. In Spring 2013, the combined faculty of this department voted to hire faculty at aratio of 2:1 CS:EE for the next 3‐4 years to address the shift toward CS in undergraduate
enrollments while balancing this shift with the still greater number of graduate EE than CS
students.62 Central administrators typically are pleased with such growth and as seen in the MIT
case, even in combined departments such as at MIT and Berkeley, there is seldom any
successful effort by non‐CS faculty to hinder adjustments to CS’s growing student numbers. The
historically decentralized education system in the United States means that the Department of
Education, unlike its Japan counterpart, has been and is a non‐actor on such matters. As
expressed by David Hodges, former Dean of Engineering at UC Berkeley, “deference tends to begiven to those faculty and departments which show leadership.”63 This captures the19entrepreneurial spirit which underlies such rapid adaptation to new growth opportunities. This
is not to say that such a decision making model doesn’t have its downsides. In situations of
declining job opportunities for graduates, departments and schools can be quite reluctant to
cut back on admissions. The glut of recent law school graduates in the U.S is a case in point.
The contrast with Japanese universities is stark. We may use the University of Tokyo,
Japan’s leading university in CS and IT programs, as cases in point. In the engineering faculty,
each undergraduate major, like information and communication engineering (not entirely
equivalent to CS at an American university), has a prescribed student quota. Until the University
deregulation of 2006, these quotas were rigidly prescribed by the education ministry, MEXT.
Since the 2006 deregulation, enrollment limits became the formal responsibility of faculty. The
faculty in question, however, is not that of specific engineering departments but rather theentire engineering faculty. Thus when discussion of allocation occurs, each department tries toprotect its turf and not suffer losses at the expense of other departments. This makes it difficult
to reach a consensus on changing the distribution of allotted student quotas. The quota for the
departments within the Faculty of Engineering at the University of Tokyo has been changed
only once since the enrollment limits became the responsibility of the faculty in 2006. In 2008,
they changed in conjunction with a restructuring and consolidation of the various departments.
Because of the restructuring, it is hard to say how the enrollment of information andcommunication technology students has fared. It is the case that the national universities,
having been so long dependent on MEXT, find it hard to exert their independent will. They willoften ask MEXT officials for advice before making changes.64 Solving the problem by expanding
the pie through increasing overall enrollments is a hard case to make in view of Japan’s
declining college population and inertial forces. In the case of the University of Tokyo, theadmission quota as of May 2012 for electrical and electronics engineers (a combined total forjuniors and seniors) was 150 while it was only 80 for information and communications
technology.65 This disparity persisted even after the adjustments of 2008 noted above.
In other words, the allocation of student quotas between EE and information andcommunications technology appears more suitable for two decades ago when IT and software,in particular, were not such global competitive forces . Instead, the current distribution
supports traditional manufacturing (monozukuri) education in which software is subordinatedto hardware. We also can see this distribution as again showing how the established disciplines
continue to influence the field of information technology. To be sure, the EE education which
Japanese students receive today, as is the case in the U.S., incorporates far more CS into theircoursework than was the case in the past. Anecdotal evidence from UC Berkeley and the
University of Tokyo, however, reveals a much stronger dose of required software courses in the
UC Berkeley undergraduate EE curriculum than is the case with the University of Tokyo.

20

Most importantly, Japanese universities find themselves in a bind in that even if farsighted
faculty believe in the need to rapidly shift toward CS and were able to overcome resistancefrom other departments, industry shows no great enthusiasm for hiring large numbers of theirgraduates at this time. Lastly, one must be careful in making too sweeping generalizations here
since CS related programs and curricula appears in multiple schools and departments in many
Japanese universities including the University of Tokyo. This is also the case in the U.S. Further
research on this matter is needed.
In summary, there is ample evidence that the Japanese educational establishment was
slow to incorporate strong software education into the curricula and that it still lags. They also
failed to insure an up‐to‐date curricula was developed and executed by a large and capablefaculty. Furthermore, growing the undergraduate CS student and related enrollments faces
multiple challenges from declining student interest, and modest industry interest, to non‐ CS
faculty resistance. Arguably, this situation contributed to human resource constraints as
regards to developing software engineers with up‐to‐date knowledge who could make strong IT
contributions to private and public sector firms. Yet, these human resource constraints, to theextent that they exist, can be better seen as a proximate cause of Japan’s lagging softwareinnovation. Our analysis suggests they operated more as an intervening variable. Some of the
deeper causes can be found in the structure of the software industry –to be addressed below.
Of critical importance was the Japanese educational establishment’s failure to recognize andact on the importance of software. This, in turn, led to a failure to prioritize software education,and faculty software competence and to address weak student interest. Relevant also is thefailure of leadership in the private sector to push for stronger IT education and to hire and train
talented IT students.
METI Support for IT
We can also assess the slow recognition of software’s importance through the actions of
METI and its predecessor MITI. When MITI had large resources to co‐invest in big projects in the
1980s like the Fifth Generation Computer Project and the Sigma Project, the big IT companies
collaborated with them. Since then, however, METI has had no big resources to invest in IT
projects. As a result, the big IT firms don’t pay a great deal of attention to their activities andthere is a widespread view among IT people that METI officials are poorly informed as to thereal issues which need to be addressed. At the same time, it is widely acknowledged that theJapanese government and MITI and METI in particular relied heavily on the advice of Fujitsu,
NEC and Hitachi (known among software people as FNH) in forming government IT policy overthe last 30 years. They formed a kind of informal club where IT matters were discussed. It ishighly probable under such circumstances that government policy was more oriented toward
preserving the dominance of Japanese incumbents than to fully adapting to the new world of IT.

21

It is also notable that an outsider, IBM Japan, was not invited to join METI’s Information
Economy Committee until 2004.66
Yasunari Baba, Shinji Takai and Yuji Mizuta writing in the mid‐1990s concluded that
fundamental change was needed in current policies. They argued that this would require thatMITI and other government organizations abandon their current premise that hardware
production is more important than software production. They further point out that mostJapanese government policies in the computer industry prioritize expansion of hardware
production and sales while doing little to establish software as an independent sector. 67 METI
did pursue an initiative in the 90’s to support software startups but it was widely seen as a
failure. As late as 2004, software related items accounted for only 5% of METI’s and theMinistry of Internal Affairs and Communications’ (MIC) combined 150 billion yen IT budget. By
contrast, hardware related R&D (especially device related) took up 75% of their budgets.68 To
be sure, hardware projects require a great deal more capital than software projects;
nevertheless the one‐sided emphasis on hardware is hard to ignore.
There is robust evidence, in short, that Japanese government agencies woefully
underestimated the importance of software throughout the 1990s and beyond for the
emerging competitive environment. Eguchi Junichi, Director of Information Services Industry
Division at METI acknowledged as much in an March 2013 interview.69 Even as METI came torecognize the growing importance of software from the early 2000’s to the present, it was, andis, often seen in the context of (embedded) software as an attachment or assistant to Japan’s
great physical (monozukuri) products rather than embedded and application software as
potential drivers of competitive success.70 METI’s primary instrument for implementing its
policy goals in IT is its subsidiary, the Information‐Technology Promotion Agency (IPA). Its 2013
plan for IPA’s Software Engineering Center (SEC) focuses on collecting defect data from industry
and establishing a mechanism for suppliers to be accountable for their products. Again, we seea play to Japan’s strengths rather than working on addressing the bigger issues confronting
Japanese IT. The rise of “Big Data” has received a great deal of attention in Japan and METI
published a 2008 report on “How to Use Big Data.” One would think that the era of big data
would finally be the vehicle for convincing government, educational and corporate leaders thatsoftware has a vital role to play in promoting competiveness. But thus far, its greatest use
among Japanese manufacturing firms appears to have been using masses of internal data to
optimize operational performance. As such, it reinforces their hardware mentality. As yet, there
are far fewer success stories of manufacturing firms collecting and analyzing customer “Big
Data” to bring about competitive breakthroughs.

22

An Institutional and Structural Perspective
The foregoing analysis suggests there are deeper structural causes of Japan’s softwareinnovation shortfall both in the period investigated by Arora and colleagues as well as
subsequently. As one Japan software veteran reported to me,
We did have labor shortage around the 2000 year period. The problem currently, is not
an overall labor shortage but rather: Not enough Japanese products are focused on software,and not enough Japanese software professionals are focused on product. Both of these lead to alack of demand for excellent software architects/designers. Taken together, this situation
results in not enough innovation.

In other words, there continues to be some human resource constraints relating to specificskills. The Japanese IT sector’s lag in software innovation, however, may arise less from humanresource constraints per se than it does from a weak corporate demand and incentives forcreating innovative software products. If firms aren’t pushing to create such products, thenthey don’t believe they have a need to hire, train, and use high talent software personnel.
One piece of evidence in support of this hypothesis can be gleaned from comparative dataon IT investment. As shown in Table 1. These data show the percentage of IT investment toannual revenue in private sector firms. They reveal that the annualized percentage for Japaneseindustry overall in 2007 was 1.03. The comparable percentages in 2008 for the U.S. was 4.3, for
the EU 3.0 and for the Asia/Pacific region (excluding Japan) 2.9. If U.S. firms are spending morethan 4 times of their annual revenue on IT than the Japanese, and they have a strong
ecosystem supporting such innovation, it would likely be the case that they would be
generating more software innovation than their Japanese counterparts. Unfortunately, there isno data broken out for the IT sector but for manufacturing assembly industries U.S. firms are
spending 6 times more than their Japanese counterparts and for manufacturing processindustries 5 times more. Only in banking, insurance and the securities sector in the 2007‐8
period were Japanese firms investing a higher percentage of their annual revenue on IT thanthe Americans. Notable also is that Japanese industries overall fall well behind the EU countries
and the rest of the Asia/Pacific region on this measure. These data are not drawn from a
representative sample so they should be taken as only a rough guide.
Nevertheless, Japanese private sector firms appear to be spending less of their annual
revenue on IT. Therefore, they require fewer IT human resources and their lower level of IT
human resources might be reasonably well matched with these lower levels of IT investment.
Therefore, contrary to Arora et.al., they are likely to suffer only modest IT human resources
constraints.

23

Table 1.
Percentage IT Investment of Annual Revenue by Industry Sector
and by Country and Region: 2007‐2008*

Country & Region
Japan
U.S.
EU
Asia Pacific
Percentage IT Invest.
of Annual Revenue:
1.03
4.31
3.04
2.92
All Industry Sectors
(N)
556
284
405
463
‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
Industry Sector
Mfg. (Process)
0.69
3.55
2.10
3.09
(N)
144
7
35
30
Mfg. (Assembly)
(N)

0.75
91

4.60
33

2.68
33

1.77
29

Retail/Hotels/Real
Estate/Wholesale
(N)

0.52
133

2.73
26

2.76
47

1.54
53

Banks/Insurance/
Securities
(N)

5.89
29

5.08
42

3.79
42

2.15
43

(N)

2.92
11

4.54
45

3.10
49

4.62
59

(N)

1.05
87

3.33
48

3.36
78

3.12
92

(N)

0.65
52

1.26
8

2.08
19

2.16
38

(N)

0.15
3

6.25
9

1.82
30

1.42
24

Info and Comm.
Services
Services
Agric./Mining/
Construction
Other Non‐mfg.
Non‐profit/Edu./
Medical Care

5.13
4.12
3.88
0.95
(N)
6
61
63
88
‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

Source: Gartner, Japan; Approval no. GJ 13141* Survey dates: Japan: 5/2008; other regions: 11‐12/2007.

24

We can dig deeper into IT investment differences by examining the composition of IT
investment. Table 2 compares the distribution of software investment in the U.S. and Japan bytype of investment. The Japanese figures from the year 2000 show a heavy reliance on
outsourcing (70%) but it is outsourcing primarily to the firms’ domestic network of IT
subsidiaries and their tiered set of supplier firms, sequentially involved in the softwaredevelopment process. The Japanese refer to this as “multiple step ordering" (tadankai hacchuu).
Thus, Arora and colleagues are correct that Japanese product firms do far less foreign
outsourcing to meet their software development needs than do U.S. firms. Yet, as just noted,
large Japanese firms, with their thin employment of software professionals, do an enormous
amount of outsourcing to a deep well of domestic subsidiaries, vendors and subcontractors.
As also shown in Table 2, in‐house development for a firm’s own use is just a modest 20%.
Together these two customized development types account for some 90% of all Japanesesoftware investment with packaged software left with just 10%. Nobuyuki Yajima, a long term
software analyst, writing in 2012, believes that the Japanese data have not changed all thatmuch since the year 2000, with the exception that there has been a rise in the use of packaged
software . He estimates it is closer to 15% in recent years.

Table 2
U.S. and Japanese Software Investment by Type(in percent)

Packaged

Outsourced(customized)

In‐House for own use(customized)

Japan*

1070

20

United States**

29

34

37

*N . Yajima, 2012. “Management’s Common Sense: Japan has Others Make Software, U.S.
Makes it Themselves,” (Keiei joushiki: sofuto o tanin tsukuraseru Nihon, jibun de tsukuru
beikoku), Nikkei Business Online, (Oct. 12):1‐7.
**Bureau of Economic Analysis, Dept. of Commerce, 2012. Table 11 Business (Private) Software
Investment and Prices,
http://search.bea.gov/search?query=software+investment+2011&commit=Go&utf8=%E2%9C%
93&affiliate=u.s.bureauofeconomicanalysis. Accessed Nov. 10. 2012
The U.S. figures for 2010 reveal a strong contrast with the Japanese distribution. They show
a relatively even balance between investments in packaged software, outsourcing and25

investment in in‐house software intended for the firm’s own use. Notable also is that in‐house
investment for own use software development accounts for almost twice as much of U.S.
private sector investment compared to Japan (37% versus 20%). Important also is the gap in theimportance of software investment in packaged software (29% in the U.S. versus just 10‐15% inJapan). An examination of U.S. software investment in the early 2000s show the distribution
among packaged, outsourced and in‐house investment is virtually the same as that shown in
the 2010 figures. These differences between the two economies reported here are non‐trivial.
Given these differences in composition of software investment, we would expect that the
distribution of software engineers would be strikingly different in the two economies as well.
More specifically, we would expect that U.S. private sector firms would be more heavily staffedwith software development personnel, many of whom are likely engaged in developing
innovative software to enhance the strategic interests of the firm.
Table 3 shows the respective distributions. Some 75% of Japanese IT engineers are locatedat software vendor firms (e.g., large independent IT firms like Fujitsu and NTT DATA), system
integrators‐some of which are subsidiaries of large corporations, and tiered subcontract firms.
As we shall show in later discussion, at most of these firms, the opportunities for creating
innovative software products for sale to large numbers of customers is very limited. The priorityof software vendors is meeting cost and, delivery and quality specifications. Vendors have few
incentives to provide solutions with the latest system architecture and product innovation
overall is a low priority. Indeed, it is not uncommon that projects led by top vendors are
actually carried out by many layers of subcontractors with little involvement by the prime
vendor.71

Table 3

26

Employment Location of IT Engineers
U.S.

%

Japan

%

No. of IT Engineers atUser Firms*

2,362,300(72)

254,700(25)

No. of IT Engineers at Software
Vendors**
Total IT Engineers Employed

941,400(28)

771,400(75)

3,303,700(100)

1,026,100 (100)*User firms are those firms using internally or selling IT systems which they develop or have hadvendors develop for them,.
**Software vendors are often called Internet service firms in Japan.
Source: Information Technology Promotion Agency (IPA), 2012. ”Survey of Factors for Disseminationand Expansion of the Areas of Adoption of Non‐Waterfall Model Development,” (Hi Wotaforu Kata
Kaihatsu no Fukyuu Yoin to Tekiyou Ryouiki no Kakudai ni Kansuru Chosa), IPA :14, 21.

Only 25% of Japanese IT engineers are estimated to be located at user firms. This meansthat most Japanese corporations are thinly staffed with high level software engineers. They arehighly dependent on Internet service provider firms (vendors of various kinds and sizes) for
meeting their IT needs. By contrast, Table 3 reports that in the U.S. some 72% of IT engineers
are located in user firms and thus suggest that those firms employing these IT personnel are
more likely to engage in developing their own software for internal use.
When discussing the large number of U.S. IT engineers employed in user firms developing
their own software. It is important to capture differences in software startups. For truly
innovative software, large U.S. technology firms still rely on software startups which attract themost creative talent. Large publicly listed firms are typically unwilling to tolerate the massive
costs arising from learning failures associated with developing breakthrough software
technologies. Instead, it is left to U.S. venture capital to fund these risky new technologies.
Software firms get a very large portion of total venture capital investments in the U.S.
In 1989, .04 percent of total venture capital investment in Japan went to software startups;
this compared to 11% in the U.S. at the same time.72 By 2011, total venture capital investmentin the U.S. totaled some 29 billion dollars while the sums invested in Japan were roughly 12% ofthat total. Computer Software startups investment accounted for some 24% of venture capital
funded startups in the U.S. and IT investment, more broadly, accounted for 57% of all US
venture capital investment. For Japan, software startups accounted for just 9% of venture
capital startups.73 So not only has there been a much lower percentage of venture capital
funded investments devoted to developing Japanese software but total venture capital

27

investment was far less in Japan as well. Most importantly, this much larger number ofsoftware personnel in the U.S. venture capital software startups were employed seeking tocreate new commercial products. Given the relatively low costs of software startups, one might
hypothesize that the percentage of software startups among all startups would be higher thanamong only venture capital funded startups. Teikoku Data Bank reports on all annual startups
which are 100% independent, have operating revenues or employees, and which have entered
their database by requesting credit or requesting a credit check on someone. Of the 5,292 firms
which qualified from 2005 through 2011, only 7% were software firms.74 In short, the muchsmaller number of software startup firms in Japan both contributes to the weakness of Japan’s
software innovation capabilities and deprives large Japanese technology firms of theirpotential products.
Moreover, even the existing software startups face a large barrier. Large Japanese IT firms
have a history of showing little interest in domestic startups, whether hardware or software.
They have been accustomed to look for innovation in their existing network of alliances. Large
IT firms tend to see partnering with unproven startups as too risky and often are only willing topurchase from or partner with existing firms with which they have exclusive subcontracting ties.
Startups often are not seen as reliable and legitimate partners and their technology therefore
suspect. Further, established firms are often not willing to do the due diligence necessary toseparate the most promising from the less promising. While this reaction of established firms is
not unique to Japan, it appears to be unusually rigid.
We can see the difference from the U.S. in the fact that many successful Japanese startups inthe past have had to turn to foreign markets (typically the U.S.) to find their first customers toprove themselves before being taken seriously by large Japanese firms. Four prominent IT
examples from Kyoto are Samco, Kyocera, and Nidec and Horiba. The founder of Horiba Ltd.
recalls that Japanese potential customers were more interested in the amount of his new firm’s
capitalization and its number of employees than they were in its technology.75
In the U.S., the large technology firms access new software technology often by acquiring
the successful startups or learning how to partner with them. In 2009, Intel acquired Wind Riverfor almost 1 billion dollars. It is a global embedded software specialist in software device
optimization. Wind River’s list of clients includes Apple, HP, Boeing, Motorola, NASA, Mitsubishi,
Siemens, and Samsung. So partnering or M&A is a possible way forward given the continuing
difficulty large firms in Japan & U.S. have in recruiting & managing the most creative software
talents.
In summary, software startups occur with far less frequency in Japan than in the U.S. The
net results is that the U.S. has a vibrant independent software industry compared to therelative weakness of this sector in Japan. Software engineers working in software product firms,

28

are by definition more likely to be oriented towards software innovation as a product andcreating new business opportunities. Those in software service firms, where an overwhelming
majority of Japanese IT professionals work, are much more likely to be engaged in installing,customizing, maintaining and upgrading existing enterprise software systems. The CEO of
Infosys Technologies, the Indian outsourcing giant, estimated in 2010 that up to 80% of annual
IT spending in Japan goes toward maintaining and operating existing systems compared with nomore than 60% in the U.S.76 Mr. Shintani at IPA , in leading corporate IT projects, reports
similar findings from his work with corporate IT planning managers.77 The upshot is that there
is far less left in the average Japanese IT budget than in the average U.S. corporate IT budget for
funding innovative software projects. These observations apply to enterprise and application
software budgets of Management Information Systems (MIS) departments; embedded
software budgets and specialists are more typically located in product development
departments.
One Japanese industry veteran talks about the extreme pressure for high quality frombusiness customers on system integrators, contractors and subcontractors. This leads to aquest for perfectionism as manifested in those lower down in the supply chain devoting
meticulous efforts to the cosmetic detail of system screens, minor improvements in usability
adding cost and a push for zero bugs instead of business process innovation.78 The end result
may be higher quality as measured by higher reliability and fewer bugs but it often comes withincreased costs. Prior research does suggest that Japanese software developers score high on
quality relative to their global competitors.79 Yet, in the rapidly changing world of IT, highreliability and few bugs are an advantage only when combined with low costs, speed and strong
innovation. But a rigid emphasis on delivering no bugs does not appear compatible with
innovation. As Michael Cusumano points out, software innovation requires experimentationand trial and error.80 User firms demanding software perfection from their suppliers display
strong risk aversion. One can contrast this Japanese approach with Facebook’s slogan, “Done is
Better than Perfect” or “the good enough” solutions adopted by many of their foreigncompetitors. Of course, when the project involves mission critical systems, then the Japaneseapproach may well be the preferred approach.
Further disconnects take place because large business customers, with their typically thin
supply of software engineers, are heavily dependent on their system integrators to tell them
what they need, with the system integrators responsible for conceiving, carrying out software
projects, and delivering a final business solution.81
The high dependency of large firms on their system integrators, as well as the lack ofstrategic importance many firms give to IT, can be seen in the low proportion of large Japanesefirms with full time Chief Information Officers (CIOs). The Mitsubishi Research Institute’s

29software specialists estimate that only 30‐40% of large Japanese firms had full time CIOs in2008.82 It would be rare to find US firms with annual revenues over $500 million which did nothave a fulltime CIO in 2008. A later survey by the Japan Users Association of Information
Systems reports that over 50% of large Japanese firms have someone with the title of CIOs but
the amount of time they spend on IT work is little more than 10%.83 Just having a CIO work fulltime on IT, of course, is no guarantee that they are performing strategic roles for the firm.84 The
absence of the CIO role, however, suggests that large Japanese firms are making far fewer
efforts in this regard and that CIO work itself is regarded as non‐strategic low level. Thissituation appears to reflects top management’s long term lack of recognition of IT’s importanceOne can reason that if top management understood the importance of IT better, their policies
would insure a full time CIO and this position and it would carry considerable weight. Indeed,this appears to be the view of many in the Japanese IT community. With this background in
mind, we see that weak software innovation in Japan relative to the U.S. arises less from aweakness in software human resources per se than it does from structural differences, which
institutionalize a maldistribution of software engineers.
This maldistribution grows, to a large degree, out of the long standing practice among
Japanese firms to heavily customize their software purchases. As shown in Table 2, some 70%
of Japanese software development investment is outsourced to other firms, compared to 34%
for the U.S. If we include in‐house development of software, just over 15% of the value of theJapanese software industry is accounted for by software products while 83% is accounted for
my customized development of software.85 This is important because of the high costs
associated with customization, maintenance and upgrades, much of which is in the form ofhuge human capital requirements.
The Mechanics of Customization
To understand what is driving the structural differences discussed in the previous section,
we turn to examining this strong propensity of Japanese firms to heavily customize theirsoftware solutions. This leads us to analyze the nature of work and product flow associatedwith customization and how they are distributed organizationally. This, in turn, will tell us agreat deal about their consequences for patentable software innovations and overall
competitive activities. What follows is a prototypical example of the organizational structure,practices and rationale of the “Big Five” Japanese electronics manufacturers which have led theenterprise software business in Japan. It is based on our field observations.86 The players are:Hitachi, NEC, Fujitsu, Mitsubishi Electric and Toshiba and their system integrator subsidiaries.
This example will not resemble exactly any one of the five firms but rather presents acomposite picture. This is less a problem than it might otherwise be because major Japanesesoftware firms tend to resemble one another in structure and practices. As in many Japanese30

industries, the leading software firms have a full range of matched product offerings. The
extensive use of the term “sogo” (general or full line) in Japanese captures these strong
tendencies.87 That is to say, there is relatively modest specialization at the firm level ofsoftware product offerings among the Big Five. Such comparable coverage by competitors is
not absent in the U.S. in such fields as human resources and financial software where
regulatory requirements induce a similarity in offerings but the phenomenon is more pervasivein Japanese industry. It is important to note that most recently Hitachi, Toshiba and Mitsubishi
Denki have announced that their primary business focus going forward will be large social
infrastructure projects (energy, transportation and utilities). For these projects, these firms see
software more a glue holding different project components together rather than as primary
drivers.
We can begin our treatment of the prototypical Company X with a discussion of its ProductGroup A. Group A is a software “product center” for the system integration business.
Although it is often formally organized and called a business unit, its “products” (such as
database management software, application development tools, and job management
software) are supposed to be used only in Company X’s system integration projects. Group A isostensibly a profit center, but in reality it is managed as a cost center of the system integration
business unit to which it reports.
The rationale for the above mentioned reporting relationship is that the enterprisesoftware developed by Company X is plugged into large complex custom solutions for specificcustomers. These inputs are coordinated and combined by the system integration business unit.
The solutions in question are typically vertically integrated solutions (e.g., Operating System +Database + Applications + Hardware). In this sense, the business application “product”
developed by Group A is just a component (independent module) in this larger complex
solution. Nevertheless, they are referred to as products because “products” reference criticalcomponents of the system to be developed that have been already “productized.” To say thatthey have already been “productized” means that they have already been operationalized andused elsewhere and consequently there will be shorter development time and lower cost forbuilding that module. In addition, these components are referred to as products because thefirm wants to have the same set of “products” that IBM and other competitors provide. They
also want to follow current fashion by saying, for example, that “our version 1.xx supports theService Oriented Architecture concept.”
Put differently, to make an ideal product at low cost in this “software factory” approach,firms avail themselves of commonly used software parts as independent modules which theycall “products.” These modules are then deployed for use in multiple end user products to31provide economies of scope. It is critical, that these components are smoothly integrated withthe larger custom solution.
The contrast with IBM is quite striking. IBM’s software group has brought to market many
innovative packaged software products, tools and middleware that it passes over to its Global
Business Services (GBS) group to be used as a factor input to which GBS adds a range of value
added services associated with their customization work for end users. These products, like its
DB2 database, compete directly with other enterprise software firm products such as thosefrom Oracle and Microsoft. Yet, the GBS group also partners with these same enterprisesoftware companies as part of its public commitment to provide customers the best possible
solution to meet their needs. That is to say, IBM’s GBS unit offers competitor, as well as IBM
products, to end users in their effort to deliver to customers the best solution. As a result, thesoftware group cannot be sure of sales from global services unless they have cutting edge
products.
Company X’s Group A, on the other hand, is primarily oriented toward meeting the needsof its System Integration Business Unit which, in turn, is responsible for integrating the total
complex custom solution for a specific customer. The System Integration Business Unit is theirprimary and sometimes exclusive customer. As a result, business applications, which in the U.S.
may be tradable stand‐alone products such as an order entry module in an ERP system orapplication development software tools or even whole ERP and Database systems, tend to be
seen quite differently in Japan. For the Japanese firms producing them, they typically are non‐tradable components aimed at contributing to the whole solution package which will be sold tothe end user. The system integration business unit provides a vertically integrated solution. As
a consequence, the “products” created by Group A, customized as they are for a specific end
user, typically are not marketed to other customers. Indeed, Group A doesn’t have a strong
marketing arm nor an aggressive sales force aimed at the external market.
Software groups, operating in this fashion, have few incentives to patent innovative
software to be sold on the open market. This is because many of the enterprise software
related innovations are unique to a particular Japanese customer’s product, thereby reducing
the incentive to patent in the US or Japan. As implicit in our previous discussion of Table 3, thebulk of young person entering into software jobs are assigned to work on customizing
enterprise software. There is not a lot of room here for creative activities and thus these young
people may lose their enthusiasm for IT and worse yet, their experiences. as we shall see, getconveyed to the next generation of students.
There is also a software Group B at Company X. Group B’s revenues are (typically) muchsmaller than Group A’s. Group B is a true software product business unit, and operates as aprofit center with relative autonomy. In some system integration firms, Groups A and B are in

32

the same business unit. While a profit center, Group B does not, however, market its products
to the external market. Rather it markets its products, enterprise software, to the Group As ofother major system integrators. The unstated assumption is that it is futile to try to sell directly
to end user corporations. This is in striking contrast to much software sales activity in the U.S.
Group B does have some marketing and sales capabilities but they are not strong. By contrast,
U.S. companies like Oracle making innovative business applications, have succeeded in the U.S.
and Japan by prioritizing the sales function.
The huge challenge facing Group B is that they are trying to sell their products to system
integrators at other companies which typically offer a full range of their own Company X
products. So unless Group B can develop a truly breakthrough product or greatly improve an
existing one, it is very hard to successfully sell product to other system integrators. These othersystem integrators are their potential customers but these customers have every incentive to
use their own products for their own end user customers. Moreover, even if Group B candevelop a successful product, the other system integrators will quickly act to “cover its hit.”
They also will do everything they can to persuade the end user to buy a related product fromthem, even if its functionality is more limited, or to wait until their own equivalent productbecomes available.
This brings us to an interesting feature of this system from a Western perspective. The
pivotal role of system integrators in Japan, is such that software vendors rarely succeed, as
discussed above, in marketing enterprise software directly to large corporate end users. While
successful cases do occur, the end user corporations are usually heavily dependent on theirlong term system integrator partners to guide them in their IT selection choices for reasons
discussed above.
Because most Japanese top managers don’t have confidence in their ability to evaluate IT
choices, they rely on their system integrator. The system integrators know the details of theirbusiness processes through their long term relationship, and can guarantee a smooth
implementation process without disruptions.
In summary, we can say that in Japan, customization work is the central activity of system
integration firms done in collaboration with in‐house teams and in some cases an external
software vendor. More than in the U.S., there is an overwhelming bias among corporate
managers that large scale business applications like ERP will require extensive customization,
despite the added costs this imposes. From a Japanese system integrator vendor perspective,
the ultimate form of a product (hardware or software) is one which is fully customized for a
specific customer and that is exactly what customers have come to expect and demand.
Software producers, inextricably tied to hardware firms, seem to have fully internalized theuser mentality epitomized by Japanese hardware managers.

33

Figure 1 summarizes the relationships we have described above in terms of the possibilityof sales results. System Integrator Firm X represents the prototypical system integration firm.
Its Product Group A is focused primarily on supplying software components to its System
Integration Business Unit which in turn integrates them into complete solutions for its
customers. In relatively rare cases, efforts are made to sell directly to Company Y’s system
integration unit. Success is not common but when successful, Company X’s system integration
unit proceeds as follows. Instead of making direct sales efforts to Y’s system integration
business unit, it rather tries to influence Y’s end user customers to use enterprise application z.

Figure 1
Software Sales Between
System Integrator (SI) Firms X & Y
and Their Customers
SI Co. X’s
Customer

SI Co. Y’s
Customer

SI CO. X
SI Business Unit
Applications
Hardware
Software Products

SI Business Unit
Applications
Hard ware
Software Products
Product Group A

Product Group A

Product Group B

Product Group B

Symbol Guide:Rare

SI CO. Y

DifficultOkay

If successful, the end users come to prefer it and tell System Integrator Y to use it in theirsystem integration projects; the sale itself is to System Integrator Y. A much smaller ProductGroup B mostly sells its software products to Company X’s system integration business unit
but it also tries to accomplish the difficult task of selling its outstanding products to other
Product Group As at other system integrators.
We may add a few additional observations regarding customization of enterprise softwarefrom an American perspective. As noted above, customizing a business package like ERP is34

often very expensive and complicated. Customization usually involves altering the code to meeta specific company need. Some business packages have very generic features, such that a great
deal of customization occurs in most implementations. Alternatively, all U.S. enterpriseproducts, like Oracle’s ERP, now have increased configuration options which eliminates theneed for customization in some areas. Rather than changing the source code, exercisingconfiguration options is more about settings tabs or parameters to meet specific customer
needs such as setting up of payment terms or the length of the customer record.
Creation of a best practice capability embedded in enterprise software systems is based onmodeling specific business processes among “lead users” and then creating a standardized bestpractice model for such things as order entry systems. A common view among U.S. software
vendors is that customization is a main cause of cost overruns in software development andleads to increased costs in long‐term maintenance and upgrades. In this view, all too often
customization is made to satisfy a perceived need for company‐specific functionality, despitethat a more than adequate method/process already exists in the standard software routines.
Indeed, a number of researchers in the U.S. cite avoiding customization as one of the critical
success factors in successful ERP implementation.88 While long term relationships with system
integrators certainly are in evidence in the U.S., it is also the case that customization work isoften undertaken on a time and materials basis rather than as an activity subsumed under along term partnership.
Much research over the last decade documents the declining significance of keiretsu in theJapanese economy, using as outcomes measuring the diminished role of interlocking stock
ownership and board of directors.89 In the world of enterprise software, however, verticalkeiretsu networks continue to powerfully shape trading relationships among enterprises andthe nature of competitive outcomes. While undoubtedly, innovation takes place under thesearrangements, firms appear to have less incentive to patent their software solutions.
In the past, exogenous shocks from American entries and products, have had shaken up
existing Japanese software markets. Salesforce.com’s aggressive entry into the Japanesemarket, may have that effect on the enterprise software market.. They were able to recruit a
top level Japanese executive who opened doors for them and they secured a prestigious
contract from Japan Post. They also did a large project for METI and thus got a big PR boost. 90
Salesforce.com promotes software as a service as the model to replace traditional enterprisesoftware. Software as a service (SaaS) or "on‐demand software" is a software delivery model inwhich software and associated data are centrally hosted on the cloud. To accommodate theJapanese market, Salesforce.com cleverly has been willing to provide a fair degree ofcustomization to their Japanese clients. Unlike in the U.S. they also targeted large companies
first and have had notable successes. Salesforce.com’s largest market outside the US is already35

Japan (led by CRM, Enterprise Software and other products). Should they continue to takemarket share, the SaaS model could radically disrupt the existing enterprise software market.
This might further a more rational reallocation of software resources.
Path Dependency and Hardware Centricity
We have seen the problems with the human resource constraint explanation for Japan’sinnovation shortfall. The alternative hypothesis posited and then rejected by Arora andcolleagues is that Japanese IT managers failed to appreciate and respond to the growing
importance of software. In so doing, they delayed in building up their software capabilities. In
support of this hypothesis, we suggest that the origins of Japanese IT management’s delayed
response toward software lay in the structural issues discussed above and in their hardware
centric histories.
We can take a page from Arthur Stinchcombe in his seminal 1965 contribution. He observedthat organizations which are founded at a particular time and place must of necessity constructtheir social systems with the social resources available. This includes, of course, the humancapital seen as necessary to enable organizational growth and survival. His particular insightwas that once established, an organizations of a given type, tends to retain many of the basic
characteristics it assumed at the time of its founding. That is to say, key organizational
characteristics are imprinted so that the nature of incentives used to drive performance and thecharacteristics of those initially recruited are often sustained. Stinchcombe stressed theimportance of understanding what enables those founding characteristics to persist over long
periods of time. The answer lies in the path dependency of organizational and technologicallearning. A firm’s prior organizational routines, norms and corporate culture (its history), often
reproduced over long periods, constrains its future behavior. This is partly because
opportunities and incentives for learning often will be close to previous capabilities. The more afirm uses a technology, the better it get at that technology with cumulative sunk costs in humanand physical capital. If a firm succeeds over time using a given technology, dynamic increasing
returns may cement its commitment to that technology.91
One can apply this understanding to the hardware centric origins and sustained commitment
to their technology on the part of established Japanese IT manufacturing firms. Their very
success reinforced these capabilities over long period of times. Electronic engineers were
dominant in the founding of IT electronics firms. This occupational specialty dominated the
management of IT firms throughout its history. It is plausible that this history continues toconstrain their transition to software.
As noted earlier, skilled human capital remains the most crucial factor for softwareinnovation.92 The quantity and quality and deployment of such skilled human capital is decisive.

36

Sony has been one of Japan’s quintessential hardware centric companies. The Walkman
epitomized Sony’s technical capabilities; it was a triumph of electronic engineering. Since then,a major portion of Sony’s innovations have involved making products, smaller, thinner andlighter, outcomes achieved largely through creative hardware design. They, however, havebeen particularly weak in developing innovative application software.93 Its Play Station is therare exception. Howard Stringer, former President of Sony, in a 2006 interview with the Wall St.
Journal provides a revealing insight into what has been one of Japan’s premier firms. The
following quote speaks specifically to the issue of human capital deployment.
We did not bring software engineers into product development at the beginning. The hardware
engineers would begin the product and then software would come in after the fact. And that’s
because in a company that has jobs for life, the older people are at the top and the younger
software engineers are on the bottom, pushing up. So there is a kind of a generation gap.94

Stringer explains the late entry of software engineers into the product development process interms of the Japanese age and seniority promotion system (nenkou joretsu seido). Yet, it is notjust that older hardware engineers have greater seniority in Japanese manufacturing firms.
Following upon Stinchcombe’s analysis referenced above, those managers, now at the upper
leadership levels, rose to their positions at a time when hardware capabilities were criticalfactors leading to their own personal and company’s success. Thus, these top people tend toassociate success with hardware innovation, unconsciously downplaying the growing
contributions that can be made by software and service orientations. This lag in leadership
recognition of current realities is hardly unique to Japan but may be more prevalent because of
the strength of the age and length of service system, the company’s extraordinary
manufacturing successes in the past, and the association of hardware manufacturing(monozukuri) with national culture.
Of relevance here is the tendency of large old established firms to enter new fields by using
spinoffs. Along with their established vertical keiretsu and tendency to staff their spinoffs withparent firm employees, these spinoffs tend to choke off opportunities for startups and limit theinnovativeness of spinoffs.95 Researchers have documented for select new technologies andindustries the tendency of extant large Japanese hi tech firms to adapt and survive, while in the
U.S., established hi tech firms more often disappear and are replaced by new firms. Such was
the case in the shift from mainframes to pcs and in the hard disk industry.96 How is thisrelevant to our preceding discussion? All things being equal, these large enduring Japanese IT
firms and their spinoffs are more likely to carry over their founding organizational culture to the
new field and be slower to adopt current practices and conventions. So we might expect them
to be slower to adapt to the expanding importance of software. The new hi tech firms in the37

U.S., however, are more likely, all things being equal, to adopt current practices andconventions which would accelerate the recognition of the importance of software.
In the case of the origins of Japanese IT, it is reasonable to assume that the most successful
firms developed practices to recruit, train and promote high talent hardware engineers.
Because they succeeded, they were more likely to be emulated by other high tech firms. It isonly in recent decades that failure to recognize the importance of software and to recruit, train,
and promote high talent software engineers has started to pose a challenge to organizational
survival. The delayed recognition of software’s importance can be attributed both to thesuccess of these firms until relatively recently and to the institutionalized power of hardware
engineers and their vested interest in protecting their status. This plays out in many different
ways and is reflected in what we call organizational culture.
Digging deeper into the micro practices that sustain past practices, the action proposals that
often look sensible to upper management are those which follow precedents, harmonize withcurrent actions, resemble practices of other organizations with which they regularly interact, fitwith top managers’ values and reinforce existing power holders.97 In short, they have strong
vested interests and sunk costs growing out of their past experiences.
We have long standing research in the U.S. which shows management feels most
comfortable promoting into their ranks people who are most like them. Why? It is because they
see those similar to them as easier to communicate with, to understand, and to trust?
Stinchcombe observes that the critical relationship of trust is more difficult to achieve when theparties do not have sufficient history together to be able to predict what their respective
colleagues will do in a given situation. So if hardware engineers dominate the top management
positions, they are most likely to feel most comfortable promoting hardware engineers. They
know what hardware engineers do but software engineers produce an intangible product. All
these factors slow the inevitable transition to the software era. Of course, there are,progressive Japanese firms that have moved ahead to successfully navigate the softwaretransition but relative to the U.S. the overall movement appears more halting.
If a firm only brings in software personnel later in the product development process, thisleads to the self‐fulfilling prophecy confirming that software doesn’t have much to contribute –that it is basically just a set of tools for implementing hardware centric product design. By thetime software engineers are called upon to perform their tasks, the product development
process, especially for complex products, is often behind schedule and the software engineers
are under intense pressure to complete their tasks. In this environment, it is less likely thatsoftware engineers will be able to fully understand and take advantage of the hardware design
strengths.98 In summary, the cost of hardware coming first is that it sacrifices the optimizationof software contributions.

38

The problems Stringer described are mirrored at many other high tech Japanese firms.99 In
the case of Sony, Stringer and his HR personnel responded to the problem by devising a new setof promotion practices designed to accelerate the rise of young software talent. In keeping withthe constraints described above, however, the new system produced only modest results asmiddle management, often described as the true strength of Japanese corporations, blocked
the full implementation of the new policies.
One reason for not enough collaboration between hardware and software engineers is thatthe hardware voice is often stronger than the software voice. In an organizational culture
dominated by hardware people, there tends to be an unconscious assumption that hardware
people should take the lead in product development. To be sure, the answer of who takes thelead should be determined by the product, whether it is integral or modular, by the dynamic
nature of customer expectations, etc. That said, the growing potential contributions ofsoftware suggest the need for more collaboration among these engineering specialists and thatit needs to be conducted on a balanced basis.
There is also an issue of how deployment of software personnel is related to positions of
power and control. In my field research, I found much stronger recognition of the importanceof prioritizing software among some of Japan’s Korean competitors than among Japanesemanagers whom were interviewed. A Samsung manager recounted the aftermath of the firm’s
recent development of a hit product. A few years after the product was released, it was foundthat the hardware engineers, who worked on it, were being promoted faster than the software
engineers who worked on it. A internal study of why this happened revealed that those higher
level managers who were making promotion decisions were hardware personnel. The
contributions of the software engineers weren’t as visible to them as were the contributions of
the hardware engineers and therefore the software engineers were promoted at a slower
rate.100 In short, organizational history, culture and power shapes which and how performance
metrics get applied, often with participants being unaware of the biases they exhibit. In thecase of Samsung’s higher level management, this case showed their priorities. They
demonstrated leadership by becoming aware of the situation, defining it as a problem andsetting about trying to understand why this was happening and then developing
countermeasures. Overall, I found Korean IT managers and government officials moreaggressively talking about the importance of software than was the case with their Japanesecounterparts.

Software Engineering as an Attractive Career Route39

How are software/IT jobs seen in society at large? The results of a CNN/Money Magazine
study of the best jobs in America were published in 2010. The survey methodology combined
objective (e.g., growth rate of jobs, salaries, educational requirements) and subjective quality oflife measures derived from a PayScale survey (e.g., amount of reported job stress, job flexibility)
to arrive at their final list.101
These U.S. job rankings were included in a June 2012 IPA report aimed at Japanese firms
with strong interests in software development.102 The subject of the report was thecomparative standing of the Japanese software industry, especially relative to the U.S. The
CNN/Money Magazine survey results show that five of the top ranked twenty jobs in the U.S.
are filled by software professionals. Kenji Hiranabe, the aforementioned leader in theJapanese agile software development movement, successfully pushed for the inclusion of thesurvey results in the IPA report. He explained to me why:
To Japanese engineers, it is amazing that software developer and other related occupations are
so highly recognized in the U.S. It seems that industry, investment, employment, innovation,
education and others factors surrounding IT are mutually reinforcing one another in the U.S. tocreate positive business outcomes.103

Katsutoshi Shintani, Chief Advisor to the Software Engineering Center at the Information‐
Technology Promotion Agency (IPA), commenting on this same data, stated:
Whenever I mention this data, I stress that Japanese software engineers need to be sociallyrespected and rewarded with high pay as in the case of the U.S. I mean to wake up Japanesemanagement to understand that if their companies are relying on software engineers for growth,then their software engineers need to be rewarded with high pay. Japanese firms also need todisplay publicly to outsiders the corporate contributions of their software engineers. In so doing,
young and talented people will be motivated to work in software development.104

These comments suggest that software engineers are not treated all that well in Japanese
corporations, nor seen as all that important in society. Consequently there are recruitment
problems, especially with regard to getting high school students to consider majoring in IT fields.
This would certainly be consistent with the structure of the industry as described above; many
software professionals work in subsidiaries and tiered subcontractors with lower pay and more
severe working conditions than would be the case than if they were employed by larger
corporations. As already documented, they are less likely to be employed in software productoriented firms, whether start‐ups or large corporations as is the case in the U.S. It is in the latterkinds of firms where higher status would more likely be accorded.
Japanese IT engineers hold what are often called the new 3k jobs. This labeling is widely usedin the media. The term originated in manufacturing many years ago to describe low status
manufacturing jobs characterized by dirty, dangerous and harsh conditions (kitanai, kiken,
kitsui). In the world of software, this has been transformed to: lots of overtime work, low40

wages and stressful conditions (kaerenai, kyuuyo ga hikui, kitsui). This designation is more likely
to apply to those working on customization, maintenance, and upgrading of enterprisesoftware than it is to the higher status embedded software development jobs.
The characterization of IT engineers as low status is on display in a set of three featured
articles published in Dec. 2006 in the popular business magazine, Nikkei Business.105 Their
analysis is supported by survey data from some 2,200 IT engineers.106 They found that 90% of
respondents reported stress in their work with over 1/3 of those reporting strong stress. The
biggest source of stress was quotas and work content. Some 25% reported that they didn’t
think their work was worth doing. Fifty one percent report their salary was low (though nocomparative data was reported). Respondents stated their overtime work averaged 12 hours aweek (versus. 10.4 hours per month for all industry employees and 17.5 per month for
manufacturing employees according to the government’s Monthly Labour Survey. It may wellbe that the perception of low wages is influenced by the extraordinarily amount of overtime
employees feel compelled to work relative to other jobs. As required by Japanese labor
regulations, overtime work under 60 hours a week, is compensated only at a rate of 1.25 times
the regular rate. A major problem reported in the survey was poor motivation of software
engineers in their late 30s. Particular sources of concern, in these and other articles and surveys,
are found in the firms’ lack of clarity about employee career trajectories and prospects. Overall,these findings are consistent with IPA reported survey data. Nevertheless, the data are notdrawn from a random sample so it is, at best suggestive.
Even allowing for exaggeration by these media treatments, they create an image that ishardly enticing to young people contemplating their future careers. This can only contribute to
the problems universities and corporations have in recruiting software students andprofessionals.107 Consistent with this interpretation, the survey found that some 73% of
respondents believed that IT companies are unpopular among students and young engineers.
The large amount of expected overtime work is believed to be a major source of these negative
views. Clearly, for many of the best and the brightest, IT is not the career route of choice. In
the end, this may be more of a constraint on Japanese software innovation than the education
system which is far from best in class but often good enough for many purposes.
None of this is to suggest that the situation in the U.S. approaches nirvana. There is alongstanding and ongoing debate as to whether there are shortages or looming shortages of IT
talent.108 Those denying shortage argue that those claiming shortage misrepresent or
misinterpret the data to justify importing low wage docile foreign workers through the H‐1B
visa program. Moreover, it is argued that the import of foreign IT labor diminishes theprospects for American citizens and reduces incentives for them to enter IT studies. This occurs
at the same time that talented foreign students continue to flock to the highest ranked U.S.

41

universities to study CS and related fields. Many of these students have stayed to work forvarying periods at U.S. corporations. Whatever the merits of the respective arguments, the U.S.
IT industry has had available to them ovr the last 30 years a strong supply of talented IT workers
and budding entrepreneurs. Indeed, the results of a 2012 study of engineering and technology
companies founded in the United States between 2006 and 2012 is quite revealing. The study
found that 24.3% of these companies had at least one key founder who was foreign born. This
was a slight decline from previous decades. There is no counterpart to this phenomenon in
Japan.109
There are relatively few examples of Japanese software firms which have achieved global
success and few software heroes celebrated in the popular culture. By contrast, the U.S. job
rankings shown earlier are consistent with the presence in the U.S. of a large number ofsoftware start‐up successes and individual software heroes, entrepreneurs like Bill Gates, Steve
Jobs and Mark Zuckerberg, Jeffrey Bezos, Larry Page and Sergey Brin. The U.S. also has highly
successful global software companies like Google, IBM and Oracle. The considerable rewards
for their founders’ and employees success are well publicized. These cannot help but contributeto the positive view of software related jobs as seen in the broader society.
We can gather more insight into this matter by looking at the research findings of Universum,
a firm engaged in employer branding.110 They conduct large multi‐national surveys of student’s
preferences for the most attractive potential employers. Business undergraduate students wereasked to choose the five employers they would most like to work for. The 2012 U.S. findings
show that among the top 20 most attractive employers, software firms accounted for four of
the top sixteen employers. Google ranked first, Facebook 12th, Microsoft 14th and Amazon 16th.
111
Moreover, Apple, which differentiated itself from competitors to a large extent as a result of
its software capabilities and strong integration between software and hardware, ranked second.
Were Apple included, five of the top sixteen would be software firms. The comparable Japanrankings shows the first software firm on the top 20 list is Nintendo at number 10 and thenGoogle at number 16, a total of two, with one being an American firm. 112 In short, we see
further evidence here for relatively poor student perception of Japanese IT jobs offeringpromising career opportunities compared to the U.S.
In the business community, successful CIO’s in the U.S. are held up as heroes in the business
community. Recognized entities such as Silicon.com and CIO magazine produce annual list of
the top 50 CIOs. The more popular Computerworld has its list of Premier 100 CIOs announcingthat the winners drive strategy and innovation in top tier IT departments.113 In short, software
has a far more positive reputation in the U.S. business culture as well and it attracts among thebest and the brightest in its universities. There are no well‐publicized counterparts in Japan andas we have seen, many Japanese corporations either have no CIO or only a part time one.

42

With hardware increasingly becoming a commodity, it is software which increasingly adds
value to the firm and enables competitive advantage. This being the case, one would expectthat software personnel would be increasingly rewarded relative to hardware personnel. Thereis anecdotal evidence in the U.S. which shows heated competition for software personnel asreports grow that firms increasingly acquire other firms just to gain access to their software
talent. Such extreme efforts are uncommon in Japan. What about wages and salaries? If
Japanese firms are lagging in the recognition of the importance of software relative to the U.S.,
then we might expect a larger wage advantage for software personnel relative to hardware
engineers in the U.S. compared to Japan.
What is the situation in Japan? First, there is a widespread view among software engineers,and in society at large, that their salaries are low compared to other professionals, such as
hardware engineers. Software specialists, whom I interviewed, tend to discount such claims.
The only evidence found in our literature search, provides weak support for a modest
advantage for hardware engineers. Again, it may be that the long overtime worked by software
engineers relative to other professionals fuels their sense of being disadvantaged overall.
We do, however, have data comparing salaries of engineering professions in Japan and the
U.S. which provide indirect evidence of a gap. Nakata and Miyazaki report that Japaneseengineering professions’ overall salaries (whether using yearly or hourly salaries), aresignificantly lower than their U.S. counterparts, as measured using either exchange rate orpurchasing power parity methods. They also found that salaries of Japanese male software
engineers (referred to in Japanese statistical reports as system engineers), relative to their U.S.
counterparts, ranged from 48.7 to 57.1 percent depending on whether they used exchange
rates or purchasing power parity methods. By contrast, male Japanese general engineers farednotably better in their pay with their pay rising to 56.6 to 62.8 of their U.S. counterparts.114 This
does suggest that Japanese software engineers are not seen as valued a resource relative totheir U.S counterparts as Japanese general engineers are compared to their U.S. counterparts.
Conclusion
This analysis began with a documentation of Japanese IT firm’s relative weakness inpatentable software innovation. One would do well to keep in mind, however, this does notmean that Japanese IT firms are outliers. It is rather more correct to say that U.S. IT firms, froma global perspective, display exceptional performance in software innovation. Were one tocompare Japanese IT firms to those in other advanced economies, Japanese performance most
likely would compare more favorably.
My analysis drew upon the findings of Arora and colleagues who analyzed USPTO time series
data from 1983 to 2004. Specifically they examined the numbers of software citations in43

hardware patent applications for both Japanese and U.S. firm originated patents. They
concluded that IT innovations are become more software intensive for firms in both countries,that Japanese firms rely less on software capabilities in their hardware inventions than U.S. IT
firms and they produce notably fewer software inventions. They also concluded that JapaneseIT firms are increasingly lagging behind especially in software intensive sectors.
The researches go on to analyze the cause of Japanese IT firms growing software deficits andconclude that they might well arise from a deficit in software human resources. They cite
reports of software labor shortages in Japan, a 3 to 1 U.S advantage in annual software
professional inflows to IT firms plus a much larger use of offshoring by U.S. IT firms. They also
examine the share of software patents as a ratio of total patents invented by Japanesesubsidiaries in the U.S. and find it occurs at a notably higher rate than the equivalent shareproduced by their parent companies in Japan. Based on this analysis, the authors conclude thata constrained supply of software knowledge and skills may explain the relatively weaker
innovation performance of Japanese IT firms in the 1990s.
There are, however, problems with this analysis. First the authors dismiss the literature
which suggests a “home country” bias that leads U.S. inventors to have a home court advantage
in filing with the USPTO compared to foreign inventors such as the Japanese. It is also quiteplausible that Japanese firms select the patents they choose to file in the U.S. from among
those with the most promising export/sales potential to the U.S. and other global markets. This
criterion could lead them to patent more software intensive solutions in the U.S. This scenario
may have nothing to do with software human resource deficits in Japan being the source of
their innovation shortfall.
The authors also documented that the U.S. advantage in the annual inflow of IT domestic
software graduates and foreigners (H‐1B visas in the case of the U.S.) into the domestic laborpool had grown to a 3 o 1 advantage by 2001. Added to this was a large U.S. advantage in theuse of offshoring. Assuming these gaps led to human resource constraints in IT innovation andthat this was recognized by Japanese executives, economic theory would predict thatmanagement and relevant government agencies would act to address these constraints. Yet,data, reporting the stock of IT professionals in 2010, show the same 3 to 1 gap advantage for
the U.S. While Japanese offshoring appears to have doubled from its very low levels in the
2004‐2005 period, it is not even clear that this gap was reduced as U.S. offshoring during thisperiod certainly also grew. Given the failure to make major strides in diminishing the humanresource capability gap, it may well be that Japanese management either did not recognize theexistence or importance of a software innovation gap or it did not see human resources
constraints as the critical factor in addressing the gap in software innovation.

44

To understand the situation more fully, we go beyond the period examined by Arora andcolleagues. While one does hear talk of some specific shortage of IT talent in the past andnowadays, there is no widespread national conversation in Japan about large human resource
constraints lying behind the recent past or current Japanese problems in IT. Nor has there beensuch a conversation for a very long time. In 1987, MITI predicted a shortage of software humanresources totaling one million by the year 2000.115 Today, METI officials acknowledge that thisreport was based on false assumptions and wildly off base.116 Indeed, it has been argued thatthe only clear cut time of human resource constraints impacting software innovate occurred
when all application and system engineering needed to be done in the Japanese language asthus required a vast army of software engineers. This changed when in 1991 IBM/Japan,
together with many of NEC’s competitors, introduced to Japan a bilingual operating system forpersonal computers .DOS/V. The significance of DOS/V was that it allowed Japanese purchasersof DSO)S/V to run English language MS‐DOS compatible software at the same time it ran
DOS/V Japanese software.117 This opened up Japanese markets to foreign software andreduced the need for large numbers of software engineers.
The failure to significantly reduce the gap over this long period can also be interpreted toprovide support for the view that Japanese IT executives have been slow to recognize humanresource constraints as a big factor limiting IT innovation. It is also consistent, however, withthe view that as top executives in IT firms came gradually to recognize the importance ofsoftware innovation for their competitive performance, they found themselves in a bind. They
didn’t know how to proceed without jeopardizing their legacy hardware businesses built onhigh quality precision manufacturing and requiring high quality and customization for theircomplementary software. Seen through their eyes, sustaining the legacy businesses does notlend itself to their prioritizing software innovation. Rather, it reinforces traditional monozukuri
practices.
In this connection, I explored the evidence for the difficulty Japanese IT firms have had in
making the transition from hardware centric to more software focused firms. Building on
Stinchcombe, one can make a plausible case that organizations of a given type, tend to retain
many of the basic characteristics they developed at the time of their founding. The nature ofincentives used to drive performance and the characteristics of those initially recruited areoften sustained because organizational and technological learning is highly path dependent. A
firm’s prior organizational routines, norms and corporate culture, often reproduced over long
periods, constrains its future behavior. This is partly because opportunities and incentives forlearning often will be close to previous capabilities. The extraordinary success of Japanese IT
firms in the 1970s, 1980s and 1990s, reinforced many of their hardware centric practices. I
elaborated various factors which enhanced the credibility of these behaviors in the view ofhardware executives.

45

There is evidence that the quality of IT capabilities produced at Japanese universities has
greatly lagged and continues to lag that produced at U.S universities. The slowness in upgrading
IT curricula is notable and it is hard not to label Japan a slow follower in this regard. This can beinterpreted to support Arora and colleagues’ thesis of the continuing human resource
constraints limiting Japanese software innovation. These same facts, however, are also quite
compatible with the understanding that the Japanese educational establishment didn’t grasp
the importance of software to Japan’s competitive strength and failed to act aggressively toaddress software weaknesses. Indeed, our analysis suggests powerful inertial forces thatslowed innovation in this area.
Arora and colleague’s analysis of the causes of the innovation shortfall ultimately rest on theassumption that more talented engineers yield more innovation. Yet, more talented engineers
do not, in themselves, equal more productivity or innovation. Large aggregations of talented
software engineers whether in a firm, region or nation cannot in itself be expected in itself toyield greater innovation. Software innovation benefits from powerful supporting ecosystems,
from high quality engineers and especially from the embeddedness of these engineers inspecific kinds of organizations and societal institutions whose objective is to enable firms tocreate and market these innovations to large numbers of users. Put differently, Japan’s
patentable innovation deficit vis a vis the U.S. may arise less from smaller numbers of talented
engineers than from different organizational and managerial capabilities and especially fromdifferent strategic choices.
This suggests there are deeper structural causes of Japan’s software innovation shortfall bothin the period investigated by Arora and colleagues as well as later. The evidence suggests notenough Japanese products are focused on software and not enough software professionals arefocused on product. Both of these lead to lack of demand for excellent softwarearchitects/designers. The net result is not enough software innovation. In this sense, thehuman resource constraints identified by Arora and colleagues at best are intervening variables
reflecting a lack of focus on software products, especially ones intended for sales to large
numbers of users. Relevant here is the thin staffing of IT professionals at IT firms. Also relevant
is the huge amount of software capabilities directed toward customization for sales in verticalmarkets. The evidence for this can be seen most starkly in the foregoing account of the
prototypical work and product flow of the “Big Five” Japanese enterprise software players
based on our field observations. Opportunities for software innovation are modest in these
activities.
The huge resources Japanese firms devote to customization are testimony to theimportance attached to preserving monozukuri capabilities. In this environment, the primaryrole of software is to support the design, production and sale of specific monozukuri products.

46

As such, software is seen as an assistant to and controller of hardware products. Its potential asa driver of customer value tends to go unfulfilled and incentives for software innovation aremodest.
Of particular concern for Japan’s IT future, is the seeming low esteem in which IT work isheld in Japan versus the U.S. This is reflected in IT not being seen as an attractive career route
relative to the U.S. The reasons for this appear to lie in the limited opportunities for innovative
activities and associated rewards for most Japanese software engineers. Instead, mostJapanese software professionals are employed as cogs in IT service firms rather than in productproducing firms or in startups.

Notes
1

The following reference is to Japan’s software imports and exports. The other weaknesses discussed
here will be documented later in the paper. D. Lippoldt and P. Stryszowski, 2009. Innovation in the
Software Sector, OECD, Paris: 94.
2
T. Morgan, 2010. “IBM Reorganization Tucks Systems Under Software,” (July 26),
http://www.itjungle.com/tfh/tfh072610‐story05.html. Accessed Dec.28, 2012.
3
T. Fujimoto, 2004, Nihon Monozukuri Tetsugaku (Japanese Philosophy of Manufacturing). Tokyo, Nihon
Keizai Shinbun.
4
N. Fligstein, 1996. “A Political‐Cultural Approach to Market Institutions,” American Sociological Review,(August): 656‐673.
5
H. Kimura,2009. Monozukuri Haisen (Monozukuri Defeat), Tokyo, Nikkei Premium Book.
6
OECD, 2002, Information Technology Outlook, Paris: Organization for Economic Cooperation andDevelopment,: 105.
7
M. Cusumano, 2008. “The Changing Software Business: Moving from Product to Services, IEEE
Computer Society, (January):20‐27.
8
http://www.datacenterdynamics.com/focus/archive/2012/01/dell‐shows‐growing‐importance‐
software‐new‐storage‐releases. Accessed Oct. 23, 2012.
9
R. Florida and M. Kenny, 1990 . The Breakthrough Illusion: America's Failure To Move From Innovation
To Mass Production, New York, Basic Books; M. Cusumano, 1991, Japan’s Software Factories: A
Challenge to U.S. Management, New York: Oxford University Press.
10
R. Katz, 2012a. “Plunge in Japanese Electronics, Part 1,” The Oriental Economist, (March 1): 1‐9.
11
A. Nakatyama, 2012. “Electronics Firms Desperately Seek New Engines as TV Ops Sputter,” Nikkei
Weekly, (Feb.12):4, http://www.tse.or.jp/english/market/data/value/index.html. Accessed Jan.19, 2013.
12
R. Katz, 2012b. “Plunge in Japanese Electronics, Part , Part 2,” The Oriental Economist, (March, 5): 1‐11
13

Information Technology Promotion Agency (IPA), 2012. ”Survey of Factors for Dissemination and Expansion of
the Areas of Adoption of Non‐Waterfall Model Development,” (Hi Wotaforu Kata Kaihatsu no Fukyuu Yoin to
Tekiyou Ryouiki no Kakudai ni Kansuru Chosa), IPA: 1‐65; Japan Users Association of Information Systems(JUAS),
2008. “More than 50% of Big Corporations Install ERP Packages, Mainly for Personnel Management and47

Accounting,” Packages and Organization, http://www.juas.or.jp/en/research_results/index.html. Accessed Oct. 10,
2012.
14

R. Cole 2006. “Software’s Hidden Challenges,” in D. Whittaker and R.Cole (eds.) Recovering from
Success, Oxford: Oxford University Press: 115.
15
K. Hiranabe, 2011.”What Has Happened and is Happening in Japan’s Agile Movement,” InfoQ,
www.inf.com/articles/japan‐agile‐whats‐happening. Accessed 8/12/2012; D. West and T. Grant, 2010.
“Agile Development has Changed Agility, Forrester Research, Inc., 5‐21
16
I. Von Morgenstern, P. Kenevan, and U. Naeher, 2011. “Rebooting Japan’s High‐Tech Sector,”
McKinsey and Company (ed.) Reimagining Japan, San Francisco: Viz Media: 297‐308.
17
Ibid., 298.
18
A. Arora, L. Branstetter, and M. Drev, 2012. “Going Soft: How the Rise of Software Based Innovation
led to the Decline of Japan’s IT Industry and the Resurgence of Silicon Valley,” The Review of Economics
and Statistics, Accepted for publication Manuscript 14150,
http://www.mitpressjournals.org/toc/rest/0/ja. Accessed June 15, 2012.
19
Ibid, 9‐10.
20Ibid, 16.
21
Ibid,30.
22
Ibid, 8‐923Sugimura, 2013. An Important Market: Software Patenting in Japan, Sugimura International Patent andTrademark Attorneys, http://sugi.pat.co.jp/portfolio/an‐important‐market‐software‐patenting‐in‐japan/. Accessed
May 31, 2013.
24

S. Nagaoka, K. Motohashi and A. Goto, 2010. “Patent Statistics as an Innovation Indicator,” (Ed.)
Bronwyn H. Hall, Nathan Rosenberg), Handbook in Economics of Innovation, Vol. 2, Oxford, Elsevier. B.V.,
1100‐1101.
25
S. Kojima and M. Kojima, 2007.” Making IT Offshoring Work for the (sic) Japanese Industries,” in B.
Meyer,nd J. Mathai (Eds.), SEAFOOD (Software Engineering for Offshore and Outsourced Development)
Conference Proceedings, LNCS 4716 (2007), 67‐82.
26
JISA, 2012. IT Human Resources White Paper (IT Jinzai Hakushou 2012). Information Technology
Promotion Center, 121.
27
National Science Foundation, 2012. Unpublished tabulations of the 2003 National Survey of College
Graduates provided to the Economic Policy Institute by Dr.Nirmala Kannankutty, senior adviser, National
Center for Science and Engineering Statistics at the National Science Foundation. Data are tabulated by
the presence or absence of various degrees for specific computer related occupations and appear in
D. Costa, 2012. Stem Labor Shortages: Microsoft Report Distorts Reality About Computing Occupations,
Economic Policy Institute. http://www.epi.org/publication/pm195‐stem‐labor‐shortages‐microsoft‐
report‐distorts/ Accessed March 2, 2013; J. Mok, 2007. My Struggles on the Front Lines of Japanese IT,”
Japan Inc, Part II, (Nov. Dec.):1‐4.
28
JISA, 2011. Survey on Factors in the Diffusion of the Development of Non‐Waterfall Models and the
Expansion of their Fields of Application,” (Hi Wotaforu Kata Kaihatsu no Fukyuu Yoin to Tekiyou Ryouiki
no Kakudai ni Kansuru Chosa), Software Engineering Center, Information Technology Promotion Agency.
29

30

Interview with Shinya Fushimi, Group Vice President, Mitsubishi Electric, March 23, 2013.

The Japan Institute for Labor Policy and Planning, 2012. Japanese Working Life Profile 2011/2012, The
Institute, 10, 14.
31
F. Brooks, 1995. The Mythical Man‐Month, Addison Wesley, Longman, Reading, MA.; K. Clark and T.
Fujimoto, 1991. Product Development Performance, Harvard Business School, Boston: 71‐76.
32
D. Lippoldt and P. Stryszowski,op.cit., 23.

48

33

W. Steinmueller, 1996. “The U.S. Software Industry: An Analysis and Interpretive History,” in David
Mowery (ed.), The International Computer Software Industry, New York: Oxford University Press: 42.
34
Y. Nakata and S. Miyazaki, 2011. “The Labor Market for Japanese Scientists and Engineers: Is the Labor
Market Externalized? What has Happened at their Workplace?” Japan Labor Review (Summer): 100
35

J. Dedrick and K. Kraemer, 1998, Asia’s Computer Challenge, Oxford University Press, 100.
D. Costa, 2012. “STEM Labor Shortages,” Economic Policy Institute, (November 19):4,
http://www.epi.org/publication/pm195‐stem‐labor‐shortages‐microsoft‐report‐distorts/.Accessed April; 15, 2013.
Original source is unpublished data from National Science Foundation’s 2003 National Survey of College Graduatesprovided to the Economic Policy Institute.
36

37
38

Ibid.

In 2012, those receiving PhDs in CS taking jobs in industry (61%) or government (4%) together accounted for
65% of all CS PhDs taking jobs from North America in PhD granting departments. This compares to29%, taking jobs in education from PhD. granting institutions, of which 14% were postdocs. Computing Research
Association, 2013. 2012 Taulbee Survey
http://www.cra.org/uploads/documents/resources/crndocs/2012_taulbee_survey.pdf
39
E. Blum and Alfred Aho, 2011. CS: The Hardware, Software and Heart of IT,” Springer, New York: 423.
40

http://www.shanghairanking.com/SubjectCS2012.html.
E‐mail communication from Prof. Tetsuo Tamai, Hosei University, Nov. 8, 2012.
42
Ibid.
43
Email communication from Prof. Tetsuo Tamai, Nov. 20, 2012.
44
N. Takahashi, 2001. “Information Processing Society of Japan Accreditation Committee Activities,”(Part 1 of 2), (Jouhou shori gakkai ni okeru akuredeiteshiyon iinkai katsudou), Bit, (March):8.
45
J. Dedrick and K. Kraemer, 1998, op.,cit., 48.
46
Email communication with Michael Cusumano, April 17, 2013. Further confirmation comes from
Masato Takeichi, e‐mail communication April, 18, 2013. .
47
Op.cit., N. Takahashi,1.
48
Ibid., 5.
49
M. Takleichi, 2003. Concerning Education of Personnel in Information Field in Japan’s Universities(Waga kuni ni okeru jōhō bunya no jinzai ikusei ni tsuite), “2003 Information Studies Symposium” (2003
nen Jōhōgaku Shinpojiumu), Science Council of Japan (Nihon Gakujutsu Kaigi), Information Studies
Research Contact Committee, Organizer: 14.
50
Interview with Prof. Masato Takeichi, National Institution for Academic Degrees and University
Evaluation, Tokyo, March 15, 2013 .
51
F. Kimura, 2013. Symposium on IT and Monozukuri: Complexity of Artifacts and Control Structures
Among Mechanical, Electrical and Software Sub‐systems,” Manufacturing Management Research Center,
University of Tokyo, (March 18).
52
P. Denning, 2003. “CS: The Discipline,” in A. Ralston and. E. Reilly (Eds.), 2nd edition,Encyclopedia of
CS and Engineering, New York: Van Nostrand and Reinhold.
41

53

Op., cit. Interview with Masato Takeichi.

54

http://www.t.u‐tokyo.ac.jp/etpage/introduction/history.html.
Op., cit. F. Kimura, 2013
56
Op., cit. Interview with Masato Takeichi.
55

57

Computing Research Association, 2013. 2012 Taulbee Survey,
http://www.cra.org/uploads/documents/resources/crndocs/2012_taulbee_survey.pdf
58

Email communication Abbas El Gamal, Chair EE, Stanford University, April 9, 2013
C. Ness, 2013.” From geeky to cool: Statistics is Berkeley’s fastest‐growing major” Berkeleyan (April 6).
http://newscenter.berkeley.edu/2013/04/16/from‐geeky‐to‐cool‐statistics‐is‐berkeleys‐fastest‐
growing‐major/.

59

49

60
61

Email communication, David Hodges, former Dean UC Berkeley, College of Engineering, April 13, 2013.
Computing Research Association, 2013, op.cit..

62

E‐mail communication from David Hodges, 4/14/13.
Op., cit. Interview with David Hodges.
64
E‐mail communication with Masato Takeichi, 4/13/13.
65
Unfortunately the data do not break out the actual number of graduating majors in the two areas.
http://www.t.u‐tokyo.ac.jp/etpage/introduction/statistics02.html.
66
Email communication Daichi Horie, Information Processing Advancement Section, METI, March 1,
2013.
67
Y. Baba, S. Takai, and Y. Mizuta, 1997. “The User‐Driven Evolution of the Japanese Software Industry:
The Case of Customized Software for Mainframes,” in David Mowery (ed.) The International Computer
Software Industry, New York: Oxford University Press.
68
JPSA,2007. Package Software Market Expansion Research Forum Activity Fiscal Year 2004
Report,(Heisei 16 Nendo Pakkeeji Sufutowea Shijou Kakudai Kenkyukai Katsudou Houkokusho), Tokyo:
Japan Personal Computer Software Association: 16.
69
Interview with Junichi Eguchi, Director, Information Services Industry Division., METI, March 28, 2013.
70
Interview with Toshihisa Hirose, Senior IT Services Platform Specialist at NEC, March 22,2013
63

71

J. Mok, 2008. “My Struggles on the Front Lines of Japanese IT,” Japan Inc., Part III, (March 4): 1‐2.
http://www.japaninc.com/mgz_mar‐apr_2008_japanese‐enterprise‐itAccessed Aug. 2, 2012.
72
J. Dedrick and K. Kraemer. Op.cit., p.100.
73

U.S. data based on the “2012 National Venture Capital Association Year Book, Thompson Reuters,
New York. Data for Japan based on responses from survey questionnaire distributed by Japan Venture
Capital Association members. Responses received from 32 companies.
http://www.jvr.jp/sites.default/files/press_releses/2011FundReport.pdf. Accessed 10/14/11.
74
Teikoku Databank, 2011. COSMOS2 database, 2011 edition.
75
Murayama, Keiichi, 2011 “Entrepreneurs turning away from Japan,” Nikkei Weekly, (Oct. 31): 43.
76
S. Gopalakrishnan, 2011. “The T‐Shirt and the Kimono,” McKinsey and Co. (ed.) Reimagining Japan, Viz
Media, San Francisco: 293.
77
E‐mail communication from Katsu Shintani 11/6/12.
78
J. Mok, 2007. “My Struggles on the Front Lines of Japanese IT,” Japan Inc, Part I, (March 25): 1‐3.
http://www.japaninc.com/mgz_spring_2007_frontline_japanese_it,
Accessed Aug. 2, 2012.
79
M. Cusumano, 2003. “Software Development Worldwide: The State of the Practice,” IEEE Software,(November/December): 2‐8.
80
M Cusumano, “The Puzzle of Japanese Software,” Communications of the ACM, (July, 2005):25‐27.
81
R.Cole and S. Fushimi, 2011. “The Japanese Enterprise Software Industry,” in in H. Miyoshi and Y.
Nakata (eds.), Have Japanese Firms Changed, Palgrave McMillan, Houndmills, England: 41‐69.
82
Ibid., 59.
83
Information Technology Promotion Agency (IPA), 2012, op cit., 64.
84
J. Peppart, 2011. “Unlocking the Potential of the Chief Information Officer (CIO),” California
Management Review, Summer: 73‐99.
85
Ministry of Internal Affairs and Communications, Japan, 2008 Information and Communications
Industries, 2007 White Paper.
http://www.soumu.go.jp/johotsusintokei/whitepaper/eng/WP2007/chapter1‐2.pdf.
86This account relies heavily on the prior work of Cole and Fushimi. It particularly draws on theobservations of Shinya Fushimi. Cole and Fushumi, op.cit. Hitachi, Toshiba and Mitsubishi Denki haveannounced that their primary business focus going forward will be large social infrastructure projects

50(energy, transportation and utilities). These firms see software more a glue holding different projectcomponents together rather than as primary drivers.
87
J. Kokuryo, 1997. “Information Technologies and the Transformation of Japanese Industry,” Paper
presented at the Pacific‐Asia Conference on Information Systems, Brisbane, Australia: 1‐15.
88
O. Lorenzo, P. Kawalek, B. Ramdani, 2009. “The Long Conversation: Learning How to Master
Enterprise Systems,” California Management Review, (Fall): 166.
89
J. Lincoln and M. Gerlach, 2004. Japan’s Network Economy, Cambridge University Press.
90

http://www.jetro.org/salesforce_how_japan_came_to_be_the_second_largest_market_for_this_billion_dollar_co
mpany Accessed May 7 ,2013.
91

R. Nelson, 1995. “Recent Evolutionary Theorizing About Economic Change,” Journal of Economic
Literature, (March): 73‐74.
92
Lippoldt and Stryszowski, op.cit., 23.
93
Y. Kane and P. Dvorak, 2007. “Caught Between Two Worlds, The Sony Chief Tightens His Grip. Will it
Work?” Wall St. Journal, March 3. ttp://online.wsj.com/article/SB117285593145024927.html
94
W. Mossberg, 2006. “Shaking Up Sony,” Wall St. Journal, June
6http://online.wsj.com/article/SB114955974505772215‐email.html, . Accessed April 5, 2012.
95
M. Gerlach and J. Lincoln. 2000. “Economic Organization and Innovation in Japan: Networks, Spinoffs,
and the Creation of Enterprise,” in G. Von Krogh, I. Nonaka, and T. Nishiguchi (eds.): Knowledge
Creation: A New Source of Value, London: Macmillan:151‐198.
96
H. Chesbrough, 1999. "Arrested Development: The Experience of European Hard Disk Drive Firms in
Comparison to US and Japanese Firms", Journal of Evolutionary Economics, 287‐330.
97
W. Starbuck, 1988. “Executives’ perceptual filters: what they notice and how they make sense,” in D. C.
Hambrick (ed.) The Executive Effect: Concepts and Methods for Studying Top Managers: Greenwich, CT:
JAI Press: 35‐65; Ibid, 1995. “How Organizations Channel Creativity,” in C.M.Ford and D.A. Gioia (eds.),
Creative Action in Organizations, Greenwich. CT: Sage: 106‐114.
98
T. Fujimoto and Y. Park, 2012. “Complexity and Control: Benchmarking of Automobiles,”Benchmarking: An International Journal, 502‐516.
99
M. Fukuzawa, 2008. “A Generation‐Selection Process of Product Architecture: A Case of Developmentof Firmware in Digital MFP,” Annals of Business Administration Science, Tokyo, (December): 1‐18; T.
Fujimoto and Y. Park, 2012. Op.cit.
100Interview with Sungcheol Kim, Manager at the Chief Technology Office of Samsung Electronics’
Advanced Institute of Technology), Seoul, Korea, April 2, 2012
101
More specifically, the best jobs were picked according to the following methodology: Researchers
created an industry screen using Bureau of Labor Statistics growth forecasts for 7,000 jobs, andidentified industries with the biggest increases in jobs requiring bachelor’s degrees. They then ranked
them by 2008‐18 expected growth and pay. They deleted jobs if at least 20% of workers were not in ahigh‐growth industry. They kept fast‐growing jobs not specific to any single industry. They then createda job screen and selected jobs that required at least a bachelor’s degree, and eliminated those projected
to grow less than 10% from 2008 to 2018. They cut jobs with median pay below $60,000 for experienced
workers (except certain high growth job titles). They then eliminated jobs with fewer than 10,000
positions nationwide. The final ranking incorporated data from a PayScale Survey in which 40,000
workers rated their jobs on quality‐of‐life factors such as stress, job security, and flexibility and short‐and long‐term employment outlook. They ranked job titles using median pay for seasoned workers,
industry and job growth, ease of entry, and estimated employment.
http://money.cnn.com/magazines/moneymag/bestjobs/2010/index.html . Accessed May 5, 2012.
102
Information Technology promotion Agency, op. cit., 22.

51

103

Email communication July 23,2012.
Email communication July 22,2012.
105
Nikkei Computer Staff, 2006a. “Future Vision of Measures against 3k: Insecurity is the Problem for
Motivation,” (3k Taisasku yori Shourai Bijon o: Fuan ga IT Engjinia no Yarigai wo Sogu), Nikkei Computer,(December): 40‐43;
2006b, “Stop Losing Engineers by Supporting their Childcare,” (Shussan Ikuji Shien de Jinzai Ryushitsu
wo Tomeru), Nikkei Computer, (December): 44‐47; 2006c. “This is the Kind of Company I’d Like to Work
at: Candid Answers from 2200 IT Engineers” (Konna Kaisha de Hatarakitai: IT Enjinia 2200 Nin no
Honne,”), Nikkei Computer, (December): 48‐53.
106
The respondent and corporate makeup of this Internet survey are as follows: 65% work for IT
vendors, 49% are employed in small and medium sized enterprises, 46% are middle managers, 31% aresystem engineers, 13% project managers, and 12% application and maintenance engineers.. Averageage of sample is 39.3, 1,935 are male and 238 female and. 33% are full time employees.
107
Nikkei Computer, 2006c, op.cit.,48‐53
108
D. Costa, op. cit.
109
V. Wadhwa, A. Saxenian and E. Siciliano, 2012. America’s New Immigrant Entrepreneurs: Then andNow, Kauffmann Foundation.
http://www.kauffman.org/uploadedFiles/Then_and_now_americas_new_immigrant_entrepreneurs.pdf
Accessed March 2, 2013.
110
http://www.universumglobal.com/ Accessed Nov 23, 2012.
111
Unfortunately, there was no comparative data for engineering students.
http://www.universumglobal.com/IDEAL‐Employer‐Rankings/The‐National‐Editions/American‐Student‐
Survey112
http://www.universumglobal.com/IDEAL‐Employer‐Rankings/The‐National‐Editions/Japanese‐
Student‐Survey
113
Peppard, op cit., 74.
114
Y. Nakata and S. Miyazaki, op.cit., 103.
115
MITI, 1987. Software Personnel in 2000 (Nisennen No Software Jinzai), Computer Age Ltd.,Tokyo, Japan,
p.62.
104

116

Interview with Junichi Eguchi, op.,cit.
M. Fransman, 1995. Japan’s Computer and Communications Industry, Oxford University Press,
Oxford: 188.

117