14 Did Modifications of the Japanese Patent System
Lead to a Reduction in Price Competition andthe Promotion of R&D Activities?
: The Impacts of Some Modifications between 1998 and 2013
on the Japanese Automobile Industry (*)
Research Fellow: Miyuki TANIGUCHI
This study tests the hypotheses that modifications of the Japanese patent system between 1998 and 2013 led
to reduced price competition and the promotion of R&D activities in the Japanese automobile industry using
econometric methods. First, this study focuses on the modifications to the Japanese patent system which have thepossibility of influencing R&D activities. It is found that the modifications in 1998, 1999, and 2003 have thepossibility of promoting R&D activities. Then, this study examines whether these modifications have promoted
R&D activities in the Japanese automobile industry, by comparing these R&D activities with R&D activities in
the German automobile industry. It is expected that the German automobile industry has not been greatly
influenced by modification of the German patent system because there has been little change in the German
patent system in the last fifteen years. The results of the econometric analysis show that the modification of theJapanese patent system in 2003 influenced the quality of the technologies to which patents have been applied for.
The number of forward citations per patent application has fallen considerably since 2003. On the other hand,the number of forward citations per patent application has not changed in the German automobile industry. The
results of the econometric analysis also show that the profits per patent application have increased since 2003.
One possible reason for this is that the constant modifications to strengthen patent protection rights haveincreased profits since 2003. Finally, this study examines whether price competition has been reduced in theJapanese automobile market since 2003. The results of the econometric analysis confirm that price competition
has tended to be reduced.

Ϩ Introduction
The level of protection of patent rights
influences the R&D activities of firms throughmarket competition. Theoretically, when theprotection of patent rights is strong enough, apatentee can obtain monopolistic profits by selling
his/her patented products without pricecompetition in markets. On the other hand, when
the protection of patent rights is not sufficient,
the patentee will fail in obtaining profits by selling
his/her patented products because not only thepatentee but also other firms can earn profits
from the patented products. The price of thepatentee’s products must be higher than that ofother firms because the patentee needs torecover R&D costs through the sales of thepatented product. As a result, a patentee loses in
the price competition with other firms. Thus, inthe situation where a differentiation strategy does
not work, firms might stop their R&D activities.

The Japanese patent system has been
modified with the intention of providing more
incentives to the R&D activities of firms. If wefocus on the modifications between 1998 and 2013,
there are three modifications which have possibly
influenced R&D activities. They are: (1) thestrengthening of the penalties for infringementsof patent rights and the lowering of patent fees tomaintain patent rights in 1998; (2) theenforcement of relief against the infringement ofpatent rights in 1999; and (3) the lowering of feesfor patent applications, patent examinations, andpatent maintenance in 2003. Strengthening
penalties or enforcing relief against patent
infringements could prevent patentees fromlosing profits due to patent infringements. Lower
patent fees makes patenting easier. Thus, there isa possibility that these modifications led to thepromotion of R&D activities.
In order to discuss policy implications topromote R&D activities in Japan through the(*) This is an English translation of the summary of the report published under the Industrial Property ResearchPromotion Project FY2014 entrusted by the Japan Patent Office. IIP is entirely responsible for any errors inexpression or description of the translation. When any ambiguity is found in the English translation, the original
Japanese text shall be prevailing.
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Japanese patent system, this study investigates
the impacts of some modifications of Japanese
patent system on the level of price competition
and the R&D activities of firms in the automobile
industry, using econometric methods. In
particular, this study investigates the impacts ofthe modifications in 1998, 1999, 2003 on the levelof price competition in Japanese automobile
market and on R&D activities in the Japaneseautomobile industry. The automobile industry isselected for three reasons. First, the automobile
industry is one of the leading industries in Japan.
Second, automobile firms tend to obtain more
patents than firms in other industries. Third, thepossibility that firms in the automobile industry
conceal new technologies without applying forpatents does not need to be considered ineconometric analysis. Basically, firms with newtechnologies in automobile industry will apply forpatents for that technology. An interview with aJapanese automobile manufacturer in 2013
suggested that in the automobile industry firmsapply for in relation to the output of R&D
activities except for know-how1. This is because
applying for patents for the new technologies has
greater merit than concealing the newtechnologies. Rival firms can copy newtechnologies if they reverse engineer automobiles
which are equipped with newly technologies.
Thus firms need to protect new technologies byobtaining patent rights.
The structure of this report is as follows.
Chapter II analyses R&D activities in theJapanese automobile industry in the period
between 1991 and 2013. For comparison, Chapter
II also analyses R&D activities in the German
automobile industry in the period between 2000
and 2013. Chapter III examines whether pricecompetition has been reduced in the Japanese
automobile market. In the last Chapter, someconclusions and policy implications are given.

ϩ The impact of some modificationsof the patent systems in the lastfifteen years on firms’ R&D
activities
In Chapter I, it is suggested that theJapanese patent system experienced threemodifications which have possibly influenced
R&D activities: (1) a strengthening of thepenalties against the infringement of patent rights
and a lowering of patent fees to maintain patentrights in 1998; (2) enforcing the relief against theinfringement of patent rights in 1999; and (3) alowering of fees for patent applications, patentexaminations, and patent maintenance in 2003.
These modifications have the possibility ofpromoting R&D activities because they give
patentees some additional advantages. Chapter II
examines whether these modifications led to thepromotion of R&D activities in the Japanese
automobile industry, by comparing R&D activities
in the Japanese automobile industry to those in
the German automobile industry. The German
automobile industry is selected for comparison
because the German automobile industry issimilar to the Japanese automobile industry inthat German firms obtain many patents, andbecause there has been no drastic modification of
the German patent system.
First, it is confirmed that R&D expenses in
the Japanese automobile industry have increased
more than in the German automobile industry
after the Japanese patent system was modified
three times around 2000. In the period between
2000 and 2007, when no large macro shock
occurred, R&D expenses increased both in theJapanese automobile industry and the Germanautomobile industry. However, the average rate ofincrease of R&D expenses in the Japanese
automobile industry is twice that in the German
automobile industry from 2000 to 2007. Thissuggests that the modifications of Japanese patent
systems around 2000 have the possibility ofpromoting the increases of R&D expenses inJapanese automobile industry.
Next, it is verified that modifications ofJapanese patent system in 1998, 1999, and 2003
have improved the efficiency of R&D in theJapanese automobile industry over the last fifteen
years, using econometric methods. It is also
verified that the efficiency of R&D in the German
automobile industry has not changed since 2000
using econometric methods. A knowledge
production function where no economies of scales
are assumed because more researchers or more
R&D expenses would not improve R&D efficiency,
is employed for these verifications.2 To control
for differences in the R&D efficiencies acrossfirms or over time, an inefficiency term is added
to the knowledge function. This means thatstochastic frontier analysis is applied to theknowledge functions. In this study, the output of
the knowledge production function is defined asthe number of forward citations or the amount ofprofits, and the input factors are defined as thenumber of researchers, the number of inventors,
R&D expenses, and the cost of technologies
imported from foreign firms. By the way, to apply● 95 ●IIP Bulletin 2015 Vol.24

stochastic frontier analysis to the knowledge
production function, the dependent variables need
to be continuous. Thus, the amount of output(forward citations or profits) per patentapplication and the number of inputs per patentapplication are used as the measures of output
and input factors, respectively.
Data on 25 firms between 1991 and 2012 areused to estimate a knowledge production functionin the Japanese automobile industry. Data on
patents is generated from IIP Patent Database(Institute of Intellectual Property), using access2013 and Stata 12. Data on R&D is drawn frommicro data in the Survey of Research andDevelopment (Kagakugijutsukenkyuu chousa)
conducted by the Statistics Bureau, Ministry ofInternal Affairs and Communications, Japan. The
firms which have answered the questionnaires
continuously over the 21 year period of 1991 to2012 are chosen as the firms to be included in thesample analyzed. Observations which include
output or input factors with a value of zero or anegative value are eliminated because theproduction function assumes that all output andinput factors are positive. As a result, 25 firms
and 331 samples are used for estimation whendependent variable is defined as the number offorward citation per patent. 25 firms and 408
samples are used for estimation when dependent
variable is defined as the amount of profit perpatent. Data on 28 firms between 2000 and 2008
are used to estimate a similar knowledgeproduction function for the German automobile
industry. Data on patents including the average
number of inventors per patent is generated fromPATSTAT (European Patent Office) using MySQL
5.6. Data on R&D expenses is drawn from the“R&D Ranking of EU Top 1000 companies”(European Commission), and from the annual
reports published by individual firms, andfinancial
reports
ofindividualfirms(Bundesanzeiger.de). As a result, 28 firms and118 samples are used for estimation.
The estimation results show that themodification of the Japanese patent system in2003 led to a decrease in the number of forward
citations per patent application in the Japanese
automobile industry, while the modifications in1998 and 1999 had no impact on these citations. Itis considered that the modification in 2003
provided firms with more incentives to apply formore patents because the modification in 2003
reduced the average fees for patent applications,patent examinations and patent maintenance by
90,000 yen per patent application. In fact, theIIP Bulletin 2015 Vol.24

number of patent applications has increased since2003. The estimation results also show thatprofits per patent application have increased since2003. One possible reason for this is that theconstant modifications to strengthen theprotection rights started to influence profits in2003 rather than the direct impact of themodification in 2003. Furthermore, the estimation
results confirm that R&D efficiencies have notchanged in the German automobile industry since2000.

Ϫ Did the strengthening of theprotection of patent rights lead toa reduction in price competition?
As Chapter I indicates, a necessary condition
for patentees to be able to obtain profits by selling
patented products without price competitions isthat the patent rights provide sufficient protection.
The estimation results in Chapter II show thepossibility that the constant modifications tostrengthen protection rights have increased
profits since 2003. Thus, Chapter III examines
whether price competition has been reduced in
the Japanese automobile market since 2003. Thishypothesis is examined by looking at movementsin the price elasticity of demand, which provides
an indication of how many additional automobiles
can be sold when the price is lowered. A smaller
absolute value of the price elasticity of demandmeans reduced price competition.
To obtain estimates of the price elasticity ofthe demand for automobiles, a demand function
for new passenger cars in the Japanese
automobile market is estimated. The estimateddemand function follows the discrete choicemodel of product differentiation in Irwin andPavcnik (2004), whose framework was originallyproposed by Berry (1994). In this model, it isassumed that a consumer has a two-step decision
making process when he/she purchases a newpassenger car: First, the consumer decides thetype of the passenger car from among standard,
small, and mini cars; and then, the consumer
decides the model of the passenger car. Following
Berry (1994) who estimates demand functions forautomobiles, the demand for cars depends on themarket shares of the selected models in themarket of the selected types, car prices, and car
performances in the model.
Data on the models of Japanese passenger
cars between 2003 and 2010 are used to estimate
the demand function year by year. Data on car
sales are drawn from the Automotive Yearbook● 96 ●

(Jidousha nenkan) (Nikkan Jidousha Shinbun-sha,and Automobile Business Association of Japan)and Auto Aftermarket Data Book (AM Network).
Though the displacement volume indicates a car’sperformance, passenger cars are categorized into
three types according to their displacement
volume. Though its horsepower also indicates a
car’s performance, the horsepower is sometimes
correlated with the car’s displacement volume.
Thus, the displacement volume and thehorsepower are not used as independent variablesin this study. As a substitute, the number ofpatents owned by the automaker producing thecar is used because the major patented
automobile technologies are expected to improve
the overall performance of a car by increasing fuelefficiency and reducing emissions. The number ofeffective patents for each automobile manufacture
is provided by the Japan Patent Office. Since data
are not necessarily available for all models, theunbalanced panel dataset used in the analysis
contains 257 models and a total of 1,319
observations.
In order to obtain an estimate of the priceelasticity of demand for each year, the demand
function is estimated using pooled data for eachyear. The estimation results show that theabsolute value of the price elasticity of demandhas tended to fall in the Japanese automobile
market since 2003. This means that pricecompetition has become less severe in theJapanese automobile market. The results also
show that the automobile manufacturers whichhave more patents tend to have larger market
shares.

ϫ Conclusion
Using econometric method, this study showsthat in the Japanese automobile industry themodifications of the Japanese patent system
between 1998 and 2013 led to reduced pricecompetition and the promotion of R&D activities.
First, this study summarizes three modificationsof the patent system which have the possibility of
influencing R&D activities over the last fifteen
years: These are: (1) the strengthening of thepenalties against the infringement of patent rights
and the lowering of patent fees to maintain patentrights in 1998; (2) the enforcement of relief
against the infringement of patent rights in 1999;
and (3) the lowering of fees for patent applications,patent examinations, and patent maintenance in
2003. Since these modifications give someadvantages to patentees, there is a possibility thatthey led to the promotion of R&D activities inJapan. Next, this study analyses R&D activities in
the Japanese automobile industry in the periodbetween 1991 and 2013. The automobile industry
is selected because the automobile industry is
one of the major industries in Japan, automobile
firms tend to obtain more patents than firms inother industries, and patent applications are madein relation to most of the output of R&D activities
in the automobile industry. As a result of an
econometric analysis, it is found that the loweringof fees for patent applications, patentexaminations, and patent maintenance in 2003 led
to a decrease in the number of forward citations
per patent application. One possible reason forthis outcome is that the reduction of the fees forpatent applications and patent maintenance in2003 led to an increase in the number of patentapplications. The fees for patent applications,patent examinations, and patent maintenancewere reduced by 90,000 yen on average in 2003.
Another possible reason is that new eco-friendly
technologies changed the trend of R&D and led toa decrease in forward citations. It is also foundthat profits per patent application have increased
since 2003. One possible reason for this is thatthe constant modifications to strengthen theprotection of patent rights could be effective after
2003. Thus, patentees could obtain more profits
by selling patented products in the market.
Another possible reason is that consumers havecome to prefer high quality cars which can saveon running costs compared to low-priced cars
after 2003. Finally, this study examines whether
price competition has been reduced in theJapanese automobile market since 2003. The
results of the econometric analysis confirm thatprice competition has tended to become lesssevere after 2003.
In conclusion, it can be said that themodifications of the Japanese patent systems
around 2000 seem to have promoted R&D
activities in the Japanese automobile industry.
Though a reduction in price competition in theJapanese automobile market can be observed, it is
not clear whether the constant modifications tostrengthen the protection of patent rights led tothis reduction in price competition. This study
also found that the drastic change of patent fees in2003 has influenced the quality of patents. Future
modifications of the Japanese patent system
which change patent fees have the possibility ofchanging both the quality of patents as well as thequantity of patents. When the fees for patentapplications, patent examinations, and patent● 97 ●IIP Bulletin 2015 Vol.24

maintenance are changed, it is necessary topredict the impact of modification of the patent
system on both the quantity and the quality ofpatents.
References
Berry, S. T. (1994). “Estimating discrete-choicemodels of product differentiation,” The RAND
Journal of Economics 25(2), 242-262.
Irwin, D.A., Pavcnik, N. (2004). “Airbus versus
Boeing revised: international competition in theaircraft market.” Journal of International
Economics 64, 223-245.
Taniguchi, M. (2014) “A Quantitative Analysis ofthe Economic Effects of Patents on Industry: The
Case of Japanese Automobile Industry.” Instituteof Intellectual Property, Report of the 2012FYIndustrial Property Research Promotion Project(2012FY-2014FY) entrusted by the Japan PatentOffice.

1

This interview was intended to help understand thebehavior of automobile firms (see Taniguchi (2014)).
The results of this interview have not been published.
2
For reference, the results of estimating a translog
knowledge production function where economies ofscale are assumed are presented in the Appendix. Theseresults support the findings related to the impact of themodifications of the Japanese patent system in 1998,
1999, and 2003, which is examined using a knowledge
production function with no economies of scale in
Chapter II.

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