西山学苑研究紀要第15号

Research and Development in Japanand its Implication
WU Zijing
I. Introduction
When talking about scientific research, people generally think ofa group of scientists in their goggles and gloves in a lab working with microscope and test tubes. Surprisingly, a large number of companies andcorporations also conduct countless scientific research. Scientific discoveries are typically available to the public; therefore, firms can choose to freeride on the research efforts. However, companies still invest in a significant
amount of money in scientific research to produce more scientific knowledge. In 2013, the business sector in the United States alone contributed toabout 24% of all scientific research（Arora et al., p. 1）. The reason thatfirms spend resources on doing scientific research is that they can takeadvantage of the findings of the research to develop new products or services. Despite the economic downturn, global spending on R&D by theworld’s top 1400 R&D investors increased by 9.5% in 2008（Walter, p. 7）.
Innovation-based industries such as pharmaceuticals and biotechnology
also experienced a growth of 7%（Walter, p. 7）. Businesses and companies
are willing to invest in innovation during a recession because the costs ofdoing so are likely to be lower. Japan and the US, unsurprisingly, are twocountries that contributed to 80% of the world’s R&D（Walter, p. 7）. One
character of R&D investment is that it requires a relatively large amountof money up front, but the return of investment is usually not seen imme―

67 ―diately; it takes time for a specific scientific achievement to transfer tospecific products or services. Also, there are risks involved in R&D investments, such as decreased internal cash flow and risks associated withknowledge spillovers. So, what makes firms want to make investments in
R&D?
Investments that corporations made to research account for a significant share of its overall investment and understanding why firms invest in research is useful not just for informing policy formulation but also
for insights into how the economy itself is changing（Arora et al., p. 3）.
Corporate production of scientific knowledge is closely related to its use of
the internal invention（Arora et al., p. 3）. Firms that are able to build on
their research in their inventive activity produce more knowledge thanthose that are  less successful in using their research internally（p. 3）. Research that is internally used is valued more by investors and the internal
use of research results is associated with higher R&D productivity（Aroraet al., p. 3）. In a study conducted by Griliches, he found that the return tobasic research to be prominent; companies that spent a larger percentageof their total R&D on basic research has shown a higher productivity（Arora et al., p. 5）. The purpose of this paper is to examine some of theleading factors that drive businesses to invest in R&D, even when doing
so involves risks that can affect firms’ profitability. I look at companies inJapan in particular in making my arguments in favor of business collaborations and present some of the benefits that Japanese firms have obtainedby doing R&D collaborations with universities. Based on my findings, I offer some implications in terms of public finance and policy making to facilitate the activities in R&D. The rest of the paper is organized as follows:
the next section presents some of the main arguments made by Aurora etal. regarding the incentives of investing in R&D and the sharing of re―

68 ―search results; then, I present my own argument about firms investing inscientific research, especially firms in Japan, and assert that firms benefit
from doing scientific research when collaborating with universities. In thethird section, I compare firms in Japan with firms in the US and explain
the different approaches taken by the two countries in doing scientific research. Lastly, I present some implication to public finance and policy makers regarding the facilitation of R&D.

II. 1. Incentives for Investment in R&D and Information Sharing
As mentioned before, since the results of basic research conducted are usually shared and published, how do companies actually benefit
from their own investment in research is intriguing. A couple of literatureattempted to provide insights into this question. The first opinion is thenotion of absorptive capacity. Absorptive capacity refers to firms’ ability
to access external knowledge（Arora et al., p. 6）. In other words, absorptive capacity is a limit to the quantity of scientific knowledge that a firm
can absorb. As a result, firms need to engage in internal R&D to expand
its research capacities. For example, Cockburn and Henderson found thatpharmaceutical firms must invest in internal basic research to take better
advantage of publicly available scientific knowledge（Arora et al., p. 6）.
So why do companies choose to publish the results of their scientific research in the first place? Many studies show that conducting corporate research and publishing the results is an effective way to attract
talented scientists and inventors（Arora et al., p. 6）. The corporate publication provides a reward system for scientists who want some autonomy
to spend some time on their own research. Moreover, publication of re―

69 ―search results sends a positive message to regulators, customers, and investors about firms’ product quality and potential, which in turn builds
firms’ reputation（Arora et al., p. 7）.
Despite the popularity of the above arguments, they raise additional questions. It is still not answered as to why do firms want to attract
researchers. Also, it is not entirely clear as to whether the research conducted by firms generate real private value. The study of Arora et al.
finds that firms indeed have incentives to invest in research, even though
the results are shared（p. 8）.Scientific knowledge generated from the firm
will help the firm’s inventive activities. Also, firms that produced the scientific knowledge have the best understanding of the findings, and firms
may leave some details of the research findings to themselves, which put
them in an advantageous position to their competitors. As a result, firms
with greater use of internal research are likely to exhibit a higher R&D
productivity（Arora et al., p. 8）. On the contrary, if the firm’s research results were being cited by its rivals, then logically this would lower thefirm’s private return on internal research and hence its willingness to invest. Specifically, a firm whose research is used in its own inventive activity is likely to continue investing in research. Logically, a firm whose
research results spill over to its rivals is likely to reduce its investment.
That begs the question, will firms be better off sharing knowledge or
keeping their research results a secret? We can get some insights by looking at how firms conducting R&D in Japan.

II. 2. University-Industry Collaboration in Japan
Perhaps a much more obvious place where research is being frequently conducted is in universities. In Arora et al.’s study, they compared―70 ―research done by corporations with research done by universities andfound that corporation publications are about three times more likely to becited by a patent than university publications（p. 12）. Contrary to the results found in Arora et al.’s study, Japanese firms often collaborate with
universities in conducting university-industry research, and that university
knowledge can spill over into firms leads to a positive effect on firms’ R&D
productivity. Fukugawa argued that while basic research conducted inuniversities do not directly associate with industrial use, it can often be applied to achieve technological advances and solve firms’ problems in R&D（p.
415）. Companies in Japan often benefit from knowledge spillovers frommajor national universities to foster industrial innovations（p. 416）
. The
study of Arora etal. seems to present the argument that companies should
not rely on basic research conducted by universities because the results
are not always valuable to industrial use and that the publications of university research get cited less often. However, based on the study of Fukugawa, the situation is Japan is different. Larger firms had a long historyof sharing talents and results with major universities, either by hiring
graduates or by the voluntary transfer of university inventions（p. 416）.
There are some apparent benefits of R&D collaborations. One of the mostimportant aspects of the R&D collaboration is the possibility of information
sharing and skill sharing. R&D collaboration allows participating firms tohave free access to knowledge of others, which can encourage firms to increase their investment in R&D（Fukugawa, p. 417）
. For example, eventhough the interaction between universities and companies do not necessarily guarantee the success of product development, firms can still takeadvantage of the knowledge and skills of university-based scientists to
help improve the productivity and skills of their R&D personnel which canbe valuable to firms’ future R&D projects（Fukugawa, p. 419）
. Therefore,―

71 ―collaborations with universities can improve R&D productivity of participating firms.
Traditionally, larger firms are reluctant to R&D collaborations ingeneral because they have sufficient resources to support them do internal
research（Motohashi, p. 340）. However, as globalization continues to bringmore players to the table, innovation competition is intensified. Large corporations in Japan find it harder and harder to conduct all R&D internallyto compete with other fast-developing countries such as South Korea andTaiwan（Motohashi, p. 340）. As a result, more large corporations in Japan
start to actively seek opportunities to collaborate with universities. Compared to smaller firms, large corporations can take more out of the R&D
collaboration with universities because they have more resources and assets such as distribution channels, service networks, and reputation, to utilize the results of R&D into product development  （Fukugawa, p. 418）.
After the reform of national innovation systems in Japan, smaller firms
also have access to exploit university knowledge for innovation. But instead of embodying the outcome of R&D in products, smaller firms rely on
the licensing of patents to commercialize technology（Fukugawa, p. 419）.
Therefore, the measurement of the effect of research collaborations with
universities on the productivity of R&D of smaller firms is by the numberof patents issued by their R&D personnel. The study done by Fukugawa
found that smaller technology firms who have less complementary assets,such as reputation and distribution channels, tend to apply for patents
more positively than their larger counterparts（p. 425）
. By issuing more
patents, smaller technological firms will have appropriate means to commercialize the technology, as they can profit from citations of their patentsfrom other firms.

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II. 3. Sharing is Not Necessarily a Problem
One of the arguments made in Arora et al.’s study is that eventhough published knowledge is available to everyone, companies still havethe incentive to conduct research and publish the results because the firmthat produced the knowledge in the first place has the best place to use
the knowledge（p. 8）. Fukugawa made a similar argument about the collaboration between universities and small firms in Japan. Intuitively, thespillover of knowledge should not be localized because everyone has access to it. However, the reality is that firms that have local ties receive
more knowledge spillovers from the collaboration with universities in research（p. 419）
. In other words, firms that are far away from the university that produced the scientific knowledge will likely to receive fewer
benefits from the knowledge. This is because, as Fukugawa argues, technological knowledge developed in universities are usually not in its maturestate, and in order to effectively understand the practical application of the
new knowledge or technology, firms need to communicate and work closely with the inventor of the university（p. 419）. The similarity between thetwo views is that the application of new knowledge is usually not easily
understood. Therefore, those with a more proximate relationship with theinventor of the knowledge will have better chances communicating with
the inventor of the knowledge or technology and thus will be in an advantageous position compared to those who are remote from the inventor.
Under the Japanese context, knowledge spillovers may be especially valuable to R&D of small technology firms. As argued by Fukugawa,cooperative research has been used by large corporations as means to preempt outcomes of publicly funded research, and that the Japanese Patent
Law prohibits one single co-owner of patents to transfer patents to other―73 ―firms without the permission of all the co-owners（p. 425）
. This puts smaller firms at a disadvantage since they often lack the social capital and resources required to perform research collaboration with universities.
Therefore, small firms have incentives to patent their inventions to build
their business reputation. Given such situation, policy makers should haveinitiatives that facilitate the cooperative research between smaller firms
and universities to improve the knowledge of smaller firms. For example,
policy makers may consider implementing projects that strengthen the relationship between the two, such as setting up regional cooperative R&D
center or local public technology centers（p. 426）.
In general, technology-based firms rely on doing extensive research to make breakthrough discoveries which then can be translated
into a sustained competitive advantage. The role university-industry collaborations play in shaping the innovative performances of universities
and firms have been a key issue in the discussion of innovation. Amongsectors that rely heavily on scientific breakthroughs, the contribution ofbasic science is considered to be high in the pharmaceuticals and chemicals industry（Baba et al., p. 756）. Collaborations between universities andfirms lead to the transfer of knowledge and bilateral interaction which
help to carry out R&D activities more effectively. As argued before, scientists from universities are important in helping smaller technology firms to
improve their R&D productivity. Characterized as one of the innovationdriven industries, firms from the pharmaceutical industry often have ahigh level of R&D expenditure. High level of R&D investment is usuallyassociated with higher firm value and operating performance（Nivoix &Nguyen, p. 225）
. In Nivoix and Nguyen’s study, although the linkage between R&D expenditure and sales growth seems to be weak, they explainthat it could be due to the fact that the benefits of R&D investment will―

74 ―

take some time to show. Otherwise, it would be hard to explain why firms
would be willing to bear the risks, such as lower internal cash flow, of conducting R&D without anticipating any benefits （p. 237）
. Nevertheless,they did show a significant  increase in sales following the R&D in a large
control sample of firms with active R&D projects（p. 238）.
Another interesting case specifically about the biotechnology sector of Japan offers different insights on the role top scientists play in the
success of biotechnology industry of Japan. The case of the Japanese biotechnology industry is important because Japanese bio-scientists are second only to the US in their genetic sequence discoveries, which is thecritical driving force behind the latest major wave of technology transferfrom basic science（Zucker et al., p. 38）.Also, the knowledge and discoveries produced by biotechnology scientists are often of high value, meaningthat it has a high degree of privatization compared to knowledge produced
via basic science（p. 38）.One of the characteristics of knowledge producedby the biotechnology sector is the high tacitness of the knowledge, which
limits the ability of other scientists to learn the knowledge（p.39）. Therefore, when dealing with knowledge with high tacitness, a certain level ofcollaboration is often a requirement. In the study of Zucker et al., theyfound that firms with linkages to top scientists from universities exhibit
higher scientific productivity and produce a higher number of biotech patents compared to those with no linkage（p. 52）.
Similarly, one of the hypotheses brought up by Baba et al. is thatcollaborations with “Pasteur scientists”, who are crucial in the process ofco-evolution of science and technology, are important in determining firms’
R&D productivity in industries that require advanced knowledge（p. 760）.
They argue that in fields where advanced knowledge is demanded, suchas biotechnology, pharmaceuticals, and advanced materials, universities―

75 ―play important role in providing firms with appropriate consulting to help
them solve problems（p. 760）. Based on the results of their study, collaborating with “Pasteur scientists” made a positive and prominent impact onfirms’ innovative productivity. This confirms that it is important for firms
to work selectively with the appropriate university partners to get valuable scientific and technological experience and advice（p. 762）.

III. The Japan Way vs. The US Way
Another study done by Cohen et al. looks at the manufacturingsectors in the US and Japan and how the within-the-industry flows andspillovers of knowledge differ between Japan and the US. As argued before, companies, in general, need to have certain ways to appropriate thevalue created by innovations to keep investing in R&D. What Cohen et al.
find in their study is that intra-industry spillovers of R&D knowledge inJapan are greater than in the US（p. 1350）. As data shows, R&D spending
in the US has been experiencing a slight decrease in recent years, and alarge part of the reason is that firms in the US do not want knowledge to
become accessible to their rivals. In Japan, however, R&D spending as apercent of total GDP is higher than the US（p. 1350）. Such difference cansuggest that the flow of information and knowledge within industry plays
different roles in Japan and the US. In the US, only 13% of companies admit that information from their rivals helps them with their own project
execution, whereas in Japan, the number is 51%（p. 1351）.
Given the more rapid spillovers of knowledge amount Japanesefirms, the appropriation of profits due to innovation in Japan should be lessthan in the US. Cohen et al. find that the time it takes for a Japanese firm
to imitate an innovation of its competitor is much shorter than it is in the―

76 ―US（p. 1353）. This makes Japanese firms to have a smaller profit window
for its inventions and innovations, thus a weaker ability to appropriate thereturns to their innovations. In the US, using secrecy as a mechanism forprotecting product innovation is seen as the most effective method acrossall industries, where as in Japan, secrecy is viewed as the least effective
appropriability mechanism. Compared to secrecy, patents in Japan are
viewed as more effective for protecting product innovations. This difference, as argued by Cohen et al., can be attributed to the different patent
system in Japan and the US（p. 1355）.
The Japanese patent system was first developed in the 19th century not only to encourage domestic inventions but to help the technology
transfer from Japan. Therefore, the emphasis of the Japanese system was
the disclosure function of patents（p. 1356）. One of the key differences between the Japanese patent system and the one in the US is that the Japanese patent system requires disclosure of information at filling, whereas
the US  system only requires disclosure upon issuance（p. 1356）. Additionally, there exists a “pregrant opposition” rule in the Japanese patent system where competitors can challenge the validity of a filed patent within
three months after the examiner of the patent gave notice about the potential grant of the patent（p. 1356）. As a result, Japanese firms filing forpatents disclose the information to the general public sooner, which leads
to the sooner filing of patents and also the incentive to monitor competitors’ actions.
It is not uncommon nowadays for countries to learn from eachother’s technological advancement and assimilate some of the valuablefindings into their own research to facilitate economic growth. Many developed countries also offer technical assistance to less-developed countries
and freely share knowledge with them. In Japan’s case, since the WWII,―

77 ―the way Japan has been taken in improving its trade balance and technology advances and productivity growth was largely by learning from theWest, particularly the United States. Most of Japan’s R&D efforts can becharacterized as adaptation, assimilation, and diffusion of foreign technologies（Spencer, p. 521）. However, a large number of policy makers of the
US have argued that Japan has benefited so much from the US scientificachievements, but has been reluctant to give back（Spencer, p. 522）
. Contrary to such belief, Spencer argued that firms in Japan share no lessknowledge with the rest of the world than firms based in the US（p. 522）.
Spencer’s study finds that Japanese firms published significantly more scientific papers in foreign countries than their US counterparts and thatJapanese publications were cited more frequently by foreign firms thanUS publications（p. 527）. The results of Spencer’s study make sense because as Japan moves into a highly technologically developed country, it
has fewer opportunities to appropriate more advanced technologies fromother countries. Scientists from Japan may be more willing to disseminate
knowledge to the globe to get recognition internationally.

IV. R&D Funding and Policy Implication
As discussed earlier, one characteristic of Japan’s national innovation system is the significant role that large corporations play. The total
R&D expenditure of corporations exceeded 11.8 trillion yen in 2003（Motohashi, p. 339）
. Despite the large amount that these corporations spent on
R&D, they are reluctant to collaborate with   universities and in general.
Relying on their internal financial resources, large corporations are dominant in the R&D field, leaving little room for small companies to participate（Motohashi, p. 340）. However, the situation starts to change as the―

78 ―Japan’s innovation system shifts from large-firm-centered to a networkbased system focusing on external collaborations. Such reform gives small
companies much more space to participate in the R&D playground because external collaboration is generally welcomed by small firms.
Through the active collaboration with universities, new technology-based
firms have managed to sustain high productivity in R&D（Motohashi, p.
358）. As mentioned earlier in the discussion, smaller firms lack the absorptive capacity, as well as sufficient funds and human resources, necessary
to make use of the research results produced by universities. This makes
their collaboration with universities riskier.
To foster the development of new firms, the government should
consider offering direct financial support, such as favorable tax policies
and subsidies. The updated R&D tax credit policy of 1999 offers a tax incentive to firms whose R&D expenses in a given year exceed both “thebase R&D expenditure” and “the comparative R&D expenditure”（Koga, p.
644）. Then firms can deduct 15% of the difference between the baseamount and the comparative amount of their corporate taxes（Koga, p.
644）. The study of Koga examines the effectiveness of R&D tax incentives
on 904 Japanese manufacturing firms and finds a tax price elasticity of −0.68
for all firms, and −1.03 for larger firms（Koga, p. 646）
. Such result suggests that the existing tax credit benefits favor larger companies morethan smaller ones. One reason could be that smaller firms do not have the
R&D expenditure that is high enough to actually take advantage of thedifference between the baseline and the comparative amount. However,since smaller firms are more active in participating in a university-industry collaboration which is beneficial to the productivity of R&D investment, maybe the Japanese government can introduce a new tax incentive
designed specifically for start-up companies whose funds are limited.
―79 ―Another way to support the research productivity of participating firms is to establish government-sponsored research consortia（Branstetter & Sakakibara, p. 143）. In Japan, the government provides subsidies
for members of R&D consortia, which can lower the effective cost of R&D,
and also encourages the sharing of research results among participating
firms（Branstetter & Sakakibara, p. 145）.In general, after joining the  consortia, firms generate more patents, however, as Branstetter and Sakakibara argues, the design of a consortium matters much more than the levelof resources spent on it. A truly effective consortium should facilitate technological spillover and give incentives for firms to cooperate（p. 156）.

V. Conclusion
Despite the recent economic recession, companies all around theworld continue to pour a significant amount of resources into R&D. Companies believe that conducting R&D can help them stay innovated amongits peers, develop new products and services, builds their reputation, andgain a competitive edge. On the other hand, there are also firms who areconcerned about the spillover effect of conducting R&D, since they do notwant their research results to become openly available to the public. Others are skeptical about cooperating with universities because they question the effectiveness of research done by universities in productdevelopment, and they are worried that the information they share with
universities will become accessible to others. Nevertheless, in this paper,
we have discussed the benefits of collaborating with scientists and experts
from universities, and how it has helped large firms to be competitive
globally and helped smaller firms with a focus on technology to sustain
higher productivity in R&D. In Japan, R&D collaboration with universities―

80 ―gives firms free access to the knowledge and expertise of universities,
which can improve the skill of firms’ own R&D personnel. When comparing firms in Japan with their counterparts in the US, we see that Japanesefirms rely on patents as a more effective way to protect product innovations, whereas firms in the US value secrecy the most. This is in part due
to the difference in the patent system between the two. In Japan, the patent system was designed to encourage information disclosure. In key areas
where the technological process is rapid, such as information technology,
engineering, and biotechnology, industry collaborations are crucial because
companies in these areas need the expert scientific knowledge from universities. Therefore, from a decision-maker's perspective, incentives suchas tax benefits and subsidies, and publicly-funded consortium, should be
carefully designed and executed to better facilitate innovative activities.
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