Why are Japanese firms so innovative in engineering technology?

Why are Japanese firms so innovative in engineering technology? * Ryuhei Wakasugi Mmstr?,

of Internatronal Trade and Industry, Kasumrgasekr,

Fmal version

received

November

Chryoda-ku,

1990

Japanese firms belonging to the electric and electromcs industry have been producing a large number of innovatlons, concentrated in the field of engineenng technology and directly related to commercial products. One reason why Japanese firms have such characteristics can be explained by their unique behavior and organization of research and development (R&D). The behavior of the R&D division of Japanese firms IS characterlzed by less Independence from other divisions of the firms, a close relatlonship with other dlvlslons, and concerted behavior to maxlmze total corporate profits. These are indicated by the fact that R&D funds are allocated flexibly by taking into account the intentions of other operational divisions or the headquarter’s office, and the fact that there exists a unique career path m a Japanese firm by which R&D personnel do not always stay m the research division, but are frequently assigned to other various divisions as they climb upward. However, these structural and behavioral characteristics of Japanese corporate R&D, which so far have been efficient m applied research and product development, are not adaptable to basic research. Recently Japanese firms are seekmg a new R&D organization and management system to solve the problem.

1.

Introduction ’

The essence of corporate innovation is to create ‘&new consumer goods, new methods of production or transportation, new markets, new forms of industrial organization.” This was long ago asserted by Schumpeter [ll]. However, it seems the country in which corporate innovations are most actively realized has changed from time to time. U.S. corporations, for example, were without a doubt substantially more innovative than firms in any other nation since the end of World War II * I am grateful to anonymous ’

referees for helpful suggestions and comments on an earlier draft. A part of this paper is based on Wakasugi [14].

Research Policy 21 (1992) 1-12 North-Holland 0048-7333/92/$05.00

Tokyo, Japan

0 1992 - Elsevier Science Publishers

through the 1960s. Results of the innovations generated by U.S. firms did not remain within the U.S., but transferred widely to European nations and Japan through U.S. multinationals. Since then, however, R&D funds and personnel of U.S. corporations have not increased as much as before. In the 198Os, in contrast, Japanese electrical and electronics corporations greatly increased their R&D expenditures and personnel. The Japanese have accomplished a lot of technological innovations in the industrial areas of electronics, mainly semiconductor and computers, new materials, electric appliances such as videocassette recorders, and automobiles. How Japanese firms are so innovative can be indicated by international comparison of the number of patent applications. The number of patent applications did not change markedly in the period between 1980 and 1985 in the U.S. and West Germany. In the U.S. the number rose by 12.5 percent from 104,000 to 117,000, while the number dipped slightly from 49,000 to 45,000 in West Germany. In contrast, applications by Japanese firms jumped by 58.6 percent from 191,000 to 303,000 in the same period. 2 There is no other developed country in which the number of patent applications increased at such a high rate. These innovative activities of Japanese firms can be explained by various factors - from a favorable macroeconomic environment to micro2 The Japanese patent system is different

from that of the U.S. or West Germany. Under the Japanese patent system. a patent is authorized by the principle of first to apply rather than first to innovate. Then, It encourages rapid, multiple, and incremental patent applications. However, the different rates of increase m the number of patent applications indicate how vigorous technolo@cal innovation in each country is. See Japanese Patent Office, Annual Report, 1987.

B.V. All rights reserved

2

R Wakasugr/ The rnnouamenesso/Japanese ftrms rn engmeerrng technolo~

economic conditions such as an efficient organization of the firm. The purpose of this article is to examine, from an economic point of view, why Japanese electric and electronics firms were so innovative in generating engineering technologies. I will focus on the characteristics of R&D organizations of Japanese firms, one of the various factors that drive firms to innovation, and on how Japanese firms are trying to alter their traditional R&D organization and management systems today. First, I will introduce briefly the structure of the article. In the second section it is pointed out that the characteristics of Japanese corporate innovation are closely tied with the backwardness of Japanese corporate technology in the past, social systems and practices, and government policy to support corporate R&D in Japan. In the third section, the reasons which have driven Japanese firms to be so innovative, in particular the close relationship between the R&D division and other divisions within a firm are discussed. Next, it is argued that in Japan there exists a unique career path for researchers in Japanese firms, which has brought about a unique structure and behavior of R&D organization. This is the most important characteristic of innovation in Japanese corporations. In the fifth section, it is pointed out that the traditional R&D organization which has so far led to efficient R&D activities, but is not adaptable to basic research, is facing serious problems. Some Japanese firms, particularly those belonging to advanced technology industries such as pharmaceuticals and chemicals, recently began to establish new R&D organization and management systems so as to adjust themselves to changing corporate R&D strategies. Thus it is possible to make Japanese firms more competitive in basic research in the future.

2. Characteristics conditions 2.1. Engineering

of innovation and environmental

innovation

A look at past innovations by Japanese firms reveals that there were only a few cases where they created a new and original concept to the market.

Table 1 Technology importation and R&D expenditure in Japan (billion yen, %) R&D

Expenditure (a)

Payment for imported technology (b)

(b)/(a)

1971 1975 1980 1985

895.0 1684.8 3142.3 5939.9

134.5 169.1 239.5 293.2

15.02 10.04 7.62 4.94

Source: Management and Coordination Agency. Report on the Survey of Research and Development, each year.

Instead, Japanese firms frequently showed a great ability to absorb and then improve the basic concept already created in foreign countries. Japanese innovations mostly emphasized improving the new commodity so as to meet the requirements of the users in the market. or devising even more efficient production methods. Their ability in these innovations far exceeded that of the firms in the United States and European countries. Japanese firms were quick to absorb technologies from overseas, improve them and add their own technological innovations to produce merchandise. They injected plenty of money and talent for technological development in order to get ahead of others in the product market. 3 The extremely high dependency of Japanese firms on foreign technologies even today is shown by the large amount of money paid by the Japanese to import advanced technologies. Table 1 indicates that the amount of imported technology to the total R&D expenditure of Japanese firms is still high. The majority of imported technology is to absorb the advanced technological knowledge of the U.S. and European firms, according to statistics of the Japanese Management and Coordination Agency, entitled Report on the Survey of Research and Development. When a researcher in Japan develops a technology, he neither will be rewarded as an innovator nor can he be compensated for the high cost of development if that technology has already been created abroad. It is more efficient for firms to import and learn an existing technology, then to develop their own technology, if they have the capability to absorb and make full use of the

’ See Rosenberg and Steinmueller [9].

of Japanese firms rn engmeerrng technology

R. Wakasugr / The mnovatweness

Table 2 Research

personnel

in major countnes

(persons) Engineering

Science

Japan U.S. U.K.

West Germany

Source:

Ministry

3

Bachelor

Master

Doctor

Bachelor

Master

Doctor

(1977) (1984) (1975) (1980) (1974)

10,234 12,698 88,990 78,246 11,878

1,663 4,361 17,560 13,829 1,719

717 2,485 8,040 7,587 2,241

69,221 71.396 53,520 90,121 6,897

6,925 18.868 18.400 20,927 2,092

1,079 2.223 3.130 2,813 1,043

(1981) (1974) (1982)

20,151 5,839 6,387

2,258 2,427

14.616 20.972 6,551

of Education,

International

, 5,056

Comparison

of Indices

technological knowledge. Furthermore, since there were plenty of talented Japanese engineers, Japanese firms were able to learn, absorb and improve advanced foreign technologies to produce merchandise quickly. Compared with the large number of university graduates from engineering departments joining Japanese firms and engaged in engineering R&D, the number of graduates from science departments, engaged in basic research, is relatively small. Table 2 compares university graduates who majored in or hold degrees in engineering and science. It shows clearly the proportion of graduates who majored in engineering is overwhelmingly higher in Japan than the U.S. This is traced to the fact that, in the 1960s during the era of high economic growth in Japan, the number of students who majored in engineering increased substantially compared with those who studied science. This was the result of universities, mainly national universities, sharply raising the number of students accepted in engineering departments. The graduates, upon joining firms, contributed strongly to making innovations more engineeringoriented and targeted at improving foreign technologies. Due to the supply of talented graduates to firms, it became possible for Japanese firms to import technologies, improve them to fit their production lines, and carry out additional R&D activities so as to generate products of higher quality.

of Education

(in Japanese),

3,416 801 919 1978 and 1985

atmosphere in Japan where originality is less treasured and imitation is accepted more leniently. 4 In a period when it is advantageous for society to imitate and absorb foreign technologies, the more ambiguous the right to protect intellectual property is, the more smoothly imitations can be carried out. During this period, accordingly, social systems to protect those rights tend to be weak. Since the technological information possesses externality, the profitability of innovations will be low unless social conditions to secure the appropriability of innovation are provided. No one is willing to invest money and talent in creative R&D activities if profitability is low. Several levels of technological development are required before inventions or new ideas are embodied into actual commodities. In many cases development can create more profits for a company than invention. Furthermore, in many cases proprietary profit brought about by technological development will become higher in the marketing stage of the innovation process. Frequently, the economic value of technological development is higher than creative ideas. Under this circumstance it is not surprising, from an economic point of view, that firms will inject relatively more funds and talent into technological development which is highly profitable. In the past the Japanese patent system played a role in engaging firms in additional technological improvement. For a long time after the Meiji era,

2.2. Social conditions It is pointed out that, in comparison with the U.S. and European countries, there exists a social

4 For example,

this is seen in the article titled An American Views Japan’s Copycat Culture, in the 15 July 1988 edition of the Wall Street Journal.

4

R Wakasugr

/ The rnnowtrueness

the Japanese patent system had not covered substantive patents. In other words, intellectual rights on ideas for products were not protected. Only patents for production methods received protection under the the system. Consequently, it became advantageous for firms to concentrate their efforts on searching for efficient production methods rather than inventing new ideas to create original products. It was only in 1975 that the patent system extended its protection to include the substantive patent. 2.3. R&D poliq Spending by private firms accounts for nearly half of the aggregate research and development expenditure in the U.S., Britain and France. This ratio increases to about 60 percent in West Germany, and to an extremely high 80 percent in Japan. So the burden of R&D expenditure in Japan is carried mostly by the private sector, indicating that Japanese innovations are market oriented. Funds provided by the government account for 20 to 30 percent of the total private R&D expenditure in the United States and European nations, In stark contrast, this ratio is mere 2 percent or so in Japan. 5 When corporations spend their own money, they expect that the research projects will create profits. However, it is not necessarily expected that results of research projects funded by the government will be commercialized. Corporations do not usually expect such projects to create profits. It is reasonable to think that the difference in the source of research funds, either government or corporate coffers, to a certain extent accounts for the difference in the R&D systems in Japan and the United States and Europe. If the Japanese government provided corporations with a large amount of R&D funds, just as the governments of the United States and European countries have been doing for their respective corporations, it is likely that more R&D money and personnel would

of Japanese firms m en.gmeermgtechnolo~

be directed by Japanese corporations to basic research than to applied research and product development. Since government funds are provided directly to the R&D division, it is also likely that such funding would increase the independence of the division. Japanese firms enjoy preferential tax treatment on R&D expenditures. The amount of financial benefit derived from it is greater than the R&D support firms receive from the government. Therefore, the R&D policies of the Japanese government have been driving Japanese firms to fit their innovations to the profit motive. ’

3. R&D organization innovation

and the characteristics

of

3. I. Corporate organization Japanese corporations have been trying for a long time to catch up to the advanced technological level of foreign competitors. Meanwhile, in Japan there existed social conditions and practices which tolerated imitation of foreign technologies. If these were the only factors that determined the characteristics of Japanese innovations, then doing away with these factors could trigger a move of corporate efforts away from engineering innovations to creative innovations. The technological level of Japanese firms in the electrical and electronics industries hzs risen to a level comparable to that of firms in the United States and Europe. In fact, in the product development area at least, Japanese R&D surpassed its rivals. Additionally, 15 years have already passed since the Japanese patent system started to include the substantive patent. The objective circumstances surrounding Japanese firms, therefore, are not much different from those surrounding firms in the United States and European nations. Despite that, Japanese innovations still continue to emphasize the development of new products that satisfy the needs of the market. In addition, Japanese firms keep importing basic technologies

5 Accordmg

to statistics of various countries, the proportion of government expenditure on corporate R&D accounted for 34.6 percent in the U.S. in 1986. 17.4 percent in West Germany in 1985, 23.2 percent m Britain in 1985, and 22.4 percent m France in 1983. In contrast. the Japanese govemmerit’s expenditure was an exceptionally low 1.8 percent m 1986. The Japanese figure has been low for a long time.

6 See Wakasugi

1121 for details of how the allocation of government funds such as government R&D contracts, R&D subsidies and preferential tax treatment affected the allocation of private R&D funds.

R. Wakasugr / The ~nnoc~atroeness of Japanese

firms m engrneermg techdog)

Table 3 Source of R&D States Industry/ Country ’ (0 9%) (44 0%)

(44

(11 0%)

0%)

Machinery

(109)

Electrical. Electronics

(65)

Chemicals

(63)

(9 5%)

Metals

(29)

(6.9%)

Public utlllty

(37)

(14 8%)

Construction

(49

2%)

(44

(6 2%)

6%)

(14.6%)

(48) (10

Ftg. 1. Source of R&D proJects.

(Source

4%)

[lo].)

from foreign countries. It is not convincing to use external factors which surround Japanese firms to explain bias toward engineering R&D for product development. 3.2. Relationships sions

between research and other divi-

The R&D division is as important a corporate entity as the production division, which actually produces goods, and the marketing division, which supplies the goods to users. Together they form a corporate organization which enables a firm to engage in business. The contents of corporate innovations will be affected by the relationship the R&D division has with other divisions in the firm or by the role the R&D division is expected to play in overall corporate activity. The R&D divisions in Japanese firms aim to maximize profits deriving directly from fees on patent use or know-how which are created by themselves. At the same time their purpose is to maximize earnings and product sales of the firm as a whole by closely coordinating their activities with other corporate divisions. Just as with other divisions in the same company, the R&D division of a Japanese firm is, more or less, integrated into the overall corporate structure which targets a unified goal. Compared with U.S. or European firms, in a Japanese firm the relationship the R&D division has with the production, marketing and other divisions is extremely close, Needless to

R&D

Total Japan 47 U.S. 58 Chermcal Japan 49 U.S. 45 Electrical Japan 47 U.S. 90 Machinery Japan 44 U.S. 56 Autos. instruments Japan 48 U.S. 51

proJects.

5

100 firms,

Percent

Japan

of R&D proJects

and

the Umted

suggest by

marketing

production

customers

18 21

15 9

15 9

23 25

15 14

3 8

21 I

5 1

27 1

11 4

20 18

26 12

13 11

22 21 and metals 8 25

a The sample sizes are all mdustnes combmed 100; chemicals, 26; electrical, 20: machinery, 26, autos. mstruments and metals, 28 Source: Mansfield [5].

say, the R&D divisions are expected to produce results in the development of new technologies and products. Japanese R&D divisions do not carry out these tasks independently, but instead they frequently exchange information with other divisions, operating in a system to achieve goals effectively. This close relationship between the R&D division and other corporate divisions is indicated survey data on what division most strongly affected the selection of R&D projects. Figure 1 illustrates the results of a survey of the source of Japanese corporate R&D projects. According to this survey, 47 percent of R&D projects come from researchers, while suggestions from management divisions account for 40 percent. Figure 2 indicates that only 44 percent of the R&D themes reflect the needs of the R&D divisions, and the rest satisfy overall corporate needs. A study by Mansfield [5], shown in table 3, indicates that the R&D divisions usually take the initiative in deciding on research themes in U.S. firms. whereas in Japanese firms production and marketing divisions play this role. ’

’ Quoted from Sakakura

[lo] and MansfIeld

[5].

R Wakasugr

6

/ The mnocatweness

of Japanese firms m engrneenng

Fostering (Sample

sizes)

Creation

of needs

technology

needs

(10.9_*/.)

/

(7.0.1.)

Others

(3.6%)

I

Total

(385)

(including

other

Needs

from

the

R and D division

industries)

Total

organiza-

tional

needs

(43.9*/.)

Machinery

(110)

Electrical,

(65)

\

/

/’

(345*/.)

electronics

Chemicals

Metals

Public

(63)

(29)

utility

(28) _--- (3.6 ‘1.1 ,.(4

Construction

( 43.8 ‘I.)

(48)

2’1.)

_,./(4.2%)

(41.7’10)

(6:3’1.) Fig. 2. Needs of R&D prqects.

(Source

[lo].)

3.3. Allocation of R&D funds

The allocation system of R&D funds provides an underpinning for the closely relationship between the R&D division and other divisions. It has been pointed out that there exists a system in Japanese firms where the strategic aims of production and marketing divisions are strongly reflected in the allocation of research funds. In many Japanese firms, research funds are classified into “ordinary and current research three categories: expenditure” for the R&D division, “current expenses for development of products” for each manufacturing division, and “research expenses for overall corporate product development based on long-term strategic policy.” ’ ’ The argument

developed m this sectlon 1s based upon the findings obtamed by the author’s Interviews with persons in charge of research and development in maJor Japanese compames. It is also based on the report of the Association of Science Policy and Research Management (1988).

Ordinary and current research expenditure is money spent under the sole decision of the R&D division. This expenditure is not very high, amounting to less than half the total R&D expenditure. Allocation of the rest of the research funds is strongly influenced by the intentions of other corporate divisions such as the manufacturing division and headquarters management. This often causes difficulty in clearly separating the R&D division from other divisions. In such an environment, more R&D funds tend to be allocated for research and development with substantive and clear goals or themes, such as applied research or product development. In other words, research funds are not allocated rigidly to the R&D divisions, but allocated fluidly and flexibly to effectively satisfy the needs of other divisions and headquarters management. Consequently, funding for basic research, which is carried out painstakingly slowly over a long period of time, is not given priority in the business world.

I

R. Wakasugr / The rnnovatrveness of Japanese firms rn engrneerzng technolog),

Under this kind of allocation system, the research division will use the strategy to maximize funds allocated to them. This will result in an increase of funds allocated to applied research and product development. This is because more funds will be allocated to the research division in the future if it can prove that it clearly contribute to corporate activities of other business divisions by generating efficient production methods or by creating products of higher quality which attract more customers. It is not surprising that R&D personnel wish to acquire higher budgets and more researchers. But even in such a case, they intend to “give” in the hope of “taking” even more in return. In order to “give” more with limited personnel and funds, R&D personnel must be sensitive to requests from other divisions and management to the research division. This creates a situation in Japanese firms where an increasing amount of funds will be allocated to applied research and product development, and diminishing the flow of resources into basic research. This relationship between the R&D division and other business divisions within a Japanese firm explains the tendency of Japanese corporate innovations to be highly market oriented, reflecting the needs of the market. On the contrary, in the U.S. most R&D funds are provided to research laboratories, and it is rare that production, marketing or other divisions will meddle with funding methods or the amount of funds.

4. Career path of researchers and innovation 4.1. Career path of researchers Personnel who support the research divisions in Japanese firms are often reshuffled within the firms. Moreover, Japanese management regards the production stage as highly important, symbolically illustrated by comments such as “It is unthinkable in firms in the United States and European countries to assign talented, university graduate engineers in large numbers to the production scene”. 9

It is also pointed out that there exists a fourstage job rotation in many Japanese firms for R&D personnel. The first stage of the career path is an educational period, which begins right after the recruit joins the firm and lasts until he reaches his late 20s. He provides support for R&D activities during this stage. In the next stage in his early 30s he becomes a full-fledged engineer. In the third stage, he becomes a manager at the front line in the research division, such as a project leader, between the age of around 35 to around 40. (This is usually a section chief or comparable level.) Finally, he leaves the forefront of R&D activities and joins general management. lo After completing the fourth stage, he leaves the R&D scene behind. He is assigned to the section which manages R&D activities, but is often posted to sections which manage production, products, sales activities or marketing. It is during this stage that those personnel who have a background in R&D begin to be shifted to divisions such as production or marketing divisions in which they directly face the commodity and the market. Staying a long time in the research division does not necessarily mean promotion. To reward an excellent engineer, Japanese firms often assign him to the manufacturing, planning or marketing divisions before promoting him to a responsible post. During the third stage, a project leader in the R&D division is often assigned to a management post of a manufacturing or a marketing division. In Japanese firms, even those who engage in R&D activities are often assigned to other divisions. Like others, they experience a “spiral promotion process.” This provides researchers with opportunities to obtain knowledge on the corporate decision-making process or information concerning product planning, production and marketing. In U.S. and European firms a researcher can choose from two career paths: one is a lifetime engagement in R&D activities, while the other enables the researcher to join the management or other divisions mid-career. It is rare to see the first option in Japanese firms. A survey of the job history of heads of R&D divisions and middle management reveals that the proportion of those

lo The publications ’ See Moritani

[6] for details.

sent the empirical

by Japan analysis.

Productwity

Center

[l-3]

pre-

8

R. Wakasugr / The mnooutioeness

who have engaged exclusively in R&D activities is extremely low. ” The reason for the existence of such a career path in Japanese firms could be found in the low mobility of researchers among firms. At least until now, there has not existed a labor market where a researcher can change firms in search of an ideal working environment. However, it is not efficient to keep a researcher rigidly in the R&D division regardless of his ability. It is. therefore, practical to create a system under which a researcher can be posted to an optimum working environment within the firm, by providing the job rotation system mentioned above as a substitute for the outer labor market. According to a survey conducted by the Japan Productivity Center [l] a researcher is most productive in his R&D activities when he is around 35 years of age. However, his salary will keep rising even after his peak productive period. This creates a gap in his contributions to R&D efforts and income. It is economically practical, therefore, to close this gap by reallocating those researchers whose productivity is dwindling. This is a common practice in Japanese firms. l2 In the United States and Europe, on the other hand, a researcher is not rotated among different jobs within a firm, but is allowed to choose to engage exclusively in research. When it becomes impossible for the firm to treat him as a researcher, he can put himself in the job market where he can look for a new firm or an organization in which he can continue his research, instead of remaining in the original firm doing jobs other than research. This has enabled researchers in U.S. and European firms to opt for a career path through which they can devote themselves to their research. Few Japanese firms have integrated a means to promote a researcher to a high ranking position as a researcher in his career path, and have estab-

” A survey of the career paths of researchers

in mqor Japanese ftrms reveals that only one out of six heads of the R&D dwtsions had expenence m the research division alone. and only en&t out of 21 mrddle-class management in the R&D drvisions. Others had expenence in the manufacturing and marketmg dwrstons. Results stmrlar to these can be found m many other hrms. and can be taken as a widespread phenomenon. ” There are some Japanese firms which propose to rettre researchers at 40 years of age from the R&D drvisions.

of Japanese ftrms m engrneerrng technology

lished a career path for permanent researchers. This is because of the evaluation in Japanese firms that basic research. for the most part, does not contribute to the firm’s earnings increase. Past performance in basic research, where it was highly advantageous to utilize the results of foreign firms or research organizations, has allowed such an evaluation to take root, and the lack of necessity to give a researcher a high corporate position resulted in the unique career path for a researcher in Japan. 4.2. Career path and churacterwtm

of innovation

The Japanese version of the career path enables the R&D division to maintain close relationships with other business divisions of the firm. This increased efficiency in applied research and product development led to active innovations in these fields. This is because Japanese R&D personnel were forced, more or less, to experience the career path characterized by a spiral ladder. Such a system made flow of information between the R&D division and the manufacturing and marketing divisions smooth, and heightened cooperation among divisions and ability to solve problems. When a researcher is positioned in such a career path, it may not be in his best interests to work only in the research division. Rather, it could be beneficial for him to experience the various types of jobs in other divisions. In Japanese firms strategic decisions on which field and what target R&D activities to focus on are often negotiated and agreed to by middle-class managers such as section chiefs in the third stage of the career path and managers in the fourth stage. This group of middle-class managers is very much interested in achieving results which are highly valuable to the other divisions of the firm which directly deal with merchandise, since their future career path will bring them to such divisions as manufacturing management, product planning and marketing. As a result. researchers carefully monitor market movement and changes in the production process, and try to find out what is required of the R&D division, instead of only being interested in a limited research field. When R&D activities are closely coordinated between the research division and other divisions. the activities of researchers function as a lubricant in conveying information within the organization,

R. Wakasugl / The mnovatwene~s of Japanese fwms m engmeermg technolofl

under the Japanese version of the career path. For example, Japanese firms often organize a project team when developing a new product. The team is formed by personnel both from the R&D division and the other divisions in order to develop a new product in a short time. Statistics reveal that Japanese firms take a shorter time between the initiation and completion of R&D activities than U.S. and European firms. l3 This can be explained by the close relationship between the R&D division and other divisions due to the ordinary job rotation of personnel. On the other hand, if a researcher can follow a straight career path as in U.S. and European firms, he can accumulate research knowledge over a long time. This may trim losses and heighten efficiency in the basic research field. The negative side of this is that there are fewer chances for exchanging information with other divisions of the firm, since contact and association between the R&D division and other divisions are limited. This creates a tendency for research divisions to formulate R&D strategies more independently than that witnessed in Japanese companies. A characteristics of Japanese innovation is that the R&D divisions do not usually take a strong initiative in designing for production and transferring the result to the manufacturing division or marketing division. Instead, R&D divisions select R&D themes which reflect feedback from production lines, sales and marketing divisions. Japanese innovations are market oriented or a strong reflection of requests originating in manufacturing stages. Japanese innovations are not of the technology-push type, which means discovery of technological knowledge is initiated by researchers in the research scene and manufacturing will be based on that knowledge. Japanese innovations, instead, are of the demand-pull type, which creates efficient production methods and holds a concrete image of new products. These characteristics in innovation were generated by the career path of personnel engaging in research in Japanese firms.

” A NSF survey in 1976 showed that it takes an average of 7.4 years for U.S. firms to market the results of R&D actlvltles from initiation. The average is 6.7 years in B&am. 5.6 years m West Germany and 7.3 years in France. Compared with these countries, the average 1s relatively short in Japan at 3.5 years

9

In the United States and Europe it is often difficult to embody R&D results into actual production of goods or services. This is perceived as a problem of transferring technologies. In Japan, on the other hand, it is rare that a problem of technology transfer is raised as a major economic issue. A smooth transfer of technology enables the firms to manufacture the commodity efficiently by using the results of innovations. When the technologies are transferred from one division to another, in Japan it is accomplished by the movement of personnel rather than through descriptions in manuals. Participation by personnel of various divisions in the innovation process usually makes technology readily transferable. In addition, such participation seems to enable smooth intra-company technology transfer by reshuffling personnel. These characteristics have helped Japanese firms create innovative engineering knowledge and utilize that knowledge to manufacture new products efficiently.

4.3. Joint R&D

and diversifying

career path I4

The path on which those who pursue careers in research are promoted in the manufacturing, product development or sales divisions may create valuable human “assets” for the firms, because they will have multiple-faceted knowledge of products. Those researchers who have experience in many business fields are highly valued in the firm, and keeping many such researchers within the firm is necessary so as to lead it to success. It will be a loss to both a researcher and the firm if he leaves the company, since his value will be reduced by leaving the company and the firm will lose a valuable asset. These talented researchers play a particularly important role in the development stage very close to commercialization. Therefore, the Japanese job-rotation system helps tal-

I4 The detalled analysis of Jomt R&D proJects is explored m another paper. The dxussion of this paper concentrates on the relatlonship between Joint R&D proJccts and corporate R&D orgamzations. For emplncal analysis of Joint R&D projects, see Wakasugi [13]. DIscussIon here is based on intervews by the study group to which the author belongs on researchers who have partupated m Joint R&D proJects.

ented researchers stay with the firm for a long time. However, it is difficult to expect these researchers to produce tangible results on basic research. As mentioned earlier, there is not a different type of career path in Japanese firms to offset this shortfall. As long as the firm cannot assign its own personnel to the field of basic research, it needs to recruit personnel who are equipped with knowledge in basic research. As a matter of fact, Japanese firms have seldom recruited outside R&LD personnel. R&D personnel recruited from other companies or research institutions must be treated at least as other colleagues belonging to the company for a long time. Otherwise the company cannot recruit them. But it is also a fact that Japanese companies recruit far fewer R&D personnel in mid-career than American and European ones. One of the main reasons is that the reward system, including salary as well as promotion, is operated in accordance with the principles of “‘equality” in and “ seniority”, which mean that differentials rewards between employees of similar seniority should not be large. Therefore, it is difficult for a company to give them special treatment such as a high salary and position, even if mid-career R&D personnel provide very important talent. Such an inflexible reward system has hindered Japanese companies from recruiting outside researchers. Japanese firms have carried out a large number of joint research projects, but project personnel are always on loan from the participating firms, and return to their firms after the completion of the project. The dispatched personnel are replaced by new researchers from the same firm every three or four years if the project is a long one. This has enabled firms to provide their own researchers with various R&D opportunities without hindering intra-company job rotation. It is often said that those researchers on loan to joint projects are uniquely talented, but that many of them have stepped off the traditional corporate ladder path. It is pointed out, however, that they leave behind superior achievements in the joint project, in which they enjoyed an opportunity to associate with outsiders. Researchers on loan to joint projects follow the uniqueness of career paths in Japanese firms. Joint R&D by researchers on loan would not carry the

same weight in the United States and European countries, where researchers frequently move between firms. ” Meanwhile, loaning researchers from the parent firm has functioned to gather technological information for the firm and to transfer it to the firm. Since it is regarded as loyal when the researchers transfer as much information as possible concerning the joint R&D to their firms, they try to keep their firms constantly informed on the project’s progress. In addition, return of the researchers after the completion of the project itself means the firms are able to obtain technological know-how. Joint projects, thus, have played the role of easing rigidity and inefficiency originating from the fact that researchers do not usually change their employer and experience only intra-company job rotation.

5. Changing systems

R&z D organization

and management

R&LD organization and management systems of Japanese firms were established to pursue their R&D strategies efficiently. Existing R&D organization and human resource management systems are adaptable to the advancement of applied research and development, but not to that of basic research. Even if R & D organization and management systems are not adaptable to basic research, this does not present a problem to firms with an R&D strategy which does not focus on basic research. However. as Japanese firms became equivalent to the U.S. and European firms in their technological levels, they could no longer rely upon the results of basic research generated by the U.S. and European firms. As a result, existing R&D organization and human resource management systems, which have so far led to efficient R&D activities, are facing serious problems. Japanese firms are searching for new organization and management systems so as to shift from ones that have emphasized applied research. to a new type which emphasizes basic research. Re-

MCC, a U.S. Joint research R&D organization for serrxconductors, hired its own researchers. chstmguishing It from the Japanese type of Joint R&D projects which are always staffed by researchers on loan from participating firms.

R. Wakasugr / The rnnovatrveness of Japanese

sponses of Japanese firms to new R&D strategies are indicated in the following four ways. Firstly, the ratio of basic research expenditures to total private R&D expenditures is increasing. In 1980, only 5.0 percent of total private R&D funds was allocated to basic research, 19.5 percent to applied research, and 75.7 percent to development. However, in 1988 6.6 percent was allocated to basic research, 21.7 percent to applied research, 71.7 percent to development. i6 This ratio is not common in industries across the board. Firms in the pharmaceutical industry, chemical industry, and steel industry, and firms whose capital intensity is large are spending more for basic research than firms whose capital intensity is small. Secondly, some firms belonging to advanced technology industries in which the ratio of basic research expenditure to total R&D expenditure is rising, began to establish a new type of career path which encourages R&D personnel to engage in R&D for a long time rather than allocates them to the various divisions under the system of job rotation. Thirdly, some firms began to recruit R&D personnel in mid-career. Until recently, workers belonging to large firms, including R&D personnel, have been given salary and position under the principle of “seniority”. They usually have been guaranteed employment with the same company for a long time under the principle of “lifetime employment”. But these two principles are changing now. R&D personnel recruited from other firms are given a high salary and position, while not necessarily being given the guarantee of lifetime employment. This is because many Japanese firms are faced with the difficulty of looking for adequate R&D personnel within the firm when they shift from their traditional R&D domain to new areas. It is also because workers themselves are beginning to prefer the new reward system, which guarantees a high salary and position reflecting their current productivity and contribution to the firm, to the traditional reward system. This indicates the greater mobility in the job market of Japanese R&D personnel. Fourthly, some Japanese firms are beginning to establish research laboratories in the U.S. and

firmsm engtneenng

technology

11

Europe. Japan’s foreign direct investment in the manufacturing sector drastically increased from $1.7 billion in 1980 to $16.3 billion in 1989. l7 In overseas research laboratories various types of R&D personnel can be recruited, in spite of the binding domestic reward system. Establishment of such an international network of R&D personnel is making R&D organization and management of Japanese firms more flexible. Those structural changes, initiated in the late 1980s are not yet widespread; however, there exists a possibility of making Japanese firms more competitive in generating innovation in basic research in the future.

6. Conclusion Innovations which have been vigorously carried out by Japanese firms have certain characteristics. Japanese firms imported results of basic research and used them for applied research and for creating technological innovations closely related to the manufacturing process. Such characteristics can be explained by the behavior of research and development organizations of Japanese firms, in addition to the fact that the technological levels of Japanese firms had been behind those of U.S. and European firms; that it was economically beneficial for them to realize the additional technological development on the imported technologies rather than invent their original ideas from scratch; and that Japanese society and government policy, including preferential tax treatment, encouraged business systems and practices allowing firms to do so. It is pointed out that the aim of Japanese R&D organizations is not to become independent but to maximize total corporate profits through close association with other business divisions. This is indicated by the existence of a system whereby the allocation of research funds is determined flexibly by considering the views of other divisions or headquarters management instead of the sole judgement of the R&D division. It is also pointed out that Japanese researchers are not confined to R&D divisions but experience

l6 See Japanese

Management and Coordination Agency, Report on the Survey of Research and Development, each year.

” See Japanese Notifications

Ministry of Fmance, Statistics of Overseas Direct Investment,

of Approvals/ each year.

12

R

Wakosugr / The mnovatweness

the unique Japanese career path, in which they are moved flexibly and are promoted spirally in other divisions. Japanese-style job rotation, which moves researchers above a certain age to other divisions, is practical to a certain extent. It narrows the gap between productivity and compensation created by the fact that while researchers reach their peak of productivity at about 40 years of age, their wages keep rising even after that. The system also provides productive younger researchers with more opportunities to engage in R&D. As a result, Japanese research and development became highly efficient in the fields of applied research and product development. This in turn has made Japanese firms emphasize these fields even more. and reduced allocation of researchers to the basic research field. A number of joint R&D projects carried out by Japanese firms has offset shortcomings of the R&D activities of Japanese firms, stemming from the system of lifetime employment which keeps researchers in a firm. However, the structural and behavioral characteristics of Japanese corporations which brought about vigorous innovations in applied research and product development may, in turn, prevent future creative innovations. Even if an R&D organization and management system is not adaptable to basic research, it is not a problem for Japanese firms whose R&D strategies do not focus on basic research. Some Japanese firms are beginning to change their R&D strategies since their technological level became almost equivalent to the U.S. and European firms and they could no longer rely upon the result of basic research by those firms. Japanese firms, particularly those belonging to advanced technology industries, began to look for new R&D organization and management systems by introducing new corporate strategies; (1) increasing the ratio of basic research expenditure to total corporate R&D expenditure, (2) establishing new career paths to encourage R&D personnel to stay in the R&D division for a long time, (3) supplementing R&D personnel with mid-career

ofJapanese firmsm engrneerrng technology people from other firms in various R&D fields, and (4) establishing research laboratories in the U.S. and Europe. There exists a possibility that Japanese firms will become more competitive in generating basic innovation in the future, though their structural changes are not yet widespread and it will take time before they are able to adjust themselves to a new R&D strategy.

Bibliography [l] Japan Productivity Center. Surwy Report on Treatment of R&D Engmeers (in Japanese) (1985). (21 Japan Productwity Center, Independent R&D und Strutegrc Organxallon and Admmrstrutron of R&D Personnel (III Japanese) (1987). [3] Japan Productlwty Center, Engrneermg rn the Age of Creative Technologlcul Development (in Japanese) (1988). [4] R. Komiya, Japanese Firms, Chinese Arms: Problems for Economic Reforms m Chma. Part I. Journrrl of Japanese and Internullonal Economres 1 (1987). [5] E. Mansfield. lndustnal R&D in Japan and the Umted States: A Comparative Study. Amerrcan Economrc Recrreu 78(2) (1988) 223-228. [6] M. Moritani, Contemporatyv Industrral Technology m Jupan (in Japanese) (Toyo-Kelza&unpousha, 1978). [7] M. Okuno-FuJiwara and K. Suzumura. Strategic Cost-Reductlon Investment and Economic Welfare. Discussion Paper 87-F-5. Research Institute for the Japanese Economy. University of Tokyo (1987). [S] N. Rosenberg. Perspeclwes and Technoloa (Cambridge Umversity Press, 1976). [9] N. Rosenberg and W.E. Steinmueller, Why are Amencans such Poor Inutators?. American Economrc Reweu 78(2) (1988) 229-234. [lo] S. Sakakura, Survey on R&D Management of the Prwate Research Laboratones (m Japanese), Journal of Scrence Pohqs and Research Managemenf 3(l) (1988) 68-81. [ll] J.A. Schumpeter, Caprtnlrsm, Socralrsm and Democracy (Harper & Row. New York, 1950). [12] R. Wakasug, Economic Am&w of Technologrcal Innovatton und R&D (m Japanese) (Toyo-Kezal-Shinpousha. 1986). [13] R. Wakasugi. A Consideration of Innovative Orgamzation: Jomt R&D of Japanese Fwms, a paper presented at the Internatlonal Schumpeter Conference (1988). [14] R. Wakasug, R&D Organization and Behawor of Japanese Films (in Japanese). in: R Komlya and K. Imai (eds), Japanese Fwms (Umversity of Tokyo Press. 1989).