Henry Rowen

What's happening in Silicon Valley the heart of technological innovation in the United States in recent years indicates how other Asian countries are closing the gap with the U.S. and Japan, said Henry Rowen, professor emeritus of public policy and management at Stanford University's Graduate School of Business.

Rowen and his co-panelists were speaking at a Jan. 21 symposium, organized by Keizai Koho Center at Keidanren Kaikan, under the theme of "Securing a competitive edge in the global economy."

According to Rowen, the net payment of fees paid by Japanese firms during the 1990s for the use of technologies created by American firms was on average somewhere above billion a year, with the amount declining to roughly half a billion dollars by the end of the decade.

Fees paid by South Korean firms to U.S. companies came to about half a billion dollars a year during the same period, while those by Taiwanese firms grew steadily to around 0 million annually by the end of the 1990s, he said. This meant that these countries were still catching up and acquiring technologies through a variety of ways either by paying for them or through foreign direct investments.

Silicon Valley is still a major source for inventing and creating these technologies and new business models, "but less and less making anything," Rowen said.

"The making of things both hardware and software has migrated from there, first to other parts of the U.S. and to Asia," and this pattern was reinforced by Asian economies other than Japan South Korea, Taiwan and more recently China and India becoming more skilled in manufacturing, he added.

The collapse of the information technology bubble in the U.S. in 2000 resulted in a marked shift to biotechnology at Silicon Valley.

Another major post-IT bubble change, Rowen said, is that large numbers of new companies formed in Silicon Valley today have part of their operations in Asia especially China and India from the beginning. Venture capitalists who provide funds for these companies insist on that, he added.

Meanwhile, the number of patents obtained by these Asian countries under the U.S. system increased dramatically, Rowen noted. Though still far below the U.S. or Japan, Taiwan topped Britain by the end of the '90s, with South Korea trailing just behind Britain, he said.

The rise of Asian countries is also impressive in terms of the production of doctorates. In 2000, the U.S. produced about 25,000 doctorates in the field of science and technology, but perhaps around 10,000 went to people from Asia, Rowen pointed out. Furthermore, he said, there has been a big increase in citations of academic papers produced by people from China, Taiwan, South Korea and Singapore in major scientific journals.

Rowen said that while he still has trouble identifying any significant technology created in Asian countries except for Japan, these data indicate that innovations are about to come from those other countries.

"How fast or how significant, it's hard to say. ... I think there's going to be a significant shift" in the pattern of technological innovations across the Pacific.

"The pattern of new company formation in Silicon Valley reflects a recognition of this. ... Venture capitalists certainly understand it," he said. "It's not just that engineers are cheaper in China and India, but also a recognition of their talent."

Hugh Patrick

Respond to change or die
Meanwhile, the competitive environment for Japanese companies has gone through tremendous changes since the collapse of the nation's asset-inflated bubble in the early 1990s, said Hugh Patrick, director of the Center on Japanese Economy and Business at Columbia Business School.

"Every company has to respond to (the changes) if they are not going to die," Patrick told the audience.

"Japan's economy is now mature technologically sophisticated, people are well-educated, relatively affluent like other advanced economies. I think it's reasonable to say that on average the growth rate would not be more than 2 percent per person per year in the future, and that growth is going to be driven primarily by continuing innovation that generates improvements in productivity," he said.

When a company's competitiveness is being discussed, people tend to focus on its technological capabilities or the ability to be innovative with products and processes, protect the technology and continue to do new research and development, he said.

Japan is obviously strong in this area, with the nation not only being a large spender on R&D but most of the R&D activities being carried out by private-sector firms, he added.

But innovation is in fact a much broader concept, he said.

"When we think of innovation we too often think of physical production processes, or manufacturing. But innovation is multidimensional, including not only production or corporate strategy but development of company reputation and brand naming, marketing and financing," Patrick noted.

It is argued, he said, that in the United States one-third of the national increase in productivity came from retail and wholesale industries areas that are not normally considered high-tech industries.

"So innovation is occurring everywhere. ... If a company doesn't innovate, it's going to lose out," he warned.

Patrick pointed to the lingering wide gap in productivity between Japan's manufacturing and service sectors, with the latter having been heavily protected by government regulations. The process of deregulation in Japan, he noted, is not finished yet.

And just as Japanese firms have to complete their process of restructuring, "the government needs to restructure almost all of its special public corporations and decide on what to do about them," he said, noting that the planned privatization of Japan Post is a "particularly important component" of this process.

More importantly, Patrick went on, the government should introduce a massive long-term program for developing basic scientific research.

"Japan is a country that's very strong in applied research, and on the whole, with some exception, extraordinarily weak in basic research.

"Basic research, by its very nature, can only be funded by governments. While you want to reduce government expenditures in many areas, this is one area in which if you are going to be competitive in the world over the next 10 or 20 years, you should start investing now and developing a huge basic science capability.

"You turn out lots of electrical engineers more than in the United States and you've got a wonderful electronics industry. I don't think you turn out many Ph.D.s in biotech, chemistry, biology, sciences, and that is the future of Japan and you've got to start tackling these problems for your growth," Patrick told the audience.

Panelists discuss competitiveness in the global economy during a Jan. 21 symposium at Keidanren Kaikan in Tokyo.

Importance of innovation
So how much lead time does Japan still has before the rest of Asia catches up in terms of innovation?

Rowen suggested that it would not be surprising to see some significant innovations emerging from those countries particularly South Korea and Taiwan over the next decade.

Patrick meanwhile said it would be meaningless to worry about the rise of these countries as a "threat."

"I think the United States learned an important lesson from Japan over the last 20 years. In the late 1980s, we were very scared by Japan catching up. In the 1990s we learned that the only thing worse than a fast-growing Japan is a slow-growing Japan," he noted.

"In that sense, to see the other parts of Asia growing fast is in the long run an advantage to the U.S. as well as those countries, because it creates new markets, new opportunities, new innovations that will spread to the U.S. in due course and we will all benefit," he said. "And we're seeing a change in attitude in Japan from viewing China as a dangerous economic threat to (seeing it as) a wonderful economic opportunity."

Innovations often take place through a "mix of cultures," the two scholars pointed out.

"When you look at Silicon Valley in the mid-1990s, about 30 percent of the companies there had as leading managers ethnic Chinese and Indians," including those born in the U.S. as well as those who migrated to the country, Rowen said.

The United States is "bringing together people from different cultures, and that stimulates us to think differently," Patrick observed.

"One of the problems in Japan is not just that you're rather internal, but each company is internal. I don't see mixture between one company and another. I don't see much communication. ... I believe we do learn from being intellectually challenged by other people, and innovation and invention comes from people who are curious who want to learn, who want to do something new.

"In a sense, the U.S. is a tremendously fortunate country that we can take anybody and turn them into an American ... and we do, and we get a lot of very able people. Even Japanese Nobel Prize winners come to the U.S.

"Japan doesn't have that desire, or social capability. It's very hard to become a Japanese ... maybe impossible," he said.

The need for public funds
Hiroyuki Itami, a professor at the Graduate School of Commerce and Management at Hitotsubashi University, noted that overall support for research activities by universities either from the government or other segments of society is insufficient in Japan.

"My university, which I believe is one of the leading institutions (in Japan) in the field of social science, is run with only 12 billion a year, including personnel costs and all," said Itami, who served as a coordinator of the panel.

Japan spent 6 trillion in subsidies for its agricultural industry to deal with farm trade liberalization under the Uruguay Round of the GATT negotiations an amount, he said, that could operate the university for 500 years.

Rowen observed that the Cold War particularly after the Sputnik shock of the 1950s was a major political reason behind a national consensus in the U.S. for spending a lot on basic scientific research.

Government funding comes from a variety of sources, and scientists themselves are involved in the allocation of much of such funds, he noted.

Patrick meanwhile said universities in the U.S. operate in a "very competitive" environment.

"We have very wide wage differentials based on performance of people within any given discipline, and we have substantial differences within the same university ... so we have a very competitive labor market for professors, and we are rewarded on the basis of research performance.

"As far as I can see, Japanese universities are the least competitive institutions in Japan," he said, adding that U.S. universities are "quite productive because we are in a very competitive industry."

Establishing incentives
The reward for corporate researchers for major inventions has recently been a hot topic of debate in Japan following a high-profile lawsuit filed by Shuji Nakamura, now a professor at the University of California, Santa Barbara, against his former Japanese employer over the patent for the blue light-emitting diode.

Asked to comment on the recent court-mediated settlement that awarded Nakamura 843 million for his contribution to the invention, Patrick said it is hard to generalize about the suit, which he described as a "very unusual case."

But a more fundamental issue, he added, is how to create the appropriate incentive system that benefits both corporate researchers and their employers.

"There's clearly a need for some sort of system reform in terms of (creating) the rules of the game for the incentives that each company has to work out with its researchers. (The LED) case brings to attention the fact that we need to have a system that provides incentives for everybody."

Universities have a similar problem, he pointed out.

"Each (American university) has strategies on how to share the benefits of inventions by any individual researcher or lab group," he said.

"The rules are specified and each university has a different rule, but at Columbia, for example, if some scientific pharmaceutical lab develops something and the university gets a patent for it and it's sold at some wonderfully high price to some company, the individual will get a certain proportion, his lab gets a certain proportion, his school gets a certain proportion.

"And that's worked out in advance, and people understand that and accept that," he said.