Regaining Japan's Competitiveness Based on Scientific and Technological Creativity

Faculty Fellow, RIETI

At the end of 2005, the Council for Science and Technology Policy adopted a framework of the Science and Technology Basic Plan for Phase III, which is to set a direction for the government's science and technology policies for the five-year period from fiscal 2006-2010. In its report titled "Striving for a Japan Based on Scientific and Technological Creativity" (tentative translation), the council recommended that public funds worth ¥25 trillion be spent on research and development (R&D) investments in the next five years. At the same time, in order to maximize the effect of such investments, the council urged the government to step up efforts on the strategic prioritization of its policies as well as on the reform of the science and technology system.

Should the government's R&D investments be increased?

Inclusion of the specific target amount - R&D expenditures of about ¥25 trillion over five years - is the key element of the phase III plan. However, there has been a great deal of criticism of an increase in the government's expenditures on R&D amid the ongoing severe fiscal situation. Some also point out that the priority spending on R&D, made in accordance with the past basic plans, have created a "research fund bubble" among researchers while failing to produce sufficient results. With all that considered, would the council's decision to include the target amount of R&D expenditures in the phase III plan, in succession to the phase I and II plans, be appropriate?

According to the "Survey of Research and Development" conducted by the Ministry of Internal Affairs and Communications, R&D expenditures by the central and local governments in fiscal 2004 totaled some ¥3.4 trillion, accounting for roughly 20% of Japan's overall R&D expenditures of ¥16.9 trillion including those by the private sector. Most of the public R&D expenditures went to the so-called science sector, which encompasses universities, public testing and research institutes and so forth. In other words, questioning the right or wrong of the government's increase its R&D expenditures is to ask what virtue Japan, as a whole, places on paying the bill for the science sector. First and foremost, it is necessary to look at this from a broad perspective. For instance, we can ask ourselves how we should define the cost of universities and public research institutes in terms of its burden on individual taxpayers. Is more funding deserved? Or should it be streamlined so as to reduce the burden on taxpayers?

One of the guiding principles of the council's proposals for the phase III plan is to seek "science and technology that will be favorably received by and able to return benefits to the society and people." But what are the rewards of the science sector for the people? It is expected that the advancement of science and technology will help activate innovation nationwide, which is of significant economic importance. At the same time, however, would it not be the case that another major factor of the benefits, from individual citizens' points of view, lies in the sense of national pride in having an internationally competitive science sector? The phase II plan called for producing some 30 Nobel Prize laureates in 50 years, a target that cannot be taken as an indicator of any substantive meaning. However, it is quite conceivable that the recent increase in the number of Japanese Nobel Prize winners has been strongly impacting individual Japanese. In this context, it is important for the government to allocate sufficient budget to researchers engaged in internationally outstanding basic research.

Growing importance of science in innovation processes

It is also important to acknowledge the growing importance of science in corporate innovation processes. The way in which Japanese companies innovate is changing as they face increasingly fierce competition with their American and European rivals as well as those in South Korea and China that are hot on their heels. Insistence on the independent, in-house development of technologies has been one of the major characteristics of the Japanese innovation system. However, a RIETI survey conducted in 2004 has found a series of signs heralding the transformation of the Japanese innovation system into one based on networks (see note 1). As innovation competition intensifies, companies are becoming more focused on R&D activities that are closer to the "exit" to the market while moving to scale back on those themes with little relation to commercialization. This, however, does not mean that Japanese companies are abandoning basic research altogether to concentrate on applied and development research. The development of truly innovative products, which is indispensable to survival in the age of mega-competition, calls for ingenious R&D based on new technology seeds. In the search for such seeds, more and more companies are turning to universities and public research institutes.

Genetic engineering, which used to be a research theme at universities, is having a huge impact on the innovation process for new drugs (see note 2). Likewise, in the area of electronics, many companies are placing considerable expectations on certain physics knowledge that may lead to the development of groundbreaking products (see note 3). However, such achievements in research conducted on an academic level have been made not on the premise of some sort of future commercialization, for instance application to the development of new drugs or electronics parts. Also, scientific knowledge per se, though having potential to substantially improve product performance and corporate innovation processes, is not subject to commercialization. Research activities in the science sector, which are promoted with the support of public funding, should be for the purpose of exploring scientific frontiers and resulting achievements should be published in the form of research papers and thus widely usable in a variety of applications. For this reason it is all the more important for the government to set aside sufficient funds, thereby creating an environment where such basic research can be carried out on a long-term basis.

Is the reform of the science and technology system making any progress?

It is quite significant that the government makes a long-term commitment to R&D investments so as to ensure that the nation's science sector remains strong. At the same time, the government should, naturally and rightfully, be demanding that the science and technology system be changed fundamentally. National testing/research institutes and national universities were transformed into incorporated administrative agencies (IAAs) in 2001 and 2004 respectively. Yet the change in form seems to have hardly translated into a change in substance.

For instance, in a bid to increase competition among incorporated national universities, the government increased the amount of competitive grants, while cutting back on the so-called operational grants for basic expenditures, i.e. noncompetitive funds that are allocated in accordance with the size of a university and expended for any purpose at the university's discretion. The move is intended to elevate the macro-level productivity of national universities by allowing only competitive institutions - those capable of obtaining competitive funds - to survive. Theoretically, this is correct. But it is a big question whether things are in fact going along with that theory. A university is an aggregation of extremely small operating units such as laboratories and individual faculty members. Therefore, the transaction cost of introducing a competitive mechanism is extremely large. Meanwhile competitive grants, just as deservedly, come with strict conditions; they must be used within a designated period of time and only for specified purposes. Even when a competitive grant is awarded for a multiple-year project, a portion of the grant designated for a certain fiscal year usually cannot be carried over to the following fiscal year. Thus, considerable waste is incurred for the sake of "using up" the funds allocated for each fiscal year. In order to solve this problem, various competitive funds, which are currently managed and graded by respective government ministries and agencies, should be sorted out and consolidated, and then, appropriate institutional measures should be implemented so as to allow flexible use of competitive funds. When these are done, the productivity of Japan's science sector is expected to increase dramatically.

While taking appropriate budgetary steps to ensure funding for the science sector, the government also needs to establish an evaluation system under which researchers will be fairly judged for their achievements. Simply conducting evaluation is not enough; the results of evaluation must be properly reflected in the compensation and promotion of individual researchers. For that, it is necessary to create a personnel management system that facilitates the mobility of researchers. In reality, however, little progress has been made regarding this system toward accommodating the needs arising from the budgetary reform, a shift in weight from noncompetitive basic funds to competitive funds. An incorporated national university typically has two kinds of professors, namely, lifetime professors covered by operational grants, and fixed-term contract professors covered by competitive grants. Fixed-term professors are employed on a project-by-project basis, thus they need to look for another post before their term expires. Facilitating the mobility of researchers concerns the employment system of the science sector as a whole and cannot be done by individual institutions. For that matter, the government is called on to implement drastic reform measures, for instance listing the implementation of advanced personnel management systems, such as a tenure system, as part of evaluation criteria for providing operational grants. Only when proper changes are made to the personnel management system at universities and public research institutes, can we say that substantive reform of the science and technology system has begun.

January 24, 2006
  1. "Kenkyu kaihatsu gaibu-renkei jittai chosa hokokusho" (Report on Survey of External R&D Collaborations), RIETI, March 2004
  2. "The Changing Autarky Pharmaceutical R&D Process: Causes and Consequences of Growing R&D Collaboration in Japanese Firms," Kazuyuki Motohashi, Journal of International Technology Management, February 2005
  3. "Kenkyu kaihatsu: butsuri ni kaeru" (Research and Development: Return to Physics), Nikkei Electronics, January 2, 2006, Nikkei Business Publications, Inc.

January 26, 2006