Growing Flow of Technology Drain: Considerations in measuring impacts and planning measures

Fellow, RIETI

Concerns over the growing flow of technology drain

Lately, cases of trade secrets and technology draining from Japanese companies to their foreign rivals have been making headlines in the media. Including those that have gone unnoticed, there may be a significant number of such episodes. Technology drain makes it difficult for originator companies to secure revenue stream from their successful outcomes of research and development (R&D) activities (because the appropriability of technology--i.e., inventing companies' ability to maintain possession of their inventions--decreases), and therefore may seriously hamper innovation activities, which are a key driver of economic growth.

Prompted by such concerns, Japan is currently reviewing the Unfair Competition Prevention Act for amendments to provide greater protection for trade secrets. However, in order to be eligible for protection under the law, trade secrets must fulfill certain criteria, and, in many cases, technological knowledge that has been acquired and become integral part of human knowledge fail to do so (Note 1).

We often hear people say that one big reason behind the decline of Japanese electrical and electronics manufacturers and the rise of their South Korean counterparts in recent years is the draining of Japanese engineers and their technological knowledge to South Korea. What they have in mind is exactly the type of technology that cannot be protected under the Unfair Competition Prevention Act.

However, to what extent can this argument be supported by objective data? Since we can track the migration of Japanese engineers to some extent by using data on the inventors of patent applications, it may be possible to find a relatively precise answer to this question.

In this column, I would like to show, in a simplistic way, how we can approach the problem of technology drain by using patent application data.

Roles of Japanese engineers in South Korean companies

The table below lists some of the inventors who moved from Japanese companies to Samsung SDI extracted from data on patent applications in the field of lithium ion batteries, where the market share of Japanese companies has been overtaken by South Korean companies. For instance, H.Y. at the top of the list filed patent applications as an inventor belonging to Sanyo GS Soft Energy Co., Ltd. until some point in 2003, but, thereafter through 2006, his/her affiliation was filed with Samsung SDI in the applications (Note 2).

Similar attempts to capture the state of technology drain from Japanese companies to Samsung SDI have been made in an article published in the Nikkei Business Online (Muto (2013)) and another in the Weekly Diamond magazine (November 16, 2013 issue). However, what is more important is to analyze what types of engineers have moved to South Korean companies and what roles they are playing there. A Japanese engineer doing research alone in a South Korean company may help the company improve competitive advantage, but probably not to the point where it will pose a major long-term threat in terms of technology competition because a significant accumulation of technological knowledge is unlikely to occur.

Though this is just an overview of data, our research has found some general tendencies in the migration of engineers from Japan to South Korea, as described below. (Please note that these findings are hypothetical as they have not been subjected to rigorous econometric analysis or testing).

To begin with, headhunting of top class engineers is surely taking place (for instance, N.Y. listed in the table was among the top in Japan in terms of the number of patent applications in the field of lithium ion batteries). After migration, those engineers typically work on inventions jointly with researchers of their new companies. It is thus believed that they are making considerable contributions to the development of the engineers in their new companies.

However, there have been very few cases of such high end headhunting and the vast majority of engineers recruited by South Korean companies are of an average skill level--i.e., those comparable or slightly inferior to their original colleagues in terms of the number of patent applications filed--who must have been affected by the streamlining of operations by Japanese companies (for instance, the number of patent applications filed by H.Y. and K.M. prior to moving to Samsung SDI was about average at Sanyo GS Soft Energy, which they joined around the time when GS-Melcotec Co., Ltd., their initial employer and a subsidiary of Japan Storage Battery Co., Ltd., was merged into Sanyo Electric Co., Ltd.).

The productivity of those average skill level engineers tends to improve after migration (achieving an average increase of one patent application per year, probably due to severe application quotas imposed by their new employer). As those engineers often work with other Japanese engineers (for instance, H.Y. and K.M. from Sanyo GS Soft Energy and M.H. from Toda Kogyo Corp. worked on inventions jointly at Samsung SDI), technology spillover to the new company would be limited.

By verifying those hypothetically with the quality of patents and changes in the productivity of new company inventors taken into account, we can expect to get a clear picture of what is happening (Note 3).

Table: Japanese Inventors Who Moved to Samsung SDI (Examples)
InventorAffiliation before/after migrationNumber of patent applications
(5 years before/ after migration)
Period in which the
inventor filed applications from Samsung SDI
H. Y.BeforeSanyo GS Soft Energy Co., Ltd.4
AfterSamsung SDI (Yokohama Research Institute's Osaka branch)52003-2006
K. M.BeforeSanyo GS Soft Energy Co., Ltd.4
AfterSamsung SDI (Yokohama Research Institute's Osaka branch)132003-2007
K. N.BeforeCanon Inc.8
AfterSamsung SDI (Yokohama Research Institute's Osaka branch)102005-present
M. H.BeforeToda Kogyo Corp.10
AfterSamsung SDI (Yokohama Research Institute's Osaka branch)192005-2010
M. T.BeforeSony Corporation10
AfterSamsung SDI (South Korea)52002-2004
N. Y.BeforePanasonic Corporation100
AfterSamsung SDI (South Korea)122004-2005

Is technology drain always evil?

In Japan, engineers from Japanese companies moving on to their follower companies are usually talked about in a negative context. But this is the kind of practice that has been and is done in any country including Japan in the catch-up process, and this is how new technological opportunities and competition are generated.

In the United States and Europe, research on the migration of human resources tends to focus on the effects of knowledge spillover and brain drain. Here, the term "brain drain" refers to the phenomenon in which highly competent individuals who have acquired advanced knowledge and skills in their own countries emigrate, in pursuit of more favorable treatment and opportunities, to those countries where talented human resources concentrate. Thus, there are some commonalities with technology drain.

However, technology drain differs greatly from brain drain in the following two points: 1) human resources move from countries with a higher level of knowledge and technology to those with a lower level; and 2) the cost of human capital development is mostly borne by source companies. Thus, emotional issues aside, we can say that the focus of criticism on technology drain is on the problem of free riding on the human resources development and R&D borne by others for catch-up purposes (Note 4).

This free riding is difficult to prevent. Human resources development and R&D inevitably involve uncertainty. However, companies poaching established engineers do not bear any part of the cost of their training. They are also free from the risk of all such training producing nothing. That is why those new employers can offer higher wages than source companies and yet secure sufficient profits. Meanwhile, it is only natural for engineers to move on to a company where their technological skills and knowledge are more highly valued, if their current employer has poor performance and they are dissatisfied with how they are treated. If free riding becomes widespread in this manner, incentives for investing in the development of human resources and R&D will diminish.

Of course, migration may turn out to be a new opportunity for engineers to demonstrate their abilities, which have been sealed off and unused at their current workplace due to worsening business performance, at another company launching a new project, and, if so, increase social welfare (measured at the global level) will increase in the short term. However, considering its long-term effects on R&D incentives, it is questionable whether such migration truly contributes to a rise in social welfare.

Is it possible to prevent free riding?

In the end, the problem of technology drain comes down to the question of appropriability, i.e., to what extent companies are able to secure revenue from the outcome of their R&D activities (Note 5). In order to boost incentives for R&D, many countries have established a system for protecting intellectual property rights (IPRs) as a way to secure appropriability. If we apply the same idea to the development of human resources, a system for allowing companies to retain their trained researchers for a designated period of time should be established.

Increasing control over leaving employees and enforcing the contractual terms of confidentiality and non-competition agreements more strictly would be effective. However, as an additional option and a way to safeguard the freedom of choice in employment, it is worthwhile considering introducing a system that would allow companies to charge transfer fees for employees leaving before completing the period specified in their contract (Note 6). This would have a deterring effect on free riding because companies poaching talented workers from their competitors would have to pay their share of the training cost for such workers. Although this kind of contractual terms is quite common in the world of sports, there will be many obstacles in introducing them into the general labor market. However, if there are sufficiently many Japanese companies that continue to be committed to the development and training of their engineers amid intensifying competition from their rivals from emerging economies, it may not be so long before we see the introduction of this type of contract for engineers in a somewhat modified form.

July 16, 2014
  1. ^ In order to be protected under the Unfair Competition Prevention Act, trade secrets must be: 1) managed properly as a secret, 2) useful, and 3) not in the public domain.
  2. ^ While the data used for the Nikkei Business Online article (Muto (2013)) are limited to applications filed with the Japan Patent Office (JPO), this article is based on patent data obtained from the JPO as well as patent authorities in in China, South Korea, and the United States. It is important, when using information on inventors, to take measures to avoid problems arising from identical names by using information on the address of inventors or limiting the sample to sole applications. Meanwhile, there are an ample number of patent applications filed by major Japanese electrical and electronics manufacturers jointly with Samsung SDI, their rival. This suggests that the migration of engineers is not entirely negative as symbolized by technology drain but has its positive side as well, i.e., stimulating collaboration.
  3. ^ Though limited in the area of technology and the number of companies covered, Fujiwara and Watanabe (2013) is one of few Japanese research studies conducted using this approach.
  4. ^ The problem of free riding with regard to the cost of human resources development is not unique to engineers. However, because of the high uncertainty and the scale of investment involved in R&D activities, engineers tend to be considered separately from other types of workers.
  5. ^ The option of not migrating could be a rational choice, for instance, if migrating to a South Korean company makes it difficult to return and find a job with a Japanese company. But such a restraining mechanism would not work when inventors are nearing retirement age or in the presence of Japanese companies willing to absorb the technology of South Korean companies (actually, many of the engineers listed in the table have subsequently returned to Japanese companies). Meanwhile, if technical know-how acquired by engineers is mostly company-specific assets and not applicable in other companies, the combination of job security and seniority-based pay will increase incentives for receiving more training and effectively deter them from migrating to other companies. However, such will not be the case if the technical know-how is general assets that are useful to rival companies.
  6. ^ Under the Patent Act, rights to obtain patents for inventions resulting from corporate research activities are given—not to companies—but to individual inventors. Thus, a typical practice of many companies is to have such rights vested in them by means of bylaws such as employee rules and regulations. In return for this, employee-inventors are given the right to receive "reasonable value" for their inventions. Some people call for amending the Patent Act so that rights to obtain patents for corporate inventions would be given to companies. However, from the viewpoint of introducing some sort of transfer fee provision, employee-inventors' rights to receive "reasonable value" should be kept intact so as to help them secure reasonable bargaining power.
  • Muto, Kenjiro (2013) "Samsung ni Ookuno Tenshokusha o Dashita Nihon Maker wa?: Jinzai no ryushutsu mondai o tokkyo-joho kara bunseki suru [Which Japanese manufacturers are major providers of migrant workers to Samsung?: Looking into the problem of human capital outflow by analyzing patent data]," Nikkei Business Online, June 5, 2013
  • "Dokusen Kokai!: Samsung ga nomikonda Nihon no gijutsu [Exclusive Report: Japanese technologies absorbed by Samsung]," Weekly Diamond, November 16, 2013
  • Fujiwara, A. and T. Watanabe (2013) "The Effect of Researcher Mobility on Organizational R&D Performance: Researcher Mobility and Innovation," IAM Discussion Paper Series #032.

July 16, 2014