Issues Facing the Japanese Economy in 2012 (January 2012)

Seeking and Exploiting Knowledge Globally

Program Director / Faculty Fellow, RIETI

Diversification of geographical sources of global economic growth

Growth in emerging economies such as China and India has been rapid. According to the analysis in the White Paper on International Economy and Trade 2011, if compared by the contribution to the increment of the world GDP for 2010, the emerging economies equaled the developed countries. The developed countries' GDP accounted for 69% of the world GDP, but the growth rate of GDP of the emerging economies reached 7.3%, greatly surpassing that of developed countries (3%). The growth rates of emerging economies are expected to remain high; therefore the significance of emerging economies from the perspective of increments in the growth of global markets should increase further in the future.

The spreading of economic growth to emerging economies and the global economic integration through the expansion of trade and investment have the effect of enhancing innovation and accelerating global economic growth. This is because the source of innovation is "knowledge," and a knowledge once developed can be employed without additional cost as long as there is demand. If the size of the market where such knowledge can be exploited expands, the revenue that is generated from developing or improving it also becomes larger, which will in turn spur research and development (R&D) investment for knowledge creation.

Enhancement of R&D capabilities in emerging economies

As emerging economies have grown, more and more companies in these countries have started to engage in R&D. Such enhanced R&D capabilities in emerging economies will also contribute to the growth of knowledge production, thus potentially becoming a significant factor for accelerating global economic growth. For example, China's investments in R&D and its research capability in science have grown substantially. China's R&D expenditure in 2009, based on purchasing power parity, is 14.1 trillion yen, surpassing Germany (9.6 trillion yen) by a wide margin and closer to overtaking Japan (17.2 trillion yen). Science and Technology Indicators 2011 of the Japanese government shows that, in recent years, China has surpassed Japan in both the number of science and technology papers published in international scientific journals and their citation frequencies.

On the other hand, if we look at the number of patent registrations (by nationality of applicants) in the United States, China's share is 1.2%, which is much smaller than 20.4% for Japan and 5.3% for Korea. Also, according to The 2010 EU Industrial R&D Investment Scoreboard published by the EU Commission, showing the world's top 1000 companies in R&D expenditures by the frequency of the countries to which they belong, the United States ranks No. 1 with 339 companies, Japan No. 2 with 199, Germany No. 3 with 75, followed by France and the UK each with 50, while Taiwan has 35, No. 8 Korea with 23, and No. 11 China with only 16 companies. These indicate that the government-led R&D efforts and investment in science have not yet been transformed into a full-scale enhancement of industrial R&D capability in China. Nevertheless, as the achievements of Korea and Taiwan indicate, such industrial capability is expected to grow substantially in the future. This is due to both the multinational companies increasing their investments in establishing R&D bases in these countries spurred by the growth of markets, and major improvement in the educational levels as well as in the domestic firms' capabilities in emerging economies.

The challenge for the Japanese industry: Seeking and exploiting knowledge globally

Corporate profits from R&D investments are determined by the size of the market where the fruits of the R&D investments can be exploited. Therefore, companies that pursue R&D and business strategies with the objective of making available the results of such investments to the emerging economies will gain global competitive advantage. The seeds of R&D are often produced from scientific research; however, the probability that these seeds can grow and the speed of their growth depend on the size of the market that can exploit them. Japanese firms have a good record of skillfully developing seeds using the Japanese market: to find new uses for technology and to develop it. Yet it is becoming important to do so globally. Withdrawing from the global market does not make an isolated evolution on the Galapagos Islands possible; it is more likely to run the risk of losing out in the competition for survival through reducing the speed of innovation.

Another aspect of the globalization of R&D is increasing the value of utilizing international human resources for research. Abilities and experiences required for R&D are diverse, and making use of foreign human resources in R&D will enable diverse combinations of capabilities and skills. In the area of cutting-edge technology, such combinations are of great importance. Furthermore, in the process of finding new uses for such technology in the overseas markets and building such uses into the domestic R&D efforts, participation by local engineers is critical. However, compared with European and U.S. firms, the frequency of joint international research by Japanese firms is extremely low. The proportion of joint international inventions among the trilateral patent applications from 2000 to 2005 shows the ratio for UK at 27%; for the United States, Germany, and France, between 10%-20%; but for Japan, only at 2%. All of these ratios have been rising, except for Japan. It is important to seek both knowledge and human resources globally for an efficient invention and innovation.

Policy issues

First, there is a need to educate human resources who are able to conduct business and professional work in English and to be able to seek and exploit knowledge internationally. Second, it is vital to expand the opportunities for global exploitation of knowledge produced from R&D. Free trade and investment is crucial in this regard because it enables the selling of products and services incorporating the fruits of R&D in the international markets as well. Third, an intellectual property system respecting global novelty and appropriate progressivity is of great significance. This will serve the purpose of removing duplication of R&D among countries so that each country can contribute to the enlargement of the frontiers of global knowledge. Fourth, free international movement of R&D personnel is also critical. Fifth, it will be important to promote international research cooperation in basic research, which will increasingly assume the character of international public goods, and in addressing global constraints on growth such as the environment and the shortage of natural resources.

January 11, 2012

January 11, 2013

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