Innovation is the creation of economic value through new knowledge. In the case of the COVID-19 outbreak, breakthrough innovations in the fields of drug discovery and information and communication technology played crucial roles in averting major human losses and an economic crisis.
In drug discovery innovation, the use of "messenger RNA (mRNA)" for drug discovery initially faced great difficulties. However, including the breakthrough by Katalin Karico in 2005, a long period of basic research at universities and a great deal of experiments accumulated. Just as the technical conditions for practical application were being met, a pandemic broke out. The U.S.-based Modera Inc. and Germany's BioNTech SE, which had been the first to invest in practical applications, designed the vaccines, and taking advantage of the characteristics of mRNA and with government support, mass vaccination became possible in a short period of time.
Online conferences and information provision have become widespread as a result of increased capacity and speed of communications and the dramatic improvement in information processing capabilities, made possible by the sustained progress of semiconductor technology (Moore's Law). Semiconductor technology is one of the most science-intensive technologies.
The advances in communications technology made it possible to provide information services to hundreds of millions of users through the Internet even before that the COVID-19 outbreak. Zoom Video Communications, a US company that reinvented online conferencing using cloud computing and other advanced technologies, were in business before the COVID-19 outbreak, but the pandemic triggered a rapid increase in users worldwide, contributing significantly to the continuation of businesses and education. The company has research bases in the U.S. and China, and many of its inventions are the joint inventions of researchers at both locations.
These cases suggest that in order to realize high-value innovation it is important to utilize scientific progress as a source of originality and progress, to take early advantage of the latest leading-edge technologies, and to utilize overseas knowledge and human resources. In the following, we focus on these factors and compare their long-term changes among Japanese, U.S., German, and Korean firms, using US patent data.
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The table below shows the average values of 6 indicators of R&D capabilities for the 1990s and for the first half of the 2010s. We classify them into four types of capabilities: the first two indicators cover use of science, the third indicator covers speed, the fourth indicator covers the geographic scope of the knowledge and the last two indicators covers team size. They are based on the top 5% of U.S. patents in terms of forward citations, for which patent applications were also filed in Japan. The focus is placed on the most significant outcomes for individual firms by limiting the data to the top 5% of U.S. patents. Even controlling for trend differences in each technology field, Japan-U.S. differences between the 1990s to the 2010s are statistically significant.
(Figures tabulated for the U.S. patents ranked the top 5 in terms of citation index for which patent applications were also filed in Japan)
First on the capability to exploit science. The first indicator is the percentage of the top 5% of patents that cited science papers, which indicates the extent to which R&D takes advantage of scientific advances. For distinguishing science papers cited in U.S. patents, the PCS database by Professor Matt Marx of Cornell University was used.
The percentage of citation of science papers did not increase from the 1990s to the first half of the 2010s in either Japan or South Korea. On the other hand, it increased from the 1990s in the United States and Germany. The frequency with which Japanese firms cite science papers in inventions is less than half of that of the U.S. or German firms. The table also contains the number of science fields covered by science papers cited in inventions, and a large gap is observed between Japan and the United States.
Second, there is a lag (time difference) between the early absorption of the prior technologies and new inventions. Obtaining R&D outputs early is a source of a first-mover advantage in innovation. In the early 1990s, the lag was approximately 20% shorter for Japanese and Korean firms than for U.S. and German firms, but by the first half of the 2010s the lag had lengthened in all countries except Korea, and while Japanese firms maintained an advantage over U.S. and German firms, their speed has fallen below that of Korean firms.
Third, the percentage of patent applications that cite foreign investors' inventions is increasing in these four countries. In the first half of the 2010s, inventions that cite foreign investors' inventions as prior arts accounted for 72% in the United States and 56% in Germany. The relevant percentage in Japan was 34%, around half of that in the United States.
Fourth, there are also significant differences in sizes of inventor teams. For complex R&D that combines diverse knowledge and know-how, a large inventor team is required, and in general, team sizes are becoming larger. However, the average team size, which was 3.1 persons both in Japan and the United States in the 1990s, expanded to 4.2 persons in the United States in the first half of the 2010s but remained almost the same, at 3.3 persons in Japan.
One of the factors that has caused this difference can be attributed to be the participation rates of foreign investors. Especially in Germany, backed by the progress of European integration, foreign investors participated in 25% of inventions in the first half of the 2010s, but in Japan, only 7% of inventions benefitted from the participation of foreign investors.
According to our studies, all of the knowledge combination factors pointed out so far strongly affect the performance of patents (numbers of citation in Japan and the United States). In addition, a comparison of the Japanese and U.S. markets shows that the U.S. market places a much higher value on the use of science, suggesting that more R&D is conducted in science-intensive fields in the U.S. market and that competition is also more intense in such fields.
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These results show that there is still considerable room for Japanese firms to enhance their R&D capabilities.
First of all, Japanese firms need to strengthen their capability to absorb science. Compared with the situations in Europe and in the United States, capacity to reflect advancing science in corporate R&D activities is relatively low in Japan. This is partly due to the fact that the number of inventors with a doctoral degree is relatively small in Japan.
Recruitment of doctoral students has been expanding in Japan, but our studies have not shown clear evidence of an effect of such recruitment on the R&D performance of individual firms, which is also the case with the national government's expenditures for commissioned research to firms. It is important for firms to engage in original, cutting-edge research in conjunction with expanding the recruitment of doctoral personnel. Japanese companies have a long track record of supporting and commercializing highly uncertain basic research within their companies from a long-term perspective. Such capabilities of Japanese companies should be utilized and supported.
In recent years, government support has become more "results-oriented," and there is concern that support for original research is declining. It is important to provide government support for cutting-edge research that is highly uncertain and has limited proprietary potential, making it difficult for companies to invest in, but which can have significant ripple effects in the economy.
Also, the ability to utilize overseas knowledge and talent should be strengthened. It is important to encourage both competition and collaboration through joint research with foreign researchers in English-speaking environments. It is important to expand English-language based classes at Japanese educational institutions, hire overseas personnel, have researchers participate in international academic conferences, and strengthen exchanges with overseas subsidiaries. The utilization of overseas human resources will enable companies to engage in more complex R&D.
The extent to which R&D results can be used for innovation depends on the scale of a company's complementary assets, such as manufacturing capacity and the size of its customer base. Global expansion is important for such scale to be realized.
Additionally, competition for scale in the use of R&D results also promotes vertical division of labor within industries as markets expand. As a result, fundamental R&D investment tends to be tilted toward the upstream and platform sectors, where economies of scale can be best exploited. Business and R&D strategies that anticipate these structural changes are also required.
* Translated by RIETI.
February 20, 2023 Nihon Keizai Shimbun
