2003/12 Research & Review

Japan's Technology Acquisition Management Policy and Corporate Performance1

Faculty Fellow, RIETI

Faculty Fellow, RIETI


Evaluations of Japan's industrial policy have seen great change. From the 1980s to the early 1990s, putting aside the issue of whether it was "fair," industrial policy was viewed a key factor behind Japan's postwar economic growth (Okimoto [1989]; Tyson [1992]). On the other hand, from the mid-1990s onward, the prevalent view has been that industrial policy has served to protect inefficient industries and has been the root cause behind the protracted recession (Beason and Weinstein [1996]; Porter, Takeuchi and Sakakibara [2000]). Such changes in the evaluation of industrial policy virtually match the changes in the performance of Japan's economy as a whole. A major reason behind the uncertainty regarding evaluation of industrial policy is that economic theory only shows there is a possibility that industrial policy might be effective and there is insufficient accumulation of positive research into quantitative analysis of the effects of industrial policy.
This essay aims to look at the effects of industrial policy - specifically, policy regarding the control of technology acquisition - using firm-level data. As will be discussed below, between the 1950s and 1960s the Japanese government, or rather the Ministry of International Trade and Industry (MITI), controlled the inflow of technology from foreign countries item by item through a permit and authorization system.2 How MITI controlled technology inflow and what effects this had on corporate performance are the main themes of this essay.

*1 This essay is the result of a research project jointly undertaken at the Research Institute of Economy, Trade and Industry by RIETI Faculty Fellows Okazaki (The University of Tokyo) and Kiyota (Yokohama National University).
*2 Branstetter and Sakakibara (1998), Horiuchi and Sui (1993), Ohashi (2003) and Okazaki and Koreanaga (1999) can be cited as quantitative positive research on industrial policy.

Earlier research and the principles behind our research

The reference material relevant to the theme of this essay can be divided into two groups. First, there has been research that directly studied the technology acquisition policy itself. Peck and Tamura (1976) is a classic work concerning technology acquisition policy. Such research provides us with many stylized facts regarding technology acquisition controls. Based on this kind of research, Odagiri and Goto (1998) study basic points in question regarding the evaluation of technology acquisition policy such as "was the government better than market mechanisms in choosing the optimal technology and the most appropriate company to acquire it, from the viewpoint of securing the growth of domestic firms and correcting the balance of payments?" and "did government intervention actually change the overall way in which technology was adopted by Japanese firms?"
Such research is essentially based on data on a macroeconomic and industrial level and descriptive material. On the other hand, Odagiri (1983) conducted an analysis of the relationship between research and development (R&D) expenditures, patent royalty payments and sales growth using firm-level data. In this essay, he discovered that royalty payments are in a positive correlation with R&D outlays, and interpreted this as an indication of the complementary relationship between technology inflow and R&D. Montalvo and Yafeh (1995) used a model on corporate decision-making regarding technology acquisition and individual company data on technology inflow between 1977 and 1981 to show that it has been the large companies that have spearheaded efforts to absorb technology and that so-called keiretsu relationships with banks have had a positive effect on the acquisition of technology.
In this essay, we will attempt a quantitative analysis of the impact of government policy-based technology acquisition controls through the integration of the two lines of research mentioned above. Firstly, we will study the effects of policy-based technology acquisition controls on the acquisition patterns established through the corporate decision-making process that Montalvo and Yafeh (1995) focused on. As will be expanded upon later, government control over technology acquisition was eased in two stages - in 1961 and in 1968. The basic idea is to probe the effects of technology acquisition controls by estimating the changes in technology acquisition patterns that were brought about through this gradual deregulation on an industry-by-industry basis. Secondly, we will study what sort of effects technology acquisition had on corporate performance. Here also, we will estimate the impact that the government screening of the technology and companies involved in the acquisition process had on the effects of the acquired technology by focusing on the two occasions in which regulations were eased.

The legal framework for technology acquisition control and how it evolved

The legal framework for controlling the acquisition of technology during the 1950s and 1960s was provided by the Foreign Investment Law (promulgated in 1950). The aims of the Foreign Investment Law were to permit only the import of foreign investment beneficial to the Japanese economy and to provide protection in the form of guarantees that compensation, principal and return on the foreign investment allowed to enter Japan could be remitted overseas. In addition, to realize these objectives, the law also regulated not only foreign acquisition of stock and other interests in Japanese companies but also technology assistance contracts (made with those whose contract term or period for compensation payment exceeded one year and whose compensation payments were made in foreign currencies). The law also stipulated that permission from the relevant minister was necessary when signing a technology assistance pact.
As conditions for the desirable type of foreign investment, the law prescribed the following "positive permit standards" (standards under which permission could be granted) and "passive permit standards" (standards under which permission should be denied). Among conditions for the former were (1) that the investment in question would directly or indirectly contribute to an improvement in the current account balance and (2) that it would directly or indirectly contribute to the development of important industries or public utilities. On the other hand, standards that fell into the latter category included (1) if the contents of the contract were unfair or illegal and (2) if the signing of the contract was determined to be the result of fraud, blackmail or unjustifiable pressure.
The first easing of regulations concerning technology assistance contracts came in 1961. Through this deregulation, the "positive standards" regarding technology assistance contracts were removed from the list of conditions necessary for granting permission, and the government's policy shifted to allow in principle any technology assistance contract so long as it was "harmless." Then, in 1968, the acquisition of technology was almost completely liberalized. Table 1 shows the changes in the number of technologies acquired by the firms used as samples in this essay. The number of technologies that were acquired shows sharp rises in periods that practically match the timing of the deregulation measures of 1961 and 1968. This indicates that the regulations up to that time had effectively restricted the acquisition of technology.

The determinants for technology acquisition

Here, we will make assumptions based on a model in which whether each company acquires technology is determined by the company's optimization behavior and the government's acquisition restrictions. We will say the company's decision-making process can be shown by the current value of expected profit when company i acquires technology during period t, and formularize πit as follows.

Importit-1 and Zitk-1 represent a technology acquisition dummy variable and corporate performance respectively. The technology acquisition dummy is a variable that is 1 when a company acquires technology and zero otherwise. κi and ηit respectively represent the random effect and error member. A company will acquire technology if it sees expected profit to be positive, and will not do so if it is zero or negative. The elements used to calculate corporate performance included in Zikt-1 are the capital-labor ratio, the intensiveness of R&D (the R&D-sales ratio), sales ranking within the industry, cash flow, TFP (total factor productivity), ranking within the industry and past technology acquisition experience. In other words, we believe that the effect technology acquisition has on profits depends on these corporate characteristics. Meanwhile, we formulate the hypothesis that the government bases its screening on the applicant firm's sales ranking, TFP ranking and the cumulative amount of technologies it has acquired, and test this hypothesis by adding the dummy variable for the technology acquisition deregulation period (periodical dummies indicate the period between 1962 and 1968 and from 1969 onward) and the cross terms with these variables to equation (4). In addition, we add the deregulation period dummies as constant term dummies to control the effects that technology acquisition deregulation had on overall technology acquisition.
In table 2, the coefficient of the deregulation period dummy is of positive significance, and shows that regulations effectively restricted the acquisition of technology. Of the cross terms that show corporate performance, the coefficient for the cumulative number of technologies acquired is positive, and the coefficient of the sales ranking within the industry is negative, and both are highly significant. Meanwhile, the coefficient for the cross terms of these two variables and the deregulation period dummy are of negative and positive significance respectively. This shows that during the period when the government controlled technology acquisition, companies that had a high accumulation of acquired technologies and ranked high in the industry in terms of sales had a relatively higher probability of acquiring technology, and indicates that the government had taken such variables into consideration when screening technology acquisition applications.

The effects of technology acquisition on corporate performance

In the previous paragraph we analyzed the factors that decide whether a company acquires technology using two types of regression analysis. So then, what effects did technology acquisition have on corporate performance? In this paragraph we will analyze the opposite relationship, in other words, we will undertake a regression analysis of the effects of technology acquisition. The regression equation can be shown as follows.

Importit-1 is a dummy variable that equals 1 when company i acquires technology during period t and zero in all other cases. In addition, we have added cross terms for the technology acquisition dummy and the dummy variable showing the deregulation period to study whether there was a difference in the effects of acquiring technology during the period when there were tight regulations and when such regulations had been eased. Table 3 shows the results of the assumptions of equation (2). The technology acquisition dummy coefficient is positively significant when corporate performance is measured by growth in value-added, labor productivity, capital-labor ratio and intensiveness of R&D outlays. It can be said that technology acquisition boosted growth in corporate scale and labor productivity measured by value-added, and also had the effect of promoting investment in materials and R&D.
The coefficient of the cross terms of the technology acquisition dummy and the deregulation period dummy is significantly negative for all the equations - for value-added, labor productivity, capital-labor ratio and intensiveness of R&D outlays. Furthermore, its absolute value exceeds the absolute value of the coefficients of all these variables with the exception of that for the capital-labor ratio equation. This means that technology acquisition had the effect of improving value-added, labor productivity and the intensiveness of R&D only during the period when such acquisitions were restricted. One interpretation of this result is that technology acquisition had a relatively large effect during this period because the government's screening of the technologies to be acquired and applicant firms was conducted appropriately. On the other hand, there is also the possibility that a sort of rent was levied on acquiring firms because technology acquisition were restricted during the regulated period. We will have to leave the work of distinguishing between these two hypotheses to future research, but we can at least say that the government's restrictions on technology acquisition did not lead to any major failures when selecting the technology to be acquired and the firms that would acquire them.

In closing

When the government restricted technology acquisition, authorities screened acquire applications one by one before deciding on whether to authorize them. In this essay, we employed a model in which the decision of acquiring technology was made by the addition of the effects of government regulations on each firm's decision to acquire, and used corporate data to analyze the standards used by the government when screening applications. Our regression results clearly show that the standards used by authorities to screen applications during the period of regulations were in effect the achievements made in technology acquisition (the cumulative number of technologies acquired), the relative scale of the firm within the industry (sales ranking) and its relative efficiency within its industry (its TFP ranking). Given the fact that Sony Corp. was once a small, fledgling company, the anecdote that its request to acquire transistor technology in the early 1950s was not swiftly granted can be said to be the consequence of the benchmarks for permission cited above. The essay also used corporate data to analyze the effects that technology acquisition had on the performance of the acquiring firms. We found that technology acquisition had the effect of promoting the value-added, labor productivity, capital-labor ratio and R&D investment of the acquiring company.

>> Original text in Japanese

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July 8, 2004