Japan’s Declining Commercial Innovation, Part I
Too Little Basic Science Or Corporations’ Declining Capacity To Utilize Science?
Source: https://www.nistep.go.jp/en/wp-content/uploads/NISTEP-RM318-SummaryE_R.pdf
There is little disagreement that Japan, in the 21st century, Japan has suffered a decline in its commercial innovation. This is a relatively recent decline. During 1980-2000, despite the rise of new players on the global patent scene, Japan maintained its share of the most important 5% of all patents in the world. The latter are the patents most cited by later inventors as the foundations for their applications. So, they not only generate lucrative products today but underpin the creation of further technological advances tomorrow. Japan still stands second only to the US, whose achievements dwarfed those of every other country. Nonetheless, since 2000, Japan’s share has fallen from 13.1% to 10.9% (see table below).
Source: https://www.rieti.go.jp/jp/publications/pdp/23p026.pdf
Worse yet, even as the global number of these highly-cited patents rose 18% from 2000 to 2010-15, the number produced in Japan actually fell by 3%. At the same time, Korea came out of nowhere in 1980 to become the third-largest generator of the most important patents by 2010-15. That raised it to half of Japan’s share. It has most likely caught up further since then. If that trend continues, Japan risks falling to third place (see table below).
Number Of Patents In Top 5%
In 2023, the Global Innovation Index ranked Japan as the 13th most innovative country, down from fourth in 2007, the first year of the index. It has been surpassed by Korea at 10th and China at 12th. The debate is about why this has happened.
Why The Decline?
Some argue that the most important part of the problem is a deterioration in Japan’s ability to generate new breakthroughs in basic science. The argument—sometimes called the “linear model—is that advances in basic science lead to advances in applied sciences, which then lead to new inventions, which companies then turn into new products (less than half of all patents lead to new or improved products). Without the advances in basic science, goes the argument, this chain of steps breaks down. The decline in basic science is, in turn, the result of a lack of inputs, i.e. the funding and people needed to generate scientific advances.
While this “linear model” is widely seen as too simplistic, there is no question that invention is becoming increasingly reliant on scientific advances. One study reports: over time, the number of science-related patents has increased twice as fast as the total number of patents and publications; the countries that are capable both in science and technology produce the main part of technology-oriented research; and, importantly, except for the US, countries utilize foreign science more than domestic science.
A conflicting analysis contends that the most important factor is a problem of outputs, i.e. how well can companies absorb the scientific advances and how much benefit in sales, profits, and productivity do companies get from each dollar of investment in science and technology. For example, few companies hire PhDs. As a result, they often fail to understand the science, and, consequently, don’t see how they could use it to create economic value (this will be detailed in the next post).
While both factors--deficiencies in basic science and company absorption capacity—are clearly important, conversations with Japanese experts have convinced me that the latter is the bigger problem, and the one more difficult to solve. For example, as detailed in Chapter Three of my book, Japan invests more than the average OECD country in “knowledge-based capital (KBC),” which includes R&D, computer software, and “economic competencies” like worker training and better management skills. Japan invests 8.1% of its GDP in KBC compared to an OECD average of 6.7%. And yet, when it comes to the boost to labor productivity for each dollar invested in KBC, Japan comes in last.
Beyond that, science is global. Even if scientists in Japan are not producing as much breakthrough science as before, technologists within Japanese companies can take advantage of what scientists elsewhere discover, as they, and those in other countries, have done for decades. The biggest gains to an economy come not from those who create new inventions, e.g. the Internet, but from those companies which use such inventions to create new goods and services, like e-commerce and the Internet of Things (IoT).
Even so, as was explained to me by Koichi Akaishi—a former METI official and former Vice Minister for Science, Technology, and Innovation Policy in the Cabinet Office—each of the two deficiencies reinforces the other. I’ll discuss that issue in the next post.
Is Public Funding Of Basic Research the Problem?
In a Zoominar presentation a couple months ago, Peter Gruss of the Okinawa Institute of Science and Technology, contended that the biggest reason for Japan’s decline in commercial innovation is a decline of public investment in basic science. He noted that, in most countries, upwards of 75% of all basic science is funded by governments. This is seen in US patent applications, where 73% of all references to science papers refer to work done at publicly-funded entities, from governmental research institutes to universities. In Japan, however, the government budget for science and technology is virtually no higher than it was two decades ago in 2001. Japan has fallen to tenth among leading countries in public funding of basic research as a share of GDP.
The drop in funding had its consequences. Back in 1998-2000, Japan was a top generator of advances in basic science. It came in second to the US in the most scientific papers published and fourth in the 1% most widely-cited papers. However, by 2018-20, Japan had fallen to 5th in total papers and 10th among the top 1% papers (see chart at the top). Worse yet, while the global number of scientific articles more than doubled in these two decades, Japan’s scientific output fell by 5%. So, it was an absolute decline, not just a relative one.
By contrast, Germany, which devotes twice as high a percentage of GDP to public funding of basic research (1% vs. 0.5%) has maintained its position as the fourth largest producer of the top 1% of scientific papers. (Gruss, by the way, was skeptical that the government’s new ¥10 trillion ($64 billion) university endowment fund—to be detailed in a later post—would be sufficient even to bring Japan up the OECD average in public funding of basic research.)
Decline in PhDs
It’s not just money that’s lacking. Japan is suffering an absolute decline in “human capital,” i.e. a decline in new PhDs. While most other countries have increased the number of PhDs they produce each year, Japan peaked two decades ago. In 2022, 14,382 students enrolled in doctoral programs across Japan, down 21% from a peak of 18,232 in fiscal 2003. In 2010, Japan produced 131 new PhDs for every million people; by 2019, the number had dropped 8% to just 120. This compares to around 350 in Germany and the UK and around 300 in the US and Korea. This includes all PhDs, not just those in the scientific and technical fields. With fewer PhDs and less financial support for their research, no wonder scientific output has tumbled (see chart below).
Source: Data compiled by Professor Sadao Nagaoka from the Science and Technology Indicators published by Japan’s National Institute of Science and Technology Policy
Japan provides few incentives to acquire a PhD. The costs are very large, while the returns are not only low but involve a great risk.
Only 45% of PhD students get any fellowship. Half of those receiving aid get less than ¥600,000 ($3,800) per year. In 2020, only 10% received enough financial aid to cover living expenses, which the government estimates at a meager ¥1.8 million ($11,500) per year. So, almost all PhD candidates have to work while studying. In 2021, the government announced a plan to raise the fraction receiving at least ¥1.8 million to 30% over five years. That’s not going to solve the problem.
At the same time, it’s hard for PhDs to find work that rewards their own effort and expense, especially in the private sector. Most Japanese PhDs become university professors. This is because companies would rather hire young people and train them themselves, rather than hire PhDs with ingrained views. Out of the 25,500 researchers hired by companies in 2018, only 4% held PhDs. Of the 2018 PhD grads, 29% were employed as lower-paid non-regulars in 2020 (e.g. temporary post-doc jobs or even jobs as contract employees outside their field of expertise).
When Masters Degree candidates in the sciences were surveyed on why only half as many moved on to PhD programs in 2016 as in 2000, nearly half of respondents cited the lack of financial support during their learning years and/or the poor employment and salary prospects upon gaining their PhD.
Japan Not In Top Ten of Leading Scientists Or Research Institutes
Every year, the widely-cited Clarivate company issues a list of the most highly-cited researchers in science, the top 0.1%. In 2023, that amounted to just 6,849 out of nearly 7 million scientists across 67 countries and 1,300 institutions. Just ten nations accounted for 84% of these top scientists. The US and China alone accounted for 55%. Japan, however, did not make it to the top ten. Its 84 highly-cited researchers amount to around 1.2% of the elite group. Italy, at 10th, had 1.6%.
Similarly, not one of Japan’s universities or research institutes made the top ten. Tenth place Max Planck Society of Germany had 59 top researchers, while the University of Tokyo and RIKEN, a government research institute, each had just 17.
It is notable that, according to data from Japan’s Ministry of Education, Culture, Sports, Science and Technology (MEXT), average salaries at the University of Tokyo (Todai) are just ¥12 million ($77,000) compared to ¥28 million ($180,000) at Stanford. Professors at Todai have, on average, just 0.7 staffers, while those at Harvard have 2.8.
Coming up in Part II: Company absorption capacity declining; the mutual reinforcement effect
On some days on amazon.co.jp
Thank all of you for your comments. I'm at a conference now and will respond in the next day or two.
I'd venture that Japanese technological innovation is being hampered by a system of public and tertiary education that is systemically unresponsive to economic needs, and a failure to teach its students to think critically, analytically and creatively while seeking to avoid both controversy and personal accountability. The metrics employed to assess student achievement do not measure important aspects of educational outcomes. Japan has the lowest rate of graduate school enrolment in the G7, and only a handful of universities that can be considered on a par academically with top universities overseas. Underfunding of education across the board by the central government, the low cost of university tuition and commensurately low pay of professors and researchers, the difficulty in hiring qualified professors from overseas, and the difficulty of raising private sector funds and impediments to collaboration with industry also play an important role in hampering technological innovation.