Tokyo To Companies: To Restore Innovativeness, Hire More PhDs

Tax Breaks For Companies; More Funding for PhD Candidates

Source: https://nistep.repo.nii.ac.jp/record/6783/files/NISTEP-RM317-FullE.pdf Note: At Purchasing Power Parity (PPP) rates, 4-5 million yen equals $40-50,000; see text for an explanation of PPP.

Tokyo has finally recognized that the dearth of PhDs at companies was a significant factor in the slowdown of Japan’s corporate innovation (see my last post on this topic). So, it launched a couple of programs aimed at tripling the number of PhDs by 2040. While that grandiose promise seems out of reach, the question is whether more modest improvements are in sight.

In 2021, Tokyo began increasing the amount of financial aid for PhD candidates. While tuition is low, too many Japanese cannot afford years of full-time studying with no income to pay daily living expenses, which is about ¥2.3 million ($23,000) per year, according to the government’s Japan Student Services Organization. And only one in ten of Japan’s 76,000 PhD candidates was receiving enough aid to cover those expenses. So, in 2021, the government set up a program for 7,800 PhD candidates to receive ¥2.4 million per year, for an initial total of just ¥18.7 billion ($187 million). The government will provide two-thirds and universities the rest. Tokyo says that, within five years, 30% of PhD candidates will receive this level of aid.

(Throughout this post, the yen will be translated into dollars at the Purchasing Power Parity rate of approximately ¥100/$. At that rate, ¥3 million and $30,000 would provide comparable living standards).

Then, last year, Tokyo started providing a tax break to companies that increased their hiring of new PhDs. They get a tax credit equal to 20% of additional wages created by hiring recruits who earned their PhD in the previous five years (25% for startups). They only get the credit in years when they hire enough to increase their R&D wages to PhDs by at least 3%. In a welcome effort to increase labor mobility for researchers, companies can also qualify if they hire a PhD who conducted research in another firm for at least 10 years.

The effectiveness of these steps is uncertain. Funding just a third of the existing level of PhD students seems unlikely even to reverse the steady decline in new doctoral students over the past two decades, and certainly not to triple their number. It remains to be seen whether the company tax break is sufficient to overcome the deep-seated reasons that companies hire so few PhDs. The early corporate reaction—to be discussed below—is not encouraging.

Still, now that precedents have been set, it will hopefully be easier politically to up the budget and take other measures.

Why Japan’s Best And Brightest Don’t Become PhDs

Japan is the only major country where the number of PhD holders per million people is lower today than two decades ago. Korea’s ratio has risen to three times that of Japan (see chart below)

Source: https://www.mext.go.jp/content/20240724-mxt_kiban03-000034860_2.pdf

One reason is that, since 2003, the number of new PhD candidates has fallen by almost a fifth (see chart below).

Source: https://www.mext.go.jp/content/20240724-mxt_kiban03-000034860_2.pdf

The immediate reason for the decline is clear: 30% of students, according to an Education Ministry survey, fear for their financial future if they take the PhD route. Their lifetime earnings won’t compensate for the cost in time and money of getting their PhD. For one thing, only 70% of PhDs get a full-time career within a few years of getting their doctorate. Others get temporary or part-time employment. By contrast, in the rich typical country, more than 90% of PhD holders aged 25 to 34 had found a career (Japan is not included in the survey, so it may not be an exact comparison). Secondly, even for those able to secure a job, salaries are low.

Consequently, the median annual income of a PhD holder in Japan is just ¥4-5 million ($40-50,000), no more than the median among all full-time employees. 40% of PhD earn less than ¥3 million ($30,000)—(see chart at the top). Colleges depend on an army of PhDs who work as part-time lecturers, the majority of whom earn less than ¥1.5 million. When Japan passed a law in 2018 requiring employers to offer a full-time permanent job to all non-regulars who had worked for five years, these colleges fired most of these lecturers and replaced them.

In Japan, only 13% of all PhDs earn more than ¥12 million. In the US, half of all PhDs earn the equivalent in dollars ($120,000). The US median at private companies is $140,000.

Consequently, explained a professor at a prominent business school, the brightest students tend not to seek PhDs. They’re better off getting a company job right after college or perhaps after getting a master's.off So, not only are there too few PhDs, but their quality may not be topnotch. Unless these conditions improve, even if companies increase their demand for PhDs, the supply of them will remain limited.

Business Won’t Hire PhDs: Causes and Consequences

Japan’s PhDs can’t find interesting, well-paying jobs largely because most companies don’t want to hire them, let alone pay them what they’re worth. Of the 23,538 new researchers recruited by Japanese companies in 2016, only 904 held PhDs, according to Professors Yuya Ikeda and Tomohiko Inui. While 48% of US PhDs work for private businesses—double the share 30 years ago--only 14% do so in Japan. Most work in academia. In Japan, companies employ just 25,386 PhDs; in the US, it’s 201,750. In some STEM (Science, Technology, Engineering, Math) fields, 60-70% of American PhDs work at companies. I don’t have comparable figures for Europe, but it seems somewhere in between.

Corporations treat PhDs like other employees in the “lifetime employment system.” They want to recruit technologists as “blank slates” whom they can mold in their own image. “The greatest obstacle is the [corporate] perception that once one gets a PhD in a subject, one is regarded as an expert [only] in that particular field,” Ken Mogi, a researcher at SONY, told Nature magazine. “With that image comes the assumption that a person with a PhD is inflexible in work in the real world.” Koichi Sumikura of the National Graduate Institute for Policy Studies in Tokyo added that “a majority of industry managers in Japan consider that the expertise and the area of interest of PhD holders are too narrow and do not fit their business.” In reality, he explained, “PhD holders tend to be trained for acquiring a wider field of view.”

Consequently, companies end up denying themselves a staff sufficiently capable of understanding the latest science and technology to translate that insight into lucrative products (see this post). Among large companies, 40% of those employing at least some PhDs had created product innovations, and 43% had created process innovations, compared to just half that share among firms with no PhDs. Mid-sized firms showed similar results. Unfortunately, the study does not show the impact on innovation of doubling or tripling the number of PhDs at each firm.

Just as bad, perhaps worse, reluctance to hire university PhDs further entrenches old—and possibly obsolescent—ways of thinking rather than infusing these companies with fresh ideas that can keep up with the times. This is reinforced by the senpai/kohai (master and protégé) relationship enforced in many companies, where challenging older ideas could be seen as disrespecting the veterans who promoted one’s advancement. Compare the individuals who gain a PhD certificate based on the work they do at their company rather than through a university program. The former are less creative, producing fewer patents, and others cite their research less. Such citations are considered the best indicator of a technologist’s merit.

The bottom line? Despite all the money companies spend on R&D, they get “less bang for the buck.” Calculations by Koji Nakamura, Sohei Kaihatsu, and Tomoyuki Yagi at the Bank of Japan show that, in the US, the more a company spends on R&D as a percentage of sales, the faster its productivity growth. This is measured by what is called Total Factor Productivity (TFP), which measures how much growth a company (or country) gets for each 1% growth in both labor and capital (including R&D). It is the broadest measure of how much new knowledge contributes to development. In the US, TFP takes off like a hockey stick among the top third of spenders on R&D. In Japan, by contrast, companies that spend a great deal on R&D don’t do much better than others (see chart below). In short, say the authors, “Japan's R&D does not enhance productivity growth.” One reason is that company investment in R&D “does not necessarily lead to the development of products which appropriately meet consumers' needs.” To be sure, the dearth of PhDs is not the only factor in this outcome, and the authors do not mention it, but, in my view, it is a significant factor.

Source: https://www.boj.or.jp/en/research/wps_rev/wps_2018/data/wp18e10.pdf

Will A Tax Break Get Companies To Change Their Ways?

Will the new tax incentive get more companies to hire PhDs? The early evidence is not encouraging. It may make it more affordable for companies that, for other reasons, have already decided to hire more PhDs to hire even more. This includes old firms like Kirin, which is moving into the health sciences to keep its revenue growing. It also includes recent high-tech startups like CyberAgent, where two-thirds of the 66 people in its AI research lab hold PhDs.

So far, however, these seem the exception, according to a recent Keidanren survey. Among 123 companies, most with at least 1,000 employees, 12,000 staffers had PhDs, just 1% of all employees. Nearly one out of four companies had zero PhD employees in 2022. Only 20% of the companies intended to increase the number of PhDs they recruit over the next five years, and it’s not stated whether their intentions were at all affected by the new tax break. Only about 10% of companies seem to be actively marketing themselves to PhDs. Tomoko Hasegawa, Managing Director at Keidanren, told Nikkei that “companies are not very willing to hire, and the industries and assignments are limited.”

In a statement outlining its policy to promote more PhDs in companies, the Education Ministry (MEXT) called on companies to “improve their employment conditions” and take advantage of tax breaks. However, if the government really wants meaningful results, it and business leaders need to get corporate leaders to wake up to today’s realities. That requires being open to the fresh thinking PhDs can bring to the table.

In response to some readers who questioned whether hiring PhDs was all that important to improving commercial innovation, I wrote this addendum. I’ll elaborate on this and related issues in the next installment in this series on innovation.