NATIONAL SCIENCE FOUNDATION
TOKYO REGIONAL OFFICE

June 9, 2000

Report Memorandum #00-09

Japanese Policies to Support High-Risk Innovation Research at Small and Medium Enterprises: a Comparison with the United States

This memorandum is based on a report prepared by Dr. Sara B. Nerlove, a Program Manager with the National Science Foundation's Small Business Innovation Program, and Dr. George J. O'Neill, a consultant on International Technology Transfer and Innovation Policy residing in Kingsport, TN.  Nerlove and O'Neill visited Japan from March 29 through April 28, 1999.  Their visits were made possible by Senior Invitational Fellowships awarded by the Japanese Science and Technology Agency.  Mr. Toshihiko Watanabe of the National Institute of Science and Technology Policy (NISTEP) served as their host scientist. 

Inquiries should be addressed to Dr. Nerlove: snerlove@nsf.gov.

Contents

I.    Introduction..................................................................................................... pg. 2
II.   Definitions of Selected Terms................................................................................. 3
III.  Comparison of Selected Policies to Support High Risk Innovation 
            Research at Small and Medium Enterprises....................................................... 3 
                 A.  Universities............................................................................................ 3 
                 B.  Venture Capital...................................................................................... 4 
                 C.  Technology............................................................................................ 6
                 D.  Human Capital..................................................................................... 10
IV.  Comparison of U.S.-Japan Small Business Innovation Research Programs............ 13
V.   Conclusions......................................................................................................... 20
                A.  Financial............................................................................................... 20 
                B.  Technology........................................................................................... 20 
                C.  Human Capital...................................................................................... 21  
VI.  Suggestions......................................................................................................... 21

Japanese Policies to Support High-Risk Innovation Research at Small and Medium Enterprises: a Comparison with the United States

I.  INTRODUCTION

The year 1945 saw the end of W.W. II in the Pacific and a Japan that was completely devastated.  At that time, the world had dismissed Japan as an economic graveyard.  However, within forty years, the Japanese economy not only had “risen from the dead” to reach its pre-war level of output, but it had reached unparalleled heights in record time. By the mid-1980’s, the “Bubble Economy,” as it was dubbed, was internationally hailed as the economic role model of the 21^st century.  Unfortunately for Japan, Asia and the global economy, the “Bubble” had burst by the 50th anniversary of the end of W.W. II.  Plummeting real estate and stock market prices, major banks burdened with enormous bad debts, and flagship corporations undergoing painful downsizing were part of this collapse.

Today, with so many of the major banks and large corporations struggling to remain profitable and with an aging population to support, Japan’s economy still faces a severe crisis.  In an effort to help revitalize the world’s #2 ranked economy, the national government is turning to policymakers for ideas to promote and sustain the growth of small and medium enterprises (SMEs).  In 1995, the National Diet passed a new Science and Technology (S&T) Law that was followed in 1996 by the Cabinet resolution known as the Science and Technology Basic Plan.  These legislative initiatives were intended to boost government spending on R&D to 17 trillion yen over the five year-period 1996-2000, launch new and improved S&T policies, and change many government regulations that affect SMEs.  One of the main objectives of the Japanese national economic policy is to increase Japan’s capability to produce a substantial and sustainable community of entrepreneurs who will create new technologies based on breakthrough research and to bring them to market.  This thrust is in marked contrast to what brought the Japanese economy to such great prosperity in the 1980s; that is, improvement upon imported technologies via the manufacturing processes.

The research objective of our short-term Science and Technology Agency Fellowship was to compare key U.S. and Japanese government policies to support SME projects requiring high-risk innovation-based (HRIB) research that have reasonable possibilities for a high return-on-investment (ROI).  However, the 29 days of research efforts in Tokyo and six prefectures in Kyushu, Kansai, Kanto and Tohoku enabled us to get only a “snapshot-in-time” of highlights of the implementation of some of these policies.

This report of our “snapshot” compares key policies initiated by the Japanese national government in the past 3-4 years addressing the roles that the universities, venture capital, and technology play in HRIB research at SMEs with those of the U.S. Federal government.  Also, the report will discuss more recent policies that intend to fill the gaps found in the support of the SME innovation process, i.e., development of human capital and Japan’s version of the U.S. Small Business Innovation Research Program. 

II.  DEFINITIONS OF SELECTED TERMS  

Small and Medium Enterprises (SMEs)

The U.S. definition of SMEs used in this report is based on eligibility for the Small Business Innovation Research (SBIR) Program.^[1]  SMEs, referred to in the United States as small businesses or small business concerns, are enterprises with 1-500 employees, organized for profit, greater than or equal to 51% U.S.-owned and operated, with the principal place of business in the United States.  The Japanese definition of SMEs has two defining features: number of employees and capitalization.  The numbers for the three sectors of the economy are as follows:  manufacturing, </= 300 employees and </=100,000,000 yen; wholesalers, </=100 employees and </= 30,000,000 yen; retailers and service, </=50 employees and </=10,000,000 yen.^[2]  [NB: as of June 1, 2000, the yen-to-dollar exchange rate was approximately 105 yen/$.]

Entrepreneur

Recently, the role of an entrepreneur was described as central to the success of capitalism and further described as a process of creative destruction.^[3]  Thus, an up-to-date definition of an entrepreneur could be as follows:  a person who takes advantage of an economic opportunity, usually with little regard for the consequences.

High-Risk, Innovation-Based (HRIB) Research

To the U.S. government, HRIB research means research requiring a scientific or technological breakthrough to solve problems that present major barriers to the successful implementation and marketing of an innovative concept.  Ideally, the concept should be “new to the world” with a good potential of generating a high return on investment (ROI).  Furthermore, the risk/benefit ratio of the concept is too high to attract sufficient funding from the private sector, such as banks or venture capitalists. 

III.  COMPARISON OF SELECTED POLICIES TO SUPPORT HIGH-RISK INNOVATION RESEARCH AT SMALL AND MEDIUM ENTERPRISES 

A.  UNIVERSITIES 

National

Legal and regulatory barriers that discourage academia-industry cooperation in Japan are gradually being removed.   For instance, professors are now allowed to consult for industry, although they are not given any release time to do so; and despite some controversy when it comes to implementation, professors can now own their own businesses.  Discussions are underway to consider changing the faculty tenure system to be more like the system in the United States.  Of particular note is the growing interest in possible ways to reduce the control that the central government exercises in managing the universities’ financial matters. [NB: National universities are slated to attain the status of Independent Administrative Agencies with substantial autonomy from the Ministry of Education and Science on April 1, 2003, as part of a major reorganization of the Japanese Government, most of which will go into effect on January 1, 2001.  See Tokyo Report Memorandum RM99-11, dated October 7, 1999.] 

Whereas in the national universities in Japan, there are no schools of management, it is frequently the case that the major research universities in the United States have well established, prestigious schools of management with strong programs granting master’s degrees (MBAs) and doctoral degrees in business administration. 

Plans are in progress to combine the Ministry of Education, Science, Sports, and Culture (Monbusho) with the Science and Technology Agency (STA) to form a Ministry of Education, Science, and Technology, effective on January 1, 2001 (See Tokyo Report RM99-11).  This merger is expected to have implications for the academia-industry relationship, but the specifics of these implications are as yet unclear. 

Private

In contrast to the national universities, universities established as private universities have taken the lead in Japan in establishing entrepreneur programs.  Among these are Doshisha University (Kyoto), Hosei University (Tokyo), Keio University (Tokyo), Kochi University of Technology (Kochi-Osaka-Tokyo), Ritsumeikan University (Kyoto), Sanno University (Tokyo), and Waseda University (Tokyo).  It is said that currently about 50 universities (about 90 percent of these are private) offer some sort of lectures related to entrepreneurship, whereas three years ago there were only a few.^[4] In Japan, private universities appear to be better suited to help support growth of HRIB research at SMEs than are the national universities.  For example, the private schools require the faculty to have more of an entrepreneurial spirit because they have tenure policies similar to those of the United States; and junior faculty members, unlike their counterparts at national universities, cannot rely on research funding from senior professors.  Furthermore, faculty at private universities seem to have considerable freedom to “learn the ways of business” as consultants and as members of top management, including becoming the president and CEO or a board member of a company.  

B.     VENTURE CAPITAL 

In the United States, venture capital is a dynamic investment mechanism for the commercialization of new ideas.  Organizations supplying venture capital funds play a more hands-on role than in Japan.  Market entry and growth opportunities are identified; assistance is provided for navigating legal issues, including intellectual property protection; strategies are developed at all levels; technological and management expertise are provided; and additional management skills and capital resources are attracted.^[5] 

Furthermore, while overall, Japan’s investments in R&D slightly exceed those of the United States relative to the size of its economy^[6], venture and pre-venture investments are limited.  This limited investment is reflected in the annual rate at which new companies are created, initial public offerings (IPOs) are made on national and regional exchanges, and in the aggregate value of these companies. 

By comparison, in 1997, there were more than 500 independent venture capital funds  (IVCFs) in the United States that were providing approximately $7 billion to $10 billion per year,^[7] and these figures are rising.  As of December 31, 1998, the number of IVCFs had grown to 547 with investments of a record $4.3 billion during the first quarter of 1999, a 41% increase over the first quarter of 1998.^[8] (See 1^st quarter venture capital investments by state, Appendix C.)  In Japan, there were 123 (1995) dedicated capital venture funds.  Most of these were subsidiaries of large companies.^{[9] [10] [11]}  Also, in contrast to Japan, in the United States the largest pool of assets available for venture capital investment is from pension funds, retirement savings, and large 401K-type savings instruments. 

Another source of venture support for American SMEs are wealthy individuals known as “angels,” who invest in start-up and early stage companies.  The Small Business Administration (SBA) estimates that 250,000 angels invest about $20 billion annually in 30,000+ SMEs.^[12]  

Greater details on angel investments are hard to confirm because most angels wish to protect their anonymity.  It is our understanding that law in Japan does not permit angel support, which in the United States is a vital source of early stage investment. 

Another source of capital, especially for HRIB research, is the U.S. government via the U.S. SBIR Program.  That source of capital has been in place as a Federal program since 1982.  Thus, in this case, government could be considered a source of venture capital.  (See Section IV, Small Business Innovation Research (SBIR) Program, below.) 

For more information on SBA’s facilitation of angel investment in SMEs, see the SBA’s World Wide Web online listing service of entrepreneurs and investors called Angel Capital Electronic Network (ACE-net) (http://www.sba.gov).  This service-for-a-fee (up to $450, for up to one year, paid by the entrepreneurs as well as by the angels) provides a list of entrepreneurial companies and information about their technologies that serves as a database for potential angels.  Information on investors is not provided online so that their identity is protected.  The investors are all accredited and like the entrepreneurs must have a password to participate.  If the prospective angel identifies a match, the angel can then contact the firm. 

The Japanese national government is encouraging funding mechanisms for new venture businesses.  For example, four years ago the government-owned Development Bank of Japan (DBJ) started a Department for Venture Business.  The national government has mandated the DBJ to target 20 million yen as matching funds to finance 50% of the cost over 5 years for a venture business project.  Our research results indicate that the projects are small by bank standards (1-2 million yen).  It is too early to determine whether this approach to venture capitalism will be successful.  Apparently there are no other systems in Japanese banking to provide money-at-risk.  The United States does not have a direct counterpart to DBJ support of venture business. 

During discussion with DBJ officials, we learned that other potential sources of money-at-risk are 1) initial public offerings (IPOs)--but the stock market is considered too immature compared to that of the United States--and 2) the pension system--but it is owned by the government, which has low-risk investment policies, rather than by the private sector as it is in the United States. 

During our visit to Osaka, we learned that the Prefecture of Osaka is trying to play the role of a venture capitalist.  In 1990, the Foundation for Osaka Research Enterprise Companies (FORECS) was established and today offers limited funding for high risk R&D SMEs.   It also facilitates the creation of R&D-oriented SMEs by indirect and direct investment as well as financial guarantees to entrepreneurial start-ups and early stage R&D-oriented enterprises. 

C.  TECHNOLOGY  

Conventional wisdom suggests that the country that consistently invests in modern infrastructure and equipment and in high impact R&D projects will produce a strong and viable economy.  If that is so, then Japan should be well positioned to recover from the current economic crisis.  Our research results indicate that Japan, acting in large part on the initiatives stemming from the S&T Law (1995) and the S&T Basic Plan (1996), has made rapid and substantial progress in building the ultra-modern infrastructure, acquiring state of the art equipment, and in providing sufficient funding to support high impact R&D projects.  

Throughout our visits to the prefectures, we saw examples of recently constructed and superbly equipped “Science Cities,” prefectural/municipal industrial research institutes (Kosetsushi) or “Technopolises”.  These outstanding facilities and capabilities and the availability of trained S&T staff are well suited to support large, high-risk, high-impact R&D projects with the potential for broad national and international impact.  They are also intended to attract medium-sized, joint R&D projects with regional impact.  These latter projects are cooperative efforts of local government, industry, and university participants.  However, these facilities and equipment along with the high quality R&D staff were often well beyond what is needed and could be afforded by entrepreneurial SMEs.  

Of special note is the effort by Hyogo prefecture to recover its economic viability after the devastation of the 1995 Hanshin-Awaji earthquake.  This quake left 6000 people dead and Kobe City, the prefecture’s largest city and Japan’s largest seaport, in ruins.  To help accomplish this goal, the New Industry Research Organization (NIRO) was formed in March 1997.  One of NIRO’s novel functions is to identify intellectual property (IP) from universities and corporations as sources of technology for new SMEs.  NIRO then proceeds to promote technology transfer.  Specifically, this “…means assisting small- and medium-sized enterprises to develop new products, increase productivity through commercialization planning and proposals, and to create specific, individual enterprises based on the research results of NIRO's own laboratories, and the patents, technologies, and know-how held by major corporations, domestic and overseas universities, and individual research institutions."^[13]  

Some of the activities at NIRO include the following:  

à         NIRO Research Institute – In-house laboratory programs in bioscience, disaster prevention systems, new materials, transportation and freight systems, etc.  
à         Advanced training and entrepreneurial programs to help new start-ups.  
à         Joint Research Projects--with Japanese and international government, industry and university participants.  
à         Technology Transfer Center – program to transfer basic technologies and patents owned by major corporations and universities to SMEs and venture enterprises  
à         Product Development Assistant Center – a new program to provide SMEs with sophisticated equipment to develop product and process concepts.  

As was mentioned earlier, the Japanese government is trying to facilitate the nation’s economic recovery by increasing support for the growth of SMEs.  However, because of the unique nature of SMEs, the type of support that is offered must take into consideration the highly diverse and rapidly changing needs of SMEs.  Typically, an R&D project proposal from a SME is relatively high risk and a potentially high regional impact.  To help meet this need, many of the government-supported facilities mentioned above have “incubators” for SMEs.  

Comparison of Japanese and U.S. Incubators for Entrepreneurs

For the purposes of this report, we consider an incubator to be a facility that provides rental offices, rental research rooms and shared services at a low fee, consultation services for management and business planning and marketing, and financial support for 1) persons who are trying to establish a business (start-up entrepreneurs), 2) recently established corporations, and 3) small- and medium-sized corporations that are attempting to advance into new fields.^[14]  

Based on what we saw during our visits to incubators in Kumamoto, Hyogo, Osaka, and Shizuoka prefectures, we noted the following: 

1. The Japanese incubator managers are relatively inexperienced.

2. The facilities vary from modern, spacious laboratories of a Kosetsushi (Osaka) to simple “boxes” (Hamamatsu).

3. Management is proving difficult because of the entrepreneurs’ diverse and changing needs.

4. There appears to be a severe shortage of start-up entrepreneurs in Japan to take advantage of the incubator facilities.  In some cases the current tenants were scheduled to exit the incubator because of the expiration of the allowed tenure of three years; but there were no new tenants in line to occupy these spaces.

In the United States, incubators are primarily intended for start-up entrepreneurs who want to commercialize high-tech, high-risk-of-failure, innovative concepts.  However, we observed that most Japanese incubator tenants were either spin-offs with strong, nurturing links to a large parent corporation or established SMEs who wanted to advance into new fields.  While we considered several occupants to be high-tech businesses with innovative ideas, most did not appear to be at a high risk of failure.  

Another difference noted was that the managers of the Japanese incubators seemed to function mainly as landlords.  Usually they offered rental space at below market rental prices, and those associated with science and technology parks provided access to some supporting technology, e.g., databases and special equipment.  

By way of comparison, in the United States, some managers of incubators will provide a full range of services to support a start-up entrepreneur.  For example, the Business/Technology Center (B/TC) at Virginia Tech University in Blacksburg, Virginia offers 

à        Strategic planning: R&D, pricing, materials
à        Financing: raising capital, accounting
à        Legal: assistance for intellectual property and regulatory matters  
à        Production: process planning, quality management  
à        Personnel: hiring, training 

The costs of these B/TC services to an entrepreneur are based on the state of development of the company and the type of assistance provided.  

Recently, Japanese policymakers have introduced the concept of Regional Science Promoter (RSP) Program to help address the need for some of these services.  In this program, which is active in 20 prefectures, an individual is designated as the New Technology Coordinator (NTC) whose role is to coordinate the fulfillment of the S&T needs of the prefecture.^[15]  

The coordinator in the RSP Program in Hamamatsu in Shizuoka prefecture illustrates how a NTC functions in Japan.  The NTC aims to upgrade technologies of SMEs and to give incentives to R&D-type, start-up enterprises.  To help accomplish these goals, the NTC provides a relatively comprehensive “Technical Support System” (TSS) that is based on the defined technology and manufacturing strengths of the prefecture.  Thus, TSS provides consultation in  

à              Technical – Chemistry, robotics, metals and advanced materials.  

à         Management – Analysis of company needs, engineering, and plant and equipment investment.  

Currently, TSS consultation is being considered for expansion to include assistance in human capital development, e.g., marketing, accounting, business planning, and personnel training. 

For examples of U.S. counterparts of RSP programs, it is appropriate to mention the BT/C Center at Virginia Tech, see above, and California’s “Goldstrike Partnership: A Network of Strategic Private/Public Partnerships.”  Goldstrike is considered to be California’s premier organization established to accelerate the creation and introduction of new technology-based products and services to the global market place.  

Comparison of Japan and U.S. Technology Licensing Offices (TLOs)^[16]

In an effort to develop valuable university scientific and engineering discoveries that could contribute to society, the concept of the Technology Licensing Office (TLO) was established by 1998 legislation as a joint effort of MITI (Ministry of International Trade and Industry) and Monbusho (Ministry of Education and Science).  MITI is the funding agency (20 million yen/year/TLO) and Monbusho is the approving agency.  The TLO authorizes the university to establish offices to patent and license university inventions that do not belong to the central government. ^[17]  We called on the TLO then located at the University of Tokyo and visited Professors Katsuya Tamai and Robert Kneller.^[18]  We learned that this TLO is a company, half non-profit and half for-profit, and it is one of the four that are currently government-approved.^[19]  In Japan, unlike in the United States, the basic principle is that university inventors retain all rights to their inventions.  Inventors now, however, have the option of relying on TLOs to manage their inventions.  The university researchers and others can buy TLO shares, but most of the revenues are anticipated to go to the inventor as personal income and to be reinvested in the university’s department.  Most shareowners realistically expect little personal gain from their investment.  

By way of comparison, at most U.S. universities, Technology Transfer Offices (TTOs), which have a technology licensing function, are part of the university.  Some universities, however, have spun off private corporations, e.g., University of Chicago (ARCH, AR stands for Argonne National Laboratories and CH stands for the University of Chicago; taken together ARCH stands for the bridge between institutional research and the real world) and University of Wisconsin (Wisconsin Alumni Research Foundation (WARF)).  Under the Bayh-Dole law of 1980, universities rather than the Federal government can take title to work supported by the Federal government.  The university must compensate the inventors.  Currently, this amount ranges from 15% to 50% of the revenues from any technology transfer.  The inventor can also be a paid consultant to help develop the technology for the company that buys the technology.  

Some of the more successful TTOs, such as those at Stanford University and MIT, where a rigorous selection process limits which technologies are patented, will license about 50% of their patents.  For a comprehensive survey and statistics on university patents filed, patents issued, disclosures, revenues, etc., issued by the Association of University Technology Managers, see AUTM Licensing Survey which can be ordered from the website, www.autm.net.  

D.          HUMAN CAPITAL  

From an American viewpoint, a national or state government that provides an attractive mix of institutional supports such as funding, modern infrastructure and equipment, and relief from legal and regulatory burdens will be most helpful to startups of SMEs.  However, the innovation of high-risk, potentially high-ROI technology requires one very important ingredient that no government can supply: the entrepreneur, the risk-taker, i.e., human capital.  

According to Thurow,^[20] the entrepreneur is crucial to the success of a capitalist system.  In this system, the new destroys the old and entrepreneurs are the change agents of capitalism.  Thurow points out that it is too easy for society to stamp out entrepreneurship.  In order to nurture and grow a steady supply of entrepreneurs, the nation’s social system must allow them the freedom to destroy the old.  “Societies, Thurow says, “that aren’t willing to break with the past aren’t willing to let entrepreneurs come into existence.”^[21]  

Thus, if Japan is to succeed as a capitalist country, Japanese society must allow for “creative destruction of the old.”  Such destruction, of course, introduces a very high potential for societal misery and turmoil.  “This is heartless capitalism!” according to what an internationally successful Japanese entrepreneur told us during our visit to Shizuoka.  His hands-on experience with American-style entrepreneurship in California’s Silicon Valley indicates that it is quite alien to the Japanese way of life. 

We found little evidence of the existence of “Heartless Capitalism” during our prefectural tours.  For example, we met the entrepreneurs of three successful information technology (IT) SMEs of the type found in Silicon Valley.  All of these enterprises had grown steadily over a period of 7-15 years and now employ 60 to 120 people.  Of special note was the very low turnover of employees compared to that in American counterpart businesses.  In the case of the largest SME, it had turnover <2%/year while its five-year old subsidiary in Silicon Valley had lost 16 of the original 20 employees.  One of the Japanese-based salesmen told us that, “When I telephone our people in the United States, I have no idea who will answer the phone from one day to the next!”  

On the other hand, these examples of job security are typical of the old-style of doing business in Japan.  However, in the future, these “old” businesses will be expected to be entrepreneurial seed beds that will generate “spin-offs” formed by employees quitting to start their own enterprises.  

When considering industries other than IT, the prospects for a large increase in the entrepreneur population to help Japan’s economy to recover soon are not encouraging either.  A study by Teikoku Data Bank across all industries, a private credit rating company, showed that some 75 venture companies went bankrupt in 1998 compared to 58 in 1997.  Unfortunately, the rate of such failures is expected to increase in the coming years and this problem is further compounded because the rate of formation of new venture companies is lower, 3.6%, than that for those shutting down, 3.8%.^[22]  When compared to the U.S. rates for formation and shut-down, 14% and 12%, respectively, these data present a discouraging view of Japan’s potential to stimulate and grow innovative SMEs in the short term.   

The picture for the long term is also not very bright.  The problems that Japan faces in its efforts to build a strong, sustainable community of entrepreneurs are likely to remain well into the 21^st century.  According to the Global Entrepreneurship Monitor (GEM) report^[23], Japan ranks low along with Germany and France, among G7 nations--Canada, France, Germany, Italy, Japan, U.K., U.S.--for “entrepreneurship through enterprise creation.”  These countries have too many structural and cultural anomalies that are barriers to potential entrepreneurs.  Thus, the authors conclude, “In such countries, it may take decades of sustained changes in many national, cultural, political, and economic institutions if they are to join the ‘elite’ of entrepreneurial economies.”  

If the experts who prepared the GEM report are correct, Japanese policymakers have a difficult task ahead in the coming decades because they must find ways to make entrepreneurial activity “an integral and accepted feature of economic and personal life.” Despite these problems, we saw very encouraging signs that policymakers are aware of what social and government institutions need changing and how these changes might be accomplished.  Initiatives are underway to educate, train, and encourage young people in the entrepreneurial spirit and way of life.  

For example, there is a growing interest in possible policy initiatives for the following areas that will directly and positively impact the long-term supply of entrepreneurs:  

      à        Integrating business start-up skills into specific education and vocational training programs.  
à        Substantially increasing the investment in undergraduate and graduate school programs related to business and entrepreneurship.  
à        Development of an individual’s capacity to recognize and pursue new opportunities for business.  
à        Encouragement of government officials and opinion leaders to promote entrepreneurship throughout society.  

In the area of entrepreneurial education and training of students, there is a very innovative program underway in some of the national universities. 

Comparison of Japanese and U.S. Means of Instilling the Venture Spirit in Students

Since 1995, a plan has been in place in Japan to establish Venture Business Laboratories (VBLs) at graduate departments in 30 national universities.  (See Tokyo Report Memorandum RM96-24, dated September 19, 1996.)  The purpose of these VBLs is to instill in graduate students the spirit of venture business.  Monbusho and, in some cases, private industry provide funding to the VBL that then uses it to support the professor, who is the head of the lab.  Each VBL has its own research project.  The professor and his students work on a problem, aiming for achievements in venture business topics.   One of the major goals is to send creative-minded people imbued with the “entrepreneurial spirit” into society.  

At the Tokyo Institute of Technology, we called on two VBLs.  Working in one of these laboratories was the Virtual Environment Study Group, a group within a broader focus on multimedia.  There the CAVE^[24] System, developed at the University of Illinois, had been installed.  Issues of image-based rendering were being pursued and work was being done on a PC version of CAVE.  The other laboratory was focused on the Collaboration between Machinery and Humans and included research on speed perception, particularly in relation to cars and on noise.   It seemed that the Japanese students in these labs aspire to the traditional career pathway of being an academic researcher/professor rather than becoming venture business entrepreneurs.  However, the VBL experience will help them to develop an awareness, appreciation, and understanding of applied research that in turn may later spawn entrepreneurial projects. For the professors, the concepts of the VBL and the TLO have potential to dovetail and reinforce each other.  

In the United States, there is no precise counterpart to the VBL.  In regard to instilling the venture spirit, part of what is driving interest in relating university research to entrepreneurial opportunities is the increasing trend that is widespread among graduate students in U.S. universities to pursue non-academic options.  In this context, it is interesting to note what is taking place at Stanford University.^[25]   At Stanford, the number of graduate students pursuing non-academic options has increased to more than 50% and continues to go up, whereas as recently as 15 years ago, graduate students were almost all pursuing an academic route.  There is a veritable culture of entrepreneurship on the campus.  In a number of fields, students write business plans as part of their courses, with engineering  (civil, electrical, industrial) taking the lead.  This also occurs in computer science.  Students need to seek information about writing business plans outside of their classes, using the school of business as one of their major resources.  In addition, there is a powerful student organization at Stanford called BASES (Business and Science Entrepreneurial Society).  The members hold seminars every week. (See the website, www.stanford.edu/group/BASES.)^[26] 

IV.  COMPARISON OF U.S.-JAPAN SMALL BUSINESS INNOVATION RESEARCH (SBIR) PROGRAMS  

A major new effort on the part of the Japanese national government to support the SME innovation process is the Japan SBIR Program.  As of April 1, 1999, Japan has put into place an SBIR Program.^[27]  Below, we compare some of the aspects of the Japan SBIR with the U.S. SBIR.  Our discussion should be read bearing in mind the incipient status of our knowledge.  Moreover, the Japan SBIR Program is still in a very formative stage.  During the tenure of our fellowship, it had as yet not been implemented: i.e., to our knowledge, no applications had been received and no awards had yet been made.  We have many questions about the goals and the nature of the program that we did not have an opportunity to ask.  Moreover, it is too soon for anyone to have the answers to many of our questions.  While we know that to some extent the Japan SBIR has been modeled after, and otherwise influenced by, the U.S. SBIR Program,^[28] we do not know ways that it was intentionally designed to be distinct from the U.S. program.  In the United States, the program importantly encompasses elements A through D, in Section III, Comparison of Selected Policies to Support High-Risk, Innovation Research at SMEs, above. 

The definition of an SME (generally referred to in the United States as a “small business” or a “small business concern”) in the United States is not concerned with any limits on capitalization.  While the size of a U.S. SME may be 500 or fewer employees, the majority of businesses applying for SBIR grants have fewer than 50 employees; indeed they have closer to 20-25 employees.  Brand new start-ups are an expected part of the applicant pool as implied by the requirement of being a small business at “time of award.” 

In the United States, the program began as a Federally mandated program under the Small Business Innovation Development Act of 1982.  Moreover, it was founded and operated as a pilot program at NSF for 5 years before the law was promulgated.  Thus, the SBIR program in the United States is an established program with more than 20 years of experience in implementing and developing the concept.  Over the duration, there has been a certain amount of development of a community of SBIR applicants.  In the United States there has been ample opportunity to observe and take appropriate steps to respond to patterns of participation in the program both at the state level and the level of individual businesses.  The goals of the U.S. program as stated 10 years into the program in the Small Business Research and Development Enhancement Act of 1992 are as follows: 

A number of studies have been done and are in process concerning the commercialization rate of SBIR projects.  For example, the U.S. General Accounting Office (GAO) issued a report that found that 35 percent of the 2090 Phase II awards made from 1984 through 1987 had resulted in sales of products or processes.^[29] 

The Japan SBIR had its formal inception at the beginning of Japanese fiscal year 1999; i.e., on April 1, 1999.  The Japan SBIR is intended to contribute to the general goal of promoting growth of SMEs by increasing the nation’s capability to create new and rapidly developing technologies based on breakthrough research and to bring these to market.

Participants

In the United States, the current participants are 10 Federal agencies listed in rank order according to the portion of the approximately $1.2 billion expended during fiscal 1999 on SBIR.  What defines mandatory participation is an extramural R&D (i.e., research supported by the agency but not conducted by the agency) budget of more than $100 million.  Since 1997, the amount of the budget reserved exclusively for SBIR has been 2.5% of the amount a given agency spends on external R&D. 

In Japan, the participants are as follows: 

As of the end of April 1999, 38 programs run by these four government agencies participated.  

In the United States, the major participating agencies represent Defense, Health, Space, Energy, and Science.  In Japan, there can be no participation of Defense because of the way Defense funds—by procurement.  Thus, even if an innovative product was created, it is not considered that it is the result of R&D.  Space and Energy and a number of other divisions that are part of STA are not participating.  Monbusho is not relevant at this time.  How education technology will be represented when Monbusho merges with STA is not yet known. 

Implementation

In the case of the United States, the implementing organizations are the participating agencies themselves.  There are no intermediate agents or institutional bodies; the link between small business and the Federal agencies is direct.  In the case of Japan, New Energy and Industrial Technology Development Organization (NEDO) is the implementing organization for MITI; Ministry of Agriculture, Fishing and Forestry is the implementing organization for itself; Telecommunications Organization is the implementing organization for MPT; and Japan Science and Technology (JST) Corporation is the implementing organization for STA. 

Stand-Alone Program vs. Integrated Program

In the United States, the SBIR Program in each agency is a dedicated program.  As stated above, the contribution of each agency at present is 2.5% annually of the amount the agency spends on external R&D.  The total amount for the Federal SBIR Program is approximately $1.2 billion for fiscal year 1999.  In Japan, the SBIR Program is built on many existing programs.  Without having any specific knowledge of the individual programs involved, it is our understanding that the configuration of support for SMEs may vary.  In many of these programs, support was theoretically already available to SMEs, but it may have been difficult for SMEs to compete with large companies.  In some programs, support may have been newly expanded to include SMEs; and in others, some support may be exclusively for SMEs (and some or all of those that fall in the latter category may be new programs).  There was a chart available to us in the Japanese language that covered 33 of the 38 programs.  This chart showed the programs grouped by participating agency with the target amount of annual R&D for these programs for each participating agency based on the 1999 budget.  The target amounts for SMEs within these programs, however, were not specified in the document. 

Program Coordination

In the United States, the Small Business Administration (SBA), a Federal agency funded by congressional appropriations, is the coordinating agency for the SBIR Program.  The SBA has government-wide policy and oversight responsibility for the SBIR Program management and policy functions.  SBA’s responsibilities under these programs include the following:

-         issuing policy guidance;

-         chairing quarterly interagency program managers’ meetings to discuss policy initiatives and directions as well as operational issues;

-         providing advisory opinions on specific project and policy issues;

-         approving solicitation schedules for SBIR projects;

-         issuing pre-solicitation information to small businesses;

-         collecting program data and annual reports to the Congress and to the Administration; and

-         maintaining a database of SBIR winners and conducting studies to determine the success of the program.^[30]

Because of the flexibility in program design, participating agencies are given considerable latitude in managing their respective SBIR Programs to effectively meet their specific mission objectives.  Thus, these agencies tend to view as particularly valuable the major role that SBA plays as an advocate to the Congress for the SBIR Program. 

In Japan, MITI is the coordinating agency for the program and a number of the specific programs that are part of the Japan SBIR are MITI programs.  In contrast to MITI, the SBA contains none of the standard SBIR Programs under its umbrella.  There is, however, a brand new SBIR outreach program that SBA supports with its own funds^[31].  In this program, the SBA has been authorized to provide up to $100,000 annually to eligible states for outreach to small businesses.  Historically, firms that have been highly successful in securing awards under the SBIR Program are clustered in a relatively small number of states.  Eligible states are those that underperform in capturing SBIR award resources.  As defined, 23 states, Puerto Rico and the District of Columbia are eligible.  For the most part, these are rural states facing barriers to successful competition in the SBIR Program.  These barriers include lack of experience selling and performing R&D work from the Federal government [and/or the private sector], long distance separation from the Federal “customer”, absence of networking with peers, and inadequate infrastructure support (e.g., technical writing and contract/grant and intellectual property management)^[32].  An amount of $1 million has been appropriated for this purpose.  The legislation requires a 50 percent match by participating states.  The eligible states must compete for these funds.  The proposal must include a narrative five-year plan describing proposed services and assistance, including a comprehensive chart or list of local services and resources within the state; and it must indicate the state’s capacity to help small high technology businesses.  It also must include documentation showing an understanding of the needs of the particular state’s small high technology business community.  These are one-year awards, with the possibility of four additional years for a maximum of 5 years, subject to availability of funds.  This program will provide vital resources to eligible states and help these states provide SBIR outreach to small high technology businesses.  It provides important groundwork for a team approach to SBIR outreach that includes both Federal agency and state outreach personnel.

State Participation

When SBIR was slated to become a program at the Federal level, it was not anticipated that the states would play an active role in the program.  Soon after its inception, however, state economic development departments and science and technology programs began to promote the program and to assist small businesses in proposal preparation.^[33]  As set forth in the document, State and Federal Perspectives on the SBIR Program,^[34] states are playing an active role in the program as reflected in the fact that all but two states have some structured SBIR promotion or assistance effort underway (i.e., outreach, technical support, or financial assistance) and that state SBIR services span the full range of SBIR program activities—from initial awareness to commercialization, with a heavy emphasis on outreach conferences and proposal writing workshops and other proposal preparation assistance.  State SBIR programs, however, vary dramatically in organizational structure, budget, and services.  The State Science and Technology Institute (SSTI) reported that Federal SBIR managers view program outreach and commercialization as the most fruitful areas of state-Federal cooperation. 

In the context of SBIR in Japan, the authors do not know how the national government will relate to the prefectural governments. 

Award Conditions

In the United States, the Federal support of SBIR Phases I and II^[35] requires neither matching funds nor any direct payback as part of the award conditions.  It is worth noting that the U.S. definition of SME is silent on the matter of capitalization. The picture of the assets and debts of U.S. small business concerns--while not unimportant-- is not defining because, in the context of the U.S. SBIR Program, the U.S. government aims to give money to qualified small business applicants and not to expect any direct return on that investment.  The SME is required to be organized for profit and to be a majority U.S.-owned firm with its principal activity occurring in the U.S.  In the United States SBIR model, the return on the Federal SBIR investment is seen in sales, job creation, and the payment of taxes of successful small business concerns.  Each agency’s program focuses on R&D that meets its needs and goals.  In the Japan SBIR, some agencies are not requiring matching funds.  It is anticipated at this time that in the majority of the Japan SBIR programs, a modest amount of profits are to be paid back to the investor. That is, in some manner, there is payback to the national government.  The support is not, however, regarded as a loan. 

Review Process

In the United States, competition is a cornerstone of the SBIR Program.  The quality and the manner of conducting the review process are crucial to the success of the SBIR Program.  Moreover, reviewer feedback contributes to making the program an important training ground for entrepreneurs (as do the national and regional conferences which attract prospective applicants as well as those who have received awards or rejections).  The review process in the U.S. SBIR varies by agency.  There are some agencies that conduct peer reviews (e.g., NSF, Agriculture, and National Institutes of Health (NIH)).  These are evaluations performed by independent third parties.  There are other agencies that perform “line review” (e.g., Defense and NASA).  In these agencies, the agency line management personnel generally perform proposal evaluations.   Some agencies use a panel process.  Agencies provide evaluation feedback in different ways.  Some debrief applicants over the phone.  In the case of NSF, evaluation feedback is written, verbatim, and automatically provided to all applicants whether they are successful in obtaining a grant or not.  At NSF, the external peer review is primarily conducted by using an onsite panel review process.  Each panel (4 to 12 experts) reviews a group of proposals (10 to 30 in number).  The panel places the proposals considered fundable in rank order and makes recommendations to the SBIR Program on each proposal it has reviewed.  For each proposal, a minimum of three written reviews is produced in addition to a summary of the panel discussion.  These documents are all provided to the applicant.  Identity of the reviewers is protected.  Confidentiality of the material in the proposals is protected. 

We obtained only preliminary information about the review process in the Japan SBIR—indeed, much of it is in the planning stage.  We did get some information that proposals will be reviewed by a committee of about 10 people from a pool of 100 experts.  We were not able to ascertain how many proposals different programs are likely to yield, how many different review committees will need to be utilized, or what type of evaluation feedback will be provided.  It was made clear that the confidentiality of the reviewers’ identity is to be maintained and also that the proposals will be in competition with each other.   Although feedback is not a usual practice in Japan, a concerted effort is being made to arrange to provide feedback.  The nature of this review process may vary by participating agency and/or specific SBIR Program within an agency.

University participation

In the United States, SBIR collaboration with universities is encouraged.  Although the Japanese are looking to the universities as the paramount source of ideas for new technology, it is not clear how this resource will be tapped within the context of the new Japan SBIR Program. 

In the United States, there are many ways the relationship between universities and small business concerns can be reflected within the context of SBIR projects themselves:

V. CONCLUSIONS  

These conclusions are based on the comparison of the Japanese national government’s policies to support high-risk, innovation-based (HRIB) research at small and medium enterprises (SMEs) to those of the U.S. Federal government policies in the following key support areas:  

A.  FINANCIAL

In the United States, the SME that proposes a HRIB research project, has two sources of financial support that are not available to most Japanese SMEs with similar proposals: venture capital firms and wealthy individual angels.  

However, there are policies in place and under discussion now in Japan to increase venture capital funding opportunities for SMEs.  It is not clear if U.S.-style angels can be introduced in a short period of time as financial sources, without new legislation being introduced. 

In the United States, the Federal government acts as a venture or “pre-venture” capitalist through the SBIR Program.  In Japan, we have seen instances of prefectural government organizations acting similarly.  As the Japan SBIR Program develops, this may be an avenue for the government to increase venture capital investment in SMEs. 

B. TECHNOLOGY  

Intellectual Property (IP)

Japan’s policies, which established Technology Licensing Organizations (TLOs) to obtain, protect, and utilize the IP of university faculty and SMEs, are modeled after the IP organizations at many U.S. universities.  In some prefectures, there are efforts in place to help local SMEs identify, obtain, and protect IP that has a good opportunity for commercial success from universities and large corporations.  The authors do not know of similar activities by Federal or state governments in the United States.  

Facilities & Equipment (F&E)

Both countries have policies in place to provide excellent sources of F&E for HRIB research projects.  Japan in particular has recently exceeded the amount the United States invests in more modern, world-class, high tech F&E, e.g., Technopolis and Science City sites, which are ideally suited for basic R&D projects.  An area of criticism and growing concern in the U.S. is the Federal government’s declining support of basic R&D.  

However, when considering the F&E at major research universities, those of the United States clearly have more modern facilities and are better equipped than many of those in Japan’s national universities and efforts are underway to correct this deficiency. 

In both countries, SMEs greatly benefit from ready access to adequate, low-cost facilities of incubators.  Many U.S.-style incubators provide a host of services to help start-up innovators with planning for budgeting, marketing, production, training, financing, etc.  In Japan, policymakers are trying to enable incubators to provide such services.  

C.     HUMAN CAPITAL 

It is clear to the authors that Japan’s policymakers are well aware of the crucial importance that a large and sustainable entrepreneurial community plays in building a diversified and strong economy.  Furthermore, they realize that there are no “quick fixes” that will overcome many structural and cultural problems that hinder the widespread development of the “entrepreneurial spirit”. 

However, there are efforts underway to cultivate the “entrepreneurial spirit” especially in schools, colleges and universities where potential “risk-takers” are being encouraged through training and hands-on experiences to start new SMEs.  

VI.         SUGGESTIONS  

During our discussions while visiting Japan and our subsequent research regarding Japan’s efforts to establish a substantial and sustainable community of entrepreneurs, several ideas emerged that might be helpful to policymakers who are trying to achieve this goal.  In this section, we offer these ideas as suggestions for consideration:  

--Encourage women to be entrepreneurs.^[36]  

            --Develop entrepreneurs-in-training exchange programs with educational institutions and SMEs
                in

Ø      United States, Canada and Israel (highest entrepreneurial activity)

Ø      China, India, Russia (greatest potential for economic opportunities.)

--Develop focus on pre-university education.  The children in Japan show tremendous fascination with computers and gadgets, which makes high quality computer software a potentially attractive learning tool.  There is some excellent educational software available that uses technology well, inviting exploration and the expression of curiosity, ingenuity, and creativity (e.g., Geometer’s Sketchpad, has been translated into Japanese and is being distributed by Yano Electric, an SME in Kobe^[37])  

-- Consider modeling a competition for support after the U.S. Small Business Administration's outreach competition for states (e.g., MITI could hold a competition among the New Technology Coordinators (NTCs) in the prefectures represented in the Research Science Promoter (RSP) Program).