R&D spillovers, patents and the incentives to innovate in Japan and the United States

Abstract

National surveys of R&D labs across the manufacturing sectors in the US and Japan show that intraindustry R&D knowledge flows and spillovers are greater in Japan than in the US and the appropriability of rents due to innovation less. Patents in particular are observed to play a more central role in diffusing information across rivals in Japan, and appear to be a key reason for greater intraindustry R&D spillovers there, suggesting that patent policy can importantly affect information flows. Uses of patents differ between the two nations, with strategic uses of patents, particularly for negotiations, being more common in Japan.

Introduction

The ability of firms to appropriate at least some of the value created by their innovations is essential if there is to be incentive to innovate. On the other hand, the economy-wide benefits from an innovation depend to a considerable degree on the extent to which the new knowledge associated with it becomes available to others to use and build on. This article reports the results of a survey research study that compares the ability of the US and Japanese firms to appropriate the returns to their innovations, how these firms protect their innovations (by using, e.g. secrecy, patents, lead time advantages) and the magnitude and channels of intraindustry R&D information flows in the two nations. We focus particularly on the role of patenting since it is both a key policy instrument affecting appropriability and an object of growing managerial attention.

Our comparison of appropriability conditions and spillovers between Japan and the US builds on prior research that shows that, in most industries, firms rely predominantly on mechanisms other than patents to protect their innovations, including secrecy, first mover advantages and the exploitation of complementary capabilities (Scherer et al., 1959, Mansfield, 1986, Levin et al., 1987, Arundel, 2001, Taylor and Silberston, 1973). In some industries, such as drugs, patents are, however, quite important. A comparison between Japan and the US should add to these insights by showing whether appropriability conditions depend on cross-national differences in policy and institutional environments, or factors, such as technology, that should vary little across nations.

The role and effectiveness of patents is of central concern to this study. We will explore whether differences between the US and Japan in patent law, and judicial and administrative practice affect the degree to which patents protect innovation. We will also examine whether the two nations’ different patent policies affect the diffusion of technical knowledge, as suggested by Ordover (1991) and Granstrand (2000).

In brief, although R&D spending as a percent of GDP is higher in Japan than the US, intraindustry R&D information spillovers appear to be greater in Japan for almost all industries, and the appropriability of rents due to innovation appears to be less. In contrast to the US, Japanese respondents report secrecy as a minor appropriability mechanism and patents as comparably effective to other major mechanisms. A key reason for less appropriability and greater intraindustry R&D spillover in Japan appears to be that patents diffuse information across rivals more readily than in the US. We suggest that this cross-national difference is not only due to the policy differences highlighted by Ordover (1991), but also due to the different ways in which patents are used in the two nations.

In Section 2, we review our sampling and survey methods. Section 3 compares intraindustry R&D information flows and spillovers. Section 4 compares the appropriability of rents due to innovation. Section 5 considers how the two patent systems influence intraindustry R&D spillovers. Section 6 concludes the paper.