Innovation Across Time and Space: Advantage New Companies

07-Kneller-c07 OUP067-Kneller (Typeset by spi publisher services, Delhi) 232 of 376 May 30, 2007 16:9 7 Innovation Across Time and Space: Advantage New Companies INTRODUCTION This book began with the assertion that innovation in Japan depends primar- ily on large companies, while, in the USA, universities, venture companies, and established companies all play major roles in the discovery and early improve- ment of technologies with commercial potential. The most striking difference between the two countries is the role of venture companies. The middle chapters described the challenges and opportunities facing ventures in Japan. Now we come face to face with the issue of which innovation system is better, mindful that innovation systems are part of larger social and institutional systems and that effectiveness depends on the specific technology and industry at issue. This in turn raises the question of the extent to which these differences have influenced the changing fortunes of high technology industries in Japan, the USA, and other countries over the last decades of the twentieth century and the initial years of the twenty-first century. What were the roots of Japan’s economic miracle from the 1960s to 1980s? Why did many US and European industries seem to lag behind Japanese counterparts in terms of innovation capabilities, and why did Japan seem to falter and the USA recover beginning around 1990? Finally, what are prospects for the future, and the lessons various countries can learn from this experience? These are complex issues which this book can only address in part. To lay my cards on the table, I think one of the key factors concerns the vitality of high technology venture companies. This vitality is based on their ability to draw liberally on and to develop quickly university discoveries, to provide a professional rebirth for scientists and engineers whose ideas are not being developed in large companies, and to find receptive customers and development partners among established large companies. In Chapters 2–6, I have tried to show how Japan’s innovation system has problems with respect to all these factors. These problems, juxtaposed against the more nourishing US environment for ventures, probably explain to a significant degree the varying 07-Kneller-c07 OUP067-Kneller (Typeset by spi publisher services, Delhi) 233 of 376 May 30, 2007 16:9 Advantage New Companies 233 fortunes of the high technology industries in Japan and the USA over the past half century. However, because of deeply rooted social factors, the environment for ventures in Japan and many countries of Continental Europe is unlikely to become similarly supportive in the foreseeable future. Thus, these countries will continue to rely on their large companies for innovation, while the USA will rely to a large extent on new companies to be innovation leaders. Whether one agrees with these assessments (or thinks their obviousness precludes the need for further analysis), because the role of ventures in US and Japanese high technology industries differs so markedly, these two countries provide a natural experiment shedding light on the types of environments ventures need to flourish, the strengths of shortcomings of the two types of innovation systems, and how government policies, university–industry rela- tions, and social factors, influence the balance between ventures and established companies as innovation leaders. Part I compares the innovative capabilities of ventures and established companies. The work of others suggests that in a fairly large number of UK and US industries, independent venture companies can be superior early stage innovators. The data presented at the end of Part 1 show, in the case of pharmaceuticals, that on a world wide basis venture companies are generally better innovators than established pharmaceutical companies, and that America’s innovation leadership is due to its venture companies. Part II discusses whether these findings are likely to be applicable to other industries. Whether strong intellectual property (IP) rights can protect ventures in fields other than pharmaceuticals from encroachment by competitors is a related issue. The conclusion is that ventures can be innovation leaders in many fields besides pharmaceuticals, and that IP is vital for them, too. Parts III and IV explore the sustainability of an innovation system based on venture companies. Part III explores whether venture companies undercut the innovation capabilities of large companies, particularly by poaching employees. The conclusion is that, while losing employees does hurt companies, probably the advantages of labor mobility outweigh the disadvantages. Part IV discusses whether ventures are capable of sustained innovation even though many companies are narrowly focused and lack broad integrated learning and organizational capabilities. The conclusion is that in an entrepreneurial region such as Silicon Valley, integrated learning and organizational capabilities that foster continued innovation are built into the disaggregated yet networked system of independent companies. However, there are questions whether the Silicon Valley model can be replicated in other regions. There are also questions whether ventures need a large supply of skilled, young researchers and whether US demographics and immigration policies can meet this need. 07-Kneller-c07 OUP067-Kneller (Typeset by spi publisher services, Delhi) 234 of 376 May 30, 2007 16:9 234 Advantage New Companies Applying these perspectives to Japan, Part V suggests that Japan’s dearth of venture companies probably is hurting its innovation capabilities in a number of fields. Nevertheless, Japan’s manufacturing industry has unique strengths that contributed to Japan’s economic miracle and to its continu- ing strength in some industries. Part VI analyzes some of these strengths: the behind-the-scenes role of small companies and personal management policies based on a system of lifetime employment, as well as the purported benefits of government-organized R&D consortia. Some of these factors are also sources of weakness for Japanese ventures. Part VII examines whether the system of lifetime employment, autarkic innovation in large companies, and preemption of university research is likely to change in the near future, and concludes that the likelihood is low. In part this is because these factors underlie the strength of large companies, and in part because of deeply rooted social factors, including Japan’s system of education. However, another reason is the new strategy of large Japanese companies to cooperate more closely with universities—to rely on them for basic research and potentially valuable early stage discoveries—which will leave ventures with even less space to grow. In the concluding part, I suggest that this strategy probably will not allow established companies to remain in the forefront of early stage innovation. In other words, without vibrant new companies, Japan’s prospects for long- term strength in new fields of technology are dim. On the other hand, some of the key factors that make the USA a fertile environment for ventures are also factors that undermine the innovative strength of its large companies, in particular labor mobility and its corollary, low job security. Thus, the USA has no choice but to rely on venture companies if it is to remain a leader in most new fields of technology. Moreover, although the US system is robust, the continued existence of all the various conditions required for its success cannot be taken for granted. Thus the USA and Japan are each locked into dependence on a different innovation system. The sources of each country’s strength with respect to one system are the sources of its weakness with respect to the other. Yet the continued success of each country’s system is not assured. This phenomenon has parallels in previous comparisons of the institutional frameworks of innovation systems, in particular the contrast between liberal market economies, such as the USA and UK, and coordinated market economies, such as Japan and Germany. However, this chapter suggests that the different impact of various institutional systems are largely mediated by whether they create environments that favor early stage innovation by new companies or confine such innovation to established companies. In order to distill the conclusions of this book into specific policies that can be the focus for productive debate, this chapter closes with suggested reforms 07-Kneller-c07 OUP067-Kneller (Typeset by spi publisher services, Delhi) 235 of 376 May 30, 2007 16:9 Advantage New Companies 235 to improve the environment for high technology ventures in Japan, the USA, and developing countries. PART I: ARE NEW-OR-SMALL OR ESTABLISHED-AND-LARGE COMPANIES BETTER INNOVATORS? Of course the answer is, ‘It depends’. The ability to realize advantages attributed to either large or small size (or longevity vs. youth)1 often depends on the particular technology and industry, as well as the overall innovation system and social context. Nevertheless advantages attributed to new/small companies include the following:2 1. Many people want to be their own boss, and when they are, they generally are more satisfied with their work and with life in general.3 Assuming job satisfaction and motivation translates into more productive effort on the part of the entrepreneur and other key employees than would be the case if they worked in large companies, then the productivity of these small businesses should be higher. 2. Small companies are more able to focus and experiment on a new product or new class of products—even though these products may seem incre- mental or risky and the market may seem small. 3. With a large number of small companies pursuing many different approaches, the chances of developing optimal approaches will be higher than if only a small number of large companies are involved. 4. Vision and goals regarding the application of innovative ideas are less con- strained in new companies than they are in large organizations, where past successes and current customers may limit the applications of a new idea.

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