489 Japan’s post-war economic success: Deming, quality, and contextual realities

Sources: Moffatt (1991, p. 88); Buderi, R. et al. (1992, pp. 68-9); Japanese Agency of Industrial
Science and Technology (1991)
Table II.
Licensing and royalty 
fees paid to USA and 
Japan

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In a number of key areas, technologies that Japanese firms are licensing are
those the Japanese government has identified as critical to Japan’s future
competitiveness. According to Japan’s Science and Technology Agency – which
formulates Japan’s technology policy – Japan is currently placing particular
emphasis on biotechnology, computers, electronics, and environmental
technologies for further development or acquisition in the 1990s. Prior to the
1990s, the Japanese focused their licensing efforts on acquiring electronics,
automotive, propulsion, and aerospace technologies. 
The USA remains Japan’s largest provider of technology. For example,
Japanese government statistics indicate that, on the basis of licensing arrange-
ments as well as outright purchases of technology, the USA currently provides
roughly 65 percent of all new technology entering Japan. Royalties and
licensing fees paid by Japan to the USA for access to technology, for example,
totaled $3.2 billion in 1991, while such payments to Europe totaled less than $1
billion (White Paper, 1991).
One catalyst that has traditionally driven licensing agreements is the need
for capital. The high cost of producing a pharmaceutical derived from a
biotechnology process, for example, makes it difficult for smaller companies to
survive financially. Biotechnology and pharmaceutical firms are eager to
license rights to Japanese firms, primarily to generate revenues over the eight-
to ten-year period generally required to bring a product to market. This pattern
was evident throughout the 1960s and 1970s as well when lower labor rates and
the availability of government-sponsored venture capital resulted in the
licensed transfer of entire product lines to Japan.
Among industrial nations, Japan has traditionally been very weak in
supporting the costly basic research required to develop new technologies or
products. Instead, Japanese firms forge ties to and licensing rights from a
variety of Western firms and institutes. This willingness to borrow the best and
most efficient technologies to support their industrial base is an excellent
illustration of the pursuit of incremental improvements so forcefully advocated
by Deming. Delavigne and Robertson have described Deming’s admonition that
“the information necessary to optimize any system is not only unknown at this
time, but inherently unknowable to us” as one of his “greatest contributions to
business” (Delavigne and Robertson, 1994, pp. 48-9). This realization led to
experimentation and the search for “plug-in” solutions to optimize existing
systems and became an intrinsic feature of Japanese industrial policy reflective
of Deming’s call to continue learning and improving systems with new
knowledge.
Just as Japanese firms want to access Western technologies through
licensing, a number of Western firms are willing to license cutting-edge
technologies to their Japanese counterparts. The willingness to license
technologies to Japanese firms stems largely from the following factors:
•
Market access. Licensing enables companies to enter the Japanese market
where they often do not have direct access, largely because the market is

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dominated by domestic competitors that are firmly entrenched and a
distribution system which discourages foreign entry.
•
Commercializing products. Although often noted for quality in basic
research, Western firms are not as adept at converting research into
products. A 1992 industry survey of 80 leading international
manufacturers, for example, found that Western firms typically are
slower than their Japanese counterparts in turning ideas into com-
mercial products. This is consistent with their adoption of Deming’s call
for incremental improvements. 
•
Incentives for sponsored research. A number of Western universities and
institutes are attempting to attract Japanese financing of their research
efforts. In exchange for funding, the corporate sponsor often receives
right of first refusal in licensing discoveries.
•
Reaping the benefits from licensing. Many of the licensing deals have
enabled Japanese firms to access innovative technologies and close gaps
in specific technological areas. Indeed, Japanese firms have used
technology licensed from the West to gain benefits ranging from core
product development to diversification into new products.