FOREWORD

Japan`s industrial technology is recognized both domestically and abroad as the most important factor behind Japan`s high rate of economic growth in the postwar period. By spurring economic growth, industrial technology has sparked new investment that in turn fuels further development. When viewed solely from the perspective of supplying high-quality, reliable goods at low cost, Japanese industrial technology can thus be considered the best in the world. As a result, it has exerted a tremendous influence on other countries, including the advanced industrialized countries of the West and the developing countries in other parts of the world. Since the 1980s, it has contributed significantly to both the quantitative expansion and qualitative improvement of global goods production.

That fact has created two serious problems for Japan. First, as a result of Japan`s contributions, the productive capabilities of other countries have improved, and that has caused a relative chipping away of Japan`s superior position. Of course, the improvement of humankind`s capacity to produce goods is a welcome development; and because Japanese influence has increased in the area of industrial production, we can assume that, at least in this respect, global understanding of Japan has been sufficiently deepened. That provides Japan with considerable bargaining power as it acts on the international stage. Unfortunately, Japan has failed to make full use of that power, and that is the second problem that must be resolved.

Along with its economic growth, Japan has watched its technologies mature, and that process has helped to suggest how current and future efforts should be focused - namely, Japan needs to further strengthen its current position of technical superiority in industrial fields while searching for a new direction in which it can move successfully; at the same time, the nation should use the bargaining power gained within the increasingly globalized international community to establish a superior position in the policy realm, thereby regaining Japan`s competitive power.

At least conceptually, we can say that in the past private industry, government agencies, and academia all agreed that Japan should achieve a new competitiveness through the simultaneous realization of technical and political superiority. All of the plans that were formulated in the latter half of the 1980s indicated this basic agreement. In industry, it was reflected in technology transfer programs carried out as part of globalization strategies; among government agencies, it was manifested in the initiatives in joint international technological projects within the larger context of internationalization; and in universities, it was seen in efforts to foster more creative human resources by broadening the standards used for the establishment of schools.

As the bubble phenomenon emerged in the Japanese economy, however, those concerns were put on the back burner; but the collapse of the bubble brought the issue of stronger competitiveness back into the limelight. With the understanding that Japan`s long-term recession has been caused by a lack of industrial competitiveness, intensive efforts are now being made to formulate the measures needed to rebuild competitiveness by strengthening Japan`s industrial technology and utilizing all the nation`s available bargaining power.

When approaching this issue, it is important to keep in mind that the Science and Technology Basic Plan (which was formulated in 1996 on the basis of the Science and Technology Basic Law promulgated in 1995) is currently being implemented. The Science and Technology Basic Law emerged from an evaluation and analysis of the prodigious economic growth that Japan achieved because of its superior industrial technologies, and the law was promulgated with the intent of transforming Japan from an adjunct nation dependent on others into a truly autonomous country able to make a unique international contribution. Restricting our view to the effect that this law has had on industrial technology, we see that it has placed basic research at the heart of scientific inquiry. The strategy behind this is to foster original intellectual property, which will provide the foundation for the creation of new industrial fields and thereby strengthen Japan`s industrial technologies. In short, the idea is to revitalize the power of Japanese industry (which was so evident during the high-growth years but has not been fully manifested during the current recession) by using unique intellectual resources generated by Japan itself.

The first chapter of a report submitted to the 105^th session of the U.S. Congress by the congressional Science Committee contains a detailed analysis of the crucial role that the 50 years of basic research since the end of World War II has played in maintaining American power, including the current era of prosperity. The "basic research" referred to is the research in traditional basic science, primarily focused on physics and powered by scientific curiosity. The same report, however, states that it is now necessary to change the direction and content of basic science. While affirming its continued importance, the report concludes that a creative approach is needed to define new directions.

Simply stated, the relationship between science and society has deepened, and we are now living in an era when the results of scientific work have an almost immediate impact on society. Within this context, the realm of pure science, where researchers are motivated solely by their curiosity about the world, can no longer be considered the only form of "basic science."

In view of such considerations, this report concentrates first and foremost on a strategy to convert the original, intellectual results generated in the spirit of the Basic Science and Technology Law into strong industrial technologies. This is not the only area addressed, however. We believe that researchers working in basic scientific fields with the potential for generating resources that have the abovementioned immediate social effect should not only have the sense of curiosity typical of basic researchers but also the power to imagine the effects of their work within society. Therefore, this report attempts to clarify this new, expanded concept of basic research and to formulate a strategy for promoting it.

The first strategy is designed to maintain room for traditional basic research founded on pure scientific curiosity while simultaneously enhancing Japan`s ability to convert the results of that work into powerful industrial technologies. As such, it is premised on the parallel development of basic research and industry.

On the other hand, the second strategy demands that greater imaginative awareness of the social effects of basic research be fostered among those who are actually conducting the research. In contrast to the first strategy, therefore, the second strategy is premised on the intersection of basic research and industry. It is our hope that both of these strategies will be accurately reflected in the next Basic Plan for Science and Technology.

Hiroyuki Yoshikawa

Chairman

The decline in the capabilities of Japan`s industrial technology should be a matter of great concern in the industrial, governmental, and academic sectors of society. Industrial technology is the driving force behind the Japanese economy, and its decline has an impact that goes far beyond a simple reduction in corporate profitability. All concerned should be aware that Japan faces a crisis that could undermine the very socioeconomic foundation of the Japanese people`s way of life.

The underlying direction Japan must now pursue is away from the "catch-up" style of technological development that has served it so well in the past, and toward a system of technical innovation that might be called "frontier creation."

The following four goals must be achieved:

To achieve those goals, all concerned parties must harden their resolve and find a way to break through the following three obstacles:

Another indispensable aspect that is inseparable from systemic reform is the prioritization of governmental investment in research and development in industrial technology. It is therefore important for the government to indicate its basic approach to this issue.

(The Slow Pace of Reform and the Decline in Competitiveness)
In the 1980s, Japanese industry (particularly the manufacturing sector) established itself as a tough international competitor. However, in the current climate of competition based on low cost, Japan has been buffeted by the fierce international competitiveness of newly industrialized countries (particularly in Asia).

Meanwhile, in many fields where advanced manufacturing technologies had previously given Japan the competitive edge, companies in the U.S. and Europe began offering stiffer competition in the 1990s in products where competition focused on finer distinctions and higher added value.

One important indicator of Japan`s competitiveness is the productivity of its economy. In the late 1980s, the rate of productivity growth began to decline, and it is now at a level that is below the average for all OECD countries.

Industrial technology was the engine of Japanese economic growth until the bursting of the economic bubble. Today, amid fierce international competition, there are fears that the foundation for that technology is sinking. The slowness with which Japan undertook reforms during the transition from high to low growth can be attributed in part to the declining competitiveness of its industry and to the slower growth in productivity.

(Strategies Used by the U.S. to Strengthen Competitiveness)
At about the same time that was happening in Japan, the United States was experiencing a deep sense of crisis with regard to the competitiveness of American companies. In the mid 1980s, the President`s Commission on Industrial Competitiveness conducted analyses and studies on the American socioeconomic system and came up with clear policy goals designed to strengthen the competitive position of U.S. firms. Strategic actions were then taken in a systematic manner to achieve those goals.

Especially in recent years, as companies have worked to thoroughly streamline their operations, the commitment individual companies make to footing the entire bill for their own research and development has begun to fall off, thus spawning a technical revolution in which companies are increasingly finding effective ways to use outside sources for their technologies. This outward orientation is taking a variety of forms, including outsourcing to universities and government institutes engaged in basic research, investments in venture companies, M&A activities, and spreading the risk and increasing the efficiency of investment by conducting joint research projects with other companies. In this way, an effective system for technical innovation is now functioning that flexibly links industry, government, and academia.

As a result, the American manufacturing sector, including semiconductor manufacturers and car makers, have regained their international competitiveness, while U.S. companies in cutting-edge fields such as IT and biotechnology enjoy an overwhelming competitive advantage.

(A Closed Japan)
In view of the various recent developments related to industrial technology, it is difficult to see a bright future for Japan as we enter the 21^st century; in fact, it would seem that the Japanese are becoming increasingly isolated.

The following phenomena can be identified as causes for concern.

• Japan is developing almost no new technologies that generate large-scale products and services that have a strong impact on the global market.
• In biotechnology, IT, and other high-tech fields, Japan seldom plays a leading role in determining such matters as intellectual property rights and international standards, which are crucial for companies if they hope to survive future international competition.
• Compared with the U.S., Japan has very few start-up companies based on research results achieved at universities, and very few venture companies that serve as the driving force behind technical innovation.
• It has become increasingly difficult to pass on to younger generations skilled production technologies and expertise, which have been the backbone of Japanese strength in the past.
• There is a widening gap between the abilities of human resources graduating from universities and the needs (and expectations) of industry.
• The research results achieved by universities and national laboratories and research institutes (collectively called 'national institutes' below) are not necessarily matched to the needs of industry.
• There is an increasing tendency for Japanese companies to look abroad when commissioning research or searching for a joint research partner.
• In the field of basic research, few Japanese researchers are achieving results that would put them in contention for the Nobel Prize.

To break through this isolation, Japan must abandon its piecemeal, vertically oriented approach and support university-led basic research, which will provide the foundation for long-term, continuous technical innovation. At the same time, it must rebuild and totally revamp the overall tri-sector (industry-government-academia) system as it relates to technical innovation.

In these times - which differ from the era of high growth in that there is no guarantee that the economy will expand from year to year - it is highly desirable for the industrial, governmental, and academic sectors to abandon their ingrained habit of indiscriminately allocating resources in an even manner. In the current climate of intense competition, efforts must be made to expand the total amount of investment in research and development while placing emphasis on strategic resource allocation. To that end, and to foster new technical innovation through tri-sector linkage, it is essential for the government to clarify its basic strategic priorities for the allocation of resources dedicated to R&D programs in industrial technology.

In order to strengthen Japan`s industrial technology, the strategic prioritization of R&D investment must be carried out in conjunction with the restructuring of the system for technical innovation with a new orientation toward frontier creation.

To restructure Japan`s tri-sector system of technical innovation and orient it toward "frontier creation," the following four goals must be achieved while taking into consideration all aspects of the innovation process, from the creation of new technologies through to market development:

In distributing its policy resources related to industrial technology, the government should give priority to the following three important fields:

1. investment in R&D that takes into account social needs and will lead to the creation of new markets,
2. investment in R&D directed toward budding technologies that are both innovative and fundamental, and
3. investment in intellectual foundations that have a public-asset aspect that serves as a basis for the development of industrial technology.

Chapter II - REORIENTING JAPAN'S SYSTEM OF TECHNOLOGICAL INNOVATION TOWARD "FRONTIER CREATION"

In the U.S., universities and government institutes are important partners of private industry, with tri-sector linkage that effectively generates technical innovation. In Japan, however, private companies, universities, and national institutes are not highly motivated to work with each other. The prevailing environment does not encourage them to share information about the new ideas they are developing and the needs that they have, and thus it does not lead to cooperative work in which institutions in different sectors provide complementary research functions that lead to technological innovation.

To overcome this impasse, universities, national institutes, and private companies must break down the walls that currently obstruct the free flow of personnel and capital among the three parties. While preserving the autonomy of universities and the researchers who work there, efforts must be made to mutually understand the respective basic roles of industry, government, and academia in order to achieve true tri-sector linkage.

To achieve a breakthrough in this area, it is essential that further reforms be implemented that will stimulate competition among universities and allow them to achieve a respectable standing in the international arena.

Researchers are the point of origin for creative work, as are the support staff and technicians at research institutes who provide the foundation for the development of industrial technologies. Therefore, it is necessary to nurture these human resources and work to create an environment in which each individual can fully develop his or her personal capabilities.

In Japan, young researchers who become affiliated with institutions can generally expect to remain affiliated with the same institution over the long term. It is said that in many cases, exclusive affiliation with just one institute prevents them from making full use of their creative potential.

To overcome this problem, it is necessary to develop a market for human resources that encourages the free flow of researchers among industry, government, and academia, while establishing a competitive environment that will stimulate and extend individual creativity. It is also imperative that steps be taken to maintain and improve the quality of technicians, who have played a major role in supporting Japan`s industrial competitiveness.

It is necessary to dismantle Japan`s current system for formulating and implementing policies related to science and technology, which is based on a vertical orientation within various governmental agencies and ministries. A comprehensive and strategic approach is needed that covers the system of technological innovation as a whole and that takes into account the business activities and managerial strategies of private companies, which are undergoing dramatic change.

Current governmental systems that cannot respond nimbly to the rapid pace of technological innovation must be reconstructed to create flexible systems that can effectively support private companies as they grapple with technological innovation within a dynamic market.

Beginning in fiscal 2001, national institutes in Japan will become independently operated corporations. This change is expected to foster the following positive managerial reforms in such areas as budgets and personnel.

(Budgets)
Flexibly and appropriately using government subsidies for operational expenses in ways that transcend individual fiscal years; introducing indirect expenses (overhead) associated with commissioned research; making active use of multiple funding from various governmental ministries and agencies.

(Personnel)
Creating focal points for greater fluidity through the use of temporary personnel assignment systems and other means; greatly expanding the employment of non-Japanese personnel; diversifying the career paths of research personnel; introducing compensation systems that are pegged to actual achievement.

(Other)
Creating an advanced research environment that is open and usable by everyone in the industrial, governmental, and academic sectors.

In November 1999, the Cabinet approved a policy designed to open the way for professors and other educational personnel at national universities to hold positions as board members in private companies that are working to commercialize the research results achieved by the individuals in question. The policy is based on the findings of a government committee established in June 1999 called the 'Liaison Committee Concerning the Question of Whether an Individual Can Simultaneously Hold Two Positions, as an Educational Official at a National University and a Board Member in a Private Company.' There is now a pressing need to put all the necessary measures in place on the basis of the new policy, and to introduce similar measures in all public universities, testing facilities, and research institutes. In addition, steps must be taken to:

• permit Technology Licensing Organizations (TLOs) to use national facilities free of charge, and to establish contractual and compensation-setting procedures for use when nationally owned patents are transferred to TLOs,
• enhance systems designed to foster and commercialize basic research results achieved at universities, national institutes, and other facilities, and
• provide academic discounts to universities and individual educational officials to help defray the cost of patent applications.

Corporations must establish long-term strategies to use and commercialize the research findings of universities and national institutes.

To make universities more flexibly responsive to changing times and diversifying expectations, and to improve their international standing, a new system must be created that recognizes the autonomous administration of each individual university. At the same time, public spending on higher education must be expanded, and the following steps should be taken:

• the creation of an environment in which universities can autonomously and freely establish their own faculties and departments,
• the active and public dissemination of information concerning the educational and research programs offered at universities, as well as financial information, which in turn form the basis for external evaluations, and
• the active use of multiple funding from various governmental ministries and agencies, and the expansion of competitive sources of research capital.

Efforts must be made to restore and expand dilapidated, overcrowded research facilities while taking into consideration the distinctive characteristics of each university. At the same time, a strategic approach must be taken toward the prioritization of graduate school programs, the establishment of Centers of Excellence (COEs), and other measures designed to meet newly emerging facility needs. It is also necessary to focus on the establishment of advanced research facilities.

Overcrowding in particular is an extremely serious problem at many universities where new construction and remodeling projects have failed to keep up with personnel increases. Every possible effort must be made to achieve the goals for facility development outlined in the Basic Plan for Science and Technology.

To create a competitive market for research personnel, the barriers between universities, national institutes, and private companies must be removed so that the abilities of researchers can be opened up to outside scrutiny and evaluated. At the same time, a system must be established that links evaluations with the compensation that researchers receive.

Specifically at universities and national institutes, it is necessary to:

• introduce an open tenure system premised on fair outside evaluation and autonomous decision-making on the part of the university in question, and make active and flexible use of a temporary personnel assignment system, and
• expand public recruitment programs for teaching positions and other posts, actively appoint non-Japanese researchers, and bolster the sabbatical-leave system.

Meanwhile, private companies must make efforts to accurately assess the abilities of researchers and give them jobs with appropriate compensation. Especially with respect to post-doctorate researchers and others who have their doctoral degrees, companies should adopt more active hiring policies.

There is also a need to establish systems that will promote fluidity in the general labor market, and to create an environment in which workers are not penalized for changing jobs by being placed at a disadvantage in terms of their level of compensation.

To promote more effective and smoother research activities and to provide researchers with a greater variety of potential career paths, universities and national institutes should establish training programs for researchers in such fields as administration, research planning, and evaluation; promote the exchange of research personnel among universities and national institutes; and work to establish appropriate evaluative systems (including performance evaluations).

To create new technological frontiers and strengthen the international competitiveness of Japanese industry, it is important to train and maintain an adequate number of high-quality technicians. To that end, efforts must be made to establish an integrated educational system for technicians that covers the entire range of their working lives, from initial training to the obtainment of qualifications and continuing education. Furthermore, steps must be taken to ensure that the system functions adequately. Specific measures that can be taken include setting up an accreditation system (external certification of technician education); improving degree programs for technicians; and, with the participation of the industrial sector, making other necessary preparations to establish a system that operates on an international level.

Skilled production technologies (namely, technologies that require a high degree of fabricating skill) provide the foundation for innovation, and efforts must be made to shift from the current system, which relies heavily on personal experience, intuition, and other individualized traits, to a more comprehensive system that utilizes machine and information technologies. Of course, technologies and skills that need to be handed down personally must also continue to be passed down in that fashion. To achieve this, steps such as the following should be actively pursued.

• In the field of engineering education, there should be a shift from an emphasis on specialization to an approach that remains focused on basic and fundamental knowledge in a student's field of specialty while allowing him or her to gain a systematic understanding of other fields.
• There should be an expansion of opportunities for practical learning experiences that underline the importance and excellence of skilled production technologies at all school levels, from elementary through secondary school and on to higher education.
• There should be an effort made to revitalize internship programs and foster greater respect for technologies and skills and for technicians and experts, beginning with an appropriate evaluation and recognition of their technical abilities.

Elementary and secondary school education plays an important role in providing the basis for attaining the four goals cited above. If Japan is to produce top-fight researchers and technicians on a world-class level, it must promote the following:

• educational programs designed to foster creativity; practically oriented English language education; IT education,
• educational programs that inspire the entrepreneurial spirit, and
• study programs that allow teachers to gain experience in private companies, and that dispatch researchers and technicians to work sites where technologies are actually used.

Chapter III - PRIORITIZING GOVERNMENT INVESTMENT IN R&D WITH THE AIM OF STRENGTHENING INUDSTRIAL TECHNOLOGY

In the past, the burgeoning growth of Japan`s economy provided an ever-expanding pie that allowed all parties to adjust their interests accordingly. This resulted in a tendency to engage in parallel, across-the-board investment in R&D related to industrial technology. Generally speaking, there was also a tendency to approach new development from the point of view of manufacturers rather than consumers.

These approaches led to the criticism that while they were effective in raising the general level of Japan's technical capabilities, they also made it difficult to achieve original, cutting-edge results, and that even when breakthroughs are achieved in individual research topics, it is difficult to commercialize the results in a form that benefits ordinary consumers.

Now that Japan is in a low-growth period, there is a demand for greater administrative efficiency. Within this context, it is appropriate for the government to prioritize its industrial technology investments in the following three areas in order to promote creative technical innovation and contribute to a true strengthening of Japan`s industrial technology:

1. Investment in R&D that takes into account social needs and will lead to the creation of new markets
2. Investment in R&D directed toward budding technologies that are both innovative and fundamental
3. Investment in intellectual foundations that play a role as public assets and serve as a basis for the development of industrial technology.

The following points should be kept in mind when translating, in a step-by-step manner, the policy goals cited in (1) above into technologies, and when systematically prioritizing research issues for governmental R&D investment.

In addition to the fields described above, there are technical fields that have a high probability of stimulating innovation in areas related to industrial technology in the mid and long term, even though they have no apparent marketability at the present time.

It is therefore necessary to invest in high priority fields that promise innovative results on future frontiers, or that display a fundamental nature that seems likely to have a wave effect in many industrial technology fields.

It is essential for the national government to have an accurate and up-to-date grasp of the latest technological trends and to strengthen related functions. In this context, a large role is played by universities, national institutes, and scientific societies, which serve as sources for technological information.

In these cutting edge fields, it is also necessary to create a free and competitive research environment that puts no restrictions on the creativity of researchers. Specifically, this means actively pursuing such measures as publicly soliciting research proposals and allowing researchers to participate in joint research projects on an individual basis.

Efforts have been made for some time to formulate policies related to intellectual property rights and standardization in an attempt to create an intellectual foundation for industrial technology (including patents, standards, and other matters).

However, with regard to databases dealing with measurement standards, test evaluation methods, and measurement/evaluation data, Japan has not always been as systematic as it could be, and the country now lags behind Western countries.

Keeping global standards in mind, the perspectives and resulting priority fields required for an intellectual foundation that will support a system of technical innovation that stimulates creativity can be summarized as follows:

In order to conduct creative research and development, and to create a business environment that has international appeal, Japan must set a target of achieving a top-level system comparable to that of the U.S. by 2010.