trends in r&d 

 expenditures 



One of the key questions regard- 

 ing Japan's future R&D efforts is 

 whether the nation is willing and able 

 to sustain the growth rates that have 

 characterized the 1965-85 period. Of 

 some concern to U.S. policymakers 

 is Japan's willingness and ability to 

 follow through on its objective to in- 

 crease the level of basic research in 

 Japan. 



The Japanese have proposed to 

 expand R&D funding to 3.5 percent 

 of national income, a ratio that had 

 not quite been achieved as of 1985.^^ 

 However, given the trends in R&D 

 expenditures and the predominance 

 of industry as the major source and 

 performer of R&D, it would be sur- 

 prising if the level of R&D funding 

 suddenly stabilized once the 3.5- 

 percent figure was realized. Because 

 the rates of change in industry R&D 

 have been so consistently high for 

 so long, it would seem that real, an- 

 nual, and large increases in R&D are 

 an integral part of industrial activity 

 in Japan. 



However, real growth in indus- 

 trial R&D from 1985 to 1986 was only 

 1.3 percent, the lowest increase in 

 the 1965-86 period except for 1974- 

 75. (From 1965 to 1970, industrial 



R&D spending expanded at a real 

 average annual rate of 20 percent; 

 from 1970 to 1980, 6 percent; and 

 from 1980 to 1985, 12 percent.) While 

 this low increase may reflect a new 

 phase in Japanese industrial R&D 

 effort, it more than likely is a re- 

 sponse to the severe economic sit- 

 uation in Japan during 1986. 

 Economic performance in that year 

 was the second worst in the entire 

 postwar period, surpassed only by 

 the oil shock of 1974. However, even 

 in 1986 — and except for the years 

 1971 and 1975-76— real increases in 

 total Japanese R&D expenditures 

 matched or significantly outpaced the 

 real rate of change in GNP. 



Concurrent with greater indus- 

 trial activity is the declining role by 

 government both as a source of R&D 

 funds and as a performer of R&D. 

 Although Japanese Government 

 R&D funding increased at an annual 

 average rate of 6 percent during the 

 seventies, this rate declined to about 

 3 percent from 1980 to 1985. Simi- 

 larly, government performance of 

 R&D is slowing down, from an an- 

 nual average rate of 7 percent during 

 1970-80 to 4 percent from 1980 to 

 1985. 



The significance of industry in the 

 Japanese S/T system is reinforced 

 given the recent trends in basic re- 

 search expenditures:^* the Japanese 

 Government has increased its basic 

 research performance by barely 1 

 percent a year from 1980 to 1985, 

 compared with 3 percent from 1975- 



'■"Japanese policymakers use a different R&D in- 

 dicator for ttieir decisionmaking purposes than the 

 ones which have been used throughout this report. 

 For them, the key ratio is R&D in natural sciences 

 and engineering to national income; this was 2.4 

 percent in 1980 and 3.2 percent in 1985. 



'"For a discussion of differences in U.S. and Jap- 

 anese definitions of basic research, see appendix A 



80. In contrast, industry increased 

 its expenditures on basic research by 

 an average annual rate of 16 percent 

 during 1980-85, compared to 7 per- 

 cent during 1975-80. The higher ed- 

 ucation sector, which now performs 

 about one-half of Japan's basic re- 

 search, increased its basic research 

 expenditures by 10 percent annually 

 from 1975-80, but from 1980 to 1985 

 this rate declined to about 4 percent 

 per year. 



Thus, for the 1980-85 period it ap- 

 pears that Japanese industry is ris- 

 ing to the challenge of continued 

 increases in Japan's total R&D and 

 basic research. Although the perfor- 

 mance of R&D in Japan has histor- 

 ically been compartmentalized (e.g., 

 the flow of funds among sectors and 

 joint use of resources have been lim- 

 ited), as reforms are made through- 

 out the R&D system, the ability of 

 the Japanese to improve the effi- 

 ciency of their research funds may 

 be increased. Collaborative research 

 projects among sectors, the oppor- 

 tunity by industry to fund academic 

 research, and the leveraging of re- 

 search expenditures can enhance the 

 relative productivity of R&D in Ja- 

 pan, especially that of basic and ap- 

 plied research. 



While the low real increase in R&D 

 expenditures from 1985 to 1986 is 

 some cause for concern, it is most 

 likely a reflection Of the economic 

 contraction and "yen shock" of 1985 

 and 1986. The macroeconomic struc- 

 tural adjustments that took place in 

 Japan during 1986-87 have put the 

 economy on a stronger footing, and 

 any consequent revival of R&D 

 spending should begin to show up 

 in the R&D data for the years 1987- 

 89. 



42 



