chapter 3. 



industrial r&d 



Industrial R&D has always been 

 the most prominent sector in the 

 Japanese system, accounting for 69 

 percent of aU R&D funds in 1985 (U.S. 

 industry accounted for 49 percent of 

 R&D funds). There are two primary 

 reasons for this sector's promi- 

 nence. First, Japan's postwar agree- 

 ments have limited Japan's defense 

 establishment; consequently, the 

 share of R&D funds accounted for 

 by government defense-related R&D 

 expenditures is very small in Japan. 

 Second, the Japanese Government 

 has maintained a policy of letting in- 

 dustry support its own R&D, with 

 the result that less than 2 percent of 

 industrial R&D funds comes from the 

 Japanese Government. In contrast, 

 in the United States, slightly more 

 than one-third of industrial R&D is 

 funded by the Federal Government; 

 these expenditures are concentrated 

 primarily in the defense, space, and 

 telecommunications industries. 



Low levels of government R&D 

 expenditures relative to industry do 

 not mean that the Japanese Govern- 

 ment does not actively encourage or 

 promote industrial R&D. In fact, a 

 system of financing and tax incen- 

 tives operates to stimulate R&D in 

 the Japanese private sector. Project- 

 oriented incentives for encouraging 

 Japanese industrial R&D include fa- 

 vorable interest rates from the Japan 

 Development Bank for the commer- 

 cialization of new technology, gov- 

 ernment contracts for the 

 commercialization of the outputs of 

 public R&D institutions, capital in- 

 vestments, and conditional interest- 

 free loans. Tax incentives — which 

 allow Japanese businesses to main- 

 tain the confidentiality of their R&D 

 activities (unlike the project-ori- 

 ented incentives) — provide special 

 tax credits for incremental increases 

 in corporate R&D expenditures (in 

 effect since 1967); the R&D per- 



formed by small and medium firms; 

 and the costs of depreciable assets 

 for R&D in "basic" technologies such 

 as new materials, biotechnology, and 

 high-performance robotics.'' In 

 comparison, the United States pro- 

 vides tax credits only for incremen- 

 tal corporate R&D expenditures and 

 industry funding of university basic 

 research; the credit was first initi- 

 ated in 1981 and later extended (in 

 a reduced and modified form) 

 through 1988. 



"A detailed discussion of Japanese industrial fi- 

 nancing and tax incentives is in Ministry of Inter- 

 national Trade and Industry, AIST, 1987 (Tokyo, 

 Japan, 1987). A thorough discussion of the R&D tax 

 system is in the Tokyo Office of the U.S. National 

 Science Foundation, Preferential Tax Systems for R&D 

 in fapan. Report Memorandum #109, November 1986. 



17 



