How the United States Outpaced Japan in Software Innovation

In the 1980s, Japan was America’s chief rival in most technology industries. Not only could Japanese firms compete in advanced sectors against U.S. firms, they had an innovation advantage.  In fact, research and design (R&D) investments in Japan were 40 percent more productive in producing IT patents than were R&D investments in the United States, implying that Japanese firms were better able to make advancements into developing better good, products, and processes.

However, in the 1990s this trend reversed. U.S. firms, while less innovative in hardware manufacturing, developed an innovation advantage in software, with R&D spending yielding 60 percent more patents per dollar spent in the United States than in Japan.  A recent paper by Ashish Arora, Lee G. Branstette, and Matej Drev explains why.

Software represented a new frontier for an industry that had previously focused on producing hardware such as semiconductor, televisions, computers, and other advanced machinery. High-tech firms adjusted rapidly to the new challenge, and innovations quickly built on previous innovations, and an IT patent filed in 2002 was 10 times more likely to cite a software patent than one filed in 1992.

Advanced technology industries in the United States leveraged several key advantages in order to surpass the Japanese in the race to innovate. For instance, strong university-industry partnerships helped speed the rate of innovation and commercialization. U.S. companies, less isolated than Japanese firms, were more inclined to work internationally, leading to broader-based solutions and universal appeal to their products. The United States also at the time had a larger pool of software engineers, looser immigration policies, and a non-homogenous populous is more welcoming to newcomers. Much of the research in the field was done by public institutions, including universities and government research labs, demonstrating the impact of public R&D dollars on competitiveness and economic success.

This advantage in software has in turn helped the United States regain its footing in hardware industries as well. While in early days of computing software was generally designed around hardware, now the opposite is true. Currently, hardware producers design products to meet the needs of the software it needs to be able to run. Because the U.S. has developed an advantage in software, it now has a natural advantage in embedding software into IT hardware as well.

United States supremacy in software development is reliant on a highly-skilled workforce and superior institutions for enabling and encouraging innovation. The United States saw that innovation could build upon innovation, allowing pockets of the United States such as Seattle, Boston, and the Silicon Valley to became a highly-productive clusters of innovation, with firms collaborating and leveraging valuable spill-over effects from collaboration. This is an example of the United States winning a race to innovate, and the victory has paid handsome dividends. However, the United States has also struggled to innovate in other advanced fields. Indeed, the U.S. has run a trade deficit in advanced technology products every year since 2002. The United States must acknowledge that we are constantly engaged in innovation races to control tomorrow’s industries lest we even more advanced industries move elsewhere.

Original Photo Credit to Lindsey Bieda, Flickr