Direct Government Expenditures

The Role of MITI

In Japan, government funding of private optoelectronics research and development is done largely under the auspices of the Ministry of International Trade and Industry (MITI) in the context of a number of cooperative government-business research projects, the first of which began in 1979 with the establishment of MITI's Optical Measurement and Control System project. This project ran for seven years with $77 million in government funding. The project joined together 16 Japanese companies with researchers from MITI's Electro-Technical Laboratory. Included among these 16 firms were such large Japanese companies as Toshiba, NEC, Hitachi, Fujitsu, Matsushita, Mitsubishi, and Oki. In 1981, as part of this project, the Optoelectronics Joint Research Laboratory (OJRL) began operations. Each of the 16 participating companies lent research personnel to staff the joint laboratory, even while they continued to receive funding for project-related work at their own laboratories. At its peak of operation in 1984 and 1985, this joint laboratory comprised no more than 50 scientists and engineers (Hayashi, Masahiro, and Yoshifumi 1989). When the optoelectronics programs of this industry employed some 5,500 scientists and engineers in the mid-1980s, this would have to be considered a relatively small research project.

When OJRL (the chief purpose of which came to be advancing technology in fiber-optic local area network systems using as a main tool optoelectronic semiconductors) disbanded in 1986, MITI promoted the Optoelectronic Technology Research Corporation (OTRC) in its place. Unlike the 100%-MITI-funded project that preceded it, the new ten-year, $82 million OTRC budget, which also sponsors a joint research laboratory to focus on optoelectronic semiconductors, is 70%-funded by the member companies themselves. While the OTRC project is comparable in scale to its predecessor, the joint laboratory includes on its roster no more than 15 scientists on loan from the participating companies.

There is almost no prospect that Japanese government funding for optoelectronics research and development will change dramatically in the future. The growing importance of MITI's Real World Computing (RWC) program does make it likely that, relatively speaking, support will return in scale to the levels that were characteristic of the late 1970s through the mid-1980s. The Real World Computing project is MITI's first major initiative in support of the development of basic computer technologies since the end of its highly controversial Fifth Generation Computer program, which, in retrospect, is viewed in Japan as having been fatally flawed in its conception (Callon 1995). The very title of MITI's new project is meant to distinguish it sharply from the failure of its previous initiative in basic computer technology. One of the distinguishing features of the RWC program is its support of optical computing in the interests of both energy-saving and miniaturization. Fujikura, Fujitsu, Furukawa Electric, Hitachi, Matsushita, Mitsubishi Electric, Nippon Sheet Glass, Oki, Sanyo, Sumitomo Electric, and Toshiba will divide a total of $70 million in government support over a ten-year period as principal research project contractors (RWC 1994). Under the rubric of the RWC program a major femtosecond project was also initiated in 1995.

The Roles of STA, the Ministry of Education, and MPT

The Science and Technology Agency (STA), the Ministry of Education, and the Ministry of Posts and Telecommunications (MPT) all oversee significant optoelectronic research programs. STA sponsors research at its own National Research Institute for Metals, (Endnote 6) while the Ministry of Education provides for grants for optoelectronics research at Japan's national universities.(Endnote 7) In turn, MPT, arbiters of Japan's future fiber-optic network, sponsors optoelectronic research at its affiliated Communications Research Laboratory (activities described in Kagaku gijutsu cho 1995). These programs most resemble the academic programs of the National Science Foundation and research at the National Institute of Standards and Technology (NIST) laboratories in the United States.

Comparison with U.S. government Direct Funding

Since 1979, when Japanese government support first began, Japanese optoelectronics firms have received a total of $125 million from MITI, which agency's direct funding is almost certainly larger than that of all other Japanese government agencies. As Table 7.2 shows, the total of 15 years of Japanese government support of its optoelectronics industry is substantially less than what the U.S. government provides the U.S. optoelectronics industry in a single year in support of R&D. (Endnote 8)

To be sure, as Table 7.3 shows, over 95% of U.S. government optoelectronics R&D funding is defense-related. Much of this funding, however, does have direct commercial relevance: respondents to a Department of Commerce survey reported there was a great deal of applicability of their defense-funded optoelectronics R&D to the commercial sector. Many firms said they supply similar or identical products to both military and non-military customers; others said that while their products were currently geared toward defense needs, the technologies were intended to be dual use (e.g., flight-by-light for use in civilian aerospace applications; military sensor work converted to production automation, industrial security or medical sensors; and forward-looking infrared systems, FLIRs, for border control, drug interdiction, and law enforcement). In general, firms reported that they could not afford to maintain the same level of funding of R&D for commercial applications without government support. As one firm put it, "the DOD pays for new product development, commercial customers do not" (DOC 1994).

Table 7.2
Optoelectronics R&D Spending by U.S. Firms, 1989-1993
($ million)

Source: DOC 1994

Table 7.3
U.S. government-Funded R&D, by Funding Organization
($ million)

Source: DOC 1994

Tax Incentives

What's true for Japanese government spending policy is also true for Japanese government tax policy. For the better part of two decades, Japan's tax policy has been more concerned with removing distortions between sectors than with giving help to any particular sector. The effective corporate income tax rates across Japanese sectors are remarkably uniform. During the 1950s and 1960s, tax-free reserves and expanded accelerated depreciation were widely used by the Japanese government to promote industrial development, but by 1982 their role was clearly marginal. Indeed, to the extent that those fiscal devices were used at all in the 1980s, they were used not to differentiate tax rates across sectors, but to harmonize them. Today there are only minor variations in the effective tax rates across Japanese manufacturing sectors (Saxonhouse 1983, 259-304).

Notwithstanding an increasingly passive tax policy, high-technology sectors do benefit from a variety of tax credits and special depreciation allowances in the Japanese tax code. In common with the rest of Japanese industry, optoelectronics companies receive a 20 percent tax credit for research and development expenditures over and above a company's previous highest level of research and development expenditures since 1967. This credit is limited to 10% of a Japanese company's income tax liability. This particular limitation on the size of the tax credit and the use of a single year as a base in calculating it instead of a three-year moving average makes this provision of the Japanese tax code, during periods of economic growth, substantially less generous than its American counterpart. In consequence, the generic U.S. research and development tax credit is estimated to be 150% larger than the Japanese tax credit as a proportion of research and development expenditures (Tsushosangyosho 1994).

There are provisions of the Japanese tax code promoting research and development that are more specific than the general research and development tax credit. Included among these is the Key Technologies Research and Development Tax Credit (Kiban gijutsu kaihatsu sokushin zeisei). The list of research eligible for this credit includes 132 technologies. The tax credit is equal to 7% of research and development investment made in any of the eligible technologies, up to 15% of the corporate income tax liability. The limitation on the tax credit is not independent, however, of the limit on the general research and development tax credit. Among the 132 technologies eligible for the Key Technologies Research and Development Tax Credit are 25 that are optoelectronics-related. These technologies are listed in Table 7.4. The length of this list suggests that along with semiconductors, robotics, new materials, biotechnology, and space science, optoelectronics is the beneficiary of special tax advantages when compared with most other high-technology industries. The Ministry of Finance estimates this special tax treatment could be worth $35 million a year (Okurasho 1993). These tax incentives are substantially larger and more widely diffused than the direct research support made available to the optoelectronics industry by MITI. It does not appear that the Japanese optoelectronics industry benefits in any significant way from the generally unexceptional accelerated depreciation provisions of the Japanese tax code (Tsushosangyosho 1994).

There is one way by which Japanese optoelectronics companies can take advantage of some accelerated tax provisions provided by the Japanese tax code: as is true for any government-sponsored cooperative R&D program, any investments made by or paid for by Japanese companies as part of the Optoelectronics Technology Research Corporation project can be depreciated 100% in the year the investment is made. This provision also governed investment made by Japanese companies in connection with MITI's Optical Measurement and Control Systems project and will govern investments made in the future in connection with the Real World Computing Program (OEDC 1993).

Published: February 1996; WTEC Hyper-Librarian