to Create Innovation, Nikkei, Keizai Kyoshitsu (Economic Lessons). 560

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1 Section 2 Distinctive policies of countries and regions which enhance innovation 1. Innovation capability as viewed through global competitiveness rankings Many countries/regions that are small in terms of area size and population compared with Japan, including Switzerland, Singapore, Finland, Israel and Taiwan, are placed among the top 20 in the global competitiveness rankings measured by the World Economic Forum (WEF) with respect to overall performance and innovation (Table II ). Table II Global competitiveness ranking (World Economic Forum (WEF)) Rank Overall rank Innovation 1 Switzerland Finland 2 Singapore Switzerland 3 United States Israel 4 Finland Japan 5 Germany United States 6 Japan Germany 7 Hong Kong Sweden 8 Netherlands Netherlands 9 United Kingdom Singapore 10 Sweden Taiwan 11 Norway Denmark 12 United Arab Emirates United Kingdom 13 Denmark Belgium 14 Taiwan Qatar 15 Canada Norway 16 Qatar Luxembourg 17 New Zealand Republic of Korea 18 Belgium Austria 19 Luxembourg France 20 Malaysia Ireland Notes: 1. Overall rankings show the overall performance in the three categories: basic requirements, efficiency enhancers, and innovation and sophistication factors. 2. The item Innovation above is one of the pillars under the Innovation and sophistication factors category, which is determined based on the results of questionnaire surveys (state of R&D conducted in the private sector, quality of research institutes, industry-academia collaboration, etc.) and objective data (the number of patent applications filed under the PCT program). 3. The ranking targets 144 countries and regions. Source: The Global Competitiveness Report (WEF). On the whole, because of constraints such as small land territory, small population, small domestic market and a shortage of resources, such countries have tendencies to place more emphasis on service industries and knowledge-intensive industries than on manufacturing industries and labor-intensive 559

2 industries, to be oriented toward foreign markets, and to devote efforts to education as they regard people as important resources. Regarding innovation as a source of growth is a global trend, so becoming a pioneering and efficient innovator is a necessary condition for Japan to survive global competition 219. The Agenda for the Evolution of the Growth Strategy, which was determined by the Industrial Competitiveness Council in January 2015, states that if Japan is to maintain competitiveness amid the intensifying global competition, it is essential to carry out reform for the future of Japanese society and it is important to enhance the innovation creation capability. In this section, we will examine the cases of countries/regions specifically Israel, Switzerland and Taiwan that have created innovations by overcoming the abovementioned constraints and explain the backgrounds of their innovation creation, and governmental support measures and ecosystems that support innovation. This will give us suggestions as to how Japan should enhance its attractiveness as a business location and acquire capabilities to attract personnel, technologies and capital from abroad. 219 Ryoji Chubachi (2015) Build Relationship of Trust between Industry, Academia and Government to Create Innovation, Nikkei, Keizai Kyoshitsu (Economic Lessons). 560

3 2. Israel Since the 1990s, Israel has made active efforts to become high tech-oriented country and has achieved rapid development as a result of its creative technology development capability. High-tech companies are clustered in an area linking Tel Aviv, Jerusalem, Haifa and Beersheba, which is called the Silicon Valley of the Middle East or the Second Silicon Valley (Figure II ). The area size of Israel is roughly that of Japan s Shikoku Island. The population of Israel, which was around 600,000 people when the country was founded in 1948, grew to around 8.18 million people 221 by Israel s nominal GDP in 2014 was worth approximately billion dollars: 37th in the world, while its per-capita nominal GDP is 36,991 dollars: 25th in the world 222. Many world-leading multinationals are operating in Israel, with research and development bases (R&D bases) and manufacturing bases concentrated in the abovementioned four cities. At the moment, around 250 foreign companies have R&D bases in Israel, employing a total of around 50,000 people 223. Israel is producing such a large number of high-tech venture companies every year that it is sometimes referred to as a start-up nation. Figure II Clusters of high-tech companies in four cities in Israel Haifa Tel Aviv Jerusalem Beersheba Source: METI. (1) Start-up nation The value of annual investments in high-tech companies in Israel has stayed higher than 1 billion dollars. The share of investments made by foreign investors in the total value of investments is growing, accounting for around 76% in 2013 (Figure II ). 221 Central Bureau of Statistics of Israel. 222 IMF WEO April Ministry of Economy of Israel ( ) Israel Innovation Landscape and OCS activity. 561

4 As the size of Israel s domestic market is limited, entrepreneurs engage in technology development keeping in mind the possibility of international expansion from the beginning. In addition, most entrepreneurs aim to achieve an exit through M&A (merger and acquisition) by domestic or foreign companies in a relatively early stage (Figure II ). In Israel, aggressive M&A activities targeted at venture companies are being conducted as a means to acquire new technologies and competent personnel (Figure II ). Some entrepreneurs aim for an IPO (initial public offering) as an alternative means of exit (Figure II ). Israel is home to the fourth largest number of companies listed on the U.S. NASDAQ market, which is heavily laden with high-tech companies, after the United States, Canada and China (Figure II ). A sector-by-sector breakdown of the value of business transactions conducted in 2014 by high tech-companies which have achieved an exit shows that the share is 28.3% for software, 20.5% for communications, and 20.4% for semiconductors (Figure II ). Figure II Changes in investment amount in high-tech companies in Israel (Billion dollars) Overseas and other investors Israeli venture capital Investment amount Notes: Target companies: 662 high-tech companies in Israel Source: IVC Research Center, Israel. (Year) 562

5 Figure II Changes in the number of start-ups and their operation states in Israel (Companies) Successful exit Running Failed Number of start-ups Notes: IVC Research Center, Israel (Year) Figure II Changes in merger and acquisition (M&A) among high-tech companies in Israel (Billion dollars) (Companies) Business transaction value Number of companies merged/acquired (right axis) Notes: IVC Research Center, Israel (Year) 563

6 Figure II Changes in initial public offering (IPO) of high-tech companies in Israel (Billion dollars) (Companies) Financing amount Number of IPOs (right axis) Notes: IVC Research Center, Israel (Year) Figure II Comparison of NASDAQ-listed companies by country (Companies) Canada China Israel United Kingdom Switzerland Netherlands Hong Kong Ireland Greece Japan France Taiwan Australia ROK Spain Source: Nasdaq Company List (as of March 19, 2015) (Nasdaq website). India Germany Singapore 564

7 Figure II Sector-by-sector breakdown of high-tech companies which have achieved an exit in Israel (2014; on the basis of value of business transactions) Environment 6.2% Others 1.5% Life science 10.1% Software 28.3% Internet 13.0% Semiconductors 20.4% Communication 20.5% Notes: IVC Research Center, Israel Of entrepreneurs who achieve a successful exit through M&A and IPOs, some become serial entrepreneurs who seek to build new start-up companies with new ideas and technologies, while others become angel investors or venture capitalists using funds obtained through the sale of their companies. Some such entrepreneurs become mentors who promote venture investment and foster entrepreneurs. Thus, there is a cycle of successful entrepreneurs supporting new entrepreneurs. Until now, Japanese companies have not necessarily been active in engaging in partnership with Israel, with only 14 or so Japanese companies operating in the country 224. However, in recent years, in order to acquire Israeli high technology, companies not only from the United States and European countries but also from emerging countries such as China and South Korea, have acquired Israeli venture companies or have established R&D bases in Israel (Figure II ). Accordingly, Japanese companies are starting to take action. 224 The number of Japanese overseas affiliates operating in Israel was obtained from Toyo Keizai Inc. (2015) Kaigai Shinshutsu Kigyo Soran (Kunibetsu Hen) 2015 (List of Japanese Companies Operating Abroad (by Country) 2015). 565

8 Figure II Countries of companies having acquired Israeli companies and the United Kingdom 5 breakdown by country (2014; number of acquiring companies) East Asia 4 New Zealand 1 Europe, Russia 9 United States, Canada 39 Israel 24 Notes: IVC Research Center, Israel (2) Characteristics of Israeli technology In Israel, because of the development of military technology in the defense sector due to the tense relations with neighboring countries, Israeli technology in the high tech sector is distinctive in that in many cases it is converted from military to civilian use. Technology development by the Israeli Defense Forces (IDF) extends across a broad range of fields and its level is very high. In Israel, both men and women are subject to conscription starting at age 18. Competent science and engineering students are assigned to the R&D division of the military and become familiar with cutting-edge military technology. Also, competent Jewish scientists and engineers who came to Israel when the former Soviet Union collapsed have been playing a significant role in research and development in Israel (Table II ). One researcher has expressed the following view 225 : If the Israeli high-tech industry is to continue growing in the political, diplomatic and economic environments faced by Israel, the most effective approach for Israeli companies will be to specialize in software development or development of products different in concept from existing industrial products and have them be acquired by a multinational after some achievements in existing markets, rather than manufacturing products domestically and exporting them. However, as few internationally known industrial product brands have grown in Israel, there would be limits to the number of jobs that can be secured through the prosperity of high-tech venture companies alone, so it is necessary to foster domestic manufacturing 225 Isamu Nakajima (2014). 566

9 industries at the same time. Figure II Examples of Israel-oriented cutting-edge technologies Developed technologies or products Capsule endoscopes Firewalls IP voice telephone communications Compact portable cardiac ultrasound-diagnostic devices Zip compression technologies Car navigation application for smartphones Source: Documents from the Ministry of Economy and Industry, Israel. (3) Enhancement of human resources In the belief that people are a national treasure and the economic driving force, Israel aggressively promotes education from early childhood. As a result, the quality of university education is at the top level in the world. With a large proportion of scientists in its population, Israel possesses a high level of science talent in terms of both quality and quantity. Israel has eight general universities, and in particular, Technion-Israel Institute of Technology, located in Haifa, which is Israel s third city, produces around 70% of entrepreneurs in the country 226. Israel s largest business park, which is located southeast of Haifa, is host to a cluster of R&D facilities operated by world-leading multinationals, with industry-academia collaboration actively implemented there. (4) Ecosystem that creates innovation In Israel, there is a unique ecosystem that continues to create and foster innovative technologies based on creative ideas and start-up companies. The Israeli ecosystem is supported not only by the culture of entrepreneurship but also by governmental support and an experienced venture capital community (Figure II ). 226 Center for Research and Development Strategy, Japan Science and Technology Agency (2010) Trends in Science and technology and Innovation Israel

10 Figure II Israeli ecosystem that creates high technology and start-ups Experienced entrepreneurs Students majoring in the computer science Overseas companies in the fields of technologies Readily-accessible engineers and business management experts Governmental support Global high-tech companies Incubators Existing technological infrastructures National defense Companies R&D Advanced academic research institutions Entrepreneurship and entrepreneurial culture Experienced venture capital communities Immigrants New businesses spun off from companies Source: Israel's High-Tech Success Story, Merging Components in Profit-driving Synergy (Ministry of Industry, Trade and Labor (current: the Ministry of Economy and Industry), Israel). (5) Governmental support for innovation In Israel, the Office of the Chief Scientist (OCS) under the Ministry of Economy provides support for business start-up and industry-academia partnership. (A) Support for business start-up The Technological Incubators Program 227 supports start-up of high-risk businesses with innovative technical ideas. In addition to encouraging research and development in minority fields and creating investment opportunities in the private sector: including venture capital investment, this program promotes technology transfer from research institutions to industry and fosters entrepreneurship as the government actively takes on risk. Over an incubation period of around two to three years, a grant of 570,000 to 860,000 dollars is given to each company. Of the total project funds, 15% are raised by private-sector incubators from venture capital investors and others, with the remaining 85% covered by governmental grants, which means the government taking on risk. Regarding the portion of the funds provided by the government, 3-5% of a business s income, together with interest, is repaid to it only if the business proves successful. Meanwhile, private-sector incubators are entitled to acquire up to 50% of the outstanding shares of successful businesses. In Israel, around 20 private-sector incubators provide business support for about 160 companies. When they have found a promising company, incubators file an application with the OCS, which decides whether or not to provide a loan after consulting with experts. The loan is repayable in 6-7 years, a period during which the borrowing company can concentrate on technology development, and 227 The website of the Office of the Chief Scientist. 568

11 this arrangement is said to be favorable for fostering successful venture companies. As a result of this program, start-up companies are created every year, with a total of approximately 730 million dollars invested in around 1,900 companies between 1991, when the program started, and Around 1,600 companies graduated from the program, and some 60% of them succeeded in receiving investment from private-sector investors, with the total amount of investment surpassing 4 billion dollars. (B) Support for industry-academia partnership The MAGNET program is intended to create cutting-edge high-tech products and processes by encouraging the formation of research and development consortiums comprised of industry and academic research institutions. OCS provides a grant equivalent to 66% of approved research and development expenditure. As successful commercialization is not a required result, royalty payment is not obligatory. Patents on technologies developed under this scheme belong to the developers 228. A foreign company may be included in the consortium if it can offer a unique contribution to the relationship 229. In one case, a project under this scheme led to the development of a capsule endoscope system which grew into a business generating annual sales of around 20 million dollars 230. Column 11 Recent industrial research partnership between Japan and Israel In July 2014, then Minister of Economy, Trade and Industry Toshimitsu Motegi visited Israel and signed a memorandum of understanding on bilateral cooperation in industrial research and development ( Memorandum of Cooperation (MOC)) between the Ministry of Economy, Trade and Industry of Japan and the Ministry of Economy of the State of Israel). The MOC stipulates that in order to encourage joint studies by Japanese and Israeli companies, Japan and Israel will (a) promote the identification of specific projects and (b) establish a framework for financial assistance. Based on the MOC, the New Energy and Industrial Technology Development Organization (NEDO) and the Israeli Industry Center for R&D (MATIMOP) concluded a memorandum of understanding and determined the specifics of the implementation of joint studies by Japanese and Israeli companies, public invitation of projects, examinations and grants and other support measures 231. Subsequently, Prime Minister Shinzo Abe visited Israel in January 2015 and met with Prime Minister Benjamin Netanyahu. Prime Minister Abe expressed his appreciation of the agreement reached during Minister Mogi s visit to Israel in July 2014 to promote industrial R&D cooperation with Israel. As cooperation and partnership between individual companies proceeded, the two leaders 228 Israel: Preferential measures for promoting research and development (website of JETRO). 229 MAGNET The Development of Technological Infrastructure for the Industry (website of the Ministry of Economy of Israel). 230 System of Industry-Academia Partnership in Israel (website of CP&C Japan Partners). 231 Ministry of Economy, Trade and Industry, a press release dated July 7, 2015 (website of the Ministry of Economy, Trade and Industry). 569

12 agreed to maintain the momentum of cooperation. In an opening address at an economic seminar held after the meeting, Prime Minister Abe stated that bilateral relations are deepening in all fields but the progress on the economic front is particularly striking and that there is no reason for Japan, which positions "innovation" as the engine of economic growth, not to cooperate with Israel, which produces innovative technologies Ministry of Foreign Affairs, Major events, January 21, 2015 (website of the Ministry of Foreign Affairs). 570

13 3. Switzerland Switzerland has a population of 8.08 million people (2013) and an area similar to that of Japan s Kyushu Island. Located in the center of Western Europe, Switzerland is a federal country comprised of 26 cantons and is surrounded by five countries: Germany, France, Italy, Austria and Liechtenstein. While German, French and Italian are the major official languages, English is widely used in business. Known as one of the wealthiest countries in the world, Switzerland has nominal GDP worth around 712 billion dollars the 20th largest in the world, and its nominal per-capita GDP of 87,475 dollars, around 2.4 times that of Japan, is the fourth highest in the world 246. Switzerland is regularly ranked among the top countries in the rankings of international competitiveness and innovation. In terms of the global competitiveness rankings compiled by the World Economic Forum (WEF), Switzerland has maintained the No. 1 position since 2009 with respect to overall performance, and in the version of the rankings it was No. 1 with respect to innovation and business sophistication. Switzerland was also ranked No.1 with respect to individual items such as quality of overall infrastructure, quality of the education system, availability of research and training services, cooperation in labor-employer relations, and country capacity to attract talent and country capacity to retain talent. Switzerland s ratio of total research and development expenditure to GDP: at around 3% (2012), is the third highest in Europe, after the ratios of Finland and Sweden. Of the total expenditure, around 70% is attributable to the private sector: mainly pharmaceutical manufacturers. A large portion of public research and development expenditure is directed to basic research by universities and public research institutions. Switzerland s major industries are precision machinery, pharmaceuticals/chemicals/biotechnology, medical equipment, financial services, foods, and tourism. In particular, the precision machinery industry is famous for watches, the financial services industry is acclaimed for its competitiveness in private banking, and the food industry is known for such products as chocolates and cheese. Switzerland s major industries are distinctive in that they create high-value-added products and services through good quality and strong brands, thereby establishing an international competitive edge. More than 1,000 world-leading multinationals have their headquarters or regional headquarters in Switzerland. It is said that between 2003 and 2011, more than 300 companies relocated their headquarters or regional headquarters to Switzerland 247. However, as for the industrial structure as a whole, 99.8% of all companies are small and medium-size enterprises (SMEs) (companies with a workforce of less than 250 employees) and around 70% of all employees are employed by SMEs. It is said that around 70% of SMEs are family-run businesses (Figure II ). 245 United Nations, World Population Prospects 246 IMF WEO April According to an analysis by the consultancy company Arthur D. Little, more than 300 headquarters have been relocated to Switzerland from 2003 to the middle of % of these companies come from the USA, 31 % from Europe and 11 % from Asia. Trade & Investment Promotion of Switzerland (2012) Handbook for Investors: Business Location in Switzerland.

14 Figure II Number of companies and employees in Switzerland (2012; ratios by the number of employees) Number of companies Number of employees As Switzerland s domestic market is small, Swiss companies depend mostly on foreign demand. Switzerland has a mostly free trade relationship with the EU except for trade in some agricultural products, so it is easy for Swiss SMEs to enter the European market. As a result, one survey found that Swiss companies engage in international business almost regardless of their own size and that a third of Swiss SMEs have a relationship with foreign companies 248. One researcher observed that the greatest difference between Switzerland and Japan is that most customers of Swiss companies are foreign firms with which they do not have a capital relationship and that as a domestic pyramid structure comprised of parent companies at the top and subsidiaries under them rarely exists in Switzerland, Swiss companies need to expand abroad in pursuit of new sales channels 249. (1) Switzerland as a business location for multinationals As Switzerland is favored as a location of companies headquarters functions, more than 1,000 multinationals have their headquarters or regional headquarters in the country, as was already mentioned. Among the factors cited for choosing Switzerland as a business location are the stable economic and political environments, abundant human resources, well-developed infrastructure, good access to major European cities, a labor environment cooperative with business management, an excellent living environment, low tax rates, security, and the presence of world-class research institutions 250. At the moment, there are around 150 Japanese companies 251 operating in Switzerland: many of which have European headquarters or sales bases there. (2) Industrial clusters In Switzerland, there are many industrial clusters. As a result of the spillover effects produced by 248 Swiss International Entrepreneurship Survey 2010 A questionnaire survey conducted on 652 companies across Switzerland by Professor Rico J. Baldegger at the School of Management Fribourg 249 Manabu Eto (2014). 250 Switzerland Global Enterprise (2015) Business Environment in Switzerland. 251 Switzerland Global Enterprise (2015) Business Environment in Switzerland. 572

15 world-renowned Swiss pharmaceutical manufacturers, pharmaceutical, chemical and biotechnology clusters have emerged in Basel and the surrounding region, resulting in active business alliance and M&A activity involving major pharmaceutical companies and biotechnology ventures. Machinery, electronics and metal processing are the largest industries in Switzerland. While major companies in these industries have business bases in most cantons, they are achieving growth particularly in Zurich, Ticino, Rhine valley and Central Switzerland. The watch industry has formed a cluster in the so-called watchmaker belt in the Jura region, which extends from Geneva to Schaffhausen, and attracted by the presence of skilled labor with professional knowhow, companies in different sectors that require similar skills have gathered in this area. As for the information and communication technology industry, major U.S. IT-related multinationals have R&D bases around Eidgenössische Technische Hochschule Zürich (ETHZ) and its research facility and the University of Zurich, which are located in the Lake Constance region 252 (Table II ). Table II Major industrial clusters in Switzerland Industrial sectors Major industrial clusters Precision machinery, nanotechnology Micro Center, Precision Cluster, Nanocluster Bodensee, Micronarc Life science BioAlps, BioValley, Biopolo, Life Science Zurich Medical equipment Zurich Mednet, Bern Medical Cluster Information and communication technology (ICT) Alp ICT, Zurich ICT, GRID Lucerne, ICT Cluster Bern, IT Valley Financial services Zurich, Geneva Environment, energy Energy Cluster, CleantechAlps, Cleantech Switzerland Source: Suisu no Bijinesu Toshi Kankyo (2015) (Embassy of Switzerland in Japan), Switzerland Global Enterprise. (3) Education system and fostering of competent personnel It is said that in Switzerland, there are many personnel who have received a high level of vocational training or university education, and who have broad language skills and international experiences. (A) Vocational training system When enrolling in high schools, students are divided into those who prepare for university studies and those who take the vocational training course. Around 70% of students take the vocational training course. In this course, students receive one or two days of school lessons and three to four days of training at partner companies each week. In school lessons, emphasis is placed on language education, so the Swiss people have a high level of English proficiency. The reason why the vocational training course is chosen is that people who receive vocational training have better job opportunities compared 252 Trade & Investment Promotion of Switzerland (2014) Handbook for Investors: Business Location in Switzerland. 573

16 with university graduates and there is no wage gap. People who have completed vocational training may also advance to universities of applied sciences and study in a bachelor s program or a master s program. A unique vocational training course like this provides the Swiss people with high vocational skills and enhances national productivity. In addition, the dual education system that combines the acquisition of theoretical knowledge and the development of practical skills is helping to foster entrepreneurship. (B) University education The proportion of people who enroll with universities in the Swiss population is around 20%. Of such people about 70% study at Swiss universities, with the remainder going abroad to study at universities in foreign countries such as the United States and Germany. In terms of the university enrollment rate, Switzerland, together with Turkey, is ranked lowest among the OECD member countries, but this is not regarded as a particular problem. At Swiss universities, foreign students account for around half of the students in bachelor s and master s programs and more than 70% of students in doctoral programs, while foreign teachers make up more than 60% of the faculty. Thus, Swiss universities play a significant role as organizations that attract competent talent from abroad. Switzerland has only two national universities, Eidgenössische Technische Hochschule Zürich and École polytechnique fédérale de Lausanne, both of which are highly regarded as top-level universities in the European continent. Albert Einstein, who received the Nobel Prize in Physics, is a graduate of Eidgenössische Technische Hochschule Zürich. In addition to these two universities, there are 10 cantonal level universities, including the University of Zurich, the University of Bern and the University of Geneva, and seven universities of applied sciences. (4) Measures to invite companies Switzerland is taking measures to invite foreign companies at two levels, the federal and cantonal ones. Switzerland Global Enterprise, a federal organization, is the first window of contact that introduces investors to appropriate cantonal authorities. Subsequently, cantonal economic development bureaus will take over, proposing specific locations and providing systematic support in cooperation with regional administrative agencies and local governments. Preferential measures are provided at the federal, cantonal and municipal levels. In most cases, companies are entirely exempted from corporate tax payment for up to 10 years from the establishment of local operations 253. In addition to offering such preferential measures, cantons are competing to attract companies by providing various other support measures, including land development and improvement of road and other infrastructure. A researcher observed as follows: The important point is that Swiss cantons aim to invite foreign companies to establish core organizations, such as headquarters and research facilities Switzerland is a society in which labor costs are even higher than in Japan, so neither Switzerland nor foreign 253 Switzerland: Incentives concerning foreign capital (website of JETRO) 574

17 companies considering relocation do not see merit in invitation for production organizations. In the case of headquarters and research facilities, their relocation involves the transfer of not only organizations but also many workers from abroad. Therefore, even though the job creation effect of such relocation would not be large, the important objective for Switzerland is creating jobs with high salaries. Furthermore, the inflow of high quality personnel, such as senior officers of major companies headquarters and researchers, into Switzerland brings various benefits to improvement of the country s productivity In this way, Switzerland s initiative to invite foreign companies is intended not only to generate tax revenue and jobs but also to invite competent personnel 254. (5) Innovation support by the federal government In Switzerland, the Swiss National Science Foundation (SNSF) and the Commission for Technology and Innovation (CTI) are responsible for providing innovation support. The SNSF supports basic research and important national research and international joint research programs, devoting efforts particularly to fostering young researchers. The source of its funds is federal government budgets and donations from the private sector. Meanwhile, the CTI, the founding philosophy of which is Science to market, is pouring efforts into industry-academia joint projects intended to overcome the death valley 255 that lies between the research community and the industrial sector and quickly bring the results of applied research to market. Over a period of more than 60 years, the CTI has been promoting innovation in Switzerland as a bridge between the industrial sector and academic and research institutions through the provision of funds to applied research and development projects, support for SMEs and venture start-up and transfer of knowledge and technology (Figure II ). As the CTI has adopted the principle of bottom-up participation, there are limits to the amount of governmental grants for universities and research institutions, with only personnel costs to be covered by grants, while companies participating in projects are required to bear more than 50% of the total costs. Decisions on grants are made in consideration of the innovative nature and commercial feasibility of projects (Figure II ). 254 Manabu Eto (2014). 255 The death valley refers to a situation in which basic research does not lead to applied research or in which research and development results do not lead to commercialization, or difficulties and obstacles that create such a situation. 575

18 Figure II Picture of Switzerland's overcoming of the death valley in the process of creating innovation Easy Valley of Death Ease in securing financing Swiss National Science Foundation (SNSF) Commission for Technology and Innovation (CTI) Companies Difficult Providing subsidies to applied research and development projects; Supporting start-ups Basic R&D Applied R&D Commercialization and bringing the results to markets Source: Documents published by the U.S. National Institute of Standards and Technology and Switzerland s Commission for Technology and Innovation. Figure II Scheme flow chart of research subsidies in Switzerland Swiss National Science Foundation (SNSF) Funding of basic research (100%) Universities, federal institutes of technology, Swiss federal laboratories for materials testing and research, Swiss federal institute of aquatic science and technology, universities of applied sciences Swiss Innovation Promotion Agency (CTI) Funding of applied research, Start-up support Crossover Innovative new technology Universities, federal institutes of technology Universities of applied sciences 50% (personnel costs only) Technology transfer Industry SMEs and large companies Technology transfer 50% co-funding Source: Ghisalba, Oreste (2005), Switzerland One Nation-One Biotech Cluster. 576

19 The CTI s Venture Lab program provides promising entrepreneurs with ways and means of realizing business ideas and establishing new companies through customized training modules. Young entrepreneurs may request professional guidance. This support program is provided to knowledge-intensive technology companies with high market potential. The CTI s Knowledge and Technology Transfer (KTT) program strengthens technology and knowledge transfer between universities and industries within regions. Under this program, National Thematic Networks (NTNs), which are operated by professionals, provides practical support for SMEs and universities to prepare contract documents and implement projects. 577

20 4. Taiwan Taiwan has an area similar to that of Japan s Kyushu Island in size and a population of around million people (2013) 267. Taiwan s nominal GDP in 2014 was worth around billion dollars, the 26th largest in the world and its per-capita nominal GDP is 22,598 dollars, the 37th highest in the world 268. Taiwan s major industries include electronics, electrical machinery, steel and metal products, precision machinery and plastic products. In 2013, Japan was Taiwan s largest trading partner in terms of imports, while it was the fifth largest partner in terms of exports, after China, Hong Kong, the United States and Singapore. Taiwan is among the leading countries in the electronics sectors, including information equipment and integrated circuits. Local SMEs play the leading role in economic activities. SMEs (with a workforce of less than 200 employees) account for 99.7% the total number of companies and around 70% of all employees (Figure II ). Figure II Number of companies and employees in Taiwan (2011; ratios by the number of employees) Number of companies Number of employees Source: National Statistics, Republic of China. Lively entrepreneurship and brisk business start-up activity have been supporting industrial growth led by SMEs. As the domestic market is small, Taiwanese companies seek international expansion. Companies depend mainly on equity capital for fund raising. It is said that individual investors account for some 70% of transactions in the Taiwanese stock market, indicating that their active investment appetite is providing financial support for new investment in venture companies 269. There are various funds at the government level. For example, the Industrial Technology Research Institute (ITRI) and the Executive Yuan s National Development Fund, among other organizations, hold shares in 267 Ministry of Foreign Affairs Taiwan (Basic Data) (website of the Ministry of Foreign Affairs) 268 IMF WEO April Taiwan s securities markets include the Taiwan Stock Exchange, which is a centralized exchange market, and the Taipei Exchange (also known as Gre Tai Securities Market), which is an over-the-counter market. The latter is intended for growth companies and is equivalent to the JASDAQ and Mothers markets in Japan. It is the second largest market for emerging companies in Asia, after Kosdaq in the Republic of Korea. 578

21 companies spun off from the ITRI and earn capital gains, which are used to develop new technologies and foster new industries 270. (1) Evaluation of Taiwan s innovation capability Infrastructure, particularly industrial clusters in the manufacturing sector, are held in high regard. In terms of the global competitiveness rankings compiled by the World Economic Forum, Taiwan is placed 11th with respect to infrastructure development and second with respect to cluster development ( version). This is largely because the Hsinchu Science Park, which was built in 1972 under the government s initiative, has made significant contributions to cluster formation in Taiwan s high-tech industry and because the ITRI, which is located at a site adjacent to the park, is considerably contributing to the development of the high-tech industry and business start-up. (2) Governmental support for innovation The ITRI is a research institution established in 1973 as a non-profit organization under the Ministry of Economic Affairs. While it covers a broad range of fields, from basic research and applied research to technology development and commercialization, the ITRI places particular emphasis on applied research and technology development. It cooperates with the industrial sector in implementing joint research for commercialization, technology transfer and consulting service, and it also performs the functions of an incubation center for advanced technology and a human resource development center by promoting technology transfer to SMEs and by encouraging researchers to start new business. The ITRI s organization is comprised mainly of the research and development division and the service division. The research and development division is comprised of 15 research laboratories and centers covering such fields as electronics/optoelectronics, information and communication, mechanical and systems engineering, cloud computing, materials and chemicals, green energy and environment. The service division is comprised of 10 departments covering such fields as technology transfer, commercialization/industry service, strategic planning, marketing and communication and international affairs 271. The ITRI s support for commercialization is distinctive in that in addition to technical support, the ITRI provides facilities and equipment and all functions necessary for commercializing research results, including venture capital investment, marketing and business feasibility evaluation, through the service division. The ITRI created a platform for the creation of venture companies through the Open Lab and the Incubator Center, which were opened in Currently, this facility is host to 70 companies with a combined workforce of 1,006 employees (2014). Foreign companies conducting joint studies with the ITRI may be accepted into the facility. Several Japanese companies are now located there. 270 Center for Research and Development Strategy, Japan Science and Technology Agency (2014). 271 Website of the Industrial Technology Research Institute (ITRI). 579

22 By 2014, the ITRI has provided business start-up support for more than 260 companies (including 103 companies spun off from the ITRI), with paid-in capital amounting to a total of 63.4 billion New Taiwan dollars (approximately billion yen) 272. In many cases, researchers involved in technology development at the ITRI start new businesses, including spinoffs. Among spinoffs that have grown into global companies is one of the largest semiconductor foundry manufacturers in the world and is headquartered in the Hsinchu Science Park. As of 2015, the ITRI had 5,631 employees (including 1,336 researchers with doctoral degrees, 3,051 with master s degrees and 1,244 with bachelor s degrees). A human network comprised of more than 20,000 former ITRI employees working in the industrial sector (including more than 70 CEOs) is supporting collaboration between the ITRI and industry and fostering of personnel. The number of patent applications filed by the ITRI in 2012 was 2,190 and the number of patents granted in the same year was 1,715 (bringing the cumulative number of acquired patents to 22,311). The results of collaboration with the industrial sector in 2014 include 15,086 cases of technical support consultation and 626 cases of technology transfer (licensing). Gross business revenue in 2013 amounted to 18.4 billion New Taiwan dollars (approx billion yen), including around 9 billion New Taiwan dollars (approx billion yen) in research and development funds provided by the private and public sectors, 8.4 billion New Taiwan dollars (approximately 32.8 billion yen) in revenue from industry and technology services, and about 0.9 billion New Taiwan dollars (approx. 3.5 billion yen) in revenue from technology transfer. It is said that public research institutions receiving a large portion of funds from the outside in the manner of the ITRI are rare around the world. The ITRI s initiatives, together with activities of Fraunhofer of Germany, were cited by the Report to the President on Ensuring American Leadership in Advanced Manufacturing, written by the President s Council of Advisors on Science and Technology (May 2011) 273 as cases of countries actively engaging in innovation and research and development activities in order to exercise leadership in manufacturing industries. (3) High-tech industry clusters In the 1980s, as light industrial products, such as textiles and foods, lost international competitiveness, Taiwan was forced to shift from labor-intensive industries to capital- and technology-intensive ones. In this situation, the Hsinchu Science Park was established in an area located around 70km southwest of Taipei in order to promote research and development concerning industrial technologies. Focusing on high-tech, high-value-added industries, such as electronics, computers, precision machinery and biotechnology, the Hsinchu Science Park has been not only promoting infrastructure improvement but also implementing a package of policy measures, including promoting research and development, fostering and securing personnel and 272 Calculated at an exchange rate of 3.9 yen per New Taiwan dollar (as of April 30, 2015). 273 The U.S. Executive Office of the President, President s Council of Advisors on Science and Technology (2011), Report to the President on Ensuring American Leadership in Advanced Manufacturing, p.7 580

23 providing tax breaks 274. Companies located in the science park conduct joint studies with and receive support from neighboring universities, such as National Tsing Hua University and National Chiao Tung University, as well as from the ITRI, in terms of both technology and human resources, including technology transfer and personnel training 275. Over the period of more than 30 years since its establishment, the Hsinchu Science Park has made significant contributions to the development of the Taiwanese economy. Currently, 481 companies (2013) in such fields as semiconductors and optoelectronics are located in the science park, which continues to expand. In Taiwan, there are two other science parks, the Southern Taiwan Science Park, established in 1995, and the Central Taiwan Science Park, established in 2003 (Table II ). Table II Changes in the development of the Hsinchu Science Park Number of employees 139, , , ,818 Number of companies Sales (100 million TWD) 11,835 10,304 10,543 11,074 Semiconductors 8,008 7,082 7,385 7,746 Computers Communications Opto-electronics 2,439 1,974 1,870 1,936 Precision instruments Biotechnology Sales growth rates (%) R&D expenditure (100 million TWD) 1,460 1,485 1,521 1,755 Number of granted patents 2,043 2,510 2,944 3,995 Source: Website of the Hsinchu Science Park, Ministry of Science and Technology. 274 Masakazu Naruse (2002). 275 Masakazu Naruse (2002). 581

24 5. Summary The characteristics of Israel, Switzerland and Taiwan, all of which are small in size but highly innovative, can be summarized as below. (1) Israel: Israel has succeeded in continuing to create innovative technologies and start-up companies. - High-tech companies are raising large amounts of capital from foreign investors. - Global multinationals have R&D bases in Israel. - The government is supporting business start-up by actively taking on risks in the early stage of start-up. (2) Switzerland: Switzerland has improved productivity by attracting high quality companies and people from abroad. - Global multinationals have headquarters and regional headquarters in Switzerland. - Switzerland accepts competent foreign students and high-salary foreign workers and fosters highly skilled personnel through a unique education system. - As a bridge between the industrial sector and academic and research institutions, the federal government supports joint studies by industry and academia, business start-up and technology transfer in order to quickly bring applied research results to market. (3) Taiwan: Taiwan has expanded opportunities for competent personnel with high-tech skills to find jobs and start new businesses under the government s leadership. - Competent domestic science and engineering students with an entrepreneurial spirit are accepted by research institutions and companies located in science parks. - The government makes intensive investments in the semiconductor and electronics industries, while non-profit organizations affiliated with government agencies implement joint studies, technology transfer and consulting services in order to promote commercialization. As they cannot rely on cost competitiveness under the current circumstances, these countries have established their positions as innovation-driven countries and gained an increasingly positive reputation amid global competition by identifying their own strengths and by improving their business environments through effective governmental support. Their superior innovation environments are attracting companies and funds from across the world, leading to the creation of new business models and technologies, and this is creating a virtuous cycle of increased competitiveness in attracting companies and funds resulting in further improvements in the innovation environments. When we examined competitiveness in attracting people and enterprises in Chapter 1, Section 2.2, we reviewed the attractions and strengths of the business environment in Japan. The cases of Israel, Switzerland and Taiwan suggest that identifying Japan s unique attractions and strengths and making the most of them is the challenge that must be achieved in order to create an attractive innovation environment in Japan. 582