Building Japanese corporate IP departments of the future

The fourth industrial revolution is expected to usher in large-scale innovations for both business and technology. When this happens, simply maintaining the status quo for IP activities will no longer be sufficient for market success. Those of us in the business world should treat these changes as opportunities for growth and prepare practices to maximise their effect. Such efforts should extend beyond IP departments to include management and business departments, introducing a new and integrated approach to intellectual property.

While business innovation will likely change the focus of IP activities in many ways, this article focuses mainly on open innovation, particularly open and closed strategies – the various counter-measures which might be needed (eg, the expansion and application of information searches) will be left for another occasion.

Breaking down barriers between business and intellectual property

Moving forward, collaboration between business and intellectual property is likely to become increasingly important. The centre of IP activities could well shift to the business department, which will be able to fully utilise IP assets under management’s clear understanding of IP functions. Of course, filing patent applications and securing patent rights will continue to be necessary, but it should become a routine matter.

The fundamental essence of corporate IP activities is to develop an understanding of and efficiently utilise intellectual property across the whole company. However, many Japanese companies have failed to fully embrace this. One reason is the specialisation of patent knowledge within Japanese companies. This has resulted in companies relying excessively on their IP departments to respond to IP issues, which in turn means that management and business departments have only a poor understanding of IP issues. Although IP departments have been able to dedicate themselves to raising the quality of patent applications, the original intent for how intellectual property should function within a company’s business has been weakened somewhat.

Big data, big challenges

The ‘fourth industrial revolution’ has been a common refrain in Japan ever since the phrase was coined in the Japan Revitalisation Strategy of June 2016. Much has been written on the subject, but it is worth clearly defining the business innovations likely to take place as a result.

It is expected that data on a variety of products and parts will be assembled and connected via the Internet, resulting in so-called ‘big data’. Combining different forms of big data, along with certain interpretations of this, will help us to understand new value and create new business opportunities.

Raw data can be compared to unrefined ore taken from a mine: collecting and interpreting this data is similar to the refining process, with the resulting data representing processed metal with a high commercial value. Going forward such data can be used as the basis for generating new businesses. Due to the power of information communications technology, new business practices are expected to spread rapidly around the globe, which will also result in significant changes to industry.

The battle has already begun for how participants in these new businesses will secure profits for their own companies. Will the biggest prizes go to the owner of the unrefined ore or the refinery?

For example, future trends in the auto sector look set to involve self-driving and car-sharing programmes as a new form of business. Existing automakers are responsible for the unrefined ore – the initial data – but algorithms are now being used to refine this to produce learned data, a process that involves various companies and service providers. Artificial intelligence (AI) will also be used during this refining process, as well as in planning and executing new business lines driven by the valuable data. As a result of AI’s own decision-making capabilities, it is now possible to outsource the thinking to AI to pursue business potential; this entirely new approach is a clear symbol of the fourth industrial revolution.

Among the multiple stakeholders involved, the company which acquires the processed data could win control over the entire business and thus secure profits. Therefore, ownership of valuable information and its usage will become a battle that goes directly to a company’s capacity to generate profits.

Figure 1. Determining whether to collaborate or not?

Source : METI, 2016 “Decision making process and issues recognition of companies for open innovation”

One important issue will be how patent rights for information can be secured under existing IP systems. Any changes to IP systems will take place only after all the facts have been obtained, therefore there will always be a lag in response time. Generally, IP rights are designed to protect economic investments and efforts. If protection under IP systems is unclear, then protection will be governed by contracts between participating stakeholders.

Further to this is the problem of how to manage results produced by AI most effectively. IP systems were developed within the scope of human involvement. Even if an idea originates from AI, a machine cannot be credited as its sole inventor or creator. The results created by AI will therefore be the property of the company that developed or invested in the AI. However, the current patent system takes no account of such developments. One possible provisional approach is to flag the results as being owned by the company from the perspective of investment protection.

As long as a company establishes that it possesses information, its advantage will continue. Without information, the creation of new business will always be a secondary outcome – making it difficult for a company to secure a rematch at a later date.

The conventional business model used by Japanese corporations to secure profits usually involves the performance of hardware (eg, sensors and actuators) and the advanced level of completed goods which combine these components. In this regard, Japanese companies are regarded as the undisputed leaders in the world. However, once the performance of the software controlling a product reaches a certain level, a phenomenon occurs whereby the performance of hardware and differences in quality are no longer questioned. This often occurs with commoditised technologies. In other words, the lower the price of these commoditised technologies, the easier it is to capture market share. Companies in emerging countries progressed rapidly and captured international market share with low priced home electronics at the beginning of the 2000s, and as a result the market share enjoyed by Japanese companies was diminished.

The technologies of highly competitive and international products developed by leading Japanese companies tend to be from hardware and software fields that have yet to be commoditised. The strength of these uncommoditised Japanese technologies should remain resilient during the fourth industrial revolution. However, if under the new business model entire businesses become controlled by parties with certain information or data, Japanese companies will be forced to become subcontractors offering contract manufacturing, even if they have technologies that have yet to be commoditised. Such a situation will make it increasingly difficult for them to retain either profits or market share. To survive, Japanese companies must therefore aim to gain greater control of upstream information without relying solely on their uncommoditised technologies.

What open innovation means for IP departments

Open innovation indicates a preference for collaboration, while an open and closed approach entails a strategic response method.

Open innovation becomes clearer when considered within its two forms: technical collaboration and business collaboration. In technical collaboration, a company’s interest lies in R&D outcomes, while in business collaboration it centres on profits.

But why is open innovation suddenly receiving so much attention?

Assuming that business innovation will occur based on broad fields of information, the R&D capabilities of a single company are unlikely to fully keep pace with wider industry changes. For example, if an automotive company considers itself a vehicle manufacturer, it will establish the limits of its scope to modify automotive technologies. If a broader perspective is taken, an automotive company might ask:

• What is the best societal approach to urban transport?
• What is the ideal role that automobiles should play in such transportation?
• What do consumers value in cars as they are considered an extension of their home?
• What should be done with the extra time if automatic driving has evolved and the act of driving becomes obsolete?
• What do people want out of automobiles?

A single automaker cannot address these issues alone. Answers to these questions can be found only by examining these issues using the broad, multifaceted perspectives of society, overall public transport and consumers. Such a multifaceted approach could ultimately yield new business avenues. Open innovation is one way for broad cooperation involving industry, academia and government to incorporate ideas and information with the goal of new business creation.

It is expected that such collaborative sharing and use of information will take place across business sectors during the fourth industrial revolution. Unfortunately Japanese companies show little interest in collaborating so far and have yet to develop the necessary skill set.

Figure 2. Factors affecting open innovation

Source : METI, 2016 “Decision making process and issues recognition of companies for open innovation”

According to the 2016 Open Innovation White Paper, approximately 60% of Japanese companies have engaged in standalone R&D. Once subsidiaries and affiliates were included, this percentage increased to 80%. This may be due to the fact that the success of Japanese companies during the post-World War Two period has, in most cases, been based on proprietary, standalone R&D. As a result, companies can repeat these patterns of success in a certain technological domain and skilfully carve out their own niche within the same business sector. Internationally, there are few examples like Japan, where large and small corporations co-exist together in the same business sector. At the moment there is little need, from either a technical or business standpoint, for companies to collaborate with other companies no matter how many companies there are in a sector, as long as they can carve out their own niche and be profitable. However, this could well change in the future. There is likely to be increased collaboration both within sectors and across sector lines. This means that the time for companies to secure their own domains within a system of open innovation and information sharing is now.

Most government publications explaining open innovation focus on venture firms or industry-academia collaboration. However, companies with actual global competitiveness are effectively responsible for Japan’s industrial competiveness and the presence of major corporations is overwhelmingly strong in open innovation when Japan’s general strengths are considered. The role of venture firms in open innovation and universities in industry-academia collaboration is more auxiliary in nature. It would thus be a mistake for major corporations to think that open innovation is irrelevant to them just because of how it is framed in these types of publication.

One of Japan’s unique traits is that it has major corporations which compete globally equally across all business sectors. Funds for innovation in Japan come predominantly from major corporations, while most in-house venture firms have a budget for stable R&D. In addition, companies spun off from in-house ventures usually continue to receive ample support. Moreover, Japan boasts a significant amount of human resources, as well as advanced functions for gathering and assembling information. Consequently, the key to success for corporate Japan will be whether major corporations exposed to global competition can respond to open innovation appropriately and demonstrate collective strength. There is absolutely no reason why partners in open innovation should be limited to Japanese companies. Partners should come from around the world to allow for breadth to produce new business and for ensuring timely responses.

There are many challenges that major corporations face in carrying out this kind of open innovation.

First is the presence of an in-house organisation for planning and promoting open innovation. Aside from a few major players, most Japanese companies have little experience with external cooperation – they tend to prefer R&D departments and business departments to work independently if possible. As a result, these companies have no in-house department dedicated to this. Without an applicable organisation, these companies are unable to develop the skills to find partners, create and verify business plans, secure a budget and coordinate internally.

A similar issue can be seen in Japanese companies’ approach to standards setting. To date, Japanese companies have been unable to best position those in charge of standardisation to obtain maximum benefit. As a result, someone highly experienced in technology management tends to be tasked with the legwork for standardisation, yet is unlikely to receive recognition for his or her contributions from other departments.

However, it is becoming increasingly apparent that strategies for standardisation and monopolisation are two sides of the same coin. The number of companies which understand and are attempting to handle this as a function of the IP departments is increasing rapidly.

Standardisation and open innovation require the same skills in terms of a company securing profits even while collaborating with outside companies.

The response to open innovation represents one of the challenges of new approaches to IP activities.

As for technology-driven open innovation, the work of IP departments has always involved information (eg, joint research agreements with other companies, sorting through shared technologies and proprietary technologies and analysing worldwide technical trends). This means that open innovation has already been accomplished to some extent. The problem lies with planning, including setting clear goals, as well as information gathering and analysis.

In most cases responses to open innovation as a form of business collaboration are not the domain of IP departments. Unless this changes, this will make it difficult for Japanese companies to respond accordingly. To undertake such open innovation would require relationships with business departments to be completely rebuilt.

Naoto Kuji

Executive managing director, Japan Intellectual Property Association

“Whether Japanese companies can maintain their global superiority and industrial competiveness in the future depends on whether management understands intellectual property and whether the entire company – including business departments – can actively get the most out of intellectual property.”

This process probably needs to start at the HR level. For example, it can be highly effective to assign a person to the IP department and then later move them to the sales department and corporate planning department to undertake an apprenticeship. In the meantime, the IP department remains responsible for that person’s payroll costs and work performance evaluation. Further, on return from their apprenticeship, these candidates should be permitted to access in-house data held by the sales department and corporate planning department. This rotation of human resources and access to information will help to ensure that IP activities are integrated throughout the company. Preparing in this way will also enable a certain degree of action with regard to open innovation for business purposes. Given that Japanese companies seldom have in-house organisations dedicated to responding to open innovation, it may be possible for IP departments to become responsible for planning and promoting open innovation for business purposes based on their years of experience in this field. This is because cooperation with many stakeholders is a fundamental element for establishing a company’s patent rights or, in other words, setting its proprietary field and securing profits. IP functions should therefore be used as a tool towards that end.

Under large-scale collaboration, it is inevitable that issues relating to competition laws will arise. This involves certain restrictions imposed upon business mergers and the potential abuse of dominant position. However, in most Japanese companies it is the IP departments which are responsible for ensuring that the company meets its obligations under Japan’s Anti-monopoly Act, suggesting that they would be well suited to assuming responsibility for open innovation wherever possible.

Open and closed strategy – protecting intellectual property in corporate collaborations

Japanese companies are known to prefer insourcing. Most Japanese companies which have experienced strong growth in the post-World War Two era take pride in the proprietary technologies they have created, viewing this culture as key to their international success. Past successes strongly motivate companies to follow their business status quo. As a result, Japanese companies fail to consider collaborating with companies in the same or different sectors. They believe that they can succeed by carrying on independently, often to their detriment.

To move beyond this mindset, it is crucial that Japanese companies grasp the merits of collaboration so that they prepare for the new business opportunities which will arise from information-sharing.

Pursuing a collaborative business involving many stakeholders will require implementing a so-called ‘open and closed’ strategy. As information sharing becomes more common, the question of what to share and what to keep proprietary will become ever more pivotal.

However, the term ‘open and closed’ can cause confusion as it is used differently by different parties. It can be explained using four phases, which can be distinguished within companies’ operations. What to keep open and closed differs based on each phase.

Joint research phase

The first phase involves joint research with one or more other companies.

The first stage of this is to select partners. When selecting a partner, an assumption must be made with regard to the technologies that the other party has and the expected outcome of combining these technologies with your own. This assumption is then used to limit the scope of the joint research within the agreement and to determine the roles of each party. Questions of how much to disclose and how much information to receive from the other party are key to the initial open and closed strategy.

Usually, when a joint research effort launches, neither party has yet submitted a patent application. So companies must take extra care when providing proprietary information, even when this is to a joint research partner. In a situation where one partner is providing abstract specifications and the other is providing detailed solutions, the latter will often apply for the relevant patents. This is because one cannot apply to be the sole inventor of an abstract idea. These cases often involve making one partner responsible for development and manufacturing – thus making it responsible for the patented technologies for which it is applying.

Sorting out the IP aspects of joint research is the job of the IP department, although for the most part this is determined by contractual conditions between the two parties.

However, in the future it will become more important to assemble and analyse information to help select a partner in the first place. This is because unlike in traditional components transactions, candidates for partnership are increasingly likely to be from different sectors. A company will need to consider its open and closed strategies based on what type of partner it is working with. This requires both an understanding of the partner’s overall business condition and an analysis of information, including worldwide trends relating to the theme being researched.

If a conventional archetypical joint research agreement is simply repeated, open and closed strategies will become meaningless.

Figure 3. Factors which prevent a company finding an appropriate collaborative partner

Source : METI, 2016 “Decision making process and issues recognition of companies for open innovation”

Technology promotion phase

This part of the strategy takes place during the business-to-business phase, where proprietary technologies are promoted to other companies.

Transactional conditions are negotiated so that proprietary technologies can be introduced through product exhibitions, technology fairs or direct negotiations.

Exhibitions provide many companies with exposure, so the patent application process must be complete for any visible parts of the technology. Since new intellectual property could arise from matching components and finished goods, a company must obtain the patent application for its own parts. Being the first to apply for patents for certain applications the partner may use will ensure superiority down the road. If another company patents an application of your company’s own technology, you may be forced into business with it exclusively. Obtaining a patent that the counterparty likely will use first and then offering to license to them for free will make it possible to expand your customer base.

It is misleading to consider that horizontal specialisation is more beneficial than vertical in this phase. Vertical and horizontal specialisations are merely business options.

This approach copies the business model in which several Silicon Valley companies open up their technologies horizontally by placing orders to companies in emerging countries, but close off their core proprietary technologies, thus securing profits and successfully beating global competition. Another business model is that of defeated Japanese companies, in which technologies are vertically shared within the group only, making it impossible to lower prices and resulting in lost competitiveness.

In reality, most Silicon Valley companies are relatively new and do not own their own factories, so in the phase where they had to expand the business through mass orders, they were forced to place orders with companies in emerging countries with the necessary infrastructure. The reason why Japanese companies have been defeated can be found in their complacency when it comes to setting conditions for investments and profits, and the fact that they were unable to fully harness the huge number of patents they owned.

The odd thing about business is that it remains completely uncertain whether a leading company today will maintain its position in the future. Unfortunately, there is no formula for ongoing success. Therefore companies must compete aggressively and continue to customise their strategies. Ongoing success is never guaranteed but at least the loser is always guaranteed a rematch.

The greatest flaw of horizontal specialisation is the creation of rivals. Silicon Valley companies have opened horizontally, which will likely result in a counterattack. In the case of vertical specialisation, there is essentially no counterattack because everything is rolled out within the group.

Some believe that Japanese companies must increase licensing to third parties because they receive large licensing income from subsidiaries and few from third parties. This opinion often originates from the government side but superficial data analysis can be misleading. Licensing to third parties results in the development of future rivals and should not be carried out actively but should rather be restricted to businesses to which market share can be lost without detriment.

During this phase of promoting proprietary technologies, the open and closed strategy should predict the long-term trends of other companies – it should not be viewed with a short-term perspective.

Market expansion phase

The third phase is when a company has as many other companies as possible use its proprietary technology with the aim of expanding its market share through finished technologies and products.

Standardisation represents a means of market expansion – although it is merely one option, regardless of the format, whether de jure, de facto or consensus based. Using standardisation to increase partners and expand market share to increase profits is a strategic goal and involves having other companies actively use a company’s patents in order to expand the market. However, in the Japanese context, the licensing fees received from such an arrangement are low.

According to Case 2013(Ne)10043 of Japan’s IP High Court, licensing fees should be calculated by multiplying the portion that contributed to standardisation by 0.0095. This figure was arrived at by dividing 5% – the maximum accumulated royalties – by 529, or the number of patents needed for a standard. This is calculated simply based on the number of patents and not the appraised value of each patent, so the larger the number of patents, the lower the royalty income. Royalty income thus represents a tricky strategic goal for securing profits from standardisation. Another phenomenon that occurs in the case of low licensing fees is that products with lower prices will capture market share as long as they have the same technologies. The same holds true for commoditised technologies. There are many examples of where a good technology was standardised for worldwide use only for cheaper priced products to capture market share and supersede the technology.

What would happen if one company retained a huge number of patent clusters and then tried to obtain a large amount of licensing fees by making these a standardised technology? The normal reaction is that no one would want to use technologies for which the patents are monopolised by a single company. This means that restrictively high licensing fees will result in fewer companies using the patent, which will hamper market expansion.

The benchmark for success of Japan’s standardisation activities, as cited by government, is whether the number of positions on International Standardisation Organisation or International Electrotechnical Commision technical committee secretariats increases. However, company benchmarks vary. Companies measure the amount which a patent contributes to earnings. People who have served as secretariats comment that even if a Japanese national is appointed to a technical committee secretariat post, there is a strong sense of fairness and justice and Japanese companies will not necessarily be favoured. Rather than rely on posts, strategy must be considered that secures a company’s profits with an eye on the future market.

Profiting from standardisation means determining whether there are profitable patents in the technologies. These preparations predict the future of the market based on the overall view of the technology and products.

R&D departments are not responsible for predicting markets – that is the responsibility of the business department. The extent to which it understands and analyses business information from collaboration with business departments and then whether it can prepare the relevant patents and know-how as a strategy for securing future profits, is the real test of any IP department.

Open and closed strategy for IP functions

Finally, the fourth phase is the open and closed strategy focused on IP functions through all of the above-mentioned phases.

This is relatively easy to understand simply because it is the use of functions, representing a method rather than a strategy.

The patent rights are enforced only in the country of application – in other countries they become public. Once a patent is made public it becomes open, while keeping know-how in-house without filing a patent allows it to remain closed. The technique used to open or close this information varies with each company. Many companies have established an approach for proprietary technologies in which know-how is kept in-house without a patent application being submitted. In this manner, technologies which cannot be identified from a product on the market are handled as closed, so no patent application is filed.

The open and closed strategy focused on IP functions has been carried out for some time, but it has become more important in recent years. This is commonly due to companies in emerging countries seeking to learn technologies from the patent information of companies in developed countries, without necessarily notifying the rights holder. Further, companies in emerging countries can slightly modify technical details written in the patents of companies in developed countries so that they can then apply for the patent themselves. The open and closed strategy can counteract such actions. For example, obtaining a patent for a new physical property or effect within a defined scope limited to numbers or designation of application will restrict the rights of the initial patent to a certain extent. However, this can be accomplished simply in writing and without R&D.

This aspect of the open and closed strategy has advanced markedly among Japanese companies as a means of countering companies in emerging countries over the past 10 years.

Coping with ‘destructive innovation’

The key to determining success or failure in the fourth industrial revolution will likely be how an entire company – including management and business departments – understands and fully utilises intellectual property.

If an assembly of information linked to component or product information is completed within a single company, this falls within the scope of normal business activities and each company can respond to this matter as an extension of previous practices. However, the fourth industrial revolution is supposed to involve big data and an assembly of vast information under the umbrella of multiple stakeholders. The use of this information will require cooperation with other companies out of necessity. As a result, IP activities must focus on more than just patent applications for fields where a company excels.

IP activities until now have been geared towards continuous innovation. ‘Continuous’ refers to developing technologies with improved functions as an extension of existing products and then selling high-end models in a stable market to increase profits. The market assumed in this scenario is the high end of an existing market rather than a new market. In the case of high-end markets, IP activities mainly become repetitive modified patents and research on existing rivals. There are few cases of patent violations or litigation involving rivals, so litigation skills remain underdeveloped.

In contrast, the fourth industrial revolution should bring a shift from continuous innovation to destructive innovation.

The term ‘destructive innovation’ describes a situation in emerging markets where the concept of a poorly performing product is modified to gain market share, instead of a high-end model. Yet, the same could apply to the fourth industrial revolution too, if the meaning is expanded to include the need to more than just modify existing products under business innovation.

IP activities will undergo significant changes as a result of destructive innovation. Simply repeating the typical patent applications fails to make full use of the IP functions. When collaborating with other companies while sharing information through open innovation, a company must always check its foundation for continuity and ask itself whether it can secure sufficient profits to survive.

IP functions can be used as a tool to solidify a company’s position.

Specialised knowledge and experience is necessary for patent applications, rights enforcement and litigation, but the fact that IP functions are highly effective in establishing open and closed strategies means that a company’s own approaches to open innovation should be understood by all employees, including management and business departments.

Looking back

The IP activities of Japanese companies have changed significantly over the years. Understanding the past can provide a clearer picture about the direction of the future.

IP activities in the 20th century mainly involved the use of patent applications and prior art searches for patent applications as tools for ensuring that the results of technical development stayed within a company. Patent applications were a method for post-World War Two Japanese companies to validate their technical prowess when entering international markets. Management of Japanese companies was satisfied simply by viewing graphs with soaring numbers of patent applications and registrations reported by the IP department. Beyond that, they seldom showed any more interest in IP activities. At the time companies in emerging countries were seen as little threat. To counter US companies all a Japanese company had to do was apply for patents in Japan and the United States. Therefore, the only skills that improved within IP departments were patent application procedures for Japan and the United States, with departments being led by people highly knowledgeable in terms of these processes.

Move forward to the 21st century and growing numbers of companies from emerging countries are superseding Japanese companies, greatly affecting the IP activities of corporate Japan. For example, there are cases where Japanese companies in the world top 10 in terms of Patent Cooperation Treaty (PCT) applications filed have seen their business performances slip drastically and have lost both profits and market share. If patents truly were beneficial, these companies should have been strong and protected by the so-called ‘steel wall of intellectual property’. However, patent applications actually provide valuable technical information for companies in emerging countries to create products which enable them to catch up with their Japanese rivals.

Most academic papers are written to prove a theory. Yet, products cannot be created from academic papers: a company must carry out applied development. However, patent literature not only proves a theory but also contains specific descriptions leading to commercialisation. Japanese patent literature is readily accessible to Chinese and South Korean companies because of the similar nature of the technical words and language. As such, it is an excellent technical text which carefully lays out an invention’s effects and purpose. At the start of the 21st century, queries to Japan’s Industrial Property Digital Library made by parties from China and South Korea exceeded access to the library from inside Japan. Despite this Japanese companies maintained that it was too soon for them to begin applying for patents in China and applied for only few patents in South Korea because of the small market size and uncertainty of the courts there. As a result, the technologies described in Japanese patent application documents were used freely by Chinese and South Korean companies in their own countries. Chinese and South Korean companies began capturing markets in Africa and South America where Japanese companies had not applied for patent rights by exporting the products they had made using patented technologies which were publicly available in Japan. A few years ago, there were headlines about an international institution that inspected a South Korean nuclear power plant and was shocked to discover huge numbers of Japanese patent specifications. Most South Korean and Chinese companies use this same approach.

In the post-World War Two period, Japanese companies used the patent specifications of European and US companies to catch up with their technologies. Companies in emerging countries are only following this pattern. As it has become clear that applying for patents in Japan would have the opposite effect on global competitiveness, IP activities have shifted emphasis naturally away from patent application and towards utilisation. With no feedback on how to utilise patents, corporate Japan came to believe that it was a waste to spend the significant sum of ¥15 million just to maintain a single invention in Japan, Europe and the United States for 20 years. Further, where suspected patent violations took place between Japanese companies, companies investigated all similar cases and then mutually ensured that patent rights would not be enforced. Such practical responses became commonplace.

The number of patent applications filed in Japan peaked in 2005 at 427,078 and since then has fallen year-on-year, with only 318,721 applications filed in 2015.

In the 20th century, electronics companies applied for huge numbers of patents in Japan and the United States for ammunition against counterclaims to IP litigation brought about by IBM and other US companies. Gradually, US companies began using contracts strategically to engage the other party without initiating litigation. In litigation, NPEs commonly became the plaintiffs. As they did not necessarily manufacture and sell the products, there was no point in applying for huge numbers of patents for counterclaims.

Under such circumstances, Japanese companies reduced the number of Japanese patent applications and used the surplus funds to apply for PCT patents, delaying the timing for determining which country to designate so that they could view market conditions. This marked the beginning of a shift in the intentional use of patents. The precipitous decline in the number of patent applications worldwide in 2008 after the collapse of Lehman Brothers was only a temporary blip caused by a drop in Japanese corporate profitability, as similar trends also hold true for companies outside Japan. Later, as companies elsewhere in the world became profitable, the number of patent applications increased, but the number of patent applications in Japan did not. There was no objective reason for Japanese companies to increase the number of patent applications in Japan. Without a reason, this number will not increase but will likely remain the same or fall slightly. By contrast, the number of patent applications in other countries should increase because of budget reallocation.

The IP activities of Japanese companies have evolved along the same path. The next evolution will not merely be an extension of this. Going forward, industry will undergo great changes in a short period of time and there are growing expectations for IP functions to be utilised as a result.

A number of new ways to utilise intellectual property are also emerging. This includes buying patents if a company does not own sufficient numbers or selling them if it has too many, creating alliances to jointly defend patents, making another company’s patent obsolete by assembling information online or opening a patent for free in order to grow the market expansion. These methods have become second nature over the past several years.

Now, the expected role of IP activities during the fourth industrial revolution has been added to this mix. One possible response to this, as laid out here is open innovation and the execution of a phased approach to open and closed strategy.

The key point is how to dynamically combine intellectual property and business. Intellectual property is needed for a country or company to remain competitive. Whether Japanese companies can maintain their global superiority and industrial competiveness in the future depends on whether management understands intellectual property and whether the entire company – including business departments – can actively get the most out of intellectual property.

Internationally successful companies have management teams which make decisions about intellectual property themselves, while the entire company attempts to use intellectual property. Japanese companies were once like this during the rapid growth period of the post-World War Two period. They would benefit greatly from remembering this because they will need to perform better than in the past.