Special Report: TLOs

There's a lot of tech innovation in academic research labs. For investors willing to partner with professors, technology licensing offices hold the key.

Takuji Nakamura, senior managing director of the Kansai TLO

Keisuke Shimizu, head of the Keio University Intellectual Property Center

DEEPENING DEREGULATION
Clearly, the scale and scope of technical innovation fermenting in Japan's universities cannot compare with that at similar institutions in the US, the birthplace and nurturing ground of Unix, Netscape, Lycos, and many other technologies (see "University-Industry Cooperation," July 2000). Japan's academic and industrial research has long been split into two separate worlds, and attitudes on both sides are still, in some cases, antediluvian. Many think professors should pursue knowledge for knowledge's sake (and forego messing with filthy lucre), and corporate researchers should forget theoretical esoterica and concentrate on developing products that can be mass-produced and marketed right away, keeping employment high, foreign trade profitable, and production lines at Japan Inc. humming right along.

Yet Japanese universities are making progress in opening up their labs to the principles of profit-making, and deregulation of the massively over-regulated educational world is one key factor. The recent increase in professor-entrepreneurs (see "The Rise of Professor-Entrepreneurs") has been boosted by a series of deregulation measures initiated by the central government, which is determined to strengthen technological cooperation between universities and industry.

In August 1998, new legislation was introduced to authorize the establishment of the semi-independent TLOs by universities. Under the concept, local TLOs will assist individual professors by, for example, submitting patent applications on the professor's behalf. While the patent application is in progress, the TLO searches for companies that would be interested in the technology concerned. It also takes charge of licensing the patent. Legally, there is no clear guidance on how patent royalties should be distributed between inventors, universities, and TLOs (and the government, in the case of national universities); it's up to each TLO to negotiate royalty distribution.

Before the 1998 TLO legislation, professors and private corporations had engaged in joint research and development projects, and professors at private universities were allowed to file patent applications for their own inventions at their own cost, says Shinichi Wakamatsu at the Industry-University Cooperation Division of the Ministry of Education, Culture, Sports, Science, and Technology. But due to a lack of clear-cut rules, professors were often not paid for their work, or paid inappropriately. Also, professors were often unable to sell their patents because they lacked the necessary connections or hard-nosed marketing skills.

Takafumi Yamamoto, president and CEO of Tokyo University's TLO

Makoto Ibuka, president of the Tama-TLO

The new legislation, Wakamatsu says, was aimed at making maximum use of university research and innovations. Since its enactment, the number of TLOs has gradually increased. According to the Ministry of Education, there were 17 government-approved TLOs as of December 2000. There have been over 700 patent applications submitted through TLOs to date, of which more than 70 have been granted. Considering that the screening of a patent often takes three years in Japan, the turnout rate doesn't look too bad.

Further deregulation in April 2000 allowed professors at national universities to take part in private enterprises. Prior to the deregulation, private university professors were allowed to establish corporations, and courageous ones were already starting the move. The deregulation further boosted the emergence of professor-run companies.

Professors aren't the only ones benefiting. The deregulation has encouraged and motivated younger university-affiliated researchers and students, whose contribution to research and innovation traditionally was concealed under the names of their professors due to Japanese academic traditions of seniority. At Keio University, student-inventors outnumber other categories two to one: While 32 students have applied for patents (together with 12 associate professors and 17 assistant professors), the number of inventors under the category of "professor"' has remained at 30 since November 1998. At Keio's Science and Technology Department, the trend is even more prominent: 27 students have applied for patents, compared with only 19 professors.

CONFLICT OF INTERESTS
Historical conflicts between universities and private companies have been an obstacle for university-industry cooperation. "Because of the post-war political history of student [activism], Japanese universities have strong feelings towards the independence of academia," says Keisuke Shimizu, the head of Keio University's TLO (known as the Intellectual Property Center).

Shimizu, an ex-Patent Office bureaucrat who is now a professor himself, also points out that distrust of university professors among industry is high. "Private businesses try to keep good relationships with professors just because they want bright students to join their companies. But they don't see universities as their research partners." One other problem, Shimizu says, is that Japanese professors tend to focus on research simply because they are interested in the subject -- most of them don't even bother to think of how their research might be utilized.

Adding to the problem is the fact that university researchers tend to focus on basic research rather than on applications, development, or commercialization. Basic research amounts to 52.6 percent of research conducted in Japanese universities, while 73.4 percent of research done by private corporations is developmental, according to a 1999 Ministry of Public Management, Home Affairs, Posts, and Telecommunications (MPMHAPT) report. The heavy reliance on basic research at Japanese universities is considered exceptional among industrialized nations. Further, government statistics show that Japanese corporations don't entirely trust their native universities, preferring instead to disburse corporate R&D support funds to foreign scholars. In fiscal 1999, Japanese corporations disbursed some ¥140 billion to foreign organizations for research and development projects, while the amount they paid to Japanese universities was less than half that (¥60 billion), according to another MPMHAPT report. "These statistics clearly show their mentality. Japanese corporations prefer to give money to US universities, rather than Japanese," Shimizu says.

BIRTH RATE BLUES
Structural changes or not, the changing socio-economic climate is helping force a narrowing between the academic and corporate ways of thinking. Japan's population is decreasing; and so is the number of university enrollees. This has already started affecting universities, since tuition fees amount to a major part of their revenue. As competition for the dwindling student pool heats up, universities -- private and public -- will be forced to look for alternative sources of revenue sooner or later.

Furthermore, the government is discussing the possibility of transforming national universities into independent administrative corporations within a few years. Under the plan, a national university will be obliged to set five-year goals for education and research. After the five years, an independent body made up of experts on education and research will review its performance. Government funding will be distributed in accordance with the evaluation, which means that non-performing universities may not be able to secure even the funding that they receive now. Although details of the proposed plan are subject to further discussion, and the change would not involve the immediate privatization of national universities, it is certain that these schools, too, will be exposed to at least some form of market competition.

In the meantime, Japan's prolonged economic difficulties are forcing private corporations to review the costs and benefits of massive research expenses. Industry sources agree that this would give all the more reason for private businesses to cooperate with universities. In fiscal 2000, Japan spent a total of ¥16 trillion (3.12 percent of GDP) on technology R&D, down 0.8 percent from the previous year. The private sector contributed 77.8 percent (¥12.45 trillion) of this (down 1.6 percent -- the first decline in six years, according to the MPMHAPT).

REGIONAL DEVELOPMENT
But while Todai's CASTI and other TLOs in the capitol region are growing in significance, universities located outside of the central Tokyo area may have a bigger role to play in their respective regions, since some local industrial communities are more severely affected by the economic slump. This situation has brought about the birth of TLOs jointly subscribed to by several universities. Some universities, taking a cue from the world of corporate competition, have realized the need to join forces rather than compete for a slice of the same pie. One TLO in Kyoto, the Kansai Technology Licensing Organization, was established jointly by Ritsumeikan and Kyoto University in 1998, and is now the TLO for 32 private and public universities in the Kansai region.

In the Kanto area (which includes Tokyo), the Tama TLO comprises five small to medium universities located within the Tama suburb of Tokyo. Membership is open to professors located anywhere in the metropolis of Tokyo, or in Saitama and Kanagawa prefectures. While local governments are supposed to be responsible for industrial promotion in their regions, they are reluctant to support any project that crosses an administrative border. "[The] governments are aware of the fact that something needs to be done to boost the economy of their respective regions, but often lack financial resources, as well as administrative know-how," says Makoto Ibuka, president of the Tama TLO. This particular TLO is designed to fill the gap between the metropolis and its two large neighboring prefectures, says Ibuka.

FIVE-YEAR DEADLINE
While nobody would disagree that the TLOs provide a vehicle for professors to commercialize their inventions, or that they at least motivate the academics to be more aware of issues surrounding technology transfer, nobody knows whether the government-approved TLOs will survive after the present five-year government subsidy scheme supporting them expires. Right now, the government subsidizes each TLO for up to one-third of the previous year's expenditures, or a maximum of ¥30 million. For fiscal 2000 alone, the government allocated ¥420 million for university-industry cooperation projects, according to the Ministry of Education, Culture, Sports, Science, and Technology.

"The biggest worry we have is whether we will be generating profit from license fees before the five-year subsidy runs out," admits Takuji Nakamura, senior managing director of the Kansai TLO. "Honestly, I don't know what we are going to do afterwards," he says. The TLO is already in year three of its subsidy period, so the organization only has two more years to make it into the black, through royalties or otherwise. Out of the 137 patents it has applied for, only seven have been licensed so far. "The average rate of successful licensing at a TLO in the US is 50 percent. Our figure is too low. It is a tough situation," he says.

And the Kansai TLO is not the only one under time pressure. Except for a handful, such as Keio University's Intellectual Property Center (IPC) and Tokyo University's Center for Advanced Science and Technology Incubation (CASTI), most TLOs are still running on the government's dime.

Ibuka at the Tama TLO has an even bleaker prediction. "Frankly, I think only three or four TLOs, including ourselves, can make it." He's convinced that the so-called "technology push" model, in which an invention is developed before there is a need for it, does not work in this country. "The government doesn't have a long-term vision when they fund a project. Neither do professors," he says.

Ibuka's strategy is to introduce a "market-in" model, whereby university professors research and develop technology in accordance with the needs of private corporations. As opposed to the technology push model, the Tama TLO would first consult with a private corporation to determine what kind of technology it needs. The TLO would then help form a consortium between the company and a group of professors, for which it would act as facilitator. It would obtain funding from the New Energy and Industrial Technology Development Organization, a semi-governmental organization under the Ministry of Economy, Trade, and Industry, and assign the group of professors to develop the technology the company wants.

In this fashion, the TLO would have income even before the professors start the project, while the professors would gain access to the research facilities of the company involved. Of course, it may take longer for this business model to work compared with selling ready-made patents already developed by a professor. Even Ibuka admits, "There is absolutely no way that we will be profitable within five years." There's also the ethical question of whether professors and students should essentially be hired -- as some would describe it -- by sponsors. But Ibuka is certain that this is a surer way to make money. "Unlike ventures, most of our clients have been in business over 30 years and are not desperate for quick inventions," says Ibuka. Whether the five-year deadline is appropriate or not is yet to be seen. After all, no TLO has been in business that long yet.

But one thing is for sure: Univer-sities will have a bigger role to play in Japan's technology industry in the coming years. Some pundits may argue that the heavily subsidized TLO scheme is just another rip-off of taxpayers money, but for now it seems to be one of the few sources of optimism for the future of industry-academia cooperation in this tech-centric country. For investors operating in Japan, the new TLOs deserve serious study.