I recently came across a 2004 Bank of Japan analysis of the Japanese balance of trade in royalty payments. Japan recorded its first surplus in royalty payments in 2003, following a shift of industrial production overseas that resulting in greater income from overseas factories.
But the overall US-Japan balance of trade in royalty payments remains in the US favor. The US-Japan royalty balance in industrial property (trademark rights, right of registered designs, utility model rights and patents) turned to a Japanese surplus in 2002, mainly due to automobile, electrical machinery, and IT industries. That surplus is overwhelmed by the trade deficit with the US in copyright royalties, mainly in software. As the report notes:
As the United States maintains a position of overwhelming technological strength in the area of computer programs, roughly 60-70% of Japan’s total deficit in its balance of copyright payments is accounted for by its deficit vis-à-vis the United States.
The report’s conclusions are mixed:
What is the outlook for Japan’s balance of royalties and license fees? As it is unlikely US companies will easily lose their superiority in the area of software, Japan’s deficit in its balance of copyright royalties can be expected to remain basically unchanged for the time being. On the other hand, some significant changes can be expected with regard to China, which currently accounts for only 3.5% (first half of 2003) of Japanese exports (receipts) of royalties and license fees. As the Chinese authorities have eliminated their previous general restrictions on royalty amounts, once the manufacturing subsidiaries established during recent years of extremely active foreign direct investment in China begin to show profits, the flow of royalty payments from China can be expected to rise sharply. The royalty incomes of Japanese automobile manufacturers can also be expected to increase steadily as a result of a continued growth of local output in North America and Southeast Asia centered on Thailand. Royalty income will also be boosted by the continued rise in local content ratios. Therefore, we conclude that Japan’s total balance of payments of royalties and license fees will continue to move in the direction of larger surpluses.
However, a closer look at Japan’s balance of payments of royalties and license fees reveals that the current surplus is not the result of an increase in income from licensing intellectual property to non-residents (third parties). Rather, the bulk of the increase is due to payments for trademark and technical instruction received from non-residents (overseas subsidiaries) reflecting both the overseas shift of manufacturing facilities (structural factors) and the increase in overseas output resulting from buoyant economic conditions (cyclical factors). It is also necessary to keep in mind that, in the case of intra-firm trade, the policies of the parent company regarding the recovery of R&D expenditures etc. can significantly affect royalty income (size of surplus). Reviewing the US balance of payments of royalties and license fees from this perspective, it is notable that the US intrafirm trading ratio peaked over a decade ago and has been following a downward trend in recent years. In light of this trend, US companies have maintained their royalty income by licensing software and other core technologies to non-group companies. In its progress toward a truly technology-based economy, it will be desirable for Japan to boost receipts from extra-firm transactions in both software and hardware by achieving higher levels of technology and maturity.
That is the Japanese strategy. What is ours?