Examination of the Interrelationship Among the Software Industry Structure, Keiretsu, and Japanese Intellectual Property Protection for Software

Abstract

In Japan, in contrast to its U.S. counterpart, prepackaged software sales accounts for approximately fifteen percent of software industry revenues. Customized software has dominated the software market. This article analyzes the reasons for the underdevelopment of the Japanese prepackaged segment, while conveying a realistic picture of the Japanese software industry and the impact of the changing keiretsu structure. Significantly, keiretsu software companies, most of which are players in the custom software segment, do not suffer from a financing problem, thanks to their creditworthiness, which is based on the social recognition that a key company/a main bank of the same keiretsu group will not let them go bankrupt. Although strong financial backing is crucial to innovation, especially in the investment-first and R&D-driven prepackaged software business, Japanese software companies have difficulty in obtaining financing due to poorly developed venture capital, a lack of a real NASDAQ-type market, and bank lending which focuses on real property as collateral. This difference in financial strength has created the discrepancy between the dominant custom segment and the underdeveloped prepackaged software segment in Japan. With the on-going recession, Japanese companies pay more attention to current profits and cost performance than to trade relationships with their affiliated keiretsu companies. Consequently, keiretsu software companies face severe competition both inside and outside the keiretsu. Still, they remain within the keiretsu due to their creditworthiness as keiretsu companies, but continue to diversify their trade partners more to the outside of the keiretsu. Though most of the comparatively larger software companies in the dominant custom segment are keiretsu software companies, they have not depended upon implicit contracts with customers within the same keiretsu group since the 1980s. Even when explicit contracts are executed in Japan, legislation has great significance to intellectual property protection due to the relative simplicity of contracts and the lack of case law. The Japanese laws have provided sufficient protection for software since the 1980s, and have not been significantly different from the scope of protection in the United States. This has been the case with copyright, which has played a major role in protection of software until recently. Both countries' scope of patent protection for software-related inventions overlapped with the other's in the 1980s. Though the United States had trended toward wider patent protection for software-related inventions than Japan by the mid-1990s, Japan has been following in a similar direction. However, Japanese intellectual property protection for software did not help Japanese software companies to attract investment capital. Thus, the difference in the ability to obtain financing has led to the superiority of the custom segment over the prepackaged segment in Japan. Additionally, the attitude of Japanese users and the hardware environment had an impact upon this difference as explained in footnote 7 of the article and in Rieko Mashima, The Turning Point of Japanese Software Companies, 11 BERKELEY TECH. L.J. 429 (1996).