HOW JAPAN PICKS AMERICA'S BRAINS Much of its economic success has been built on bought, borrowed, or stolen technology. Now U.S. companies are striking back -- but a two-way street is still far off.

(FORTUNE Magazine) – AFTER ITS DEFEAT in World War II, Japan was content to take foreign inventions -- the transistor, the laser, the videotape player -- and convert them into products that it could market around the world. Japan acquired much of its base of Western technology, most of it American, perfectly legally through licensing, careful study of scientific papers and patents, and imitation. But when the U.S. wasn't willing to share, some Japanese companies simply copied with little regard for patents and other intellectual property rights that the courts have only recently begun to define in many areas of high technology. The U.S., confident of its technical superiority, ''sold out to the Japanese,'' says G. Steven Burrill, head of the high-technology consulting group at Arthur Young, a Big Eight accounting firm. ''We let them share our brain.'' Now, belatedly awake to the recognition that Japan has been eating their breakfast, lunch, dinner, and bedtime snack, American companies are stirring. IBM vs. Fujitsu over computer software, Honeywell vs. Minolta over automatic focusing, Corning Glass vs. Sumitomo Electric over fiber optics -- these are only the latest, best-publicized complaints that Japan has stolen American technology. Even as those legal battles are fought out, the copycat cliche is becoming obsolete. A series of studies financed by the U.S. government since 1984 warn that Japan has caught up with the U.S. or passed it in the development of integrated circuits, fiber optics, computer hardware engineering, and advanced materials like polymers. It is pressing hard in some areas of biotechnology, and lags primarily in computer software. Already there are signs that the Japanese, buoyed by their new prowess, have assumed the arrogance of the U.S. along with its technology.

WHILE skirmishes over trade balances continue to dominate the governmental dialogue between Tokyo and Washington, technology is rapidly becoming the main battleground. ''The future of U.S.-Japan trade negotiations is increasingly high tech,'' says a top Western diplomat in Tokyo. Indeed, technology has been at the root of a number of recent diplomatic flaps between the two countries: sanctions against Japanese electronic products in response to microchip dumping, the illegal sale of Toshiba machine tools to the Soviet Union, demands for access to a big part of Japan's market for U.S. supercomputers, and attempts by Japanese bureaucrats to restrict foreign competition in domestic telecommunications. Sometimes protectionist sentiment spills into the technical arena. White House officials barred foreign scientists last July from a Washington, D.C., conference on superconductivity, where international competition is intense. The University of Rochester's business school was widely criticized in September for succumbing to pressure from Kodak and barring an employee of its archrival Fuji Photo Film, who wound up at MIT. And in its turn, MIT in November ruled out buying a supercomputer made by Japan's NEC, after a U.S. Commerce Department official warned the university that it might bring antidumping charges if the price was too low. ''Are the Japanese picking our brains?'' a congressional staffer asks. ''Yes. They're doing it very well. They're doing it legally. The question is whether we have a two-way street.'' As in the broader case of equal access to each other's domestic markets, building a two-way street isn't easy. For one thing, much U.S. basic research is done at universities or government centers -- and so is generally in the public domain; because Japanese universities have neglected basic research, much of it is done by corporations -- and so is proprietary. Says Daniel Burton, an official of the non-profit Council on Competitiveness: ''You can't get the same information from Hitachi that you can get from a university. If you're a company, you have a vested interest in keeping intellectual property within the company.'' Moreover, as their research and development matures, the Japanese will have less reason to need U.S. technology. According to the National Science Foundation, among the U.S., Britain, West Germany, France, and Japan, the U.S. did 69% of the R&D in 1965, during the post-Sputnik boom; by 1985, the U.S. share was just 55%. Corporations in the U.S. are beginning to realize that intellectual property may be their most valuable asset in competing with Japan. And with the Koreans, Taiwanese, and Brazilians, whose lower manufacturing and labor costs promise to make them serious rivals. Companies that may have viewed Japanese imitation as an annoying form of flattery a decade ago are now aggressively trying to protect their hard-earned knowledge. The three most recent cases: -- Corning Glass persuaded a federal judge this fall that Sumitomo Electric stole its patent for making fiber-optic cable, a discovery central to the development of all-purpose, high-capacity telecommunications. The judge ruled that Sumitomo had blatantly copied Corning's design for adding selected impurities to glass fiber so it will carry light efficiently. Sumitomo had to stop manufacturing the fibers at its North Carolina plant. -- Honeywell accused Minolta, one of Japan's biggest manufacturers of 35-mm cameras, of infringing Honeywell's patents on automatic-focusing technology. Honeywell demonstrated the technology for several Japanese camera makers five years ago and eventually sold licenses to a few. Minolta attended a demonstration but did not get a license from Honeywell. In two years its Maxxum and Alpha autofocus cameras have become worldwide best-sellers and revived a moribund business. Honeywell doesn't accuse Minolta of stealing, but argues that its patents cover the autofocus concept so thoroughly that Minolta must obtain a license. No trial date has been set. -- IBM and Fujitsu finally settled in September a copyright dispute that began way back in 1982. IBM accused Fujitsu of copying the software that controls its mainframe computers. After an initial agreement fell through, the companies turned to the American Arbitration Association. The arbitrators gave Fujitsu tightly controlled access to IBM's operating-system software for five to ten years -- probably at a stiff price. In turn IBM will have the right to examine Fujitsu's software for violations of the agreement. But the ruling apparently obliges IBM to reveal trade secrets to Fujitsu, which could make the Japanese company an even stronger competitor. The underlying reason that the Japanese need to tap American brainpower is to make up for the great weakness of their industrial juggernaut: the lack of basic research and creativity. Susumu Tonegawa, a Japanese-born researcher at MIT who won this year's Nobel Prize in Medicine, is highly critical of the absence of commitment to basic research in Japan. He contends that scientific concepts are essentially Western inventions and that Japanese culture remains a major block to true creativity. Scientific thinking, he argues, is a product of individualism, and ''in Japan, individualism has never been of personal value.'' The Japanese excel at applied science, says Tonegawa, because teamwork is important to success. After the war Japan failed to invest in basic research because it was too expensive and time consuming. That tradition has continued. ''The Japanese buy patents rather than developing their own technology, which requires enormous investment,'' says Tonegawa. ''They buy the patent, perfect it, synthesize it, sell it, and reinvest the money in another patent.'' The numbers support him: The U.S. maintains a healthy and growing surplus with Japan in license fees and royalties. In 1986, the Commerce Department reports, Japanese companies paid $697 million to U.S. firms, up from $549 million in 1984. In the relentless pursuit of new technology, Japanese companies have built a solid pipeline to America's research centers. Barely 800 U.S. citizens are studying at Japanese universities. But the National Science Foundation says that some 13,000 Japanese are studying in U.S. universities. In 1985, 95 Japanese nationals won Ph.D.s in engineering and science from American institutions. More than 300 Japanese scientists work at the National Institutes of Health -- the largest group of foreigners at the government- funded research center in Bethesda, Maryland. Probably the biggest batch of foreign researchers in Japan -- around 35 -- is at the National Laboratory for High Energy Physics. Japanese corporations pay for 14 professorships at MIT, and they are cranking up their other donations to U.S. universities. National Science Foundation surveys show that those contributions rose from $3.7 million in 1983 to $9 million in 1985.

BECAUSE Japanese companies prefer to hire undergraduates and train them their own way, most Japanese researchers sent to the U.S. are not academics but company employees. That corporate affiliation raises the fear that they will take leading-edge technology back to Japan, where it will be turned into more crushing exports. Japanese researchers strongly disagree. Michiyuki Uenohara, director of research at NEC, insists that he sends people to the U.S. not to bring back technology but to develop international connections and broaden their approach to problem solving. Uenohara, an Ohio State Ph.D. in engineering who spent ten years at AT&T's Bell Labs, says it is wrong to view Japanese researchers as spies. While at Bell Labs, he says, many of the projects he worked on were patented by Western Electric, AT&T's manufacturing arm. American scientists agree that Japanese researchers make excellent contributions outside their stifling home environment. R. M. Latanision, professor of materials science at MIT, says those he gets ''work hard and do first-class research.'' But unlike researchers from developing countries, most of the Japanese who study or work in the U.S. go back home after their studies are completed, taking their talent and newfound knowledge with them. Japan has tapped American brains in other ways. Close to 50% of Japanese corporate investment in research and development goes overseas, mostly to the U.S. The Japanese have been particularly interested in innovative small companies of the type they lack at home, where entrepreneurship is still in its infancy. Between 1980 and 1982, Japanese companies invested $2 million to $3 million in emerging growth firms in the U.S. By 1986 that figure had jumped to $200 million a year, says Mark Radtke, a vice president of Venture Economics, a consulting firm in Wellesley Hills, Massachusetts. For money- starved startups, Japanese investment can be irresistible, says Radtke. ''The Japanese companies can be very attractive to help them crack the Asian market,'' he adds. But the investments also enable Japan to acquire new technology early. The fear of getting left behind can bring out the worst in Japan Inc. In computer software, for example, the Japanese seem unable to catch up despite well-organized efforts. The Ministry of International Trade and Industry (MITI) proposed a law in 1984 that appeared to force foreign companies doing business in Japan to license their software to Japanese companies. In the ensuing international uproar the government backed down, but copyright experts at a recent conference on software protection in Tokyo say the Japanese haven't given up. Says Roy Freed, a U.S. copyright lawyer who is a visiting researcher at Tokyo University: ''They continue to display a 'have- not' mentality. They see themselves as users, not producers.'' Adds Hisao Ishihara of the government-financed Software Information Center: ''We have to be made aware that invading copyright is the same as stealing something.'' The cavalier attitude of some Japanese companies toward intellectual property may also reflect a new arrogance. As the Japanese evolve from ''have- nots'' to ''haves,'' it becomes more difficult for them to admit needing anything from the U.S. Recently the Japanese media have been ballyhooing the national effort to get into the aerospace business, where the U.S. is far ahead. Much has been made of a second-stage liquid oxygen-liquid hydrogen rocket developed by Mitsubishi Heavy Industries. There is almost no mention that the huge first stage and its engine were designed by McDonnell Douglas and Rocketdyne, both U.S. companies. Paying for the use of patents or copyrighted material can be expensive, and the strong yen has triggered a heroic effort to trim costs. Japanese managers complain that U.S. companies are jacking up prices. Says NEC's Uenohara: ''We're getting pressure to accelerate our own development of intellectual property.''

A MEASURE of Japan's progress can be found in the number of patent filings in the U.S., Japan's most important export market. The U.S. patent office in 1986 granted 14,000 patents to Japanese nationals vs. 38,000 to Americans. In fact so many Japanese are thought to have filed for patents at home in the hot new area of superconductivity that U.S. companies have complained that Japanese / are trying to preempt the field. Risaburo Nezu, a MITI planner in basic technology, says the filings are probably defensive, reflecting concern that someone in the U.S. may take out a broad basic patent that blocks everyone else, as Corning did in fiber optics. But all those Japanese patents will have an impact far in the future. Gerhard Parker, director of technology development at Intel, the California chipmaker, says that as U.S. patents expire and newer Japanese patents remain in effect, U.S. royalties to Japan will rise. There are other signs that Japan is no longer waiting for America to hand it technology -- possibly because it has already made off with the best available. Boasts Genya Chiba, director of Japan's Exploratory Research for Advanced Technology program: ''As Japan becomes more competitive, it becomes increasingly difficult to find superior technology in the rest of the world.'' To stimulate basic research, the Japanese government has poured money into new research labs and prodded companies to cooperate. Fujitsu R&D director Bun- ichi Oguchi says his company is now spending one-third of the research segment of his R&D budget on basic research. Since 1985, Nippon Telegraph & Telephone, the telecommunications giant, has nearly tripled its research labs from four to 11.

THE FACT that Americans now worry about their access to Japanese technology is an acknowledgment of Japan's new scientific competence. When the Japanese were known primarily as copycats, the flow of technology was essentially in one direction. It was also cheap. Aaron Gellman, president of a consulting firm, says that for years U.S. firms licensed technology to the Japanese without asking for a grant-back, the right to use any improvements they made. Says Gellman: ''This was very arrogant and implied that no one could improve on our technology.'' Ignorance of Japanese advances can be costly for rivals. Bruce Rubinger, director of studies for the Global Competitiveness Council, a high-tech research firm, says many U.S. patents are invalid because companies have not adequately searched foreign precedents. He cites a major U.S. semiconductor company that had been successfully suing American companies over a process for programming logic chips. When the company sued NEC, however, a patent search showed that the Japanese company had developed and patented the same procedure three years before the U.S. firm. Not all the blame for the absence of a two-way street in technology falls on Japan. U.S. scientists and companies have failed to take advantage of opportunities to tap Japanese academic research. ''What's wrong here is pure laziness,'' says Martin Anderson, an analyst with the MAC Group, a consulting firm in Cambridge, Massachusetts. He complains that few Japanese technical papers are translated and that few American scientists are going abroad. Says Anderson: ''In order to keep generating ideas, you've got to constantly see new things.'' A recent survey of large Japanese companies by the National Science Foundation found that about half were willing to accept visiting U.S. scientists in their research labs, many more than NSF had expected. But candidates are difficult to find because of the language and the lingering conviction that there is little to learn there. Says Richard J. Samuels, director of the MIT-Japan Science and Technology Program: ''Americans have become rather smug. They don't read foreign journals and they don't know a foreign language. '' MIT and a handful of other universities have started Japanese language programs for scientists and engineers; MIT actually places students in Japanese laboratories. U.S. databases are adding more translations of Japanese scientific publications.

ON THEIR END, the Japanese are trying to adjust to their new role as a scientific leader. ''We have to accept that our facilities have not been open to foreigners,'' says Chiba. He believes a consensus is forming in Japan that government and company laboratories must do more to attract Western scientists and to translate more Japanese research. At the same time, Chiba says, there are other barriers. Foreigners haven't been beating down the doors of Japanese institutions, in part because ''we are not known so far as a place for young scientists to prove themselves.'' While Japan struggles to open up, U.S. companies are becoming more protective of their technology. The recent rash of lawsuits shows that they are paying more attention to patents and pursuing violators more vigorously. They have also become more careful about joint ventures and licensing. Intel has refused to license its newest generation of 32-bit 80386 microprocessors to anyone but IBM; a company that wants to clone the most powerful of the new IBM PS/2 personal computers would have to buy the 80386s outright. Intel and NEC have exchanged lawsuits; Intel has accused the Japanese company of infringing its copyright on another chip. William Norris, chairman emeritus of Control Data, warns that any effort to achieve a balanced flow of technology between the U.S. and Japan will require concerted action and patience. ''It'll probably take ten years to get to the point where we should be now,'' says Norris. ''Let's face up to it and get it done before things get out of control.''