Risk Management and Innovation in Japan, Britain and the USA

Ruth Taplin

• Publisher: Taylor & Francis
• Year: 2005
• eBook ISBN: 9781134207930
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Assessing and managing risk is vitally important, and is increasingly studied in a range of areas including politics and international relations, finance and insurance, and innovation and the valuing of intangible assets such as patents and intellectual property. The degree to which innovation is encouraged or otherwise – a key factor for many businesses - depends in part on the attitude towards risk in the context in which it takes place.

Taplin considers the different attitudes towards risk and innovation, and the different ways in which risk and innovation are handled, in Japan, Britain the USA. Providing a broad and detailed examination of the subject, she discusses topics including risk management standards, managing risk in marketing, the insurance industry, patents, and in venture capital, and of how risk management in organizations has evolved.

1 Introduction

An interdisciplinary and cross-cultural approach

Ruth Taplin and Nick Schymyck

Introduction

It is opportune to publish a book on risk management and innovation. It is almost axiomatic to say that risks are at their greatest during periods of change. At the moment we are seeing the rapid introduction of new technologies, for example genetically modified (GM) foods, biotechnology and nanotechnology, which bring with them exciting new opportunities. They also create a whole new set of risks, which will themselves be both a great opportunity and a challenge.

Risk and innovation are also linked to intellectual property (IP) whereby the bulk of assets in most companies are becoming intangible. The basis of IP is innovative, original ideas that make the risk greater as original ideas are a rare commodity which the less original seek to copy and infringe. In this book we cover new emerging risks and insurance responses, the increasingly complex risks associated with capital markets and new ways of protecting such risk through insurance, developments in enterprise risk management and, of course, IP – from a variety of approaches: the insurance and risk management perspective, managing risk in the Japanese and UK patent courts and then IP and bridging loans with particular reference to their emerging roles for the venture and rehabilitation of businesses in Japan. The book carries two overarching themes: first, the interrelationship between risk and innovation and, second, the need for a cross-cultural and interdisciplinary approach to risk management as set out in this introductory chapter.

The concept of risk being interdisciplinary and cross-cultural

The concept of risk is broadening in nature and taking on an interdisciplinary nature. It is following the trend in the widening of the definition of IP into many disciplines because intangible assets have become increasingly pervasive in companies at all levels and across different professions. The definition of risk is changing as it becomes interwoven with innovation and a rapidly globalizing world. For companies to survive they must innovate at a previously unparalleled rate and in the context of greater uncertainty. This can only mean that the risks they take are deepening. The management of risk has also always varied according to the cultural context. In a globalized world it is becoming imperative to understand the variations in risk taken at a cultural level, which affect business decisions profoundly. If one society is risk averse and one risk taking it will affect the way in which business can be conducted. Further on in this chapter we explore these cross-cultural differences with regard to East Asian, North American and European cultures.

The scope of this book is, therefore, necessarily broad in its exploration of the concept of risk at a variety of levels, in different contexts and emerging considerations. Therefore, risk management is explored in different cultures, and in a variety of industries, professions and disciplines, including banking, insurance, law, accountancy, education, IP, alternative risk transfer, development banking and the patent courts.

Unsurprisingly, risk management from necessity is continuing to evolve rapidly to respond to these developments in a proactive manner. In this book we aim to move the understanding of the processes of risk to new levels.

Definition

There are many definitions of risk management and there are many views as to where risk management as a process begins and ends and what its responsibilities should be. Some definitions are fairly narrow and some quite broad. The nature of risk reflects the fact that the future holds great uncertainty. Risks can represent both threats and dangers as well as offering significant opportunities. To fit in with the theme of innovation we have preferred to take an expansive view of risk management and this will also align itself with the advent of enterprise risk management where an organization-wide approach is taken to consider all of the risks facing an organization. For the purposes of this chapter we have taken risk management to mean ‘the process of understanding the nature of uncertain future events and making positive plans to mitigate them where they represent threats or to take advantage of them where they represent opportunities’.¹ The definition therefore encompasses both ‘upside’ and ‘downside’ risk. The AIRMIC Risk Management Standard ,² for example, states that ‘Risk Management is increasingly recognised with both positive and negative aspects of risk’. This broad view moves risk management to the core of an organization’s activities and makes it essential to the organization’s strategy. Aligning risk management with upside risk may also see risk management bringing with it competitive advantage for those organizations that embed robust risk management structures. The development of enterprise risk management, holistic risk management and the Chief Risk Officer can be seen as a natural development from a broad definition of risk management.

Above all, risk management is a dynamic process whereby intervening factors can cause outcomes to differ from those planned. Internal causes can be for the most part grouped under operational risks, which include fraud, system failure, the disruption of production, human error and so forth.

Other risks that will be covered in this book include emerging or new risk, systems risk, credit risk, market risk and liquidity risk. A pervasive feature of many of the risks under consideration, and particularly emerging risk, is that they are often systemic in nature – an incident in one place may have dramatic and unforeseen consequences elsewhere or in a number of different places.

Systems risk as opposed to systemic risk refers to the risk of sustaining losses that result from breakdown or malfunction of computer systems, systems defects or the improper usage of computers.

The other three risks (credit, market and liquidity risk) are considered mainly in relation to banking functions. The first is credit risk, which refers to the risk of sustaining losses resulting from a decline or complete loss in the value of assets due to the deterioration in the financial circumstances of the borrower. Credit risk management involves the monitoring of individual loans in addition to bank-wide portfolio management.

Market risk comprises interest rate risk, based on changing interest rates, and exchange risk which results from issuing foreign currency bonds and from extending foreign currency loans. Liquidity risk refers to unexpected short-term funding requirements that may occur.

Risk and innovation

At the heart of both risk taking and innovation is the ability to adapt to change, to view change as an opportunity rather than a threat. Therefore, risk can be viewed both positively as an opportunity and negatively as a threat. With competition intensifying on international markets and research costs escalating and necessitating greater cooperation among companies in the form of innovative consortia, being overprotective of one’s interests and being overcautious concerning risk taking and cooperating with other companies can only lead to poor results. The UK’s Department of Trade and Industry estimates that the top 700 R&D active companies globally spent over £200bn on R&D in the financial year 2003/4. Eighty billion pounds was spent by companies based in the Americas (mostly the US), £73bn in Europe and £50bn in the rest of the world (mainly Japan).³ At 4.2 per cent of sales for such companies R&D is clearly a massive item of expenditure.

Change is essential to the process of innovation and, in the modern world of increasing complexity and rapid change, managing efficiently the risk of changing opportunities, even if it entails innovation being created within traditional institutions in society such as the family, is the only way forward. Entrepreneurs are among the best equipped people to deal with risk as they ride on waves of change and see the majority of opportunities that come their way. Entrepreneurs recognize the abundance of opportunities that surround them and decide quickly which are the best irrespective of the risk as they think of innovative ways to manage risk, making systematically thoughtful decisions through intelligent choices, and rearranging existing resources so that they become more productive.

Expanded role of risk management

Traditional role

Until the recent past the practice of risk management has often, although not always, taken a disparate and uncoordinated approach to the risks facing an organization. This meant that risks were often treated separately with different sections of an organization taking responsibility for different risks. The issue of a silo approach to risk management has been well written about and discussed in risk management literature. Often an organization’s risk manager would have been responsible for the negotiation of a firm’s insurance policies and also hazard risk management, particularly in connection with the organization’s physical assets such as buildings, equipment and stock. The more sophisticated or complex organizations might also buy alternative risk transfer (ART) products, a process that will be explained in Oliver Prior’s chapter (Chapter 6), and these would often also have fallen within the risk manager’s remit. Other risks such as legal, financial or IT would often be handled elsewhere within the organization, say by the General Counsel, Finance Director or Chief Technology Officer respectively. Thus, there was not one overarching approach to the total risks facing a firm. This disparate approach to risk also meant that some areas of risk were not even considered.

In the recent past a variety of pressures have caused risk management to broaden its approach and become future-facing to the total risks facing an organization. One overriding reason is that a traditional approach is simply no longer sufficient to match today’s risks and the aspirations of organizations. At the same time a number of corporate scandals often involving the equivalent of a corporate meltdown has led to the realization that compartmentalizing or departmentalizing the risk function will simply mean that it will not be able to do its job properly. We summarize reasons for this evolution below.

Changing nature of business and impact of technology

Business has become much more complex during recent decades. As men tioned above globalization continues to increase unabated. Organizations often have operations in many different territories. The use of the internet and e-commerce was minimal just ten years ago whereas now they are essential features of the way we work. The intangible assets of an organization, for example IP, reputation and brand, are now likely to form a significant proportion of a firm’s total value. The types of claim an organization could face are also now far wider than ever before.

Risk management has simply evolved to meet the changing nature and requirements of business and thereby has avoided gaps appearing in the firm’s approach to risk and significant issues being missed.

Insurance and insurable risk

The period 1996–2000 was a period of plentiful insurance capacity and reducing premium rates. At that time insurers were wil...

Table of contents

• Cover
• Half Title
• Routledge Studies in the Growth Economies of Asia
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Notes on contributors
• Preface
• Acknowledgements
• 1 Introduction: an interdisciplinary and cross-cultural approach
• 2 Emerging risk
• 3 Intangible assets, risk management and insurance: bringing all minds together
• 4 Developments in patent enforcement procedure in Japan and England
• 5 Risk transfer in a changing world
• 6 Transferring insurable risk
• 7 Recent risk financing innovations: motives, principles and practices
• 8 The evolution of enterprise risk management
• 9 Intellectual property and bridging loans: their emerging roles in venture finance and business rehabilitation in Japan
• Index