This report is about innovation, defined here as any activity that provides users with new or improved processes or products. It discusses industrial behavior, excluding such activities as education that lie outside the production sphere. The study addresses several issues: (1) the differences between the United States and Japan in their approaches to innovation, (2) the reasons and sources of these differences, (3) how these differences and their sources are changing, and (4) the implications for innovation in the future. The author sought out previous studies in which comparisons could be drawn between Japan and the United States. These comparative studies were placed in a context provided by policy research, macroeconomic analyses, and productivity investigations, as well as by detailed case studies of automobile manufacturing and biotechnology. Most of the reviewed literature covers the period from 1950 to the 1980s. The author presents a possible view of the future that includes U.S. strengths in science, research, new products and concepts, graduate education, entrepreneurship, and venture capital; and Japanese strengths in financial capital, product commercialization, applied technology, and production efficiency.