INNOVATION IN GLOBAL INDUSTRIES

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INNOVATION IN GLOBAL INDUSTRIES U.S. FIRMS COMPETING IN A NEW WORLD C O L L E C T E D S T U D I E S Jeffrey T. Macher and David C. Mowery, Editors Committee on the Competitiveness and Workforce Needs of U.S. Industry Board on Science, Technology, and Economic Policy Policy and Global Affairs

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THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract/Grant No. SB 1341-06-Z-0011, TO #2 between the National Academy of Sciences and the Technology Administration of the U.S. Department of Commerce; Contract/Grant No. SLON 2005-10-18 between the National Academy of Sciences and the Alfred P. Sloan Foundation; and Contract/Grant No. P116Z05283 between the National Academy of Sciences and the U. S. Department of Education. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number-13: 978-0-309-11631-2 International Standard Book Number-10: 0-309-11631-7 Library of Congress Catalog Card Number: 2008926521 Limited copies are available from: Board on Science, Technology, and Economic Policy National Research Council 500 Fifth Street, N.W., Keck Center 574, Washington, D.C. 20001 Phone: (202) 334-2200 Fax: (202) 334-1505 E-mail: step@nas.edu Cover: The cover design depicts a possible far distant future configuration bringing nearly all of the earth’s land mass into a single supercontinent, including merging the Americas into Asia. Copyright 2008 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examina- tion of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the Na- tional Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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COMMITTEE ON COMPETITIvENESS AND WORkFORCE NEEDS OF U.S. INDUSTRy David T. Morgenthaler, Chair Founding Partner, Morgenthaler Ventures David C. Mowery, Vice-Chair William A. & Betty H. Hasler Professor of New Enterprise Development University of California at Berkeley Ashish Arora Devesh kapur Professor of Economics and Public Director Policy Center for the Advanced Study of Heinz School, Carnegie Mellon India University University of Pennsylvania Nicholas M. Donofrio Thomas R. Pickering Executive Vice President, Innovation Vice-Chairman, Hills and Company and Technology U.S. Career Ambassador (retired) IBM Corporation AnnaLee Saxenian kenneth S. Flamm Dean and Professor, School of Dean Rusk Chair in International Affairs Information and Professor, Lyndon B. Johnson School of Public Department of City and Regional Affairs Planning University of Texas at Austin University of California at Berkeley Richard B. Freeman Denis F. Simon Herbert Ascherman Professor of Provost and Vice-President Economics for Academic Affairs, Harvard University Levin Graduate Institute of International Relations and Mary L. Good Commerce Donaghey University Professor and State University of New York Dean, Donaghey College of Richard P. Suttmeier Information Science and Systems Engineering Professor of Political Science and University of Arkansas at Little Rock Director, Asian Studies Program University of Oregon kent H. Hughes Director, Program on Science, Technology, America and the Global Economy Woodrow Wilson International Center for Scholars v

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Project Staff Stephen A. Merrill Study Director Mahendra Shunmoogam Program Associate Cynthia Getner Financial Associate vi

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BOARD ON SCIENCE, TECHNOLOGy, AND ECONOMIC POLICy Edward E. Penhoet Interim Chairman Director, Alta Partners Timothy F. Bresnahan Amory Houghton, Jr. Landau Professor in Technology and Former Member of Congress the Economy David T. Morgenthaler Stanford University Founding Partner Lewis W. Coleman Morgenthaler Ventures President Joseph P. Newhouse DreamWorks Animation John D. MacArthur Professor of kenneth S. Flamm Health Policy and Management Professor and Dean Rusk Chair in Director, Division of Health Policy International Affairs Research and Education Lyndon B. Johnson School of Public Harvard University Affairs Arati Prabhakar University of Texas at Austin General Partner Ralph E. Gomory U.S. Venture Partners President Emeritus William J. Raduchel Alfred P. Sloan Foundation Independent Director and Investor Mary L. Good Jack W. Schuler Donaghey University Professor Chairman and Dean, Donaghey College of Ventana Medical Systems, Inc. Information Science and Systems Alan Wm. Wolff Engineering University of Arkansas at Little Rock Partner Dewey & LeBoeuf LLP Ex-Officio Members Ralph J. Cicerone Harvey v. Fineberg President President National Academy of Sciences Institute of Medicine Charles M. vest President National Academy of Engineering vii

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STEP Staff Stephen A. Merrill Mahendra Shunmoogam Executive Director Program Associate Charles W. Wessner Jeffrey C. McCullough Program Director Program Associate Sujai J. Shivakumar Cynthia A. Getner Senior Program Officer Financial Associate David E. Dierksheide Program Officer viii

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Preface and Acknowledgments In 1999 the National Academies’ Board on Science, Technology, and Eco- nomic Policy (STEP) released a series of industry studies analyzing the sources of competitive resurgence from the 1980s to the 1990s of many U.S.-based firms in a variety of manufacturing and service sectors. These studies, published under the title U.S. Industry in 2000: Studies in Competitive Performance, included steel, chemicals, metal working, trucking, grocery retailing, retail banking, computing, semiconductors, hard disk drives, apparel, pharmaceuticals, and biotechnology. The general picture of stronger performance in the mid-to-late 1990s than in the early 1990s was attributed to a variety of factors including heavy investment in applications of information technology, supportive public policies, openness to innovation, and changes in supplier and customer relationships. Vigorous foreign competition forced cost-cutting changes in manufacturing processes, organiza- tion, and strategy but then receded, making the performance of U.S. industries look even better. As none of these favorable conditions could be assumed to be permanent, the collected studies persuasively made the point that U.S. industries’ superior performance is not guaranteed to continue. In late 2005 the STEP Board decided to reprise the study, focusing on the ac- celeration in global sourcing of innovation and emergence of new locations of re- search capacity, new sources of skilled technical workers, and the implications of these developments for U.S. businesses and workforce. Although the current study involves several of the same industries—in particular, semiconductors, personal computing, financial services, pharmaceuticals, and biotechnology—the overall selection shifted markedly toward technology-intensive producing, supporting, or using sectors to include software, flat panel displays, solid state lighting, logistics, and venture capital finance. The group of industries examined does not represent ix

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x PREFACE AND ACKNOWLEDGMENTS a carefully selected sample representative of the economy as a whole. Rather, it reflects a decision to again capitalize on the work of university-based multidisci- plinary research teams studying economic performance and technological change at the industry level. Most of these groups were formed and supported under the Industry Centers Program of the Alfred P. Sloan Foundation. To help integrate this work, the Board again asked David C. Mowery, Pro- fessor at the Haas School of Business at the University of California at Berkeley, to develop a general framework for analyzing changes in the structure of innova- tion over the past 10 to 15 years. Mowery in turn recruited Jeffrey T. Macher, Associate Professor, McDonough School of Business, Georgetown University, to assist in this effort and co-edit the resulting volume. The chapters in this volume were drafted independently by individual authors, and their findings and any policy recommendations do not represent a consensus among all of the contribu- tors to the volume. They also do not necessarily represent the opinions and views of the Committee on Competitiveness and Workforce Needs of U.S. Industry, the STEP Board, the National Academies, or the sponsoring organizations. In the course of their work, the editors and chapter authors participated in two public workshops in Washington, D.C. The first, on April 19, 2006, reviewed their preliminary findings with industry representatives and other analysts includ- ing Irving Wladawsky-Berger, IBM Corporation; Jack Gill, Vanguard Ventures and Harvard Medical School; Richard S. Golaszewski, GRA, Inc.; Jeffrey D. Tew, General Motors; Jerome H. Grossman, LionGate Corporation and Harvard University; Gordon W. Day, Optoelectronic Industry Development Association; Timothy J. Sturgeon, Massachusetts Institute of Technology; Charles W. Wade, Technology Forecasters, Inc.; Richard B. Freeman, Harvard University; Nancy Hauge, K12; Harold Salzman, the Urban Institute; and Navi Radjou, Forrester Research, Inc. A year later a second workshop was held, on April 20, 2007, to try to an- ticipate trends over the next several years in three broad sectors encompassing most of the industries being studied—information and computing technology, biopharmaceuticals, and finance. Speakers in addition to committee members and authors included Undersecretary Robert C. Cresanti, Commerce Depart- ment’s Technology Administration; Barry Jaruzelski, Booz Allen Hamilton; Robert D. Atkinson, Information Technology and Innovation Foundation; Alex Soojung-kim Pang, Institute for the Future; Bhaskar Chakravorti, McKinsey and Company; David Moschella, Leading Edge Forum; Michael E. Fawkes, Hewlett-Packard Company; Anna D. Barker, National Cancer Institute; Thomas R. Cech, Howard Hughes Medical Institute; Joseph Jasinski, Health Care Life Science, IBM; Andy Lee, Pfizer Inc.; T. L. Stebbins, Canaccord Adams, Inc.; karen G. Mills, Solera Capital; and Alex J. Pollock, American Enterprise Institute. As the editors state in their summary introduction to this collection, despite the emergence of robust R&D and innovative capabilities in East, Southeast, and

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xi PREFACE AND ACKNOWLEDGMENTS South Asia, and concerted efforts to develop them in other parts of the world, patterns of innovation are highly variable across industries and across firms within industries. Many industries and some firms within nearly all industries retain leading-edge capacity in the United States. The flat panel display sector, in which innovative activity for the most part has followed production abroad, is not as yet the norm. This is no reason for complacency about the outlook for the future, however. Empirically-based analyses such as those in this volume are inevitably backward-looking. Even recently issued patents generally represent filings two to five years back and R&D investments considerably earlier. Al- though not pessimistic overall, our authors compellingly document the rapidity of contemporary industrial change and shifts in competitive advantage. For that reason alone, innovation deserves more sustained public policy attention than it has been receiving. The STEP Board is grateful to the authors, the editors, and the workshop par- ticipants as well as to the sponsors of this activity—the Alfred P. Sloan Founda- tion, the U.S. Department of Education, and the Technology Administration of the U.S. Department of Commerce. This collection has been reviewed in draft from by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Academies’ Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making the published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their review of this report: Suma Athreye, Brunel University; MaryAnn Feldman, University of Toronto; Jeffrey Furman, Boston University; Bronwyn Hall, University of California at Berkeley; Megan MacGarvie, Boston University; Deepak Somaya, University of Maryland; Jerry Thursby, Emory University; and Philip Webre, Congres- sional Budget Office. Although the reviewers listed above have provided many constructive com- ments and suggestions, they were not asked to endorse the content of the report, nor did they see the final draft of the report before its release. Responsibility for the final content of this report rests entirely with the individual authors. David T. Morgenthaler, Chair Stephen A. Merrill, Study Director

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Contents INTRODUCTION 1 Jeffrey T. Macher and David C. Mowery 1 PERSONAL COMPUTING 19 Jason Dedrick and Kenneth L. Kraemer 2 SOFTWARE 53 Ashish Arora, Chris Forman, and JiWoong Yoon 3 SEMICONDUCTORS 101 Jeffrey T. Macher, David C. Mowery, and Alberto Di Minin 4 FLAT PANEL DISPLAyS 141 Jeffrey A. Hart 5 LIGHTING 163 Susan W. Sanderson, Kenneth L. Simons, Judith L. Walls, and Yin-Yi Lai, 6 PHARMACEUTICALS 207 Iain M. Cockburn 7 BIOTECHNOLOGy 231 Raine Hermans, Alicia Löffler, and Scott Stern xiii

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xiv CONTENTS 8 LOGISTICS 273 Anuradha Nagarajan and Chelsea C. White III 9 vENTURE CAPITAL 313 Martin Kenney, Martin Haemmig, and W. Richard Goe 10 FINANCIAL SERvICES 341 Ravi Aron