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E ~ xecutlve summary Internationalization is an increasingly pervasive force in U.S. man- ufacturing, creating new sources of competition and new standards for competitiveness. The growing importance of imports and exports in do- mestic manufacturing and the significant rise in foreign investment in the United States in recent years are tile most obvious evidence of interna- tionalization. Less obvious, but more important, are the interdependent relationships being established across national borders. International net- works of suppliers, customers, researchers, technology developers, and distributors have emerged, creating an unprecedented degree of global interdependence. The formation of these networks is being driven by manufacturing managers seeking to maximize competitive advantages in response to changes in markets, costs, technologies, and politics. Markets are global. Manufacturers cannot afford to ignore the rev- enue potential of foreign markets, the necessity of attacking competitors abroad to protect domestic market share, or the advantages of learning the demands of customers in diverse markets. For many product lines, penetration of global markets depends on having local production capacity for quick response to customer demand and manufacturing systems that can achieve constant improvement in cost, quality, and value. Cost priorities have shifted. Cheap labor no longer dominates de- cisions to manufacture offshore; few industries have product lines with sufficient labor content to justify investment strategies based solely on la- bor costs. Manufacturing costs are being driven by process control and flexibility, product quality, customer responsiveness, and the skills needed 1

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2 to spur constant improvement. The need to control total system costs determines the resources sought in decisions on international investment locations as well as the level of sophistication to be used in foreign plants. Technology is global. The sources of new technology have multiplied, and U.S. dominance in the creation of new technology has ended. Many countries have the human resources and scientific infrastructure to excel at research and technology development. Competitive success depends on how quickly and effectively new technology, from whatever source, is incorporated into new products and processes. The international economic and political environment is increasingly complex. Flexible exchange rates, the magnitude of global capital flows, and the virtual elimination of tariffs among developed countries, combined with the emergence of nontariff barriers as the dominant form of protectionism, have opened new market opportunities and introduced new sources of risk for global manufacturers. Internationalization has clouded the distinction between domestic and foreign policy and created pressure for greater international cooperation in setting national policies. Too many domestic manufacturers continue to base their strategies on the U.S. market, U.S. competitors, and U.S. technology. The changes wrought by internationalization are well understood by large multinational companies, both in the United States and abroad. In fact, U.S. multina- tionals have a more extensive global production base and longer experience at managing that base than firms of other nations, potentially creating a source of competitive advantage as internationalization progresses. On the other hand, the size of the U.S. market has long insulated domestic manufacturers from the pressures of foreign competition. Too few U.S. manufacturers yet realize the importance or the pervasiveness of the inter- nationalization process. They react to foreign competition in this market, rather than building a strategy for attacking foreign markets, gaining access to foreign technology, and building world-class production capabilities. Similarly, national policies must be placed in the context of global competition and global dissemination of technology. Internationalization has introduced considerations for policy that were less important or nonex- istent when the United States was virtually self-sufficient. For instance, the need to monitor and gain access to foreign technological developments has emerged as a major rtational priority. Similarly, the growth of foreign ownership of the domestic production base and the global dissemination of U.S.~wned production facilities have blurred the definition of a company as American or foreign, bringing new complications to established policies in areas such as trade and technology. Above all, internationalization has created a greater degree of choice for manufacturers pursuing global market share and profitability objectives, thereby generating greater competition among nations for manufacturing investment. The United States cannot

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3 rely on market size alone to attract the high-value manufacturing activities that are essential for building national wealth. Manufacturers will place their high-value activities where the resources, skills, and infrastructure are available to perform them most effectively. This fact dictates the standards that must be met in maintaining a favorable environment for investment, innovation, and operations. Given these realities, what factors are essential for corporate and na- tional success in the l990s? For both, internationalization must become the cornerstone of policy. The knowledge that global competition will be intense and constant, with different participants striving to maximize unique competitive advantages, must be the foundation of strategy. The dynamism of such a competitive environment dictates corporate and national strate- gies that are equally dynamic. The ability to implement these strategies in turn requires manufacturing resources that allow flexibility, constant improvement, and a focus on innovation. For manufacturers the essential ingredients of a successful strategy include: Developing managers with a broad understanding of not only for- eign markets and international competitors but also the technology and the knowledge to use it needed by world-class manufacturers. Building corporate intelligence on international markets, techno- logical developments, competitors' strategies, consumer demand, and po- litical changes as a prerequisite for aggressive pursuit of global market share. Strengthening core competitive capabilities the combination of technologies, skills, and products that provide competitive advantages that are difficult for competitors to imitate or overcome. Using international relationships with suppliers, researchers, tech- nology developers, and producers to leverage in-house resources while also using and absorbing outside expertise to strengthen core competitive capabilities. Speeding commercialization of new technologies by improving ac- cess to and utilization of external technology, integrating product and process design and engineering, and emphasizing rapid time to market as a core competence. Similar considerations apply in creating national policies that will strengthen U.S. competitive advantage in an environment of national com- petition for manufacturing investments. To ensure that the United States remains an attractive location for high-value manufacturing activities, poli- cymakers must take steps to:

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4 Spur competition in the United States by continuing to resist protec- tionist pressures and, at the same time, work to ensure that U.S. companies have open access to global markets. Build the intellectual assets required to perform advanced manu- facturing functions by investing in an effective educational infrastructure with emphasis on constantly upgrading the skills of the existing work force and on imparting state-of-the-art engineering and technology management practices to new graduates. Reassess the national information requirements for understanding the changing position of the U.S. economy and U.S. corporations in the global environment, thereby facilitating creation and implementation of appropriate national policies. Emphasize high-value manufacturing as a national core competitive capability by providing the incentives and resources intellectual, capital, infrastructural required to encourage private manufacturers to perform high-value activities in the United States. Internationalization has already made these factors essential to cor- porate and national success in the global economy. Unfortunately, U.S. corporations will find no generalizable prescriptions for acting on them. Each firm must match itself against its global competitors to establish benchmarks, assess market and technology potential on a global basis, and develop an implementable strategy based on its unique capabilities and objectives. Similar steps are needed on a national level. Little effective national strategy can be expected until the United States establishes her position vis-~-vis her global competitors; strengths must be maximized and weaknesses corrected. Such national action is the only way to implement a proactive strategy that builds on U.S. successes rather than reacting to foreign achievements. ~7 To maintain leadership in the dynamic world created by international- ization, the nation must recognize that global interdependence is here to stay. Such interdependence must be managed, through cooperation and collaboration between industry and government, including foreign partners, both to ensure continued advances in the global manufacturing system and to maximize U.S. interests as this global system evolves. The required ac- tions demand a national consensus that international manufacturing com- petitiveness deserves the highest national priority and, therefore, should command whatever resources are necessary.