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3 National Economic and Political Implications The initiatives being taken by manufacturers to succeed in the global economy are creating networks of assets, technology sources, markets, suppliers, and partners that transcend national borders. Building such networks, or at least participating in them, is becoming a critical factor in competitive success, not only for multinational corporations but also for smaller companies being challenged in domestic markets. Although it is difficult to predict all the consequences for specific companies or the national manufacturing sector, a few trends seem clear. INWARD INVESTMENT AND FOREIGN OWNERSHIP The importance of foreign investment flowing into the U.S. manufac- turing sector will continue to grow. Although foreigners now own roughly 12 percent of total U.S. manufacturing assets, the percentage can be much higher in specific industries. For instance, foreign firms control about one- third of U.S. production in the chemical industry and about 40 percent in the tire industry.) In the most visible case, Japanese production of au- tomobiles in U.S. factories is forecast to account for 12 to 15 percent of domestic production by 1991.2 ~ Graham and Krugman, Foreign Direct Investment in the United! States, p. 33. 2 Jonathan P. Hicks, "Foreign Owners Are Shaking Up the Competition," New York Times, May 28, 1989, p. F9. 34

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35 Tangible reasons to encourage inward flows of foreign investment: Honda has been steadily increasing the American content of cars built at its Marysville, Ohio, plant, requiring demanding quality and delivery improvements by U.S. suppliers to the benefit of their total business. Stamped panels in production inside Honda's Marysville Auto Plant. These investment inflows have become a critical part of the U.S. man- ufacturing sector. They provide capital to help maintain the size of the manufacturing base, introduce competition to reinvigorate domestic firms, and in many cases displace imports or even produce exports. Such invest- ment flows also bring closer contact with foreign management practices, investment procedures and priorities, and organizational relationships that benefit domestic firms. For instance, Honda has been steadily increasing the U.S. content of the cars built at its Marysville, Ohio, plant, requiring demanding improvements in quality and delivery by U.S. suppliers to the benefit of their total business. Inland Steel gained additional customers as a result of working with Honda to improve the quality of its coated steel.3 Such indirect benefits, combined with capital needed for manufacturing investment, provide tangible reasons to encourage inward flows of foreign investment. Unfortunately, foreign direct investment has evoked considerable crit- icism for two major reasons. First, there is the fear that the United States is losing control of its productive assets, endangering national security. A 3Doron P. Levin, "Honda Blurs Line Between American and Foreign," New York Times, March 14,1990, pp. 1, D8.

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36 number of concerns surface in this context. They range from the role of foreign affiliates during wartime, to the potential loss of foreign component supplies, to the loss of control of critical technologies, yet the true degree of threat in these areas has not been systematically analyzed or confirmed. On one hand, political intervention, justified on the premise of controlling critical technologies, has squelched a few foreign acquisitions, such as Fu- jitsu's attempted purchase of Fairchild Industries in 1988. On the other hand, little effort has been made to identity critical technologies outside the defense context, to determine the status of U.S. technology relative to foreign technology, or to identify the range of technologies in which foreign investment should be encouraged to strengthen national capabilities. The second major criticism of foreign investment is that foreign a~li- ates in the United States are primarily assemblers of imported components, providing low-wage jobs and little value added. The evidence does not sup- port this concern. Compared to U.S. firms in the same industries, foreign affiliates pay comparable wages, conduct similar levels of R&D, and add comparable valued In fact, the majority of foreign investment goes into the acquisition of existing firms, often resulting in an increase in capital spending for facilities' improvement. The predominance of these concerns in the national debate does a national disservice. Instead of decrying unsubstantiated negative effects of inward investmentechoing European concerns about U.S. investment in the 1960snational attention should be focused on creating a favorable en- vironment for investments in high-value manufacturing activities, regardless of the source. Product and process design and implementation, engineer- ing, and R&D provide the basis for innovation and continued participation in emerging markets. These types of high-value activities, combined with production of high-value products, must be pursued in the United States to maintain vigorous economic growth. As corporations continue to confront the pressures of global compe- tition, managers will make decisions intended to maximize the competi- tiveness of their firms. The competitive environment will not allow U.S. firms the luxury of siting manufacturing activities in this country for patri- otic reasons, and the size of the U.S. market is no guarantee that foreign firms will undertake high-value activities here. Managers will locate these high-value activities where the intellectual expertise and business infras- tructure exist to perform them most effectively and profitably. This basic fact must govern the decisions of policymakers. Policy initiatives must focus on strengthening the national infrastructure needed to support high-value activities and nurture new business development, rather than addressing 4 Graham and Krugman, Foreign Direct Investment u: the United States, pp. 48-54.

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37 unsupported and misplaced concerns about ownership and control of the U.S. manufacturing base. TECHNOLOGY FLOWS A second clear consequence of the internationalization process is that it has become impossible to control the Dow of technology across national borders. This development is unsettling from the point of view of a nation like the United States that bases its international competitiveness on ad- vanced technology. The prevalent tone of national debate has emphasized the need to control the flow of technology abroad using export controls or exclusion of foreign firms from R&D consortia. For instance, the Mi- croelectronics and Computer Technology Corporation (MCC), a private research consortium based in Austin, Texas, limits membership to compa- nies with more than 50 percent U.S. or Canadian ownership. The issue is more complex, however, when the consortium receives government funding and blocks foreign membership, which is the case for the National Cen- ter for Manufacturing Sciences (NCMS) and for Sematech.5 Government funding makes foreign membership an issue of national policy, and forbid- ding it can prompt retaliation by foreign governments. For instance, the Joint European Submicron Silicon (JESSI) research effort is closed to U.S. companies. Such attempts to limit foreign access to U.S. civilian technology ignore the realities of both the U.S. and international economies. The relationships among companies, the presence of companies in every major market, the dispersion of technology-creating activities across countries, and the free flow of goods have made technology an international resource. Further- more, the open education system and the relationship between industrial and academic research in this country give foreigners easy access to U.S. basic research. In fact, the predominance of foreigners in U.S. graduate schools of science and engineering makes such research strongly dependent on them (see Figure 8~. Instead of trying to restrict foreign access to U.S. technology an impossibilityU.S. energy should focus on facilitating the flow of foreign technology into the United States by ensuring comparable access to foreign research and conducting effective intelligence on foreign technological developments, and, most importantly, on speeding the process of turning technology into commercial products. 5 For membership purposes, NCMS requires companies to be "U.S.-based with a substantial portion of their research, development, and manufacturing occurring within U.S. boundaries. In addition, U.S. citizens must hold majority ownership and control...."

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38 50 40 30 20 10 Temporary Visa Holders as % Total PhDs Engineering _ ~ Mathematics A__ ~~ All Science ~ = ~ ~ ~ O ON Physical Science ~- o 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 FIGURE 8 Ph.D.s awarded to foreigners in science and engineering, 1978-1988. DOMESTIC VERSUS INTERNATIONAL POLICY : ~ internationalization is blurring the distinction between domestic and international economic and technology policy. In a growing number of cases, policies developed with little consideration for their effects on trade have become targets for trade negotiations. Japan, for instance, has the lowest tariff of any industrial country, but her domestic policies and cus- toms determine the openness of the market to foreign products. A good example is the recent negotiations on Motorola's access to the cellular phone market in lblyo and Osaka, which hinged on the allocation of radio frequency rights in those cities rather than on import restrictions on foreign cellular phones. In the United States the linkage has become particularly apparent in technology policy.6 The recent debate on high-definition tele- vision (HDTV) provides an example. The Federal Communication Com- mission's decision to require HDTV transmissions that will be compatible with existing receivers effectively precluded use of emerging Japanese and European transmission standards. The decision will certainly slow, though not eliminate, Japanese and European penetration of the U.S. market and will require additional development of U.S.-compatible equipment. The potential for conflict between domestic and international policy is 6 For a discussion of many of the issues involved in technology policy and internationalization, see David C. M owe ry and Nathan Rosenberg, "New Developments in U.S. Technology Policy Im- plications for Competitiveness and International Trade Policy," Califomia Management Review, Fall 1989, pp. 107-124.

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39 particularly apparent in regulatory policy. Virtually every type of regula- tion, from control of smokestack emissions to mandatory worker benefits to antitrust, has some impact on the ability of U.S. manufacturers to com- pete globally. When the U.S. economy was fairly self-sufficient, regulatory policy could be imposed with the knowledge that all major producers would be treated equally. Although foreign firms manufacturing in the United States are subject to the same regulatory regime as domestic firms, inter- nationalization has increased the number of foreign competitors operating under different and potentially less costly regulatory conditions and cre- ated opportunities for domestic firms to produce abroad to avoid some types of U.S. regulations. Such considerations should play a greater role in setting U.S. regulatory policy to avoid making this country a high-cost manufacturing location unnecessarily. INADEQUATE INFORMATION Another consequence of internationalization is that public and private statistical data often do not capture the breadth of information needed to formulate effective policy. Existing government statistics have become inadequate to reflect the complex relationships among the United States as a country, U.S. corporations, and the rest of the world. For instance, current government reporting requirements, data gathering methods, and statistical interpretations are not designed to take account of the growing percentage of trade conducted on an intrafirm basis. When a firm ships U-S.-made components abroad for final assembly, reimports some of the final product, and exports the rest to third markets, the transaction is far more complicated and represents far more export value to the U.S. firm than is shown in standard trade statistics.7 Relatively minor adjustments to an individual firm's production system can create dramatic changes in the accounting of national imports and exports. Such inadequacies in the existing trade statistics indicate that the trade balance is flawed as the measure of national competitiveness or the definer of needed policy measures. A more accurate picture of national competitiveness could be gleaned from data on factors such as global market shares of U.S. companies, nature and location of manufacturing activities, and sources of materiel supply.8 7W~lliam Finan, "Globalization Is Skewing the Trade Statistics," The International Economy, Januar,/February 1988, p. 132, and Paul Blustein, "Critics Say U.S. Economic Picture Is Blurred by Reliance on Bad Data," Wall Street Journal, January 10, 1986, p. B1. Thor an overview of the factors influencing the accuracy of national statistics, see Office of Tech- nology Assessment, Statistical Needs for a Changmg US. Economy, Washington, D.C., U.S. Gov- ernment Printing Office, 1989.

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40 CONCLUSION In an earlier era, when the U.S. economy was largely self-sufficient, domestic policy could be set with little consideration of its international implications. Both public and private policymakers could make decisions with the confidence that the primary competitors in the U.S. market were all domestic, that the sources of new technology were domestic, and that the only information needed to set sound policy was available nationally. Similarly, foreign policy was shaped by this confidence in U.S. superiority, emphasizing free trade and open access to and national treatment for U.S. direct investment abroad. For many years the United States was relatively immune from the reciprocal consequences of these policies. Internationalization has changed the context for U.S. policy. Historic policies have not only expanded world trade, spurred the growth of U.S. multinational corporations, and advanced global economic development but also have increased this country's integration into the global economy. Awareness of the domestic policies of major trading partners, foreign technology developments, and the global flow of technologies has become essential to effective policymaking. The need for additional information that accurately portrays the position of U.S. manufacturers and the U.S. economy has increased at the same time that characterizing a company as U.S. or foreign has become more difficult. These factors have heightened the need to define national interests clearly with the recognition that the United States has much to gain from foreign manufacturers and much to lose from restrictions on foreign competition. The fundamental premises of U.S. policy free flows of goods, invest- ment, technology, and scientific knowledge-remain valid. Recognizing the benefits and the necessity of inward flows of investment, technology, and goods has become more important than propounding the virtues of outward flows.