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4 Keys to Success Internationalization has created unprecedented competition for U.S. manufacturers. Success requires that quality, cost, service, and value be truly world class, regardless of the size of the firm or type of industry. A number of factors can be identified that have become essential to the competitiveness of U.S. manufacturing companies and the nation's manufacturing sector. Though specific steps needed to maintain global competitiveness will vary by company, the following themes can be applied across the board as the foundation of corporate and national success in the internationalization process. SOURCES OF CORPORATE SUCCESS Internationalization does not change the metrics of corporate success. The fundamental importance of profitability in the U.S. system is not likely to change, but corporations will have to recognize the need to place less emphasis on short-term profits and more emphasis on participating in in- ternational markets in positioning themselves for long-term profitability. In this light three other characteristics can be linked to corporate success in the international environment. First, the firm must maintain control of corporate destiny by retaining control of the core capabilities necessary to support a strong long-term presence in its chosen markets and technologies. Second, the firm must be able to benefit from changes in technology, indus- trial structure, and other significant events. Third, the firm must nurture the stakeholders in the business, including employees, suppliers, customers, 41

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42 communities, and shareholders. A manufacturer that can achieve these objectives and maintain long-term profitability will benefit from the inter- nationalization process. The challenge is to use internationalization as a tool to strengthen the firm's abilities in these areas. Corporate Imperatives Drawing on its research, observations, and experience in interna- tional manufacturing, the committee identified several factors necessary for long-term success in the emerging global marketplace. As usual, specific implementation steps vary, but the concepts apply universally. 1. Develop necessary managerial capabilities Fostering international experience should be made an explicit part of management development planning. Despite the impact of international- ization on the broad base of U.S. manufacturing, too few manufacturers have managers with significant international experience or understanding of the international marketplace. A few multinational companies emphasize foreign expenence, but too many firms retain a culture that both discour- ages foreign assignments and fails to take advantage of foreign management experience. U.S. companies need to implement an explicit practice of rotat- ing managers to a variety of foreign locations to impart a broad perspective of unique international markets. Such a practice should be applied, at a minimum, to manufacturing and marketing managers since the need to recognize customers' needs in diverse global markets and respond to them quickly and effectively will be prerequisites to corporate success. Broader experience in international operations is not the only need in management development. Steps are also needed to improve the manage- ment of technology in U.S. corporations. Again, some firms are very good at developing, acquiring, and leveraging technological assets, but, overall, technology management remains a weakness. Managers need to do a better job of . - , cat identifying the key technologies that determine the firm's ability to compete in specific product segments now and in the future, . creating the capability to exploit existing expertise and update that expertise constantly, assessing the technological capabilities of competitors and tracking relevant technological developments from sources around the world, and orchestrating this entire body of knowledge to maintain a techno- logical advantage.

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43 2. Accumulate and exploit key competitive capabilities Given that resources such as funds, talent, technologies, distribution networks, and marketing information are becoming both equal and mo- bile among international competitors, the only viable route to long-term success is to develop proprietary competitive capabilities that allow the firm to perform critical activities better and faster than the competition. Key competitive capabilities encompass an array of tangible and intangible strengths that build on each other and provide the ability to create innova- tions, to take advantage of them rapidly, and to respond to the challenges of competitors by quickly introducing products of competing cost, quality, and functionality. These strengths stem from a combination of technology, corporate organization, and collective learning abilities that are difficult to imitate because they are deeply imbedded in the firm. For example, 3M Corporation applies its expertise in substrates and coatings to create a leading position in businesses ranging from magnetic tape to masking tape. Honda considers strong capabilities in internal combustion engine techno- logy to be critical to the global success of its businesses. Casio uses its proficiency in miniaturization across an expanding product line? including a pocket-sized photocopier.) In the current manufacturing environment of rapid technology flows, high investment costs, and global competition, the ability to accumulate and strengthen key competitive capabilities is typically beyond the capacity of in-house resources. Managers must explicitly assess the capabilities the firm has today, which of them will be critical in the future, and what other capabilities need to be built or acquired to ensure long-term competitiveness. A critical question is which capabilities must be retained, practiced, and owned by the firm and which can be obtained from outside. The answer requires a holistic view of the firm's products, markets, and long- term strategy. For instance, the decision to manufacture or buy a specific part cannot be based only on cost. It also requires an assessment of the part's importance to the final product; the importance of the final product to corporate success; opportunities to gain competitive advantage through improvements in the part; and the design, engineering, and manufacturing capabilities gained as a direct result of making that part. For example, General Electric used such considerations in its decision to redesign its large refrigerator compressors and to upgrade the manufacturing systems used for their production rather than close the existing compressor line, buy from outside suppliers, both domestic and foreign, and risk losing both ~ Lee concept of key competitive capabilities, or core competences, is more fully explored by C. K. Prahalad and Gary Hamel in "The Core Competence of the Corporation," Harvard Business Review, May-June 1990, pp. 79-91.

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44 : ~~ : ::: ~~:~:~::::~:~:~:~:~::~ ~~:~ ~~ ~ ::: I: ::S :: :: :.:< T:: S: ~ S: S~ ?: ~ ~ x SS ~ S ~ General Electric used a holistic view of the firm's products, markets, and long-term strategy in its decision to redesign refrigerator compressors to allow competitive manufacture in- house rather than source from Japan and risk losing both the design and manufacturing expertise necessary to participate in the compressor market. the design and manufacturing expertise necessary to participate in the large refrigerator market.2 Strong capabilities in manufacturing-related functions will be increas- ~ngly critical to international success. Building a system of constant im- provement in manufacturing is an example of a core competitive capability that provides unique advantages. Such a system must include a process of benchmarking existing manufacturing capabilities against both competitors and emerging technological developments, creating an ability to absorb new 2This decision-making process is described extensively by Ira Magaziner and Mark Patinkin in The Silent War: Inside the Global Business Battles Shaping Amenca's Future, New York, Ran- dom House, 1989, pp. 67-100. Although deficiencies in the initial redesign led to compressor failures, necessitating purchases of compressors from outside suppliers while design corrections were made, the new manufacturing systems continue to perform well and General Electric has gained invaluable experience in mass producing extremely close tolerance parts. See Thomas F. O'Boyle, "GE Refrigerator Woes Illustrate the Hazards in Changing a Product," Wall Street Joumal, May 7, 1990, pp. A1, AS.

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45 manufacturing techniques and technologies into existing processes, and en- suring that manufacturing improvements feed through to other functions and activities in the organization. This feedthrough should occur both hor- izontally and vertically. Horizontally, the interaction between design and manufacturing capabilities can be a strong basis for unique competitive ad- vantages: improvements in production processes foster improved product designs, and design improvements, demanded by customers or to match competitors, force further advances in manufacturing processes. Vertically, manufacturing capabilities at the final product level drive capabilities at all the intermediate levels from subassemblies and parts to materials, tools, and methods. The firms that are best at building key capabilities in man- ufacturing and integrating them horizontally and vertically throughout the firm will have a strong basis on which to build world-class competitiveness. 3. Collect and exploit global intelligence A specific activity that U.S. manufacturers have tended to neglect is systematically gathering and using information on competitors, technolog- ical developments, and emerging product opportunities. Too many U.S. manufacturers remain provincial, focusing strictly on the domestic market in terms of market opportunities, assessments of competitors, and invest- ment decisions. Few U.S. firms keep tabs on developments in science and technology in universities and other firms in the United States. In- stead, intelligence gathering continues to have a marketing focus; efforts to gather relevant manufacturing and technological data remain haphazard and largely ineffective. Perhaps the most significant implication of internationalization is that U.S. manufacturers must broaden their frame of reference to incorporate global competitors and opportunities. They pay little attention to foreign competitors until they face a direct threat in the United States; they make no attempt to gain access to foreign technologies, and too few of them track external technological developments. Such a cavalier attitude to competi- tors and technologies that will likely affect the business is unaffordable in today's international markets. U.S. manufacturers must build a systematic global intelligence network to collect coherent, strategically useful informa- tion from both domestic and foreign sources. The capacity to tap diverse sources of information, to absorb new ideas, and to integrate them into both operations and strategy has become critical to competing successfully in the international market. Starting with an assessment of the information the firm already has or can obtain readily, managers and workers should determine what additional information is needed on markets, competitors, technologies, politics, and economics that will affect their business;

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46 what means are available for acquiring such information cost effec- tively; and what procedures, structures, and systems are needed to ensure that the right information is in the right hands in the appropriate format in time to act effectively. The motivation for building effective intelligence systems must come from a shift in thinking about the global market and the profit opportunities of participating fully in that market. Implementing such a system and, more importantly, ensuring effective use of the results require fundamental changes in the total business system. It must include clear incentives to use the information and to devote the resources necessary to effect action. The exercise is not trivial, but it has become absolutely essential to long-term success in the international manufacturing environment. 4. Tap international capabilities by participating in global networks Few manufacturing companies have the resources in-house to develop every promising technology, counter every competitive threat, and build a dominant presence in every important market. Success on a global scale requires that internal resources be used as effectively as possible and that they be leveraged with skills and resources available outside the firm. Building and participating in global networks can be an effective mechanism for gaining the most from internal capabilities while gaining access to external sources of competitiveness. Three types of networks deserve attention. The first is simply net- works between customers and suppliers. Collaborative relationships with competitors is the second type of network becoming more prominent in the international arena. Examples include joint research with foreign com- panies, contracting with other firms to do manufacturing, and joint product development and manufacturing with marketing remaining distinct. The third type, too often overlooked, is the network established among sub- sidiaries and divisions within the same firm. Companies' management of their participation in these types of networks has become a significant factor in their international competitive success. Little is new, of course, in the concept of networks as a way to leverage resources, but the internationalization process is introducing new consid- erations that are not yet fully recognized by U.S. managers. For instance, close relations between suppliers and customers are an absolute necessity in the manufacture of many complex products. In some cases, foreign suppli- ers are the only competitive source of key components or equipment. With a few prominent exceptions, however, the concept of supplier relations as networks of technological capabilities and market information to be ex- ploited in ways that go beyond simple contractual obligations has not been

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47 extensively embraced by U.S. manufacturers. Particularly with purchasing from foreign manufacturers, U.S. companies too often are motivated solely by the low cost of the product; the possibility of using the relationship to absorb key lessons about why the supplier's costs are lower, quality higher, and delivery times shorter than in-house production is simply ignored. Collaborations with competitors create another type of network that, while essential in many businesses, can be mismanaged if the goals of the collaboration are not clearly delineated and the lessons learned not absorbed effectively into the organization. Managers must remember that the assets each partner contributes to such ventures depreciate over time; the market context in which the venture operates also varies, so the value of the venture to each partner will change over time. The dynamic nature of such relationships must be explicitly recognized. If collaborations with competitors are to be effective in building international networks and core competitive capabilities, managers must invest in the assets and activities that will sustain and maximize the value of the collaboration.3 Effective participation in international networks requires new man- agerial skills and explicit consideration of the full capabilities available in-house, including all foreign subsidiaries, and the trade-offs involved in sharing technology or market knowledge with competitors or potential competitors. In this context, using key competitive capabilities to obtain unique advantages from a shared source of information becomes especially important to competitive success. An organization's ability to learn through its international networks and to act on the resulting lessons is crucial in determining the nature and success of its global activities. 5. Maximize value Achieving a combination of cost, quality, delivery, and performance that maximizes value to the customer has become the determinant of global manufacturing success. Maximizing value to the customer, for instance by mobilizing unique manufacturing capabilities to provide distinctive product features and to facilitate responsiveness, is the strategy most likely to build global market share for U.S. manufacturers. Moreover, a value-based strategy often provides a sustainable competitive advantage by building customer loyalty and capturing the benefits of well-developed competitive capabilities. Improvements in production systems, fostered primarily by Japanese manufacturers, are defining the steps necessary to maximize value. Im- proving worker skills, redefining supplier-customer relations, integrating product and process design and engineering, using appropriate advanced 3Ga~y Hamel, Yves ~ Doz. and C. K. Prahalad, "Collaborate with Your Competitom and Win," [Iarvard Business Review, Janua~y-February, 1989, pp. 133-139.

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48 rise The quality aggression strategy of the Loctite corporation has given the firm a major position in the growing world-wide electronics industry. The firms Chipbonder TM 360, which permits surface mounted devices to be bonded to printed circuit boards during the manufacturing process, was developed to meet a specific need in the manufacture of electronic equipment. manufacturing technologies, and creating information systems that convey the status of markets, competition, technology, and the total production system are keys to creating world-class manufacturing capabilities. For example, companies in a variety of markets are using their manufacturing systems to make the concept of quality aggression a central feature of their competitive strategies. These firms use technology and total quality control practices to command premium prices and strong customer loyalty as well as to reveal and minimize the costs of quality to strengthen profit margins, creating resources for innovation. Loctite Corporation, for one, has used a quality aggression strategy to become a leading producer of engineering adhesives and other specialty chemicals for world markets based on quality products and continuous advances in chemical technology. Similarly, Mil- lipore has built a global business in fluid analysis and purification systems based on superior technology.4 An important point to bear in mind from a national perspective is that high-value products are not limited to relatively expensive, high-technology 4American Business Conference, Wnningin the World Market.

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49 products that succeed because of their sophistication. Although high- technology products will continue to be a source of competitive advantage for this country, standard technology products for commodity markets that compete on price and features also provide high value. U.S. manufacturers cannot afford to abandon these market segments. Continued participation depends on companies building effective manufacturing systems in their domestic plants and, at the same time, integrating the capabilities of foreign suppliers and partners in ways that strengthen core capabilities in manufacturing. Meeting these requirements represents the fundamental challenge of internationalization and the key to maximizing value in world markets. 6. Speed technology commercialization A number of aspects of the internationalization process have combined to make the ability to commercialize new technologies quickly critical to success. Me increasing number of foreign competitors with advanced tech- nological capabilities has multiplied the potential sources of new products. Capital costs in some industries have made quick penetration of markets to gain production volume a necessity for profitability. Finally, short product life cycles in a growing number of industries are creating advantages for firms who are first to market. In the current international manufacturing environment, managing the technology commercialization process requires an ability to be both a technology pioneer and a quick follower. U.S. companies have long viewed their ability to introduce new technologies into mass markets as a critical competitive advantage. In fact, U.S. corporations, universities, and government laboratories devote so many resources to the creation of new science and technology that pioneering new technologies must retain a central role in corporate strategy. At the same time, the international mobility of technology and the technological sophistication of foreign competitors require an ability to be a rapid follower as well as a technology pioneer. U.S. managers too often overlook the importance of quickly matching the technological introductions of competitors, often preferring to take a leapfrog approach. Yet while the next breakthrough is being prepared, the U.S. firm misses the valuable learning experience of having a product competing in the marketplace and cannot take advantage of gradual technology iterations incorporated into the competitor's product. Leapfrogging, in effect, becomes more difficult when it involves a moving target. Speeding technology commercialization is closely linked to all the other success factors identified. An essential aspect is the emphasis on global intelligence and the ability to feed the resulting information into an effective manufacturing organization. The ability to speed commercialization, even

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so to make rapid product commercialization that maximizes customer value a core competitive capability, hinges on the intellectual capital available to U.S. manufacturers. Maximizing intellectual capital has been the implicit strategy of the United States in world markets, but there is disturbing evidence that this resource is slipping. The importance of developing and harnessing skills, expertise, and creativity embodied in intellectual capital is so great that it Is the focus of the following suggestions for ensuring national success. SOURCES OF NATIONAL SUCCESS A central consequence of internationalization is that manufacturers have an unprecedented and growing degree of choice in their decisions on production and investment locations. As companies increase their ability to separate design, engineering, production, and marketing geographically while still maintaining a globally integrated manufacturing system, oppor- tunities will grow to enjoy the benefits of participating in the U.S. market regardless of where production takes place. It is presumptuous to as- sume that market size alone will stimulate investments in high value-added manufacturing activities in this country. The attractiveness of a location for manufacturing investments is determined by many additional factors- low costs, a strong supplier base, well-trained workers, skilled engineers and managers, and access to advanced technology. The realities of global competition are such that the interests of manufacturing corporations- performing functions in their most effective location may diverge from the national interest of attracting high-value manufacturing activities. Because internationalization has created unprecedented competition among countries for manufacturing investments, a conscious effort is needed to build and leverage the national assets that will spur manufactur- ing activity in the United States. This country must have a comprehensive set of national policies that will ensure competitiveness with rapidly advanc- ing foreign locations policies that support a U.S. industrial base with the ability to attack global markets rather than policies that defend historical positions. This fundamental requirement suggests a number of national success factors. They focus on building national intellectual capital by spurring competition, investment, and knowledge creation. 1. Maintain open markets It is not necessary to rehash the advantages of fair and open trade, but it is worth noting how internationalization is changing the dynamics of trade protection. In classic (and simple) terms, trade restraints repre- sent a victory of producers beset by foreign competition over consumers of

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51 foreign goods. With the growth of international networks, however, the dis- tinctions between domestic and foreign producers and between producers and consumers have blurred. In automobiles, for instance, the production networks that have emerged among U.S., Japanese, European, and Korean manufacturers in both parts and final products now make any type of trade restrictions difficult to implement effectively. The three U.S. producers have become customers, suppliers, and partners of foreign firms; they have built extensive manufacturing capacity abroad, especially in Mexico; and the major Japanese producers have established significant North Ameri- can production capacity. Under these conditions the costs and benefits of protection would be difficult to assess. Similar developments in other indus- tries, ranging from machine tools to electronics, have effectively precluded trade protection as a realistic option for helping U.S. producers.5 The argument for trade protection has taken a more aggressive tone in recent years. Many analysts claim that U.S. firms suffer from foreign competition in the domestic market without having equal access to competi- tors' markets. Though protecting the U.S. market might provide additional leverage in trade negotiations, there is strong evidence that such protec- tion only temporarily affects foreign producers' U.S. market share as they increase U.S. production capacity. Current policy emphasis on opening foreign markets to U.S. exports and investment should be continued, but using domestic protection as a bargaining chip unjustifiably damages both consumers and producers. Particularly given the futility of unambiguously capturing any benefits from trade protection, there is clearly no substitute for the level and strength of competition provided by open markets. International trade introduces new technologies, new management practices, and new strategic priorities that would otherwise penetrate U.S. industry slowly at best. Renewed attention to quality, efforts to improve worker participation in production management, changes in customer-supplier relationships, and other trends sweeping the manufacturing base have been forced by foreign competition. They have become the benchmarks of world-class manufacturing and are the clearest possible indication of the absolute necessity of open markets, both in the United States and abroad, to the long-term success of U.S. manufacturing. 2. Build intellectual assets The competitive imperatives emerging in the international manufac- turing environment are placing a premium on intellectual assets. In many 5The effects of international investment and alliances on trade policy, and the effects of trade policy on national competitiveness, are discussed in detail lay Jagdish Bhagwati in Protectionism, Boston, Mass., MIT Press, 1988.

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52 industries the emphasis has shifted from minimizing labor content and cost to attracting and using a skilled work force to gain competitive advantage from superior operation and maintenance of advanced manufacturing sys- tems. If U.S. manufacturers are to use such advanced systems to provide superior value to global customers, and if foreign manufacturers are to perceive advantages in establishing high-value activities in this country, the United States must provide the intellectual capital to make such strategies profitable. That means continued investment in basic research and greater attention to education. A great deal of effort has gone into improving primary and secondary education, and progress is being made on a local basis, but the overall quality of U.S. education remains too low. A U.S. aerospace firm, for example, discovered in a recent survey that its factory employees read on average at an eighth-grade level; math skills were only slightly better. The Office of Technology Assessment reports that U.S. twelfth graders ranked twelfth and fourteenth in geometry and algebra, respectively, among students in 15 developed and developing countries.6 U.S. manufacturers cannot succeed when they must devote undue attention to product and process design to ensure quality production by a low-skilled work force. The situation can only get worse as international competition demands greater flexibility, more worker responsibility, and more use of sophisticated technology. An often overlooked fact is that the people who will be working in U.S. manufacturing in the year 2000 are already in the work force. Im- provements in national intellectual assets must include a focus on building the infrastructure to facilitate continuing education and retraining. Two- and 4-year technical colleges play a key role, but to be effective they must have a close relationship with industry. Because industry itself is often the source of new technologies and techniques, technical colleges can be important links in disseminating the best practices and upgrading the skills and knowledge of the nation's work force. Without dramatic improvements in U.S. education, admittedly a long-term process, the educated work forces in foreign countries will provide important competitive advantages and in- crease the attraction of those locations for new manufacturing investments by U.S. firms. Although retraining and continuing education deseIve emphasis, the need to strengthen intellectual assets also has ramifications for academe, es- pecially U.S. engineering and business schools. Shortcomings in engineering education result in poor engineering practice in U.S. manufacturing corpo- rations. Some analysts attribute cost advantages of foreign manufacturers 6 Office of Technology Assessment, Making Things Better: Competingin Manufacturirl~, Washing- ton, D.C., U.S. Government Printing Office, 1990, p. 13.

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53 to their product designs rather than to any great differences in technology or input costs. For instance, an automobile door produced in the United States can cost twice as much as one produced in Japan, mainly because of design. Japanese engineers design for less scrap and fewer components and specify less expensive materials and more realistic performance mar- gins.7 Though some of these factors are a function of corporate culture and practice, much depends on how engineers are trained. 3. Reassess information requirements The inability of national statistics to capture the full extent and meaning of U.S. integration with the international economy imposes increasing handicaps on the policymaking process. The rise of global competitors, the integration of production systems and corporate ownership worldwide, the inflow of direct investment into the United States, and the dispersion of technological excellence globally have been so extensive that U.S. policy and data gathering efforts have not kept pace. For example, in a recent study of U.S. merchandise trade statistics, the U.S. General Accounting Office found that monthly trade balances are highly volatile and do not necessarily indicate changes in trade performance, that the accuracy of export statistics is questionable, and that existing data do not reflect changes in global production wrought by internationalization.8 Though improvements in trade data are essential, attention should be paid to broader issues: 1. What information is needed to direct, participate in, and respond to developments in the international production system? 2. What mechanisms are available or need to be developed to acquire and disseminate such information in a timely manner? 3. What definitions and methodologies need to be established to provide an appropriate basis for analyzing the information to provide useful policy insight? Lack of resolution of these questions will continue to create impediments to consistent policy development and will cause unnecessary Dolitical disoutes with U.S. trading partners. As a key example, consider the disputes that have already arisen over foreign investment in U.S. h~gh-technology companies and the exclusion of foreign companies from government-sponsored research consortia both here and abroad. The lack of clear criteria for defining a manufacturer ~ 1 1 7Leif G. Soderberg, "Facing Up to the Engineering Gap," Me McKinsey Quarterly, Spring 1989, pp. 2-18. General Accounting Of Bce, Merchandise Trade Statistics: Some Obse~vatior~s, Washington, D.C., U.S. Government Printing Office, April 1989.

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54 as U.S. or foreign makes such discriminating policies appear capricious. Possible criteria for U.S. firms that could be consistently applied and in- ternationally accepted include a specified level of activity, in all functions, to be performed within U.S. borders, and a majority equity interest to be held by U.S. citizens. Alternatively, the question could be made moot by negotiating to make foreign economic systems so similar to the U.S. system, in terms of openness, competition, procurement, and general government support, that questions of fairness are eliminated and nationality becomes a neutral issue. Current policy seems to be an amalgam of both of these approaches. A clearer definition of U.S. firms would provide a basis for including foreign interests in domestic policy debates and for reconciling national interests with global production regardless of nationality. It would also help to eliminate contradictory policies and provide a basis for es- tablishing the benefits of foreign investment and foreign production in the United States.9 Defining corporate nationality, or determining that such definition is unnecessary, is one step in providing the policy basis for judging infor- mation requirements. The goal should be to gather sufficient appropriate data, from both domestic and foreign sources, to support policy needs and to provide the ability to anticipate and guide events in international manufacturing to a greater extent than is possible now. 4. Retain high value-added manufacturing as a key national competitive capability by providing a favorable manufacturing environment The question of what manufacturing capabilities are essential to na- tional well-being tends to arise in policy discussions only in the context of national defense. Those discussions ought to be broadened to encom- pass key issues of wealth creation, employment generation, and continued national ability to participate in important emerging market segments. Pol- icymakers should recognize, however, that different industries and different manufacturing activities generate very different income and employment effects, which are impossible to predict a priori. It is, therefore, impossible to judge the full value of retaining or the cost of losing any particular manufacturing capability. Instead, the essential role of government should be to provide the incentive structure and resources necessary to encourage private manufacturers to perform high-value functions in the United States. Assuming a national consensus that high-value manufacturing must remain a national competitive capability, what steps are necessary to create a favorable environment for such activities in the United States? Many have been suggested elsewhere. They include providing incentives for 9The issue of defining a U.S. company is discussed more fully by Robert Reich in "Who Is Us?," Harvard Business Review, Janua~y-Februa~y 1990, pp. 53 64.

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55 long-term investment through favorable tax treatment of long-term capital gains, making the R&D tax credit permanent, revising antitrust restric- tions to allow joint production agreements in addition to R&D consortia, providing additional incentives for U.S. students to pursue degrees in sci- ence and engineering, and strengthening global intellectual property rights. Although the costs and benefits of these and similar policy proposals are hotly debated, their assumed objectives of increasing investment, strength- ening technological resources, and building intellectual capital are central elements in making the United States an attractive location for high-value manufacturing activities. This economy-wide approach to ensuring the availability of human and capital resources needed for high-value manufacturing should be the focus of government policy. Inevitably, however, concern for the health of key industries will spark government intervention to ensure that certain capabilities, deemed necessary for national defense, for instance, remain in U.S. hands. Such debates are becoming more common now that the United States is no longer superior in a range of technologies from semi- conductors to engineered materials. Government responses have included research support (Sematech, NCMS), trade protection (semiconductors, machine tools), and direct negotiation of technology transfer (FSX). These and other cases entail unique circumstances for instance, different levels of foreign participation in the relevant U.S. industries and varied political importance. Nevertheless, when government intervention is deemed desir- able, the decision should be based on thorough analysis of a consistent set of factc ~ and the type of government helD provided should be evaluated against all available options.~ 1 A The objective of retaining high-value manufacturing as a key national competitive capability implies a number of factors that should be considered in policy debates about assistance for industry. ~ reiterate the most important factors, the value of specific manufacturing capabilities should be defined not only in terms of criticality to defense systems but also in relation to technology and knowledge content, importance as a supplier to other industries, and importance to U.S. exports. Although job creation or protection is a major political motivator, potential employment effects need to be assessed in terms of the quality and knowledge content of the affected jobs, not just quantity. When direct government intervention is deemed necessary to retain specific manufacturing capabilities, it should be done in a way that least distorts trade. Given the pervasiveness of the internationalization process, iOThis discussion is not intended to imply that extensive analysis is not now performed before government intervention. See, for example, Congressional Budget Office. The Benefits and Risks of Federal Fund~ngfor Sematech, Washington, D.C., U.S. Congress, 1987. -

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56 strict trade protection sacrifices access to foreign technology, invites re- taliation and thereby closes major foreign markets to U.S. exports, and diminishes the incentives for constant improvement in product and pro- cesses created by foreign competition. Other mechanisms, such as support for R&D, encouragement of consortia activities, direct subsidies for adop- tion of new technology, and public funding for development of technical standards, would be preferable to the indirect subsidies implied by trade protection. In the context of high value-added manufacturing as a core competi- tive capability, it might be useful for policymakers to think of the national manufacturing base as if it were a single corporation. The United States must be able to interact with the international manufacturing community from a position of strength. With appropriate national policies to spur investment and research and to improve education, both foreign and do- mestic manufacturers will have incentives to perform high-value activities in the United States. Government policy should continue to emphasize both strengthening the national skill base and ensuring access to foreign research so that new technologies, regardless of origin, can be rapidly incorporated into U.~. products. Much as corporations will participate in international networks to help strengthen and exploit their competitive capabilities, the United States should take part in the interdependent global economy in the context of a strong domestic manufacturing and technology base with the capability to participate in high-value markets. With the internationaliza- tion process accelerating, a policy mix that builds core national competitive capabilities in high-value manufacturing, interacting with the global market to exploit and strengthen them, is the only sure way to achieve the ultimate national goal to advance the national standard of living.