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OCR for page 41
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
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: :::
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::S ::
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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
OCR for page 47
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
OCR for page 50
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. -
OCR for page 56
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.
Representative terms from entire chapter:
manufacturing capabilities
