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The Internationalization of U.S. Manufacturing: Causes and Consequences Committee for the Study of the Causes and Consequences of the Internationalization of U.S. Manufacturing Manufacturing Studies Board Commission on Engineering and Technical Systems National Research Council NATIONAL ACADEMY PRESS Washington, D.C. 1990

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NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the panel responsible for the report were chosen for their special competence and with regard for appropriate balance. This report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The National Academy of Sciences is a private, nonprofit, self-perpetuating society of dis- tinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Frank Press is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Robert M. White is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Samuel O. Thier is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Frank Press and Dr. Robert M. White are chairman and vice-chai~man, respectively, of the National Research Council. This study was supported by the Federal Emergency Management Administration and the National Science Foundation under Contract No. DMC-871-3483 between the National Science Foundation and the National Academy of Sciences, and by the Academy-Industry Program of the National Research Council. Library of Congress Catalog Card Number 90~2810 International Standard Book Number 0-309-04331-X Limited copies are available from: Manufacturing Studies Board National Research Council 2101 Constitution Avenue, HA 270 Washington, DC 20418 Additional copies are available for sale from: National Academy Press 2101 Constitution Avenue, N.W. Washington, D.C. 20418 S214 Printed in the United States of America

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COMMITTEE FOR THE STUDY OF THE CAUSES AND CONSEQUENCES OF THE INTERNATIONALIZATION OF U.S. MANUFACTURING PAUL J. KEHOE (Chairman), Vice Chairman (retired), Kellogg Company, Battle Creek, Michigan CLAUDE E. BARFIELD, Director, Science and Technology Studies, American Enterprise Institute, Washington, D.C. KAN CHEN, Professor of Electrical Engineering and Computer Science, University of Michigan, Ann Arbor CHARLES E. EBERLE, Executive Vice President, Consumer Products Business, James River Corporation, Richmond, Virginia MURRAY FINLEY, President (retired), Amalgamated Clothing and Textile Workers Union, New York, New York HERBERT I. FUSFELD, Director, Center for Science and Technology Policy, School of Management, Rensselaer Polytechnic Institute, Troy, New York HOWARD K. GRUENSPECHT, Economic Advisor to the Chairman, International Trade Commission, Washington, D.C. IAN HANCOCK, Managing Director, Putnam, Hayes & Bartlett, Ltd., London, England WILLIAM C. HI11INGER, Executive Vice President (retired), RCA Corporation, Summit, New Jersey WILLIAM G. HOWARD, JR., National Academy of Engineering Senior Fellow and Senior Vice President and Director of R&D, Motorola, Inc. (on sabbatical), Scottsdale, Arizona MELVIN KUPPERMAN, President, ~ Epstein & Sons International, Inc., Chicago, Illinois TINA M. MARQUEZ, Purchasing Manager, Apple Computer, Inc., Fremont, California DAVID C. MOWERY, School of Business, University of California, Berkeley WILSON NOLEN, Corporate Vice President and Assistant to the Chairman and CEO, Becton Dickinson and Company, Franklin Lakes, New Jersey MICHAEL OPPENHEIMER, Executive Vice President, The Futures Group, Glastonbury, Connecticut C. K PRA1HALAD, Professor, Corporate Strategy and International Business, School of Business Administration, University of Michigan, Ann Arbor MICHAEL RADNOR, Professor, Kellogg Graduate School of Management, and Director, Center for Interdisciplinary Study of Science and Technology, Northwestern University, Evanston, Illinois , . .

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JOHN C. READ, Vice President & General Manager, Engine Group, Donaldson and Company, Minneapolis, Minnesota J. RONALD STEIGER, JR., Vice President for Computer-Integrated Manufacturing, IBM Corporation, Purchase, New York W. EDWARD STEINMUELLER, Deputy Director, Center for Economic Policy Research, Stanford University, Stanford, California SIDNEY TOP OL, Chairman of the Board, Scientific-Atlanta, Inc., Atlanta, Georgia Staff THOMAS C. MAHONEY, Project Director, and Acting Director of the Manufacturing Studies Board KERSTIN B. POLLACK, Deputy Director of the Manufacturing Studies Board, and Director of New Program Development ERIC ~ THACKER, Research Associate LUCY V. FUSCO, Staff Assistant 1V

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MANUFACTURING STUDIES BOARD JAMES F. LARDNER (Chairman), Vice President (retired), Component Group, Deere & Company MATTHEW O. DIGGS, JR., Vice Chairman, Copeland Corporation GEORGE C. EADS, Vice President, Product Planning and Economics, General Motors Corporation HEINZ K FEtIDRICH, Vice President, Manufacturing, IBM Corporation LEONARD A. HARVEY, Executive Vice President (retired), Borg-Warner Chemical Company EDWARD E. LAWLER III, Director, Center for Effective Organization, University of Southern California JOEL MOSES, Head, Department of Electrical and Computer Engineering, Massachusetts Institute of Technology LAURENCE C. SEIFERT, Vice President, Communications and Computer Products, Sourcing and Manufacturing, AT&T JOHN M. STEWART, Director, McKinsey and Company, Inc. WILLIAM J. USERY, JR., President, Bill Used Associates, Inc. HERBERT B. VOELCKER, Charles Lake Professor of Engineering, Sibley School of Mechanical Engineering, Cornell University v

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Preface and Acknowledgments Confronted with ever-increasing volume of foreign products competing for domestic and global market share, a rapidly rising number of foreign companies establishing manufacturing operations in the United States, and world-wide dispersion of skills and technology, U.S. manufacturing finds itself in a new, largely unfamiliar, competitive environment. Global competition has become a powerful driving force behind manufacturing investment, operations, and strategic decisions. Of course, U.S. multinationals have led the way in foreign investment, building global manufacturing presence and gaining global market share by internationalizing their operations. However, the pace of change in global markets has accelerated in the last 15 years, with unprecedented levels of penetration of the U.S. market through imports and direct investment, growing competitive challenges to American products in foreign markets, and a rise in the size, number, and capabilities of foreign multinationals that has eliminated the dominance of U.S. firms. Internationalization has forced rapid change on companies historically immune to foreign competition and, in a short time, totally redefined the meaning of competitive manufacturing. The pace of change has arguably left many companies unprepared. Accustomed to solving domestic customers and fighting well-known com- petitors, many firms have had difficulty adapting to new competition. The need to help U.S. manufacturers and policymakers respond to greater for- eign competition and continued international interdependence led directly to this project. With funding from the Federal Emergency Management . . V11

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Agency, the National Science Foundation, and the Academy-Industry Pro- gram, the Manufacturing Studies Board of the National Research Council formed the Committee on the Causes and Consequences of the Interna- tionalization of U.S. Manufacturing. The committee was asked to examine the responses of U.S. manufacturers to trends in international competi- tion and to relate these competitive responses to current and prospective government policies. The findings and analysis contained in this report are based on the committee members' experience either managing, studying, or advising major multinational manufacturers. Information was gathered through in- terviews with senior managers from manufacturing companies in industries as diverse as biotechnology, paper products, and auto parts. In addition, professors from the Center for the Study of U.S.-Japan Relations at North- western University, led by Dr. Atul Wad, conducted interviews for the committee with senior manufacturing managers in Japan. The report has also benefitted from a parallel effort by a National Academy of Engineering study committee that has explored the globalization of technology and its policy implications for the United States (National Interests in an Age of Global Technology, 19~30~. Based on its discussions and analysis of the current environment for international competition, the committee has written this report to dispel misconceptions regarding the drivers of internationalization and, therefore, to improve understanding of both the challenges and the opportunities of a global market and production base. Important consequences of inter- nationalization for both manufacturers and national policy are described. Finally, the committee provides its assessment of what it takes to be suc- cessful as manufacturers and as a nation in the international competitive environment. The Committee on the Causes and Consequences of the International- ization of U.S. Manufacturing is responsible for organizing and conducting the research and writing the findings of this study. Our work would not have been possible without the contributions of the Manufacturing Studies Board staff: former executive director George Kuper, deputy director Ker- stin Pollack, senior staff officer Tom Mahoney, and administrative assistant Lucy Fusco. We also wish to thank Proctor Reid for his assistance during the early stages of the project and Kenneth Reese for his help in editing the final report. . . . vail Paul J. Kehoe Chairman

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Contents EXECUTIVE SUMMARY. 1. INTRODUCTION CAUSES OF INTERNATIONALIZATION .. Changes in Global Markets, 10 Global Dissemination of Technology, 16 Changes in Cost Priorities, 22 Political and Economic Factors, 26 Conclusion, 30 NATIONAL ECONOMIC AND POLITICAL IMPLICATIONS Inward Investment and Foreign Ownership, 34 Technology Flows, 37 Domestic Versus International Policy, 38 Inadequate Information, 39 Conclusion, 40 4. KEYS TO SUCCESS .. Sources of Corporate Success, 41 Sources of National Success, 50 IX . . 34 ..... 41

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5. CONCLUSION. APPENDIX: INDICATORS OF INTERNATIONALIZATION.. BIBLIOGRAPHY ....57 .59 x .... 63

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The Internationalization of U.S. Manufacturing: Causes and Consequences

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