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- Opportunities and Challenges of Globalization THE PROMISE OF GLOBALIZATION The globalization of technical activities and the closing of the postwar technology gaps among nations offer both the United States and its trading partners several major opportunities for technical and economic advance. First, the globalization of industry and technology promises to acceler- ate transnational integration and cross-fertilization in engineering, technology, and management. As multilateral flows of trade, investment, and technology increase and more companies are drawn into global industri- al networks of production, research, finance, and distribution, more firms are able to exploit the special competencies and technologies of an ever larger number of world-class national technical enterprises. This, in turn, speeds the development and diffusion of new product and process technolo- gies and new "best practice" engineering and management techniques worldwide. Thirty years ago, international technology flows between U.S. corpora- tions and their foreign affiliates in most high-technology industries were by and large unidirectional, outward from the United States. Since the mid- 1960s, the flow of technology and know-how between American and affili- ated or unaffiliated foreign firms has become increasingly reciprocal as for- eign technical competence has grown (Mansfield and Romeo, 1984~. During the 1980s, however, both the pace of reverse technology flows into the United States and public appreciation of its significance increased rapid- ly. This is perhaps most apparent in technologically more mature U.S. indus- tries, such as steel and automobiles, where foreign, particularly Japanese, 45

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46 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY product and process technologies and management techniques have made significant contributions toward improving overall performance in recent years. Yet even the most technically dynamic industries studied by the com- mittee demonstrated a shift toward more reciprocal flows of technology and "best practice" engineering and management techniques. Consider, for example, relatively recent adoption by U.S. companies such as Motorola, Xerox, and Hewlett-Packard of techniques developed by Japanese firms for the management of technology and other productive resources, for example, total quality control, just-in-time manufacturing, and concurrent engineer- ing. The contribution of Japanese and European companies to the advance of specific product and process technologies in high-technology industries is clearly demonstrated by both patent and trade data (see Figure 1.6 above), and the committee's case studies of the aircraft engine, computer printer, and semiconductor industries (see Appendix A). Second, competitive globalization of technical activities promises to enhance the diversity and depth of the current stock of world engineer- ing and scientific resources and thereby provide greater stimulus to eco- nomic growth and technology development. In the context of competi- tive, open markets, global sourcing, assembly, production, and research per- mit private corporations to increase the efficiency with which they employ technical resources. In an increasingly integrated global economy, firms are able to access larger markets, a larger pool of specialized technical compe- tence, and a larger reserve of complementary assets such as managerial tal- ent, capital, and skilled labor. This, in turn, offers them the opportunity to increase economies of scale and scope across the spectrum of technical functions encompassing research, design, development, production, sales, and service. In addition to increasing the efficiency with which technical resources are applied in advanced industrialized economies, the global development and acquisition of technology and know-how by corporations promise to inte- grate a growing number of less-developed national technical enterprises into emerging global industrial technology networks. As large numbers of high- ly trained, low-cost engineers and scientists in countries such as India, the People's Republic of China, Indonesia, the German Democratic Republic, Czechoslovakia, and Hungary become increasingly linked with global prod- uct, service, and factor markets, the productive potential of available human assets is certain to increase.! Without hard data concerning world demand and the price elasticity thereof for science and engineering services, it is impossible to state conclu- sively whether the anticipated increase in productivity of the globe's techni- cal work force would raise or lower total world demand for engineers and scientists. Nevertheless, there are numerous factors that cause the commit- tee to believe that the growth of world demand for all sorts of technical tal

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OPPORTUNITIES AND CHALLENGES OF GLOBALIZATION 47 ent will continue to outstrip the growth of even a more productive world supply well into the next century. The documented secular shift in patterns of consumption toward increas- ingly technology-intensive products and services in the United States and other advanced industrialized countries should provide a sustained boost to demand for sophisticated technical services, particularly in the areas of information technology, biotechnology, and advanced materials. The advanced age and poor condition of public infrastructure, such as trans- portation systems, energy systems, water and waste treatment facilities, and housing, in many advanced industrialized countries, not to mention the lack of these vital infrastructures in many industrializing countries should also place major demands on a wide range of engineering and scientific talent in coming decades. Finally, the magnitude and intractable character of current global environmental problems, such as global warming or solid and haz- ardous waste reduction and disposal, are certain to require vast human tech- nical resources to develop and apply tools, concepts, and specific technolo- gies to meet these challenges. CHALLENGES FACING THE UNITED STATES AND ITS TRADING PARTNERS Despite the lack of conclusive quantitative evidence, it is the best judg- ment of the committee that increased global integration of national technical enterprises will contribute to world economic growth, technical advance, and world demand for science and engineering services in coming decades. At the same time, it must be acknowledged that the process of globalization will continue to involve a spatial redistribution of industrial and associated technical activities and will necessarily benefit some countries and compa- nies more than others. In short, although the rising tide of engineering com- petence worldwide and the greatly increased transnational mobility of tech- nology and other factors of production promise greater efficiencies and eco- nomic growth in the aggregate, they have also intensified and recast compe- tition among firms and nations in the process. Inward-looking corporate and national strategies for economic competi- tiveness, strategies preoccupied with the management of essentially indige- nous markets, technology, and other factors of production, are being ren- dered ineffective or irrelevant by the process of globalization. As a result, nations as well as firms are being forced to recognize that it is no longer possible to achieve or sustain leadership in technologies vital to their future competitiveness and economic growth without greatly improving both the firm's and the nation's ability to capture a fair share of the benefits of what is becoming a truly global technical enterprise. Unfortunately, major obsta

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48 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY cles to the full exploitation of the global technical enterprise are emerging as the process of globalization gathers momentum. Forces That Lead to Domestic Protectionist Response The globalization of industry and technology creates new winners and losers within a national economy. Some industries or regions experi- ence growth as a result of integration into global markets, while others, unable to weather the force of global competition, undergo economic decline. For example, the U.S. aircraft, computer, and telecommunications industries and their host locations have watched their business opportunities expand dramatically with the globalization of markets for their products. In contrast, the U.S. machine tool, steel, and automotive industries and their host communities have experienced severe economic dislocation and con- traction as a result of growing foreign competition over the past 10 to 15 years. The problem is that those who benefit from globalization tend to take their good fortune for granted or attribute it entirely to their own supe- rior efforts and initiatives. The losers tend to blame their losses on an unfair and hostile world, from which they demand protection. Hence, the winners often fail to appreciate their stake in globalization, while the losers are fully conscious that globalization is the source of their problems. This difference in the perceived stakes of globalization creates a domestic political imbal- ance that often fosters protectionism. Another source of protectionism is the fact that the costs of protective actions are widely distributed and the benefits are highly concentrated among regions or industries. This gives the beneficiaries of protection considerably larger incentives for political mobi- lization than it does to the general public, that is, consumers and taxpayers, who usually pay the price. International Asymmetries of Market Access Some national economies are more closed to the reciprocal flow of technology, trade, and investment across their borders than others. One need only consider the patterns of trade and foreign direct investment among the world's technologically most dynamic economies to appreciate this fact. International comparison of average levels of intraindustry trade the extent to which a nation exports and imports similar products- offers one particularly illustrative perspective on the anomaly that is Japan. A country's level of intraindustry trade is suggestive not only of the rela- tive specialization and sophistication of its industrial base but also of the degree to which its economy is open to exports from its industrial and tech- nological peers. In this context, the greater a nation's ratio of intraindustry to total trade, the more "open" its economy is to the products and services

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OPPORTUNITIES AND CHALLENGES OF GLOBALIZATION 49 of its industrialized trading partners. As Table 2.1 suggests, however, over the postwar period as intraindustry trade has greatly expanded as a share of total trade, Japan has consistently registered average levels of intraindustry trade that are out of line with those experienced by other industrialized nations (Lincoln, 1990~. In the area of foreign direct investment, the anomalous status of Japan is equally apparent (Figure 2.1~. Western Europe has absorbed more than a third of total world direct investment for decades. The United States, despite accounting for a relatively small share of world inward investment for most of the period since 1945, has watched its share increase to more than one-fourth of the world total during the past decade. Japan, on the other hand, continues to account for a remarkably small share of total inward investment, even though its share of total outward direct investment has grown rapidly in recent years. The reasons behind the more mercantilist character of particular nations are complex, having as much to do with the timing, historical context, and structural consequences of a country's industrialization, its culture, or its legal traditions, as with its specific public policies. Regardless of its causes, however, differential national treatment of international trade, technology, and investment flows has contributed to bilateral economic imbalances, increased international political friction, and fostered protectionism. In so doing, it has made the task of adjustment to the economic challenges and opportunities of globalization more difficult for all nations, although partic- ularly for more open national economies. The Different "Learning" Aptitudes of Nations Some nations are much better at taking advantage of a globalizing technology base than others. Free access to another country's markets, technologies, and financial resources is of limited use to a nation if its citi- zens and corporations are unwilling or unable to take advantage of the opportunity. During the nineteenth and early twentieth centuries, the United States made its successful bid for global industrial leadership by rapidly assimilating and improving upon technologies and techniques first devel- oped in other countries. Following World War II, however, the need, and with it, the ability of U.S.-based companies to assimilate and exploit foreign technology and know-how seems to have declined markedly relative to that of its main trading rivals, most notably Japan. At a time when the sources of technical advance in a growing number of industries are becoming more widely dispersed throughout the globe, the "not-invented-here" syndrome, a product of decades of unchallenged U.S. technological supremacy, poses a severe handicap to the country.2 Meanwhile, Japan has assumed the former American role as the industrial

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so NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY TABLE 2.1 Average Intraindustry Trade, Five Countries, Selected Years: 1959-1985. Intraindustry trade index points.a Index Basis Three-digit SITCb categories 21 40 60 42 26 53 67 54 32 57 78 60 19 19 57 65 52 26 62 78 58 36 Country All traded products Japan 17 United States 40 France 45 West Germany 39 Manufactured products only Japan United States France West Germany South Korea Four-digit SITC categories 1959 1964 1970 1975 1980 1985 1985 19 57 67 57 28 62 82 66 40 23 54 74 63 26 61 82 67 49 23 54 74 63 44 SOURCE: Lincoln (1990, p. 47). Reprinted with permission. a The calculation of intraindustry trade (IIT) in a single industry is based on the standard equation, IITi = [l-[xi-mi]/[xi+mi]] x 100, where i = industry, x = exports, and m = imports. The average index for trade in all industries within a nation is calculated by weighting each industry by its share in total trade. b SITC = Standard International Trade Classification 100 80 60 40 20 o Percent United States HI Japan U.K. ~ Europe I I W. Germany ~ France Netherlands FIGURE 2.1 Ratio of inward to outward stocks of foreign direct investment, by selected coun- tries: 1987. SOURCE: U.S. Department of Commerce (1989, p. 11, p. 15).

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OPPORTUNITIES AND CHALLENGES OF GLOBALIZATION 51 ized world's most diligent student of other nations' technical practices, inviting both the admiration of those impressed by its diligence and the wrath of those who view the continuance of such behavior as the most insid- ious form of "free-riding" possible. Again, it is important to understand that the different "learning" aptitudes of nations, like differences in the relative openness of their economies, stem as much from the structural, institutional, legal, and cultural consequences of their unique political and economic development as from particular pub- lic policies. Hence there is no quick or simple policy response that will eliminate the learning differential. The result, however, is an international technological order in which there are additional impediments to reciprocal transfers of technology and know-how. Though not explicitly "protection- ist," these impediments generate additional political tension between nations and often encourage policy responses that impede political and economic adjustment to new global realities. The Threat of Global Monopolies The recent surge in national and transnational mergers, takeovers, and strategic alliances in highly concentrated industries such as the production of electrical equipment, computers, semiconductors, auto- mobiles, and aircraft engines underlines the inherent contradictions of corporate strategies and publics policies with regard to "competitive- ness" and "competition." Much of the recent transnational alliance activi- ty among erstwhile competitors has involved major companies in industries such as semiconductors and aircraft, where the sheer technological com- plexity, high initial capital costs, and spiraling cost of technological advance already pose virtually insurmountable barriers to market entry. At the pre- sent time, these companies' alliances, joint ventures, and cross-licensing agreements do not appear to be anticompetitive in motive or consequences. However, it is not unreasonable to anticipate that some of these alliances will eventually impede competition, with negative consequences for eco- nomic growth and technical advance (Porter, 1990~. In other technologically more mature concentrated industries, anticom- petitive behavior becomes more of a possibility as markets for certain prod- ucts mature or saturate. In a mature market, incremental improvements in product technology tend to become more and more costly, so that firms are increasingly tempted to forgo such improvements in order to preserve their profitability by avoiding an increasingly cost-ineffective product improve- ment race. It is important to recognize that the potential for harmful anticompetitive behavior by global companies has been exacerbated by the trade, tech- nology, and industrial policies of the industrialized nations in recent years.

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52 NATIONAL INTERESTS IN AN AGE OF GLOBAL TECHNOLOGY "Managed trade" agreements such as the 1986 U.S.-Japan Semiconductor Agreement often encourage cartel-like behavior. Anticompetitive behavior may also be reinforced by the "closed" technology development programs funded by the governments of many industrialized countries. At the same time, there is growing evidence that national competition policies or antitrust laws are becoming significant obstacles to cross-border mergers and acquisitions that do not undermine national, regional, or global competition (Julius, 1990~. Such policy-induced impediments to interna- tional competition in the name of antitrust enforcement also threaten to undercut economic growth and technical advance. GLOBALIZATION: ON BALANCE A POSITIVE TREND On balance, the committee is convinced that the globalization of R&D, production, investment, markets, and technology is a positive trend for both the United States and the rest of the world. Most impor- tant, globalization of technical activities represents a trend that cannot be reversed or significantly impeded by national governments without inflicting high costs on their citizens. At the same time, the committee recognizes that failure to advance effective domestic policies and interna- tional negotiations toward the objective of reducing impediments to the competitive globalization of industry and technology is likely to encourage protectionist policies by governments of the advanced industrialized nations. Whether policy obstacles to the free movement of goods, capital, labor, arid technology accumulate gradually or explode in trade or invest- ment wars, they are bound to increase global economic dislocation, delay needed structural adjustment, and impede economic growth and technical advance for all nations. Either scenario, although costly to the advanced industrialized nations, would have particularly harsh consequences for developing and newly industrializing countries. NOTES 1. For example, consider the rapid pace at which the once isolated technical work force of Eastern Europe is being drawn into the global technical order through the recent actions of European, Asian, and North American multinationals in the automotive, electrical equipment, and chemical industries. 2. Given the recent changes in the distribution of world technology-intensive trade, the rapid growth of non-U.S. foreign direct investment, and the declining share of total patents granted U.S. citizens, perhaps the persistently large U.S. technological balance of payments surplus (royalty receipts minus royalty payments) should be interpreted not so much as a sign of technological "free-riding" by our major competitors as an indica- tor of the U.S. relative inability to absorb foreign technologies.

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OPPORTUNITIES AND CHALLENGES OF GLOBALIZATION REFERENCES 53 Julius, DeAnne. 1990. Global Companies and Public Policy: The Growing Challenge of Foreign Direct Investment. New York: Council on Foreign Relations Press. Lincoln, Edward J. 1990. Japan's Unequal Trade. Washington, DC: The Brookings Institution. Mansfield, Edwin, and Anthony Romeo. 1984. "Reverse" transfers of technology from over- seas subsidiaries to American firms. IEEE Transactions on Engineering Management EM- 31(3): 122-127. Porter, Michael E. 1990. The Competitive Advantage of Nations. New York: The Free Press. U.S. Department of Commerce. 1989. Staff Report Direct Investment Update: Trends in International Direct Investment. International Trade Administration, Office of Trade and Investment Analysis. Washington, D.C. September.