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Appendix B Science and Technology and the ~ 992 European Market Integration: Implications for R&D-Intenstive Industries Patrice Zechman~ PART I. OVERVIEW OF THE EUROPEAN COMMUNITY AND ITS ROLE IN SHAPING EUROPEAN R&D PROGRAMS Background For observers of the rapid changes in Europe today, there is little doubt that the drive and momentum of the 1992 activities are creating a climate of increased competition in many areas, including research and development. The role that the Commission of the European Communities plays in the stimulation of this climate is under continuing discussion in the international science and technology community. There appears to be a consensus within the CEC that its role be to facilitate, coordinate, and disseminate R&D activities, thereby representing a positive addition to science and technology resources available in the 12 member countries. The Cockfield White Paper of 1985,2 the Single European Act of 1986,3 and expenditures committed to the Framework Program4 are fundamental to the CEC's mandate to strengthen the scientific and technological basis of European industry and encourage it to become more competitive at the international level. To ensure economic growth through industrial develop- ment, the CEC acts as a mechanism to accelerate the tendencies toward cooperation and collaboration among industry, research centers, and universities. Governed by the overriding principle of "subsidiarity,"5 CEC projects and programs must demonstrate value added from a Community perspective over and above what could be achieved at the purely national level. *Patrice Zechman, Office of International Affairs, National Research Council, January 1990. 160

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APPENDIX B 161 Table A-1 shows R&D funded by the CEC in 1987 as well as levels of funding in each of the 12 member countries. The percentage of funding by objective is the most revealing. The two areas receiving the most emphasis by the CEC are energy and industrial productivity and technology. Although total CEC R&D funding is small, the contribution is enhanced by identifying priorities where no single nation can afford to pursue forefront research. Research quality judged from a wider perspective strengthens the science base of each participant by concentrating available resources within the Community structure. Programs The challenges of an expanding role for the European Community in R&D are well illustrated in the emphasis and growth in the Framework Program. This umbrella program (see Annex 1) is directed by legislation to provide overall principles and objectives for the improvement of industrial competitiveness. On December 15, 1989, political agreement was reached (with final agreement expected in early in 1990) for funding the next phase (1990-1994) of the program as outlined below: Enabling technologies: ECUs $U.S. Information and communication technologies 2,221 2,532 Industrial and material technologies 888 1,012 Management of natural resources: Environment Life sciences and technologies Energy Management of intellectual resources: Human capital and mobility Total (million) 518 741 814 590 845 928 518 590 5,700 6,497 Under the first heading, information and communication technologies receive the largest portion of total funding, followed by industrial and mate- rial technologies, together equaling approximately 55 percent of the total 5.7 billion ECUs. The "industry-led" nature of the Framework Program is very clear. Research is tied directly to the goals of the Single Market, both to necessitate improved trans-European capacity and international competi- tiveness. Examples of R&D at the Community level can be found in the enabling

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64 APPENDIX B technologies category, which is part of ESPRIT. The goals of ESPRIT are (1) to help the European information technology industry with the technol- ogy base it needs to meet competitive requirements, (2) to promote Euro- pean industrial cooperation in information technology, and (3) to contribute to the development of internationally accepted standards. As part of the ESPRIT program, the Community has launched ENS, a program that will link all the electronic networks of Europe into a single supranational struc- ture. The idea for ENS evolved from the need for collaborative research in information technology between industry and academia. The free move- ment of information is viewed as critical to the realization of the free movement of goods, services, and people. The supernode "fifth-generation" computer is considered one of ESPRIT's most important successes. Capable of handling concepts and ideas instead of numbers, the supernode has been developed by groups in Britain and France. The parallel architecture of this supercomputer has already been exploited as a commercial product and, in the view of some, has given Europe a lead over Japan and the United States. Some have also suggested that European information technology will be the largest economic sector in Europe by 1993, and almost two-thirds of other industrial and service sectors will depend on it for their efficiency and competitiveness. Although the budget for ESPRIT is comparatively small (approximately 5 percent of the R&D expenditure of the information technology industry), it has measurably increased information technology activity by persuading European industrialists to tackle R&D projects they would not otherwise have attempted. Evidence of this can be seen in the microelec- tronics and software sectors, which have responded by creating highly competitive multinational firms. The second category set out under the Framework Program is the management of natural resources, representing approximately 36 percent of the total funding under the next phase. Environment, life sciences, and energy are all transborder issues. The CEC has responded to increased pressure from growing national environmental interests by forming a European Environment Agency. In addition, the CEC has taken on issues of auto pollution, water quality standards, and "polluter pays" legislation, to name only a few. Whether CEC's role will be scientific or operational is yet to be determined, but the challenge of enforcing environmental legislation will be the proving ground for its effectiveness. Projects in the life sciences include quality of life categories in medical and health issues, radiation protection, and human genome analysis, as well as biological resource areas of biotechnology and agroindustrial technologies. As an example of CEC legislation, directives for genetic release by the 12 member countries were approved in the fall of 1989. It provides for national authorities to assess the environmental effect of releasing genetically altered organisms.

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APPENDIX B 165 Though receiving slightly less emphasis in the new phase of the Frame- work Program, energy research is identified for development. Examples of programs in this category are radioactive waste management, decommissioning of nuclear installations, remote handling in hazardous environments, con- trolled thermonuclear fusion, and nonnuclear energy. Under the last category of management of intellectual resources, human capital and mobility make up the final 9 percent of the total funding of the 1990-1994 phase of the Framework Program. Concerns for the quality, mobility, and concentration of scientific personnel play an integral part in the future of the Single Market. The long history of collaboration and cross-fertilization in the scientific community may well aid this effort, although national disputes remain on the protection of human resource capital. The Communication from the Commission dated June 1989 entitled "A Framework for Community RTD6 Actions in the 90's" balances observa- tions of the European Community's activity in R&D against the backdrop of national and international priorities: The strengthening of the European R&D efforts in the 1990s does not at all imply a greater centralization of planning and support. Individual regional and national actions will fully retain their importance; and a number of different mechanisms for coordination and support will continue to evolve. The diversity of national expertise and specialization in Europe is one of the Community's assets. But not only are there national benefits from giving a European dimension to nationally planned and managed R&D efforts. In many cases it will be much more cost-efficient to pursue a specific R&D objective in the Community framework, rather than develop separate and competing sub-critical national efforts. There are also areas where R&D is needed specifically in support of other Community policies (for example, standards and environment in particular). In these areas Community-level R&D will be a more natural and appropriate frame of reference than either national or bilateral efforts. PART II. SELECT U.S. INDUSTRY AND GOVERNMENT RESPONSES TO EUROPEAN MARKET INTEGRATION Overview In a survey done by KPMG Peat Marwick in the fall of 1989, U.S. executives expressed mixed concern about European market integration. Of the 872 responses from senior executives of U.S. manufacturing, high-tech- nology, merchandising, and transportation firms, only 17 percent had actu- ally implemented plans to strengthen their position in the European Com- munity. In his article "Strategies for Survival in Europe in 1993," Peter Drucker summarizes one of the main concerns for those who have yet to implement plans:

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166 APPENDIX B Altogether the most important decision a European company has to make- but also an American multinational operating in Europe is whether the Common Market will be primarily a market of competing national economies or of competing European businesses. (Wall Street Journal, July 12, 1988, p. 32) Realizing their stake in the outcome of Single Market initiatives, many U.S. companies are becoming more active (if only in response to the uncertainty) in the European Community through various investment mechanisms. The fact that North American and European Community companies accounted for more than 95 percent of all cross-border acquisitions (in the 12 months ending September 30, 1989), according to another Peat Marwick survey, is evidence of this trend. As U.S. industry examines its strategy, the question of ownership may not be as critical an issue as where the know-how or design capability resides for determination of successful investment. U.S. and European alliances in the high-technology sector have been under discussion as a mechanism to bolster market strength to compete better against Japan. These alliances would be difficult for a number of reasons. For example, considering U.S. government and European-funded R&D projects, would public funding by either party underwrite technology advances by other governments? Will "technonationalism" be a barrier to strategic cross-border alliances? Problems with reciprocal access, intellectual property rights, restrictions on technology transfer, antitrust, and product liability are only a few of the major corporate concerns. In the case of the U.S. SEMATECH7 and European JESSIE programs, cooperation in semi- conductor technology has not provided full reciprocal membership, as many had hoped. Instead, cooperation on select projects and development of technical standards have been the allowable extent of participation. Select U.S. Government Responses In November 1989 the Senate Task Force on the European Commu- nity 1992 made the following 10-point policy recommendation concerning U.S. interest in the emerging directives and rules of the European Commu- nity: 1. Promote the positive evolution of EC 1992 through U.S. objectives in the GATT Uruguay Round.9 2. Recommend that the EC not adopt policies that force firms to abandon sales to Europe in favor of investment in Europe. 3. Address concerns of small and medium-sized businesses. 4. Pay careful attention to standard setting. 5. Increase burden sharing of western security by the EC. 6. Increase cooperation by U.S. and Europe on environmental issues. 7. Increase staff commitment in the U.S. mission in Brussels.

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APPENDIX B 167 8. Improve the administration's internal coordination of the U.S. re- sponse to EC 1992. 9. Establish an intergovernmental group to represent U.S. concerns regarding EC 1992 developments. union. 10. Begin to look at implications of European economic and monetary Other U.S. government agencies and advisory boards have identified sectors and specific areas of concern. For example, the International Trade Commission report, The Effects of Greater integration Within the European Community on the United States (July 1989), identified machinery, automotive, computers, banking, insurance, chemicals, telecommunications, and medical equipment as sectors most likely to be affected by market integration. The Advisory Committee for Trade Policy and Negotiations report entitled Europe 1992 flags rules of origin, public procurement, product standards, testing and certification, technology transfer, local content, and reciprocity as significant issues in which the United States has substantial interest. The report further points out that "public focus in the United States on 'Fortress Europe' impedes understanding of actual developments in Europe and is therefore counterproductive." Suggesting the United States should support and encourage the successful promarket constituency of the 1992 activities, the Advisory Committee recommends the U.S. government should keep pressing the EC to make its rules clear, predictable, and free of local content clauses; use renegotiations of defense agreements as leverage to ensure that U.S. industries can compete for government projects; formalize and clarify agreements that ensure the EC will not set stan- dards that discriminate against U.S. products; and give the highest priority to streamlining the list of products and tech- nologies that are subject to special export controls. These recommendations only begin to identify the issues as they emerge in a climate of rapid political change. How the United States acts to respond constructively to European market integration and its effect on R&D-inten- sive industry is one of the many challenges for the 1990s. PART III. QUESTIONS TO CONSIDER: U.S. STRATEGY AND U.S.-EC RELATIONS This section is intended to provide preliminary questions for consider- ation based on the agenda of the meeting. Fuller discussion of these and other important issues will undoubtedly take place in response to the pre- sentations.

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168 APPENDIX B Plenary Session I: Access to Precompetitive Research Programs of the European Community There are significant differences between SEMATECH and JESSI (objectives, shares of funding provided by government, linkages between universities and member companies, technology transfer arrangements between firms, etc.~. How does the EC define precompetitive R&D and how do these definitions fit those used in the United States? 2. If equal access to precompetitive research results from government- industry consortia like SEMATECH and JESSI is made possible in critical areas of technology, what controls are there on the extent to which U.S. and EC companies can pass information back to their respective parent compa- nies? 3. Is there a need to formalize the structure/process through which the EC and United States make decisions on access to R&D programs? Which government agencies/advisory groups should take the lead in these: U.S. trade representative, Department of Commerce, or Department of State, in the United States? What group would take the lead in the EC? 4. Will the United States and the EC provide the incentive, legislation, and regulatory environment that would allow reciprocal access to precompetitive research? 5. Bilateral science and technology agreements, like the move toward bilateral trade pacts, are often mentioned as a way of starting a process toward regulating technology flows. How far will the EC go in taking responsibility for deciding whether or not U.S. firms can participate in joint programs in Europe? Aside from the programs directly under its control, can the EC hope to dictate what are essentially national science and technology policies? 6. Does formal access to these programs really matter? Are the informal linkages between U.S. and European firms, like a SEMATECH member company in the United States and a JESSI member firm in the EC, the avenue through which technology generated in joint R&D programs ultimately flows out of consortia? In essence, are multinational corporations and strategic alliances the primary force in international technology transfer? 7. Successful resolution of intellectual property rights, national treatment, and subsidies issues would have an important impact on EC 1992, as it relates to U.S. industry. How will the GATT round completion affect U.S.- EC science and technology relations?

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APPENDIX B 169 Plenary Session II: EC Standards-Setting, Certification, and Testing Processes: Roles and Implications for U.S. it&D-Intensive Industries I. Will the technology used in commercial products be advanced through proposed standards-setting policies and what concerns exist about the use of standards to gain "unfair" competitive advantage? 2. In the absence of mandatory mutual recognition of testing and certification procedures, what standards will U.S. products be subject to in order to gain acceptance in the EC? 3. In developing standard systems for conformity assessment, can the existing or proposed international organizations represent all interests equally? Plenary Session III: Strategic Implications of European Market Integration for U.S. it&D-Intensive Industry and the Science and Technology Base 1. With the increase in R&D activity and investment in Europe, are U.S. government and industry setting appropriate priorities for the country's science and technology base? 2. Are small and medium-sized enterprises being excluded by the strategic maneuvering of multinational enterprises based on both sides of the Atlan- tic? 3. Are issues of local content and rules of origin fully addressed and unambiguous? 4. With U.S., European, and Asian companies looking at the market potential in eastern Europe, can issues of technology transfer and export controls be resolved quickly enough to take advantage of the expanded market without deteriorating into economic anarchy? Plenary Session IV: Suggested Strategies for U.S.-EC Cooperation and Competition 1. What are the most important avenues through which private sector actors will influence U.S.-EC cooperation and competition? 2. Are current intellectual property laws adequate for future cooperation between the United States and the EC? 3. Do the various current science and technology agreements and infor- mal memoranda of understanding adequately reflect the U.S. position with the 12 European Community members? 4. What are the most productive government-to-government forums for addressing potential problems? Are these mainline trade forums, GATT, U.S.-EC bilateral working groups in sector-specific talks, WIPO, or others? Should a new technology-specific forum be devised? The Technology Ad-

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170 APPENDIX B ministration was given the lead (nominally) in representing U.S. commer- cial interests in science and technology agreements/forums (P.L. 110-519~. What role will it play as events unfold in the EC? NOTES 1. The European Community's 12 member countries are B. Belgium; DK, Den- mark; D, Federal Republic of Germany; GR, Greece; E, Spain; F. France; IRL, Ireland; I, Italy; L, Luxembourg; NL, the Netherlands; P. Portugal; and U.K., United Kingdom. 2. The CEC's Cockfield White Paper of 1985 was a study listing approximately 300 directives that were seen as necessary to achieve a true European common market, along with a timetable to dismantle all physical, technical, and fiscal barri- ers within the Community by the end of 1992. 3. The Single European Act of 1986-1987 is the act amending the Treaty of Rome, the EC founding document. It gives the European Parliament wider powers, eliminates the unanimous voting requirement in the Council of Ministers, and provides a basis for Community action in the field of R&D. (Title VI of Third Part of the EC Treaty as introduced by the Single European Act, Article 130 I) 4. Through legislative directives in the Single European Act, the Framework Program (1983-1987, 1987-1990, 1990-1994) defines priorities, sets out criteria, and establishes a financial structure for Community research and development. 5. The principle of subsidiarily states that what can be done by the private sector should not be done by national or regional authorities; what can be done better at the national level should not be done at the Community level, provided that Community law, including provisions relating to competition policy, is fully respected. (Communication from the Commission, SEC(89)675 final) 6. RTD is European nomenclature for research and technology development. 7. SEMATECH is a U.S. government-industry consortium in semiconductor manufacturing with the mandate to provide the U.S. semiconductor industry with the capability to achieve world leadership by 1993 using American-made equipment and material. The fiscal 1990 budget is $223.9 million of which $100 million comes from U.S. government sources and $123.9 million from 14 member companies. 8. JESSI is t'ne Joint European Submicron Silicon project organized by European governments and companies. It encompasses all aspects of the semiconductor manufacturing industry and seeks to develop the next generation of semiconductor products. The annual budget is estimated to be in excess of $4 billion, coming from six European countries and 32 research institutions and companies. 9. GATT is the General Agreement on Tariffs and Trade. It was created in 1948 to be a multilateral forum for establishing rules of international trade. The Uruguay Round refers to the current phase of negotiations.

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APPENDIX B ANNEX 1 List of Research Programs Within the Framework Program of the European Community (1987-1991~* AIM Informatics in medicine BAP Biotechnology BCR Applied metrology BRIDGE Biotechnology BRITE/EURAM Industrial technologies/advanced materials DELTA Informatics in education DOSES Statistics DRIVE Informatics in road safety ECLAIR Agroindustrial technologies EPOCH Climatology and natural hazards ESPRIT Information technologies EUROATA Machine translation FAST Forecasting and assessment FLAIR Food technologies JOULE Nonnuclear energies MAST Marine science MONITOR Forecasting, analysis, and evaluation RACE Telecommunications SAST Strategic analysis SCIENCE Scientific cooperation SPEAR Research evaluation SPES Economic science SAD Science and technology for developing countries STEP Environmental protection TELEMAN Remote handling systems VALUE Dissemination of results 171 Status as of September 1, 1989. Source: Commission of the European Communities, Directorate-General for Sci- ence, Research, and Development, Catalogue of Research Programmes Within the Framework Programme of the European Community 1987-1991, Brussels, Septem- ber 1989.

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172 APPENDIX B SELECTED BIBLIOGRAPHY Part I Archey, W. T., exec. ea., Europe 1992: A Practical Guide for American Business, U.S. Chamber of Commerce, International Division, Wash- ington, D.C., 1989. Associated Press, "EC Unveils New Waste Plan," August 2, 1989. Commission of the European Communities, Catalogue of Research Programmes Within the Framework Programme of the European Community 1987- 1991, September I, 1989. Commission of the European Communities, Communication from the Com- mission, A Framework for Community RTD Actions in the 90's, SEC (89) 675 final, June 13, 1989. Commission of the European Communities, conference papers from Science, Technology and 1992, November 1989. Commission of the European Communities, Research and Development in Europe and the Challenges and Changes in the 90's, (P - 20), May 3, 1989. Congressional Research Service Report for Congress, The Europe 1992 Plan: Science and Technology Issues, CRS, Washington, D.C., March 16, 1989. New Scientist, "Europe Sets Framework Rolling for Next Four Years," p. 22, August 5, 1989. New Scientist, "Europe Brings Its Members into Line on Genetic Release," p. 22, September 30, 1989. New Scientist, "ESPRIT at the Core," p. 14, "Giant 'Nervous System' to Link Europe's Networks," p. 16, December 9, 1989. New Scientist, "ESPRIT Gives Brussels a Good Name," p. 16, "Europe's Supercomputer Tackles Real Problems," p. 22, December 16, 1989. New York Times, "Europeans Unite to Compete with Japan and U.S.," pp. Al and D8, August 21, 1989. Office for Official Publications of the European Communities, Government Financing of Research and Development, 1980-1987, Luxembourg. Paoloni, M., ea., European Report: Research ESPRIT Week, European In- formation Service, Brussels, p. III/3, December 6, 1989. Reuters Wire Service, "Europe Faces Challenge of Turning Green Words into Action," August 31, 1989. Part II McGraw-Hill News, "1992 EC Integration Seen Having 'Major Impact' on U.S.," July 20, 1989. The New York Times, "U.S.-Europe Technology Union Urged," pp. D1 and D10,July 24, 1989.

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APPENDIX B 173 The New York Times, "German Integration Will Delay 1992," November 19, 1989. The New York Times, "SEMATECH Today: Cash Dispenser," pp. D1 and D4, January 4, 1990. The New York Times, "IBM Joins Siemens in Developing Chips," p. D1, January 25, 1990. Offices of Senator Max Baucus and Senator William V. Roth, "Senate Task Force on EC 1992 Policy Recommendations," press release, Novem- ber 1, 1989. PRNewswire, "U.S. Executives to Two Minds on 1992, KPMG Peat Marwick Survey Shows," September 14, 1989. PRNewswire, "EC and North American Companies Account for More than 95 Percent of all Cross-Border Sales," December 12, 1989. The Wall Street Journal, "Strategies for Survival in Europe in 1993," p. 32, July 12, 1988. The Washington Post, "High-Tech Firms Rethinking Foreign Ties," pp. B 1 and B3, July 5, 1989.