2
Background: Technology Transfer and Latecomer Catch-up

Japan has reaped the incalculable benefits of a steady stream of scientific and technological know-how from the United States and Europe.1 From 1951 to 1984—a time frame encompassing Japan's postwar economic reconstruction and consolidation during the 1950s, rapid growth during the 1960s, adjustment to oil shocks of the 1970s, and breakthrough to prominence in the semiconductor and other high-technology industries during the early 1980s—Japanese corporations concluded more than 40,000 contracts with foreign firms, providing for the transfer of technologies deemed critical for commercial competitiveness in domestic and world markets.2 This windfall of foreign technology included such seminal patents as Du Pont's for nylon (used in synthetic textiles), RCA's for basic color television technology (for television and consumer electronics), and transistors from Bell Laboratories (for integrated circuits and the information industries).

Having access to seminal technologies from abroad—adapted and up-graded by Japanese importers—paved the way for Japan to emerge as a world-class manufacturing power. Indeed, most analyses of Japan's fast-paced growth into economic superpower status give heavy weight to the

1  

Terutomo Ozawa, Japan's Technological Challenge to the West, 1950–1974: Motivation and Accomplishment (Cambridge: MIT Press, 1974).

2  

James C. Abegglen and George Stalk, Jr., Kaisha: The Japanese Corporation (New York: Basic Books, 1985), pp. 126–127.



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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy 2 Background: Technology Transfer and Latecomer Catch-up Japan has reaped the incalculable benefits of a steady stream of scientific and technological know-how from the United States and Europe.1 From 1951 to 1984—a time frame encompassing Japan's postwar economic reconstruction and consolidation during the 1950s, rapid growth during the 1960s, adjustment to oil shocks of the 1970s, and breakthrough to prominence in the semiconductor and other high-technology industries during the early 1980s—Japanese corporations concluded more than 40,000 contracts with foreign firms, providing for the transfer of technologies deemed critical for commercial competitiveness in domestic and world markets.2 This windfall of foreign technology included such seminal patents as Du Pont's for nylon (used in synthetic textiles), RCA's for basic color television technology (for television and consumer electronics), and transistors from Bell Laboratories (for integrated circuits and the information industries). Having access to seminal technologies from abroad—adapted and up-graded by Japanese importers—paved the way for Japan to emerge as a world-class manufacturing power. Indeed, most analyses of Japan's fast-paced growth into economic superpower status give heavy weight to the 1   Terutomo Ozawa, Japan's Technological Challenge to the West, 1950–1974: Motivation and Accomplishment (Cambridge: MIT Press, 1974). 2   James C. Abegglen and George Stalk, Jr., Kaisha: The Japanese Corporation (New York: Basic Books, 1985), pp. 126–127.

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy FIGURE 1 The Japanese challenge in high technology. Source: Dr. Hisao Kanamori, from Daniel I. Okimoto ''The Japanese Challenge in High Technology,'' Ralph Landau and Nathan Rosenberg, eds., The Positive Sum Strategy: Harnessing Technology for Economic Growth (Washington, D.C.: National Academy Press, 1986). contributions made by technological improvements.3 According to one prominent Japanese economist, technology (much of it imported) was responsible for more than half of Japan's economic growth between 1955 and 1980 (see Figure 1). Other nations and industries—such as the U.S. shipbuilding industry in the eighteenth century—have implemented "catch-up" strategies in which the transfer of technology from abroad was a major element. What is significant about Japan's experience is the systematic, organized way in which technology has been imported. In return for billions of revenue dollars generated by the transfer and adaptation of foreign technology, Japanese companies paid a relatively modest cumulative sum of only $17 billion. Amortized over 33 years, Japanese industry paid, on average, only about $500 million per year, a fraction of what it undoubtedly would have cost to develop the technology at home, provided Japanese companies could have achieved the breakthroughs. For 3   Edward F. Denison and William K. Chung, "Economic Growth and Its Source" in Hugh Patrick and Henry Rosovsky, eds., Asia's New Giant: How the Japanese Economy Works (Washington, D.C.: The Brookings Institution, 1976), especially pp. 125–130.

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy individual firms struggling to be competitive, the royalty payments proved burdensome, taking a significant bite out of revenues and limiting the earnings that could be ploughed back into research and development. However, royalty payments represent only a portion of the up-front costs and risks of R&D incurred by foreign patent holders—to say nothing of the uncertainties, false starts, and time required for the processes of invention. For Japanese firms, the benefits of having access to foreign technology far out-weighed the marginal costs. It would be hard to exaggerate the advantages of being in a position to buy foreign technologies "off the shelf." With modifications, leading-edge technologies could be put to immediate use in manufacturing. For Japanese companies, the immense benefits included crucial time saved, large uncertainties eliminated, promising R&D pathways clarified, rapid movement down technological and commercial learning curves, resources freed to focus on incremental adaptations, and new commercial opportunities opened up. Without the infusion of key foreign technology, Japanese industry probably would have advanced less rapidly and not as synergistically across so many fronts.4 At the same time, it must be noted that the most significant transfers of technology occurred many years ago. Experts may disagree about the point at which U.S. companies had transferred the critical mass of technology to companies in Japan, but the time is probably 10 to 20 years ago. Japanese companies have invested considerable resources in adapting, commercializing, and further developing these technologies. They are now global technological leaders in many segments of this industry, and the high rate of current R&D investments by these companies indicates their long-term viability as formidable competitors. From the standpoint of U.S. companies that sold advanced technology, the consequences were not as positive. Individual U.S. firms may have earned a steady stream of patent revenues, bolstering quarterly dividends and yearly profits, but most U.S. companies failed at the time to appreciate the impetus for rapid catch-up that the transfer of technology gave to competitor firms in Japan. For the U.S. economy as a whole, the long-term effects of technology bartering were debilitating to the extent that it contributed to an erosion of America's industrial preeminence. James Abegglen and George Stalk go so far as to call the one-way outflow "disastrous."5 4   Christopher Freeman stresses the multiplier-effect benefits for Japan of imported technology, including especially "reverse engineering." See Christopher Freeman, Technology Policy and Economic Performance: Lessons from Japan (London: Pinter Publishers, 1987), pp. 39–49. 5   Abegglen and Stalk, op. cit., p. 128.

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy Reflecting on the circumstances at the time, however, we can understand that U.S. companies had reasons for selling their hard-earned technology. Many were preoccupied with the huge and expanding U.S. domestic market, one so much bigger and more enticing than any other national market. Because success in the domestic market would bring in profits that would dwarf anything earned from foreign markets, why bother incurring the costs, risks, and uncertainties of trying to break into what was, in the 1960s, a small and distant Japanese market? Why not sell patents to bolster profits? Patent sales required little or no up-front investment of time or money, and few people expected Japanese companies to transform themselves soon into world-class competitors. The idea of second sourcing in Japan also had great appeal. What about far-sighted U.S. companies, such as Texas Instruments, Motorola, Intel, and National Semiconductor, which understood the long-term importance of breaking into the Japanese market? These companies ran into the roadblock of formal and informal barriers as they tried to enter the Japanese market, which led them to abandon or delay early plans to establish a presence in Japan. Under such circumstances, they came to the conclusion that earning royalties from the sale of their technology patents was better than having nothing to show for their efforts to penetrate the Japanese market. National Semiconductor, an unusual case, was able to set up operations in Japan only by purchasing a plant in Okinawa shortly before reversion of the islands to Japan. American companies have learned some hard lessons from past experience. Today, the value of state-of-the-art technology is recognized more clearly than it was two decades ago. American executives realize that the possession of key technologies can be converted into major gains in the commercial marketplace. Accordingly, many U.S. companies in the semi-conductor industry have tightened up their licensing practices, often choosing either not to license at all or to use their patents to obtain know-how of comparable value in return. Even if companies take a more cautious approach to licensing their technology, there are many other avenues through which know-how can travel. For basic research, the channels of transmission include published articles and books, conference papers and public discussions, graduate training, contract research, consulting services, and corporate participation in university-based laboratory research. For product and process technology, the channels include reverse engineering of already manufactured products, industrial espionage, consulting services, hiring away of key researchers from competitor companies, and various forms of strategic alliances. For companies in industries such as semiconductor manufacturing equipment, the sale of a product inherently involves technology transfer to the customer. Closing off the flow of knowledge in basic research is not only impos-

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U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer, Competition, and Public Policy sible but also undesirable. Carefully structuring the transfer of product and process technology, on the other hand, is not only desirable but also more feasible. No matter how much the faucets are tightened, technology will continue to flow out. Indeed, the semiconductor industry is today inherently global—no company (U.S. or foreign based) is completely self-sufficient in terms of technology. Japanese companies are still importing technologies developed in the United States, such as reduced instruction set computing (RISC), parallelism, and video compression. At the same time, there is now evidence of export of technologies developed in Japan. Intel has a strong position in flash memories and will shore up its market position through an alliance with Sharp. Although Toshiba published early work on flash memories, it was Intel that developed the first application of the technology that was widely successful in the market. Semiconductor companies cannot survive without global technology linkages. The question today, then, is not how these linkages can be reduced or avoided, but how to make them work best for participating U.S. companies and for the United States as a country.6 America's early postwar experience with a continued outflow of technology has led to an outpouring of concerns about its corrosive long-term effects on the competitiveness of U.S. companies in the high-technology sectors and on the U.S. economy as a whole.7 Measures to slow or control the outflow of technology have been prescribed, including stricter monitoring and restriction of foreign direct investments and the imposition of tighter reins on certain types of strategic alliances. Arguments in favor of tighter controls clash with the deeply entrenched ideology of free market economics and the presumed advantages of security alliance structures (especially the U.S.-Japan alliance). Although everyone wants to protect U.S. national interests, analysts disagree on how this might best be accomplished. This report seeks to highlight some of the problems and some of the opportunities associated with U.S.-Japan alliances for practitioners and policy-makers who must consider how to make these rapidly expanding relationships demonstrate concrete benefits for the United States. 6   For purposes of this report, a "U.S. company" is one in which more than half of the equity is held by U.S. citizens. This approach is convenient but not totally satisfactory because some foreign-owned companies may contribute more to the U.S. industrial and technology base than U.S.-owned companies. See Robert Reich, "Who is Us?" Harvard Business Review, January–February 1990, pp. 53–64. 7   See, for example, Linda Spencer, Foreign Investment in the United States: Unencumbered Access (Washington, D.C.: Economic Strategy Institute, May 1991).