Japan's Growing Technological Capability and Implications for the U.S. Economy: an Overview

THOMAS S. ARRISON AND MARTHA CALDWELL HARRIS

What are the present extent and nature of Japan's technological prowess? How will Japan's technological strength evolve in the future? What are the implications for the U.S. economy? This volume of papers authored by technologists, economists, and policymakers from the United States, Japan, and Europe contains varied perspectives on these questions. Their contributions in the chapters that follow should interest individuals, public and private, who are formulating technology policies in advanced industrial countries.

This volume is a compilation of papers first presented at a conference organized by the National Research Council's Committee on Japan as part of a larger program of activities designed to enable the United States to develop more effective ways of competing and cooperating with Japan as a technological superpower. Chaired by C. Fred Bergsten, member of the committee and director of the Institute for International Economics, the conference entitled "Japan's Growing Technological Capabilities: Implications for the U.S. Economy" was held on October 23 and 24, 1991, at the National Academy of Sciences.

The impetus for this volume, and the conference that produced it, comes from a belief that technological and economic perspectives on these issues are rarely joined. Thus, our goal was to incorporate insights from different disciplines and nations, especially Japan, and to explore the significance of Japan's growing technological leadership for global competition, particularly U.S. competitiveness.



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Japan's Growing Technological Capability: Implications for the U.S. Economy Japan's Growing Technological Capability and Implications for the U.S. Economy: an Overview THOMAS S. ARRISON AND MARTHA CALDWELL HARRIS What are the present extent and nature of Japan's technological prowess? How will Japan's technological strength evolve in the future? What are the implications for the U.S. economy? This volume of papers authored by technologists, economists, and policymakers from the United States, Japan, and Europe contains varied perspectives on these questions. Their contributions in the chapters that follow should interest individuals, public and private, who are formulating technology policies in advanced industrial countries. This volume is a compilation of papers first presented at a conference organized by the National Research Council's Committee on Japan as part of a larger program of activities designed to enable the United States to develop more effective ways of competing and cooperating with Japan as a technological superpower. Chaired by C. Fred Bergsten, member of the committee and director of the Institute for International Economics, the conference entitled "Japan's Growing Technological Capabilities: Implications for the U.S. Economy" was held on October 23 and 24, 1991, at the National Academy of Sciences. The impetus for this volume, and the conference that produced it, comes from a belief that technological and economic perspectives on these issues are rarely joined. Thus, our goal was to incorporate insights from different disciplines and nations, especially Japan, and to explore the significance of Japan's growing technological leadership for global competition, particularly U.S. competitiveness.

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Japan's Growing Technological Capability: Implications for the U.S. Economy CONTEXT The passing of a world order dominated by two military superpowers naturally focuses attention on the character that international relations will assume in the years to come. A central question is how the three economic and technological superpowers (the United States, Japan and a united Europe) will interact in a world where bipolar military confrontation is diminished and where all major nations have elected the market as the preferred organizing principle for economic activity. As C. Fred Bergsten noted in his opening remarks for the conference, two opposing tendencies are already apparent. First, opportunities for fruitful cross-border technological exchange and collaboration, particularly between private sector actors, are expanding at a rapid pace. These opportunities are driven by the globalization of markets. They are also strongly affected by another trend: the passing of U.S. technological preeminence and growing evidence that the United States lags Japan in terms of capabilities to commercialize civilian technology. The globalization trend is already well developed among the industrial democracies and promises to broaden as more countries move toward open, market economies. In the foreseeable future, firms from the United States, Japan, and to some extent Europe are likely to remain in the forefront of international collaboration in research and technology development. Therefore, a deepening and acceleration of U.S.-Japan interdependence in technology is a particularly conspicuous aspect of the globalization of markets. Yet while globalization would seem to suggest an inexorable movement toward a more integrated world economy and U.S.-Japan relationship, the growing divergence in the innovative and commercialization capabilities of countries may point in the opposite direction. Technology-related issues are increasingly prominent among U.S.-Japan economic frictions. The weakening or elimination of bipolar tensions has ushered in a period in which economic issues will rise on the agendas of the advanced, industrial countries. In the absence of the Cold War threat that held these countries together, conflicts arising from competition for technological and economic leadership will almost surely be more difficult to resolve under the rubric of common security concerns. In short, we appear to be entering a world in which there is more potential for beneficial technological interaction among the advanced industrial nations but where the stakes and potential for conflict are also higher. Needless to say, the United States and Japan will play major roles in shaping the global cooperative and competitive context.

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Japan's Growing Technological Capability: Implications for the U.S. Economy ASSESSMENTS OF U.S. AND JAPANESE TECHNOLOGICAL STRENGTHS AND WEAKNESSES1 Part I of this volume has a twofold purpose. The first is to present views of the countries' relative strengths and weaknesses by experts familiar with the technological capabilities of the United States and Japan. Together, these insights give us a ''snapshot'' comparison to serve as a baseline for the consideration of economic and policy implications that follows. The second purpose is to examine the methods for and applications of assessments of national technological strengths and weaknesses, particularly applications to policymaking. The authors present a unanimous, unambiguous conclusion from their review of American and Japanese technological capabilities: while the United States retains leadership in software and in some other areas, Japan's technological capability across a wide spectrum of commercially significant fields is formidable and growing relative to that of the United States. By itself, this conclusion is not surprising. Over the past several decades Japanese companies have captured growing shares of the global market for numerous high technology products and have accelerated the pace of innovation in mature industries. Besides agreeing on the specific technological strengths and weaknesses of the United States and Japan, the authors offer similar views on key aspects of Japan's technological strength. George Gamota points out that Japan's strength lies in the application of technology to products, while American companies are stronger in breakthrough research. In a similar vein, Jim Martin observes that the laboratories of U.S. universities or start-up companies are often ahead of any comparable technical effort in Japan, but Japanese companies still often enjoy more success in economically manufacturing related products. Martin's observation reminds us that a meaningful assessment of the technology levels of the United States and Japan must gauge the likely effect of new technology on the production and distribution of goods and services. While the R&D laboratory is important, it is necessary to look beyond it to the commercialization and deployment capabilities of the respective national innovation systems and constituent organizations. For example, a firm will not employ a more efficient manufacturing process unless it possesses the necessary complementary assets, which include access to affordable capital, the availability of labor with the skills necessary 1   The term "technology assessment" is used here and in many of the papers in this volume to refer to the process and results of analyses that compare and contrast national technological capabilities. It encompasses assessments of research, development, and deployment capabilities, although many analyses focus primarily on R&D capabilities.

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Japan's Growing Technological Capability: Implications for the U.S. Economy to utilize the process, and managers who recognize the importance of innovation and marketing. Some assert that many U.S. executives face a structure of financial incentives that encourages short-term thinking, while the Japanese environment allows executives the longer time horizon needed for effective commercialization of laboratory research. G. Laurie Miller makes the point that R&D in Japanese companies seems to be more closely tied to market developments than is often the case in American companies. Strong organizational links between market needs and the technology development function in Japanese firms not only speed technology utilization, but also have a deeper impact on the types of tasks emphasized in R&D. Miller argues that the "trial-and-error," market-driven approach to technology development taken by successful Japanese companies differs from the "scientific spin-off" model that has been more prevalent in the United States. In the scientific spin-off or ''linear'' model, basic research performed in universities and companies generates fundamental discoveries that firms then turn into products. In contrast, firms with a market-driven orientation stress incremental technology development, process improvements, and the construction of prototypes in product development. Effective technology commercialization usually incorporates both technology push and needs pull, but Miller asserts that the latter mechanism drives most innovation. He believes that Japanese firms typically recognize this and exploit it more effectively than do American companies. Miller believes that studies of Japanese technological capabilities yield diminishing returns and it is time for Americans to put knowledge about Japan to work by strengthening the links between research and the market. The second purpose of the opening chapters is to consider the methodologies for and applications of assessments of national technological strengths and weaknesses as practiced in the United States and Japan. Recent publication of several critical technology lists in the United States attests to a growing interest here in identifying the technologies that are likely to have significant economic and national security impacts in the future, and in exploring how the United States compares with other countries in its capacity for developing and deploying those technologies. George Gamota outlines the approach used by JTEC (Japan Technology Evaluation Center), which is probably the most prominent, continuing public effort in the United States to assess Japanese technological capability. JTEC, which is administered by the National Science Foundation, conducts several assessments annually that focus on particular technology areas and utilize a panel of U.S. experts. JTEC panels disseminate their results through workshops and by publishing reports that compare U.S. and Japanese technological capabilities. Although JTEC studies usually focus heavily on technology development in R&D labs, the panels also evaluate manufacturing capability and

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Japan's Growing Technological Capability: Implications for the U.S. Economy other downstream assets. The assessments that have been performed over the seven years that JTEC has been in existence include many technologies that appear on critical technologies lists. Selection and assessment methodology reflect the interests of the line agencies, such as the Department of Defense or National Aeronautics and Space Administration that provide much of the funding for individual studies, rather than the commercial importance of the technology, though these considerations often overlap. If Gamota could have his way, JTEC would be given the resources to do follow-up studies. It is unclear, however, whether JTEC studies have a significant impact on policymaking or on U.S. corporate strategy. Despite the presence of industry experts on the panels, awareness of the program in industry appears to be rather low. Jim Martin describes in-house programs of U.S. companies to monitor and access Japanese technology, and stresses the importance of an ongoing commitment and presence in the form of a liaison office or, preferably, an R&D lab in Japan. Shigetaka Seki's description of the approach to technology assessment taken by Japan's Ministry of International Trade and Industry (MITI) in preparing white papers on industrial technology contrasts in some ways with the JTEC method.2 The technology assessments summarized in MITI white papers are snapshots across a range of industries and technologies rather than a series of in-depth studies like those of JTEC. Seki points out that it is natural that governments are concerned about whether their nation's vital industries can compete with industries of other nations. Technological capability is one of the factors that affects the competitiveness of industry. Technology assessment can give fundamental information to policy planners that they can use to develop appropriate policies. For the 1988 white paper, MITI identified Japan's strengths and weaknesses in particular technologies and at various stages of research and development. The published aggregate results showed that in many fields the United States was strong in pure basic research while Japan showed more capability for improvement in R&D. These findings are consistent with those of Gamota, Martin, and Miller. In the process of performing the assessment, MITI learned a great deal about the complexities and possible pitfalls encountered in performing technology assessments. Seki makes a significant contribution by discussing some of these issues in detail. Simple scorecards comparing overall performance can be misleading. The contribution of technology to competitiveness varies and depends on the aspect of technology that is under examination.3 2   See Tsushosangyosho (MITI), Sangyo Gijutsu no Doko to Kadai (Trends and Topics in Industrial Technology), (Tokyo: Tsushosangyosho, 1988). 3   For example, Seki echoes Miller in pointing out that in the case of semiconductors, high productivity and quality may come from the accumulation of ordinal problem solving efforts rather than from new advanced technology.

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Japan's Growing Technological Capability: Implications for the U.S. Economy Seki argues that there are no a priori objective criteria for selecting key technologies or predicting the future technological development capability of an industry or country. He points to the growth of technological partnerships among firms as another factor complicating technology assessment. Nevertheless, technology assessment can produce valuable information, highlighting the manner in which innovative activities of different disciplines interact, the technological interdependence among industries and nations, and factors that stimulate the creation and diffusion of technology. In carrying out a technology assessment for its next industrial white paper, MITI selected 20 industrial products, based on the size of their respective markets rather than the technological sophistication of their products. Seki believes that technology assessment can contribute to better policymaking by clarifying which environments favor innovation and the extent of interdependence, thereby hopefully promoting greater harmony among national technology policies at an international level. ECONOMIC IMPACTS AND IMPLICATIONS The chapters focusing on assessments of Japanese and U.S. technological capabilities are followed by four that deal with the economic implications of Japan's growing technological capability—two devoted to macroeconomic and two to microeconomic issues. In their contribution to the volume, Dale Jorgenson and Masahiro Kuroda present results of an extensive comparison of American and Japanese productivity growth in 29 industries for the period 1960–1985. In the model, differences in measurable productivity levels between U.S. and Japanese industries are defined as the technology component of differences in the relative price competitiveness of industry output. Jorgenson and Kuroda find that productivity growth in nearly every industry was faster in Japan than in the United States from 1960 until the first oil shock in 1973. Differences in industry productivity growth narrowed considerably after that as the rate of growth slowed in both economies. Jorgenson and Kuroda conclude that technological competition has not played a determining role in generating visible manifestations of U.S.-Japan imbalance, such as the U.S. bilateral trade deficit with Japan. They further assert that technological competition between the two economies stabilized around 1980, when productivity levels of Japanese industries reached an average level of 87 percent of the productivity of U.S. industries. According to these authors, factors such as swings in relative labor costs and, most important, in the yen-dollar exchange rate have had a much greater impact than technology on competitiveness, defined as the relative price of delivering the same product in the two economies expressed in a common currency. Although the productivity analysis only considers the period through

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Japan's Growing Technological Capability: Implications for the U.S. Economy 1985, the improvement in the U.S. external position achieved since the fall in the value of the dollar after October 1985 illustrates this point. Jorgenson and Kuroda draw the conclusion that technology is not a major explanation for U.S.-Japan trade problems. Masaru Yoshitomi, the other contributor to the discussion of macroeconomic issues, has a different perspective that in some ways complements and in others diverges from that of Jorgenson and Kuroda. Yoshitomi asserts that in the 1980s, productivity in Japanese manufacturing advanced at a pace that rivaled the performance of the rapid growth period of the 1960s. He attributes this result to significant increases in R&D spending and other investment on the part of Japanese firms. R&D spending increases and other activities associated with accelerated innovation were in turn motivated by fierce rivalries among firms. According to Yoshitomi, industry rivalries, the resulting innovations motivated by the pursuit of temporary "extra profits," and the beneficial spillovers from R&D spending in one industry to the productivity of other industries through input-output relationships are all keys to the "Schumpetarian" character of the Japanese economy. Yoshitomi holds that whenever an economy, like Japan's, is marked by Schumpetarian competition, it can experience rapid upgrading of its resource endowments and shifts in the structure of comparative advantage that determines its trade. Therefore, innovation can have an impact on the dynamic trade performance of an economy even if trade at any given time conforms to notions of Ricardian static efficiency. There are several apparent differences between Jorgenson/Kuroda and Yoshitomi, some of which diminish on closer inspection. The first concerns the impact that innovation has had on Japan's trade. Jorgenson and Kuroda say that the impact has been small, while Yoshitomi asserts that it has been significant. This disparity is not as great as it appears, since the two papers are answering different questions in this respect. Jorgenson/Kuroda and Yoshitomi might agree that a country's trade balance at a given time is determined largely by macroeconomic factors, but that the rate and level of innovation in an economy and in particular industries will significantly affect the composition of exports and imports without necessarily affecting the trade balance of the nation.4 The two papers also contain different perspectives on productivity growth in Japan during the 1980s, with Yoshitomi giving a much more favorable assessment than Jorgenson and Kuroda. Part of this disparity may be due to the time periods covered. Yoshitomi includes developments up to 1988, 4   John Cantwell, in another paper included in this volume, argues that the technological capabilities of a country's firms can have an impact on the trade balance and other macroeconomic indicators. Cantwell's reasoning is summarized in more detail below.

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Japan's Growing Technological Capability: Implications for the U.S. Economy when appreciation of the yen had intensified the struggle for efficiency and innovation in Japan's manufacturing sector, whereas the Jorgenson/Kuroda analysis ends in 1985. Yoshitomi also emphasizes overall manufacturing productivity growth in contrast to the focus on average productivity growth over 29 manufacturing and nonmanufacturing industries by Jorgenson and Kuroda. If Yoshitomi is correct, the overall technological gap that Jorgenson and Kuroda say stabilized around 1980 may have begun to narrow once more. Fundamentally, this is an empirical issue that should be clarified by further research. There are also basic, theoretical questions worthy of attention in the future. Jorgenson and Kuroda would likely attribute the strong growth performance of the Japanese economy during the 1980s to high investment levels (i.e., to higher levels of capital input into the production function rather than to a more efficient use of those resources). In Yoshitomi's view, there is an intimate relationship between innovation and capital investment. A closer comparison of the empirical tools that Jorgenson/Kuroda and Yoshitomi use to distinguish between the effects of more capital and more efficient capital might yield interesting results. The most significant differences in outlook between the two papers are revealed in subtle extrapolation rather than clear disagreement. A closer look at Jorgenson and Kuroda's findings reveals that, while overall productivity growth between the United States and Japan converged after the first oil shock, the U.S.-Japan variance in productivity growth in particular industries has increased. For example, in the electrical machinery industry, Japanese productivity has surpassed the U.S. level and is continuing to pull away, while the United States has maintained or increased its productivity lead in agriculture. While Jorgenson and Kuroda document these differences, Yoshitomi appears to give greater weight to their macroeconomic impact. In emphasizing the spillover benefits of R&D performed in one industry to other industries, Yoshitomi explains that the transportation and the iron and steel industries were particularly receptive to these benefits in the 1980s. Although it is not directly stated, it follows that if there are industry differences in the receptivity to spillover, there should be differences in spillover generation as well. If a high level of innovation in an industry such as electrical machinery has a greater impact on the macroeconomy through spillover than an industry such as agriculture, some would conclude that the spillover-generating, "strategic" industries should be supported by government policy. Once again, some of the theoretical questions at the root of this issue are amenable to empirical inquiry. If some industries are generally seen to contribute more to economic growth and if Japan enjoys higher productivity growth than the United States in the bulk of them, it should

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Japan's Growing Technological Capability: Implications for the U.S. Economy eventually show up on the bottom line of overall productivity growth in the two economies. In the papers dealing with microeconomic issues, the difference in perspectives is less complex and more complementary. The chapter authored by David Mowery and David Teece has two components. The first is a comprehensive literature and statistical survey that lends further support to the consensus of the authors in the first section that the technological capabilities of Japanese firms are increasingly formidable. Mowery and Teece show how the commercial focus of Japan's national innovation system has a major positive impact on the ability of Japanese firms to develop and utilize technology. The second component is a discussion of the most prominent mechanisms for growing U.S.-Japan private sector technology collaboration and an evaluation of the policy implications. The mechanisms include the overseas R&D labs of multinational corporations and U.S.-Japan corporate strategic alliances. Mowery and Teece conclude that these mechanisms are not a significant cause of unbalanced technology flow between the United States and Japan. They assert that the visible consequences of alliances and Japanese direct investment thus far do not support the critical view put forward by some analysts. Therefore, the authors conclude, policies aimed at restricting Japanese investment and U.S.-Japan technology linkages are not likely to help the competitive fortunes of U.S. firms. In presenting their views on the likely impacts of various types of U.S.-Japan technological interactions, Mowery and Teece point out that the information base for considering these issues is inadequate. Given the uncertainty that remains over the extent to which Japanese "transplants" are contributing to the technological skills of the U.S. work force and suppliers, as well as the lack of data on establishment-level R&D activities and other aspects of Japanese direct investment, there is a strong case to be made for more research and analysis on these questions. In the other paper dealing with micro issues, William Finan and Carl Williams present a case study of how Japanese electronics companies are moving to overcome a perceived technological deficiency—the lack of adequate human resources to match U.S. strengths in software engineering. They focus on a subfield of software engineering, the development of integrated circuit computer-aided design (IC CAD) tools for use in the semiconductor industry. Finan and Williams conclude that in IC CAD, Japanese companies will have to supplement their traditional approach to building strength in critical technologies, which is to build capability in-house through training and college recruiting. The authors anticipate that Japanese electronics firms will be forced to resort to lateral hiring, recruiting from second-tier schools and building research labs offshore in order to build the

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Japan's Growing Technological Capability: Implications for the U.S. Economy necessary capability. These new imperatives and tactics will have important consequences for the future of Japanese management. Finan and Williams also point out the implications for U.S. companies, which will face competition from Japanese firms in the U.S. market for software engineers but may find it easier to hire skilled Japanese engineers laterally as Japanese corporate culture becomes less tightly knit. FUTURE OF COMPETITION Part III of this volume consists of three chapters on future trends in U.S.-Japan technological competition and their wider implications. Edward Graham focuses on a phenomenon mentioned by Mowery/Teece and Finan/Williams: the growing number of Japanese-owned R&D facilities in the United States. Graham surveys the literature on the subject, examines the most recent data, and considers the likely motivations and distribution of benefits associated with Japanese-controlled R&D labs in order to answer the question of whether Americans should be concerned. His analysis indicates that the available data do not provide a basis for drawing firm conclusions. To the extent that Japanese-owned R&D in the United States provides a channel for increased Japanese contributions to open, basic research, Graham argues that these firms should be welcomed except for a few cases of legitimate national security concern. Basic research generates more "downstream" and "external" benefits that accrue to users of the firm's products and society at large than does proprietary product development. Graham believes that Japanese-owned research facilities in the United States will provide considerable benefits to Americans. It will be interesting to see, in the years ahead, whether Japanese firms performing R&D in the United States opt for more fundamental research or pursue the typical approach—emphasis on proprietary research to spark new products and increased sales. Graham argues that even proprietary R&D performed by Japanese companies in the United States generates external and downstream benefits. The key question here is whether the activities are "additive" (additions to overall R&D performance above what would otherwise have been performed by American-owned firms) or whether they displace equivalent R&D under U.S. ownership. Overall, however, Graham expresses doubt that Japanese-owned R&D laboratories raise significant cause for U.S. concern. The authors of the other two chapters in this section present theoretical arguments on how changes in innovation paradigms will affect global technological competition. The approaches taken by both John Cantwell and Fumio Kodama are informed by the Japanese experience, but they display interesting differences in emphasis. Cantwell argues that between the 1960s and the 1980s a change occurred

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Japan's Growing Technological Capability: Implications for the U.S. Economy in the technological paradigm characterizing commercial innovation. A technological paradigm is a "widespread cluster of innovations that represent a response to a related set of technological problems, based on a common set of scientific principles and on similar organizational methods." When a paradigm changes, technological leadership passes to the country whose social institutions are best suited to the new approach. According to Cantwell, the United States was the pacesetter for the technological paradigm that arose during the interwar period, which was characterized by opportunities in energy and oil-related technologies. With the advent of the current paradigm, in which the most promising opportunities for innovation are in microelectronics and computerized systems, leadership has passed to Japan. Cantwell holds that it is impossible to predict when or where the next paradigm will arise, but Japanese industry and the leading Japanese firms may well continue to outperform American companies as long as the current paradigm stays in place. There are several other aspects of Cantwell's argument that deserve comment. First, he asserts that innovation by Japanese firms has played a major role in producing Japan's large, persistent trade surplus.5 Since the difference between any country's exports and imports is equal to the difference between domestic saving and domestic investment, Cantwell must explain why Japan's savings persistently exceed investment. He asserts that a country such as present-day Japan that is innovating rapidly (as a result of its fit with the prevailing technological-economic paradigm) will see productivity gains and corporate profits outstrip wage increases. Since the recipients of profit income have a higher propensity to save than the recipients of wage income, consumption growth in a leading economy of a technological paradigm will tend to lag income growth, and savings will tend to exceed investment. Cantwell's second point concerns policy implications for the United States. He does not believe that it would be possible for the United States to adapt its institutions to the opportunities of the current paradigm through government policy alone. He does believe that technology policy measures may be necessary to prevent the United States from falling further behind. Fumio Kodama also sees a new technological paradigm emerging. Rather than emphasizing a shift in opportunities from one set of technological fields to another, Kodama asserts that the emerging paradigm is characterized by a closer interdependence between innovative activities in different fields. This technology interdependence, or "fusion," is illustrated by Japan's prominence in mechatronics (the fusion of mechanical and electronic 5   Under traditional open market trade theory, however, a large and consistent current account surplus should induce appreciation of the surplus nation's currency that will drive the nation toward external balance. Why this did not occur as rapidly for Japan remains an open issue.

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Japan's Growing Technological Capability: Implications for the U.S. Economy systems) and optoelectronics (the fusion of optics and electronics). Technology fusion is accompanied by shifts in organizational and policy imperatives. At the firm and industry level, technology fusion necessitates a shift from "producing" to "thinking" companies (companies that spend more on R&D than on capital equipment), a shift from a single to multitechnology base, and a shift from linear to "demand articulation"-driven technology development (essentially a shift from technology push to needs pull as discussed above). Although Kodama's title implies that Japanese firms are uniquely situated to take advantage of the new paradigm because of their success in technology fusion, he does not emphasize this point in his paper. Instead, he draws the policy inference that research and development consortia that include companies from a range of industries are an effective means of constructing the "innovative infrastructure" necessary to exploit technology fusion. He argues that excluding foreign firms from these consortia would be counterproductive to national technology policy. Taken together, Cantwell and Kodama make a number of provocative arguments and raise some interesting questions that deserve further study. Cantwell's analysis, for example, raises a basic "chicken and egg" question. Did a shift in the technological paradigm present opportunities that Japanese firms are better organized to exploit, as Cantwell argues? Alternatively, did the dynamism of Japanese firms allow them to blaze an innovative path with somewhat different characteristics than the one that American companies were previously following in the same industries, thereby creating the new style of action that the new paradigm embodies? Which came first, the paradigm or the ability of Japanese corporations to take new approaches to innovation broadly defined? Kodama's analysis raises questions as well. Future research may clarify the degree to which elements of the technology fusion paradigm are really new and the degree to which they are constants of successful innovation. The parallels between demand articulation as described by Kodama and "Edisonian incrementalism" as described by G. Laurie Miller earlier in the volume may be instructive in this sense. In short, new paradigms governing the course of technology development and its relationship with economic growth and national prosperity may be operative. However, the specific mechanisms and relationships that characterize paradigms and the laws governing shifts from one to another are key issues that demand further elaboration. The contributions by Cantwell and Kodama are excellent starting points for organizing such an effort. POLICY IMPLICATIONS Richard Nelson frames the discussion of policy implications for the United States by focusing on five issues that bear on the relationship between

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Japan's Growing Technological Capability: Implications for the U.S. Economy the relative technological capabilities of the United States and Japan and their economic implications. The five issues are (1) the convergence in technological capabilities of major industrialized nations since the early postwar period; (2) the comparatively slow growth in U.S. productivity and incomes since the early 1970s; (3) the loss of U.S. comparative advantage in "strategic industries;" (4) the complexity of national institutions and policies supporting the development of technology; and (5) the impact of the internationalization of business on policy formation. Nelson draws an important distinction between long-term convergence in the technological capabilities of the major industrialized nations and the slowdown in productivity growth experienced by the United States. These two trends are often linked but, according to Nelson, may not have a great deal to do with each other. The loss of the special advantages that the United States previously held in strategic industries is another secular trend. Nelson argues that formulating appropriate policies is an increasingly difficult undertaking for two main reasons. First, national institutions that support technology development are complex, so determining whether various types of government involvement are appropriate and fair under international rules of the game is no simple task. Second, the internationalization of business is making it more difficult to target or predict the impact of technology policy measures on national firms in advance. Governments that want to help "domestic" firms find it increasingly difficult to define them and their products. Despite these caveats and considerations, Erich Bloch and Hiroshi Ota add their perspectives, as individuals involved in the policymaking processes in both countries, on the implications for the United States. 6 The degree of agreement between the two is somewhat startling. Both believe that the technological leadership of the United States is eroding and that a continuation of current trends could have serious and unfavorable consequences for the American and global economies. Both believe that the United States should formulate an explicit technology policy as part of a more vigorous program to restore the competitiveness of the U.S. economy. Both also call on Japan to take a more proactive stance toward adapting its institutions and business practices to international norms, and Ota suggests that an appropriate level of U.S. pressure in this respect is productive. Bloch outlines his perspectives on the problems and causes faced by the United States, proposes areas for policy change, and also points out what America and Japan can do together to manage the technological aspects of 6   See also Erich Bloch, "Toward a U.S. Technology Strategy: Enhancing Manufacturing Competitiveness, Manufacturing Forum Discussion Paper 1" (Washington, D.C.: National Academy Press, 1991) and Hiroshi Ota, Kuzureyuku Gijutsu Taikoku: America no Jigazo (The Crumbling Technological Superpower: America's Self-Portrait), (Tokyo: Simul, 1992).

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Japan's Growing Technological Capability: Implications for the U.S. Economy the bilateral relationship. Ota outlines some of the elements that he would not like to see in a U.S. technology policy: the exclusion of foreign firms from U.S. government R&D consortia, restrictions on inward direct investment, and other measures he terms ''technonationalistic.'' By arguing that such measures would hurt rather than help U.S. competitiveness, Ota echoes Mowery/Teece, Kodama and Graham. The question of whether the United States needs to make substantial policy changes in order to remain a front-line player in global technology development and in the world economy during the coming century is the most significant theme underlying the papers in this volume and the discussions at the conference.7 The views of technologists, economists, and policymakers add valuable perspectives to the consideration of this question. The Japanese experience is directly relevant for two obvious reasons. First, Japan's technological and economic strength will have an important impact on the world economy and on the United States. Second, Japan's success challenges assumptions of U.S. policymakers at different points on the political spectrum—both those who question whether government policy can accelerate the pace of innovation and those who advocate a more activist technology policy. Differences in emphasis that emerge in the following chapters are related to alternative explanations of Japan's economic and technological performance. Some of the authors attribute the performance mainly to the higher savings and investment rates achieved by the Japanese economy. Indeed, many economists would say that superior management of the macroeconomy by the Japanese government has played the major role in sustaining a high investment rate, which has led to a fast turnover of capital stock. Other contributors postulate that a better fit between the organization of Japan's economy and an emerging technological paradigm has made a significant contribution to performance. Viewed from this perspective, the key question is what role policy has played in "fitting" the Japanese economy to the paradigm. It is likely that both high rates of investment and changes in the character of innovation have contributed to some extent. While Japan's sectoral policies of the past are well documented, the current extent and relevance of Japanese industrial policy constitute a subject of debate. From a historical perspective, the unique contribution of Japanese industrial policy is difficult to determine because Japan's macroeconomic management during the postwar period has been exceptional. Apart 7   The United States has a technology policy, that has traditionally been structured to support specific goals, especially national security and public health. There have been increasing calls for the U.S. government to refocus technology policy on fields more relevant to commercial competitiveness.

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Japan's Growing Technological Capability: Implications for the U.S. Economy from a brief period of large budget deficits during the late 1970s and early 1980s, Japanese monetary and fiscal policy have encouraged low inflation and high saving. Japan's industrial policy, including its technology promotion measures, would not have worked as well in a poorly managed macroeconomy. It has been about 20 years since the American economy has had stable prices and a balanced budget simultaneously. These two decades of fiscal imbalance coincide with slower productivity growth in the U.S. economy. Though difficult to quantify, there is considerable evidence that Japan's technology and industrial policies have had positive impacts on the economy. This experience is relevant for the United States today. Japan, a major competitor and a country that developed effective industrial promotion policies, offers some interesting examples in its adaptation of policies to new international market forces. Japan's technology policy today, with its emphasis on technology fusion and the globalization of technology, is a far cry from the sectoral industrial policies of years past. Both government and industry in Japan are actively promoting strategic alliances, and a variety of new forms of international technology linkage—such as inviting foreign participation in Japanese government-sponsored R&D and building ties to foreign research institutions. When such technology linkages are considered together, interaction with Japan is as intensive (perhaps more intense) as that with any other country in key fields. The Japanese government is working with Japanese and U.S. companies to restructure important bilateral technological linkages. It is important to note the emergence of a debate in Japan over the distinctiveness of Japanese-style capitalism and whether special efforts are needed in order for Japan to enjoy good relations with the United States and the rest of the world. This debate is marked by disagreement over whether Japan has a responsibility to bring its market system closer to those of the United States and others, or whether the responsibility for change lies elsewhere. Sometimes explicit and sometimes implicit are concerns about the unfortunate political repercussions likely to arise if the patterns of the past (technology transfer from the United States to Japan, growing Japanese dominance in some important high technology industries, and laggardly Japanese government funding of more fundamental research) persist. The conscious effort now under way in Japan to restructure technological linkages suggests the continuing importance of public and private policy in Japan and the need to relate domestic technology policy to larger global market trends. These observations also provide reinforcement for those who call for new attention to technology policy in the United States. What might a U.S. technology policy directed at promoting innovation in a changing international context look like? How might three elements identified in some of

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Japan's Growing Technological Capability: Implications for the U.S. Economy the papers in this volume—diffusion, human capital development, and a new organizational and analytical approach to policymaking—be woven into new approaches? These observations cannot be answered in detail here, but some observations are suggested by themes in this volume. Policies for technology diffusion, to be effective, must extend beyond technology developed within the United States (for example, from universities to industry) to the application of technologies and production techniques developed in Japan for the benefit of the U.S. economy. Japanese companies are well known for capitalizing on technology developed externally—including technology developed in the United States—and policy has played a role. Many excellent U.S. companies use technology developed externally, but only a small percentage of the largest firms have the resources and motivation to systematically monitor and actively acquire Japanese technology. A key question is whether policy can help U.S. companies develop a "fast second" approach that facilitates reentry into industries such as consumer electronics, which have broad spillover effects for electronic components, computers, and telecommunications equipment. Policies that promote diffusion will be more effective if they contribute to developing mechanisms for tapping into the expertise and resources of Japanese firms doing business in the United States as well as Japan. In working to upgrade U.S. capabilities to use technology more effectively to produce internationally competitive goods and services, policymakers will need to consider incentives for foreign-based firms that contribute significantly to the U.S. economy through technology transfer, training, and advanced production and R&D. Some would argue that foreign-based companies that thus contribute to the U.S. economy and technology base should be invited to participate in U.S. collaborative R&D projects. Cooperative programs by U.S. industry to monitor and diffuse technology developed in Japan may be another avenue worthy of consideration. The papers authored by Gamota and Martin indicate that Japanese technical information is plentiful and strategies for acquiring Japanese technology can work for U.S. companies that build the organizational resources necessary to access and use it. Policies aimed at promoting the acquisition of skills by Americans that would facilitate a stronger flow of technology from Japan to the United States would complement steps suggested above. Training of technical personnel in the Japanese language and in Japanese management practices is a step in this direction as are internships for young U.S. engineers that give them firsthand experience with Japanese manufacturing practices. To the extent that U.S. universities and industry develop mechanisms for cooperation with foreign firms that build in reciprocal access to Japanese manufacturing technologies and practices, the result should be to increase technology transfer from Japan to the United States.

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Japan's Growing Technological Capability: Implications for the U.S. Economy No matter how well conceived and implemented the particular measures might be, they will not be effective in the absence of a new organizational and analytical framework for civilian technology policy and deep understanding of new trends in the globalization of technology. Many of the papers in this volume point to the need for improved capabilities to assess the future of industries important to the U.S. economy, to identify technologies that will have broad impacts on many industries, and to develop a U.S.-style vision or notion of the desired industrial structure of the future. Understanding of new developments in Japan and around the world and the ability to integrate domestic technology policy with international economic policy are other key imperatives suggested from our reading of the papers. It is clear that U.S. technological preeminence has passed, that U.S. technological leadership is eroding in many fields, and that Japan will be a major competitor and collaborator in the future. The challenge for U.S. policymakers is to come to terms with the two trends outlined at the outset—growing international collaboration in technology and greater friction over growing national disparities in their capabilities to profit from innovation. In order for the United States and Japan to reap the benefits of the first trend, it will be necessary to take steps to arrest the second. A continued erosion of America's capability to reap economic benefits from innovation relative to Japan and other countries would have adverse impacts not only on the United States, but also on Japan and the global economy. The question is whether the United States can develop effective policies to both compete and cooperate with Japan as a technological superpower. Hopefully, this volume will contribute to the clarification of the issues and the formulation of responses.

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