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International Competition in Acivancecl Technology: Decisions for America A Consensus Statement Prepared by the Pane! on Advanced Technology Competition and the Industrialized Allies Office of International Affairs National Research Council NATIONAL ACADEMY PRESS Washington, D.C. 1983

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NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the Councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The National Research Council was established by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and of advising the federal government. The Council operates in accordance with general policies determined by the Academy under the authority of its congressional charter of 1863, which establishes the Academy as a private, nonprofit, self-governing membership corporation. The Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in the conduct of their services to the government, the public, and the scientific and engineering communities. It is administered jointly by both Academies and the Institute of Medicine. The National Academy of Engineering and the Institute of Medicine were established in 1964 and 1970, respectively, under the charter of the National Academy of Sciences. This study was supported by the Executive Office of the President, Office of Science and Technology Policy, and the National Academy of Sciences. The NAS contribution was drawn from funds used for Academy-initiated studies; funds were provided by a consortium of private foundations. Consortium members include the Carnegie Corporation of New York, the Charles E. Culpeper Foundation, the William and Flora Hewlett Foundation, the John D. and Catherine T. MacArthur Foundation, the Andrew W. Mellon Foundation, and the Rockefeller Foundation. Library of Congress Catalog Card Number 83-60712 International Standard Book Number 0-309-03379-9 Avai fable f rom NATIONAL ACADEMY PRESS 2101 Constitution Avenue, NW Washington, DC 20418 Printed in the United States of America

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Pane! on Advanced Technology Competition and the Industrialized Allies HOWARD W. JOHNSON, Chairman of the Corporation, Massachusetts Institute of Technology, Chairman HARVEY BROOKS, Benjamin Peirce Professor of Technology and Public Policy, Harvard University ROBERT A. CHARPIE, President, Cabot Corporation RICHARD N. COOPER, Maurits C. Boas Professor of International Economics, Harvard University ROBERT A. FULLER, Corporate Vice President, Johnson & Johnson RALPH E. GOMORY, Vice President and Director of Research, IBM Corporation NORMAN HACKERMAN, President, Rice University N. BRUCE HANNAY, Vice President, Research, Bell Laboratories (retired) THEODORE M. HESBURGH, President, University of Notre Dame WILLIAM R. HEWLETT, Chairman of the Executive Committee, Hewlett-Packard Company WILLIAM N. HUBBARD, JR., President, The Upjohn Company SHIRLEY M. HUFSTEDLER, Partner, Hufstedler Miller Carlson & Beardsley ROBERT S. . INGERSOLL, Former U.S. Ambassador to Japan CARL KAYSEN, David W. Skinner Professor of Political Economy and Director, Program in Science, Technology & Society, Massachusetts Institute of Technology ALLEN E. PUCKETT, Chairman and Chief Executive Officer, Hughes Aircraft Company DAVID V. RAGONE, President, Case Western Reserve University JOHN S. REED, Vice Chairman, Citibank WALTER A. ROSENBLITH, Institute Professor, Massachusetts Institute of Technology ROBERT M. SOLOW, Institute Professor, Department of Economics, Massachusetts Institute of Technology ~

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JOHN E. STEINER, Vice President, Corporate Product Development, The Boeing Company WILLIAM J. WEISZ, Vice Chairman of the Board, Motorola, Inc. LEONARD WOODCOCK, Former U.S. Ambassador to China Staff ANNE G. KEATLEY, Project Director NORMAN METZGER, Editor NANCY L. GARDNER, Staff Associate PAUL KRUGMAN, Consultant 1V

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Preface A central new policy concern--international trade and competitiveness in advanced technology--is asserting itself in the United States and in each of its closest allies and trading partners. This concern is likely to remain in the forefront of American debates for many years because of its ongoing importance in questions of national security and national economic prosperity. In the United States, this concern is accentuated by forces that are affecting the competitiveness of American advanced technology, both within our own vast economy and in world trade. Some shortcomings of our own and con- certed actions on the part of other nations are both involved. Leaders in all of the world's most techno- logically advanced democratic nations are beginning to focus urgent attention on their nations' abilities to marshal their innovative capacities. All appreciate the need for prompt responses to the problems besetting the extensions of advanced technology. They also know that those responses must reflect the increasingly close interrelationships among nations that are, simultane- ously, allies, partners, and competitors. Hence, any responses must take into account extremely complex Interrelated factors--social and economic and political as well as technical. Given the urgency and complexity of the issues, it was essential for the organization representing the American scientific and technical community, with the special charge of aiding national policy deliberations, to organize intensive studies of the situation in international technological competition as a contribution to the wider multinational debate that has been building up for several years. Accordingly, advanced technology competition among the industrialized allies was one of a number of national v

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issues on which the National Academy of Sciences and National Academy of Engineering initiated policy studies during the past 2 years. The Academies assembled in late 1981 a study panel of experts on technology, industry, labor, education, eco- nomics, and foreign affairs to consider the set of prob- lems associated with advanced technology. The panel was composed of 22 members including former senior federal officials, senior members of the academic community, and leaders of advanced technology industries and of the scientific and legal communities. The Academies asked the panel to describe, in broad terms, the nature of technology in the context of inter- national competition and to recommend fundamental guide- lines for national actions that would aid policymakers today and in the years to come. The panel's work was to focus on relations among the major industrialized nations--Canada, the Federal Republic of Germany, France, Japan, the United Kingdom, and the United States. Ques- tions of trade and technology relations with the devel- oping nations, the Soviet Union, and Eastern bloc nations were excluded. Issues and problems of mature industries were to be considered only as they were affected by new technologies. The panel was asked to consider how frontier tech- nological development comes about and how it affects nations economically and socially; how governments view new technologies and attempt to draw on technological development to serve national needs; and how technologi- cal development--and government's responses to it--may affect relations among nations. Finally, the panel was asked to propose a course of action for America's policymakers. In work that involved monthly working sessions extending over a period of 14 months, the panel heard many public and private sector expert witnesses and reviewed policy papers and analyses developed in the United States and abroad. In addition, the panel commissioned special studies by experts in a wide range of fields and discussed with the authors their findings and conclusions. The process of deliberation took place during a period in which issues of international tech- nological competition increasingly became front-page news. In setting forth conclusions and recommendations, panel members have attempted to contribute in a timely way to current discussions while at the same time convey- V1

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ing judgments that will be a useful basis for policy- making in years to come. The panel believes the descriptions of the nature of technological development, of the manner in which advanced technology industries carry out their work, and of how government actions may affect innovation globally will be of special relevance. The panel's report should be viewed as a white paper--a consensus statement by a group of experienced individuals who approached the problem from diverse points of view. Their concern reflects the importance to the nation, not only of this issue, but also of the urgent need for wise and far-sighted policy actions as we compete internationally for advanced technology markets. The panel wishes to express its gratitude to each of those who prepared special studies for its inquiry and who appeared before it to inform the members on issues that were always complicated and often subtle. We wish to express special thanks to Frank Press, President of the National Academy of Sciences; Courtland D. Perkins, President of the National Academy of Engineering; and Philip M. Smith, Executive Officer of the National Academy of Sciences, for their help and support. I wish especially to extend my thanks to Anne Keatley, Project Director; Nancy Gardner, Staff Associate; and Norman Metzger of the Office of Information for their competent support. I thank Paul R. Krugman of the Massachusetts Institute of Technology, now on the staff of the President's Council of Economic Advisors, for his help during the panel's early deliberations, and Victor K. McElheny of MIT for his counsel. I wish particularly to thank each member of the panel, not only for dedicated service, but also for exceptional efforts in marshaling objectivity and a sense of national interest on subjects where views frequently diverge. Because of their work, the public purpose in this complex and difficult subject may be advanced. HOWARD W. JOHNSON Chairman Panel on Advanced Technology Competition and the Industrialized Allies . V11

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Contents EXECUTIVE SUMMARY Historical Evolution, 2 Technology and the Nation's Economic Well-Being and Military Security, 3 National Capacity for Innovation, 3 Maintaining Technological Strength, 4 Government's Role, 4 Management's Responsibilities, 6 Advanced Technology Trade Practices, 7 U.S. Objectives, 8 Negotiations Required, 8 Conclusions, 10 Recommendations, 11 INTRODUCTION 1 ADVANCED TECHNOLOGY: ITS NATURE AND IMPORTANCE TO THE UNITED STATES What is Advanced Technology?, 20 The Innovation Process, 21 Why is Advanced Technology Important to the United States?, 22 Advanced Technology and National Security, 22 Advanced Technology and Trade, 23 Advanced Technologies--Core Technologies in the Economy, 24 Need for National Attention, 25 Advanced Technology and the Nation's Future, 26 2 NATIONAL POLICIES AFFECTING ADVANCED TECHNOLOGY CAPACITY AND COMPETITION Basic Research, 28 Applied Research and Development, 29 Production, 31 viii 1 14 20 28

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Distribution, 31 The Emerging Market, 32 Nontariff Barriers and Procurement Policies, 32 National Practices--Positive and Negative Consequences, 33 U.S. International Negotiating Strategies, 37 3 POLICIES AND PRACTICES AFFECTING U.S. COMPETITIVENESS IN ADVANCED TECHNOLOGY Government Policies, 40 Macroeconomic Environment, 40 Antitrust Policy, 41 Capital Supply, 42 Export Policies, 43 Tax Policy, 43 Regulatory Policy, 44 Private Sector Policies, 44 Management, 44 University-Industry Relations, 45 Government and Private Policies, 46 Human Resources, 46 Precollege Education, 47 University Education and Research, 47 Engineering Education, 48 Monitoring International Technology, 48 Support of Basic Research and Development, 49 What Policies Are Appropriate?, 49 4 CONCLUSIONS AND RECOMMENDATIONS SELECTED BIBLIOGRAPHY BIOGRAPHIES OF THE PANEL MEMBERS COMMISSIONED PAPERS OF THE PANEL PRESENTERS 1X 39 52 57 61 67 69

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