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OCR for page 28
2
Ncdional Policies Affecting
Advanced Technology
Capacity and Competition
The innovation process, as we have seen, embraces
research, development, manufacturing, marketing, and
distribution. A wide variety of government policies
affect this process--those explicitly intended to
strengthen it, such as federal support of basic research;
those framed for a broader impact, such as the nation's
fiscal and monetary policies; and those aimed at other
objectives that may unintentionally adversely affect the
process, such as export controls. In this chapter we
consider how national policies affect a nation's advanced
technology capacity and international trade position.
Many governments have designed comprehensive policies
to ensure successful technology and trade development.
Their efforts span the whole of the innovation process.
The U.S. system supports basic research applicable to
broad national goals but does not systematically support
the other parts of the process leading to commercial
sales. Responsibility for product development, produc-
tion, marketing, and distribution are left to the indi-
vidual firm. This system of free enterprise has worked
remarkably well. However, as other governments
coordinate--and provide increasing support to--their
advanced technology industries, American firms find
themselves competing internationally with government
aided firms or groups of firms. U.S. industry feels
burdened by an unfair disadvantage.
BASIC RESEARCH
Governmental support of basic research may serve broad
national needs--for national defense, for food produc-
tion, for medical care, and for energy availability, but
28
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29
current spending on basic research is only tenuously
linked to current competition for markets for advanced
technologies.
Investment in basic research is a capital investment
with a payback period measured in decades rather than
years. Because the results of basic research are quickly
available globally, governmental support does not spark
international conflict. Each country's research benefits
others. Indeed, the United States is a major beneficiary
not only of its own research but of the research abroad
as well.
Strength in a nation's research infrastructure,
however, is no guarantee of successful technological
competition. A country may lead in basic science, but
lag in the process of making innovative ideas commer-
cially profitable. On the other hand, a country may lag
in research, but draw on research conducted abroad as a
base for creating commercially successful advanced
technologies. Japan has followed this strategy with
remarkable success. Japanese leaders recognize, however,
that an economically and technologically advanced country
must develop a strong domestic research base in order to
excell at making world class technological advances.
France, too, has chosen to increase support of basic
research. The United States has one of the strongest
research bases in the world, but this base is not invul-
nerable. Federal support for basic research rose rapidly
in the United States from 1960 to 1968 discounting
inflation, but has increased only marginally against
inflation since then (Figure 2).
APPLIED RESEARCH AND DEVELOPMENT
National practices diverge more sharply with regard to
support for applied research and development than with
regard to basic research. The three most prominent
positions favoring some support follow.
First, a traditional U.S. position held by many indus-
trial leaders and recent administrations is skeptical of
any government effort to select particular sectors of
industrial R&D for support. It holds rather that deci-
sions on investing in development and the subsequent
stages of industrial innovation are best made by private
industry. This view, however, does espouse government
support through tax credits for industry determined
research.
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30
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FIGURE 2 Basic research expenditures by source, 1960 to
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SOURCE: National Science Foundation, Science Indicators
1980.
Another view, occasionally argued in the United States
but practiced primarily in other countries, suggests that
the diffuse benefits, or "spillovers," of technological
development warrant federal targeted support to particular
technologies. It is argued that such support leads to
commercially successful products--indeed, that favorable
technological spillovers are likely even if the targeted
products or processes are unsuccessful.
A third position, taken by some foreign governments,
is that government support is warranted for those tech-
nologies for which there is a national need and in which
the private market would tend to underinvest, either
because of high risks and costs or because the benefits
likely to result from research and development are not
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31
easily captured. Certainly, in the United States and
elsewhere, defense and those space technologies where the
government is the prime customer receive full governmental
research and development support.
PRODUCTION
France and Japan, among others, believe that government
support for new technologies should in part assure produc-
tion of the new industrial products. Proponents of this
view stress that experience gained in manufacturing is
crucial, that there is no clean break between development
and production, and that, in any case, intervention by
governments in advanced technology is justified by enhanc-
ing employment and making broad contributions to the
national economy. Support can take a number of forms,
including direct subsidies, low-interest loans for produc-
tion facilities, and governmental absorption of potential
losses.
Governmental actions affecting production costs also
include regulatory policies--factory environmental
standards, worker safety procedures, or production
standards.
DISTRIBUTION
Government programs that support new technological devel-
opments politically may require support for the succeeding
stages of innovation, including marketing and distribu-
tion. It is in the distribution stage that government
intervention can be most damaging to free trade. Govern-
ments may protect domestic markets through procurement
policies or nontariff barriers. They also may attempt to
ensure third-country markets through below-market export
credits* or political inducements. Such practices frag-
ment international markets, denying the economies of scale
that drive the continuing evolution of advanced
technologies.
*Any form of financial assistance, direct or indirect,
intended to provide financing in whole or in part for a
transaction.
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32
The Emerging Market
The latest area for intense competition in advanced
technology industries is the Third World's emerging
market--the some 113 countries that account for about 40
percent of the world's GNP. Sales to the newly indus-
trializing nations--Brazil, Korea, Mexico, Taiwan, etc.--
are a powerful determinant of success in international
competition in advanced technologies. The nations or
firms that make initial sales to an emerging nation tend
to continue as preferred sources. There is concern that
competing exporting governments may offer special induce-
ments for commercial sales such as weapons, nuclear tech-
nology, export credits, or bilateral agreements favorable
to the purchasing nation. The perceived use of such
inducements has already provoked bitter conflicts.
Nontariff Barriers and Procurement Policies
Explicit barriers to trade currently are not the major
tools for protecting markets. Tariffs for advanced
technology trade are quite low among the industrialized
countries. Formal quantitative restrictions are ruled
out by the General Agreement on Tariffs and Trade (GATT).
The Voluntary restraints" and "orderly marketing agree-
ments" through which exporting nations agree to curtail
sales in another country are familiar in traditional
industries, but are absent in the advanced technology
area. Instead, protected markets are created through
national procurement policies, through suspension of
antitrust enforcement, and through nontariff barriers to
imports, such as customs delays and regulations. These
barriers can be quite effective. For example, national
procurement policies limit trade in telecommunication
products between the large European countries, even though
the advantages of large-scale production and the costs of
duplicative research and development may justify special-
ization and free trade. 2
Nontariff barriers may be institutional and attitu-
dinal factors, such as national loyalties inclining
nations to support domestic industries, which effectively
prevent import of foreign goods.
Imports of foreign goods that compete with domestic
products may be ensnared in complex bureaucratic customs
procedures, or marketing of products may be blocked by
the interlocking control of business. For example, mar-
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keting and distribution firms may be owned by or have a
special relationship with domestic manufacturing firms
and thus refuse to serve foreign suppliers, or local
lending institutions may deny financing for foreign
product distribution.
Investment barriers, like trade barriers, may take the
form either of overt legal restrictions or more subtle
pressures. A country may limit foreign direct investment
in certain domestic businesses.
In addition, a government may deny foreign-owned firms
"national treatment," i.e., the same privileges as domes-
tically based firms, or foreign subsidiaries may be denied
access to low-interest loans, excluded from local procure-
ment, or denied the right to participate in collaborative
R&D. In many cases, firms investing in countries seek
local participation, perhaps at a majority level, to avoid
this ~second-class" treatment.
There are several other ways in which governments' re-
strictions on foreign investments may be to the disadvan-
tage of firms attempting import:
· firms may be unable to invest in necessary com-
plements to advanced technology exports, such as local
parts and service facilities;
· "offset" requirements or "local content" laws may
force firms to produce products in-country (occasionally
at low volume and high unit cost) as a condition for
access to the local market;
.
firms may suffer unfavorable conditions of tech-
nology transfer--e.g., licensing at disadvantageous
terms--because the preferred route of direct investment
is closed.
NATIONAL PRACTICES--POSITIVE AND NEGATIVE CONSEQUENCES
The extent to which our national welfare is interwoven
with that of our allies in the fields of science coopera-
tion and advanced technology trade is not generally
appreciated. The costs and risks of protectionist
policies and market fragmentation are probably greater
than in almost any other economic field except energy.
Paradoxically, the international coordination of trade
practices is more backward in advanced technology than in
many other fields at a time when both nations and regions
within nations are looking more and more to advanced
technology as a primary source of economic salvation.
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34
Innovation proceeds most rapidly and efficiently when
new products have access to the widest possible markets,
thus spreading the costs and risks of innovation over
more units and generating the cash flow for follow-on
.
improvements and further innovation. Thus, the United
States should negotiate in international forums t~ Or
the openness ot world markets to innovative entrepreneurs
wherever they may be based and to eliminate those national
actions practiced by other countries that distort the free
Such a policy is
required, both to preserve the U.S. position as a major
source of innovation and to ease growing tensions among
the industrialized allies, tensions that threaten not only
international economic and political management, but also
mutually beneficial cooperation in science and technology.
There are a number of practices that effectively close
markets in a given country to the advanced technology
products of another country. Government intervention to
force purchase of products from domestic suppliers is an
example. Such practices reduce the total size of the
market open to an innovator, reduce the rewards for the
innovating firm, and limit the distribution of innovative
products globally. Other practices may result in one
country rapidly acquiring a larger share of the market in
another country than would occur under conditions of free
competition. Export credits on highly concessionary
terms is an example. Some practices may not be outlawed
by international agreement, but may be injurious to trad-
ing partners. An example would be the suspension of
antitrust policy for specific advanced technology indus-
tries in order to accelerate product innovation and
foreign sales.
Commercial and financial practices that are generally
agreed to be harmful to the world trading system as a
whole, even if at least temporarily advantageous to the
perpetrating country, are not necessarily the ones that
cause the most damage. While it may be easiest to elimi-
nate by agreement the practices that are acknowledged to
be unfair and which add nothing to aggregate world produc-
tion, it may be more urgent to take aim at some more
debatable tactics that cause clear danger. These tactics
are difficult to categorize, but they may be the most
important and call for the most immediate hard bargaining.
They may be protectionist, trade distorting, or harmful
to world welfare. Examples of such practices are:
market operation in the United States.
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· Predatory pricing sales abroad at prices below
the domestic selling price or below cost. (Below-cost
pricing may be defined as pricing that does not permit
recovery of production costs over any plausible projec-
tion of the learning curve. This may be very hard to
define for advanced technology products because of the
steepness of the learning curve and because of the
subjectivity of business judgments as to how long a time
is reasonable for recovery of Front end" costs.) When
systematically applied, predatory pricing can be used to
"pick off" one sector after another. Protection against
this practice is not readily available from either GATT
rules or traditional domestic policies of the U.S.
government.3
· Targeting" of specific U.S. advanced technology
markets by foreign countries through governmentally
orchestrated industrial strategies that suspend normal
business or regulatory practices with respect to the
targeted product line, such as cartelization. Coor-
dinated "picking off n of particular U.S. markets through
a concentrated effort is especially pernicious.
· Nontariff type barriers that effectively exclude
U.S. products from fair competition with local products
in local markets.
· Government intervention to force purchase of
products, especially advanced technology capital goods,
from domestic suppliers despite competitive price and/or
performance of foreign products. (This would include
"Buy American" requirements on U.S. federal or state
government contractors.)
.
Restrictions on foreign direct investment, par-
ticularly those that effectively deny distribution
outlets for U.S. advanced technology products in the host
country.
.
Exclusion of U.S. foreign subsidiaries from
"national treatments equivalent to that afforded national
firms.
.
Use of political leverage or concessions to
influence purchasers in third-country markets to buy a
foreign product in competition with a U.S. product. This
includes tying sales to trade agreements, military
weapons support, nuclear development projects, economic/
regional assistance and similar Programs.
.
, _ , _
Official or unofficial preferential government
procurement favoring domestic producers when contrary to
GATT rules.
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· Capital or operating subsidies, including conces-
sionary loans that result in extra market penetration of
foreign advanced technol~av nr^~.= i non rim c mart or
world markets. ~
_ :~ ~ ,1~ ~ ~ ~ ~ &~ _ #A ~ _ _ ~ _
Invocation or tne GATT subsidy rule may
provide some protection for the injured party. Unfor-
tunately, unless it is vigorously pursued by the firms
and country affected within the framework of the GATT
rules for subsidies, redress is obtained too late to
prevent substantial damage.
· Export credits on highly concessionary terms,
based on government subsidies. In the absence of inter-
national agreement on what constitutes a reasonable
concessionary interest rate, however, it is difficult to
fix a criterion unilaterally that would trigger retalia-
tory action. Such retaliation might be equal or better
confessional terms.
· Practices that stimulate innovation by relaxing
various domestic rules in the exporting country may
nevertheless have some positive spill-over effects. They
might be best matched by adopting similar modifications
of domestic ground rules for the competing industries in
the importing country. If the rule changes were rela-
tively mild--for example, exempting research consortia
from antitrust regulations, or permitting patent or other
information exchanges among competing domestic firms--the
net effect might even be positive.
· R&D subsidies to accelerate the development and
commercialization of particular products. Such targeting
is considered difficult by many, yet the Japanese record
of success seems to be good.
· Exchange of technical information and agreed
product specialization (or "market sharing") among com-
petitive firms in a broad technological area. It is
frequently pointed out that Japanese law and adminis-
trative interpretation permit a degree of both market
sharing and technical cooperation in domestic markets
that would be illegal under U.S. law and/or regulatory
policy. While this may be "unfair practice" from an
American point of view, it is within the traditions of
the Japanese system.
· Mutual support among independent firms belonging
to industrial "groups" whose members enjoy preferential
financial and intellectual or other cooperative relation-
ships with each other. Such "group strategy" gives the
practitioner a relative competitive advantage in the
American market. It represents the kind of rationaliza-
tion pursued by large U.S. corporations in the early
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37
twentieth century that U.S. antitrust policy was designed
to prevent. It may be acceptable, however, when viewed
from some standpoints, e.g., buyers in the emerging market
rather than from the standpoint of "fair competitions
with the United States.
U. . S. . INTERNATIONAL NEGOTIATING STRATEGIES
In the preceding discussions, we have described govern-
ments' practices affecting their respective advanced
technology industrial systems and suggested criteria for
assessing those actions according to their consequences
for the international trading system. These criteria
place value on maintaining open markets, thus rewarding
innovators, and making innovative products available
globally. We believe that the United States must con-
tinue to negotiate in international forums to maintain
international systems that foster healthy, mutual com-
petition in advanced technology. Such competition will
be to the ultimate economic advantage of the world.
The United States must give immediate attention to
efforts to strengthen its advanced technology capacity
and international trade competitiveness. Such efforts
will require both a national focus on the importance of
advanced technology to U.S. military and economic inter-
ests and the need to compete vigorously in international
markets. Recommendations for domestic actions will be
discussed in Chapters 3 and 4.
We recognize that there may be circumstances in which,
although our domestic advanced techology capacities are
well nurtured and strong, still a few key technological
sectors essential to our national welfare may be endan-
gered. Successful aggressive policies of our allies
could create such vulnerability. If capabilities in a
significant advanced technology sector, deemed essential
to U.S. economic and military interests, are seriously
endangered because of the loss of markets, the United
States must take remedial actions. Damage to the nation's
total innovative capacity, however, is far more pernicious
than adverse impact on a particular product or firm.
A first step is to seek to renegotiate multilaterally
agreed rules in forums such as the GATT. Such negotia-
tions should seek to establish clearer guidelines for
government actions in high-technology sectors. A basic
requirement of such negotiations would be that countries,
including the United States, be prepared to consider
altering traditional practices.
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When there is a specific threat to U.S. interests from
a particular country's government policies, the U.S.
government should initiate bilateral consultations within
the framework of GATT and other appropriate multilateral
institutions. The goal of such negotiations would be to
reach agreements on a time scale that would prevent or
reverse damage to U.S. capacity for technological innova-
tion. If these bilateral consultations are unsuccessful
in resolving the issues, the U.S. government should
utilize formal multilateral dispute settlement procedures
to seek a resolution. If those procedures fail or if the
threat of damage is imminent, the United States would be
required as a last resort to take unilateral action to
protect the national interest.
NOTES
Japan Committee for Economic Development, Building
an Industrial Structure for the 21st Century (Tokyo:
JCED, 1982), pp. 14-15.
2 Organisation for Economic Co-operation and
Development, Telecommunications Equipment Industry Study
(Paris: OECD, 1981), p. 19.
3 The negotiations in the Tokyo Round of GATT on
subsidies developed criteria for "material injury" caused
by such subsidies. Such criteria would probably define
the limits of acceptable practice even when a theoretical
argument might conclude that the causative practice
resulted in a total mutual benefit that exceeded the
injury to one of the parties.
Certainly in the case of
subsidies to advanced technology industries, the machinery
of GATT should be available, although the standards of
proof of injury may be harder to apply in the case of
advanced technology than for other goods. Richard Rivers
and John Greenwald, Subsidies and Counterveiling
Measures," Law and Policy in International Business, 2
(1979), pp. 1465-1495.
Representative terms from entire chapter:
technology industries
