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CONFLICT AND COOPERRTI[ IN NRTIONRL COMPETITION FOR HIGH-TECHNOLOGY INDUSTRY A Cooperative Project of the Hamburg Institute for Economic Research HWWA Kiel Institute for World Economics IMr and National Research Council NRC on "Sources of International Friction and Cooperation in High-Technology Development and Trade" NATIONAL ACADEMY PRESS Washington, D.C. 1996

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NATIONAL ACADEMY PRESS 2101 Constitution Ave., N.W. Washington, DC 20418 The National Academy of Sciences is a private, nonprofit society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by Congress in 1863, the Academy has a mandate that requires it to advise the federal government on science and technical matters. Dr. Bruce Alberts is president of the National Academy of Sciences. The National Academy of Engineering, was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. William A. Wulf is interim president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is president of the Institute of Medicine. The National Research Council was organized 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 advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communi- ties. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce Alberts and Dr. William A. Wolf are chairman and vice chairman, respectively, of the National Research Council. Limited copies are available from: Board on Science, Technology, and Economic Policy National Research Council 2101 Constitution Ave., N.W. Washington, DC 20418 202-334-2200 Library of Congress Catalog Card Number 96-70949 International Standard Book Number 0-309-05529-6 With the exception of Section V, copyright 1996 by the National Academy of Sciences. All rights reserved. Additional copies are available for sale from: National Academy Press Box 285 2101 Constitution Ave., N.W. Washington, DC 20055 800-624-6242 202-334-3313 (in the Washington Metropolitan Area) Printed in the United States of America

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For the National Research Council, this project was overseen by the Board on Science, Technology and Economic Policy (STEP), a new standing Board of the NRC established by the National Academies of Sciences and Engineering and the Institute of Medicine in 1991. The mandate of the STEP Board is to integrate understanding of scientific, technological, and economic elements in the formulation of national policies to promote the economic well-being of the United States. A distinctive characteristic of STEP's approach is its frequent interac- tions with public and private sector decisionmakers. STEP bridges the disciplines of business management, engineering, economics, and the social sciences to bring diverse expertise to bear on pressing public policy questions. The members of the STEP Board are listed below: A. Michael Spence, Chairman Dean, Graduate School of Business Stanford University John A. Strong Amherst, Massachusetts James F. Gibbons Dean, School of Engineering Stanford University George N. Hatsopoulos President and CEO Therrno Electron Corporation Karen N. Horn Chairman and CEO Bank One Cleveland Dale Jorgenson Frederic Eaton Abbe Professor of Economics Harvard University Ralph Landau Consulting Professor Economics Stanford University Stephen A. Merrill Executive Director Lena L. Steele Administrative Assistant Staff . . . adz James T. Lynn Advisor Lazard Freres Burton J. McMurtry General Partner Technology Venture Investors Ruben Mettler Chairman and CEO (retired) TRW, Inc. Mark B. Myers Senior Vice President Xerox Corporation Donald E. Peterson Chairman and CEO (retired) Ford Motor Company James M. Poterba Professor of Economics Massachusetts Institute of Technology George M. Whitesides Professor of Chemistry Harvard University Charles W. Wessner Program Director George Georgountzos Program Associate

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NATIONAL RESEARCH COUNCIL BOARD ON SCIENCE, TECHNOLOGY AND ECONOMIC POLICY Sponsors The National Research Council gratefully acknowledges the support of the following sponsors: The German-American Academic Council Northern Telecom Limited MEMC Electronic Materials, Inc. Trimble Navigation Samsung Electronics Co., Ltd. Varian Associates, Inc. Hitachi, Ltd. Siemens Corporation Philips Electronics N.V AT&T General Electric Company Program Support for the Board on Science, Technology and Economic Policy is provided by a grant from the Alfred P. Sloan Foundation Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the views of the project sponsors. IV

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Table of Contents I. Preface lI. Introduction III. Steering Committee Policy Recommendations and Findings IV. NRC Summary Report on the Project FOREWORD TO THE NRC SUMMARY REPORT .......... 5 9 SOURCES OF FRICTION AND COOPERATION IN HIGH-TECHNOLOGY INDUSTRIES 12 The Permanency of Competition for High-Technology Industry, 12 Growth in Regional and National Technology Development Programs, 13 Greater National Competition, 19 National Strategies: Producers versus Consumers, 24 The Importance of Conditional Government Support, 28 The Importance of Sustained Effort, 29 Export-Oriented Economies, 31 Creating Comparative Advantage, 36 v

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Al Internationalization of "Domestic" Policies, 38 National Locational Competition and Its Impact on Scientific Research and Cooperation, 41 Greater International Cooperation May Generate Increased Friction, 43 Different Modes of Cooperation, 45 Principles of International Cooperation, 45 Challenges to Cooperation, 47 National and International Consortia, 48 Best Practice for National Programs of Technology Development, 50 Producer versus Consumer Economies: Different Goals, 51 International Eligibility for Participation in National Technology Programs, 54 A Case-by-Case Approach, 59 Strategic Alliances, 61 Globalization of R&D?, 64 Technology Cooperation and an Open Multilateral Trading System, 66 Strengthening Institutions to Integrate Trade and Technology Policies, 67 SYSTEM INTEGRATION AND SYSTEM FRICTION: NEW CHALLENGES IN TRADE POLICY.................... Direct and Indirect Subsidies, 72 National Security and Dual-Use Technologies, 76 Discriminatory Public Procurement, 77 Product Standards, 79 Dumping and Antidumping, 80 Market Access: Compulsory Technology Transfers and Aerospace Competition, 85 Intellectual Property Protection, 91 Investment Incentives, 94 CONTENTS .72 DIFFERENT NATIONAL INVESTMENT REGIMES AND THEIR CONSEQUENCES 96 National Investment Regimes Differ, 96 Investment Barriers, Licensing Agreements, and Technology Transfer, 100 Foreign Direct Investment in High-Technology Industry, 102 Consequences for Competition Policy and Foreign Policy, 104 Consequences for High-Technology Competition, 107 Sanctuary Markets, 108

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CONTENTS Bilateral Solutions?, 109 Competition Policy Convergence?, 1 15 Cumulative Consequences, 1 16 Global Competition among National Companies, 117 National Strategies for Multilateral Solutions, 118 . . Vil MAIN POINTS OF THE SUMMARY REPORT 121 SUPPLEMENTS TO THE SUMMARY REPORT 131 A. High-Technology Competition in Semiconductors, 131 B. Government Support for Technology Development: The SEMATECH Experiment, 141 C. Implications of the U.S. Dual-Use Strategy, 152 D. The Global Positioning System: Government Missions, Commercial Applications, and Policy Evolution, 158 E. Discriminatory Public Procurement: Prospects for Progress, 164 BIBLIOGRAPHY 173 Boxes within the Summary Report and Supplements Box A. Why Are Countries Concerned about Their High-Technology Industries?, 33 Box B. How Do Governments Support High-Technology Industries?, 39 Box C. Dnvers of Cooperation in the Semiconductor Industry, 46 Box D. Real-World Case: International Cooperation on the 300mm Wafer, 60 Box E. Types of Alliance Activity, 63 Box F. Comparative Advantage and High-Technolo~,y Competition, 70 Box G. The Dump~ng/Antidumping Policy Debate, 82 Box H. The Stakes in Aerospace Competition, 88 Box I. The U.S.-Japan Semiconductor Agreements of 1996, 1 11 Box J. Lessons in Technology Transfer, 151 V. Joint HWWA-If`7V Analysis: National Technology Policies and International Friction: Theory, Evidence, and Policy Options 187 THE ECONOMICS OF TECHNOLOGY POLICY IN GLOBALIZED MARKETS 190 APPROACHES TO CONFLICT RESOLUTION: AGENDA FOR ACTION ............................................................................. .206 REFERENCES 237

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PROJECT STEERING COMMITTEE Erhard Kantzenbach, Co-Chairman President Hamburg Institute for Economic Research Institut fur Wirtschaftsforschung Hamburg GERMANY Richard E. Baldwin Professor of International Economics Graduate Institute of International Studies Geneva SWITZERLAND Charles Fine Associate Professor of Management Sloan School of Management Massachusetts Institute of Technology Cambridge, Massachusetts USA Frieder Meyer-Krahmer President Fraunhofer Institute for Systems Analysis and Innovation Research Karlsruhe GERMANY Sylvia Ostry Chairman Centre for International Studies University of Toronto Toronto CANADA George M. Scalise Executive Vice President and Chief Administrative Officer Apple Computer, Inc. Cupertino, California USA . . . vale Alan Wm. Wolff, Co-Chairman Managing Partner Dewey Ballantine Washington, D.C. USA Horst Siebert President Kiel Institute for World Economics Institut fur Weltwirtschaft Kiel GERMANY Luc L.G. Soete Professor Maastricht Economic Research Institute for Innovation and Technology (MERIT) Maastricht THE NETHERLANDS William J. Spencer President and CEO SEMATECH Austin, Texas USA Hiroyuki Yoshikawa President University of Tokyo Tokyo JAPAN Gerhard Zeidler Chairman, Committee for Research and Development Confederation of German Industry Bonn GERMANY

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I. Preface . PROJECT ORIGINS This project has its roots in the belief that relationships need to be tended in order to remain strong and vibrant. Reflecting his concern with the vitality of the German-American intellectual dialogue, Chancellor Helmut Kohl proposed to then President George Bush that a sustained effort be undertaken to strengthen intellectual ties between the two countries. Presi- dent Bill Clinton subsequently endorsed this concept and the German-American Academic Council (GAAC) was established in March 1993. The purpose of the Council is to support cooperation between Germany and the United States in all fields of science and scholarship by providing a forum for transatlantic dialogue and by collaborating on policy studies on issues con- fronting decisionmakers in both countries. As its first policy project, the GAAC chose to sponsor an examination of the development of new technologies and the industries based on them. These technologies and industries are sources of economic growth and hi~,h- wage employment; competition for high-technology markets makes them also a source of growing international friction that could undermine both the multilateral trading system and the tradition of shared scientific and technological information. In recognition of the importance of understand- ing the roles of competition, conflict, and cooperation in high-technology development and trade, the German-American Academic Council solicited IX

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x PREFACE and approved a proposal from the U.S. National Research Council, through its Board on Science, Technology and Economic Policy (STEP), in partner- ship with two leading German research institutions, the Institute for Eco- nomic Research in Hamburg (HWWA) and the Institute of World Econom- ics (IfW) in Kiel. It was recognized from the outset that policy questions related to trade, investment, technology development, and cooperative activities are essen- tially global in nature. Furthermore, to ensure that the project yields practi- cal policy recommendations for national governments, a sustained effort was made to bring a variety of perspectives to bear, not only scholarly analysis and technical expertise, but also business management and govern- ment policymaking experience. Accordingly, an innovative structure was adopted to secure the broadest participation with respect to project guid- ance, finance, conferences, and related activities. MULTINATIONAL STEERING COMMITTEE In order to provide leadership and direction for the project, a Steering Committee of distinguished academics, leading business executives, trade and technology policy practitioners, and other experts was assembled. The Committee includes members from Canada, Japan, Germany, and other European countries as well as the United States. The diverse national perspectives and training of this distinguished Committee brought a multidisciplinary and global perspective to the complex issues considered by the project. Different perspectives have a value in their own right but by no means assure consensus. The Steering Committee discussions involved a sus- tained effort to identify the limits of consensus on a broad range of analyti- cally difficult and often contentious issues of great consequence for interna- tional cooperation in science, technology, and trade. The Findings and Recommendations reflect the consensus reached by the Steering Committee on these issues. PRIVATE SECTOR PARTICIPATION The generous GAAC grant covered the costs of participation for the German institutes and provided a foundation for the fundraising effort re- quired of the National Research Council to meet its different budgetary requirements as a private independent institution. The challenge of secur- ing adequate funding was also seen as an opportunity to secure broad pri- vate sector participation in the information-gathering phase of the project. Validating the project's concept and the GAAC's interest, the National Research Council succeeded in assembling, over a relatively short period, a group of private sponsors that is very diverse in terms of nationality, sector

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PREFACE Xl of activity, and corporate size. These corporate contributors and partici- pants include companies based in the United States, the Netherlands, Japan, Canada, Korea, and Germany, with operations across a broad range of high- technology sectors such as consumer electronics, semiconductors, comput- ers, telecommunications, turbines, and materials. The participating compa- nies include Northern Telecom, Siemens, Hitachi, Samsung, Philips, General Electric, MEMC, Trimble Navigation, Varian Associates, and AT&T. The substantive and financial contributions of the project sponsors were essential to the success of this undertaking. Without their financial support, the NRC could not have carried out a project of this scope and intensity. Equally important, the active participation of senior industry representatives from these sponsors and a wide range of other companies, as well as of academic experts and senior policymakers, helped ensure that the presenta- tions and discussions of the conferences accurately reflected the genuine opportunities for increased cooperation, the realities of global commercial competition for high-technology markets, the national stakes inherent in this competition, and the resulting policy challenges. THREE CONFERENCES AND A SYMPOSIUM The structure of the project reflected its international orientation, with each of the three participating institutions responsible for one of the princi- pal conferences, to which the NRC added a timely symposium. The goal of these conferences was to assemble a body of analysis on the principal issues of the project. The conferences brought together an exceptionally knowl- edgeable group of academic experts, leading industrialists, and responsible officials of national governments and supranational institutions to partici- pate in the presentations and debate. The sequence of the conferences was designed to progress from analysis of the underlying theoretical issues, through an examination of particular high-technology disputes and cases of international cooperation, to consideration of best practices and future policy options. Each institution independently organized meetings reflecting its particu- lar analytical strengths, policy interests, and traditions. The first confer- ence, The Economics of High Technology Competition and Cooperation in Global Markets, was held at the HWWA in Hamburg, Germany, on 2-3 February 1995. The second conference, The Sources of Friction and Coop- eration in High-Technology Development and Trade, was hosted by the National Academy of Sciences on 30-31 May 1995 in Washington, D.C. The third conference, Towards a New Global Framework for High-Technol- ogy Competition and Cooperation, took place at the Kiel Institute of World Economics on 30-31 August 1995 in Kiel, Germany. In addition, the STEP Board of the NRC elected to hold a symposium,

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. . XZI PREFACE International Access to National Technology Development Programs, on 19 January 1995. This symposium was designed to ensure a balanced analysis of the issue of foreign participation in national technology programs. Pro- posals to restrict participation in U.S. government-sponsored programs had generated intense debate in early 1995. The symposium enabled the project to address, in a timely and effective fashion, this controversial element of its agenda. DIFFERENT TRADITIONS JOINED The institutional partners in this collaborative effort brought different perspectives and traditions to this undertaking. The two participating Ger- man institutes form part of a system for providing high-quality economic analysis of public policy issues to the German government and public at large. For example, both institutes are well known for their expertise in global trade developments and international economic policy. Both insti- tutes make important contributions to German policymaking. The National Research Council, as the operating arm of the National Academies of Sci- ences and Engineering, advises the U.S. government on a broad array of public policy questions. In addition to the different perspectives within the Steering Committee on the substantive issues reviewed by the project, the German institutes and the NRC have quite different procedures for taking positions on public issues. The National Research Council is obliged by its procedures and tradi- tions to submit its reports to independent review by experts who were not involved in the preparation of the report. The parent bodies of the NRC, the National Academies of Sciences and Engineering, consider this review to be an integral and constructive part of the study process, enabling committees to test their rationales, conclusions, and recommendations before a report is released to the public. Only after the authoring committee is independently judged to have been responsive to the reviewers' comments is its report released by the National Research Council. In this case, the Recommenda- tions and Findings were agreed to by all members of the Steering Commit- tee. Section IV of the report was prepared by the NRC staff, on the basis of contributions by Steering Committee members, the commissioned papers, and conference discussions. All sections of the Report were subject to the NRC review process, with the exception of Section V, which was prepared according to the procedures of the two Ghan institutes. The German institutes have a different tradition, reflecting their role in German public policymaking. They are able to release reports on their own responsibility, and the institute presidents are authorized to take policy po- sitions on behalf of their institutions. It is for this reason that the joint document produced by the German institutes, though an integral part of the

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PREFA CE . . . XZlI report, was not subject to independent review. This joint report does, how- ever, represent the views of the institutes and was an integral part of the Steering Committee deliberations. It is therefore of great relevance to the final Recommendations and Findings of the Steering Committee. The Steering Committee met on four occasions. Three of the meetings were held in conjunction with the conferences, in which Committee mem- bers were the principal participants. The final deliberative meeting, which took place at the NRC in Washington in December 1995, took into account the conference papers, presentations, and discussions and the analysis pre- pared by the three institutions. In the course of this final meeting, the Steering Committee agreed to a comprehensive and significant set of rec- ommendations on a series of interrelated and highly complex issues. The Recommendations and Findings underscore the importance of the subject matter and address specific issues of technology and trade policy, govern- ment support of research and development, and policies affecting interna- tional cooperation. The recommendations also highlight the need for addi- tional information and identify specific areas that would benefit from further analysis. In the rare instance where no agreement was possible, the Steer- ing Committee acknowledges its inability to achieve consensus on a recom- mendation. FINAL PRODUCTS The results of the project are in four parts. The proceedings of the conferences and symposium are being published by the respective host in- stitutions in three separate volumes. This volume contains the Findings and Recommendations of the Steering Committee, and revised versions of the two reports considered by the Committee at its final meeting, the first pre- pared by the NRC staff, the second jointly prepared by the HWWA and IfW staffs. The process of arriving at the agreements which constitute this report was not always easy. In the end, it was successful, largely as a result of the cooperative spirit, dedication, and hard work of the participants. Indeed, in a sense, the success of the project is perhaps itself a model and a lesson for those who wish to strengthen international cooperation. Erhard Kantzenbach Project Co-Chairman Alan Wm. Wolff Project Co-Chairman

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