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2 CONFLICT AND COOPERATION Sources of Friction and Cooperation in High-TechnoZogy Industries During this century, scientific discovery and engineering developments have brought enormous technological progress, with widespread benefits for mankind in both the industrialized and industrializing world. As a recent report of the National Research Council remarked, "the change has often been gradual, almost unnoticed in daily life, but fundamentally impor- tant."i Technological advance has permitted astronauts to walk on the moon and astrophysicists to probe the origins of the universe, while the physical sciences have brought us microelectronic devices, lasers, and fiber-optic networks. High-technology industries such as aircraft, chemicals, comput- ers, software, pharmaceuticals, and biotechnology continue to brie=, us new products that lengthen our lives, extend our personal ability to communicate and access knowledge, and increasingly to provide cures to the ills that plague man. The power for it is that and wealth-creating activities generated by these technologies also bring out the acquisitive instincts of mankind, en ~ _ ~ 1~ 1 1_ ^1~ dad _~_~:~1 ~ __ ^~11~ gendering competition wn~cn notes tne twin po~enua~ cat ,grearc;r c;~;~;~c; and debilitating conflict. This Report reviews some of the sources of inter- national competition for hi~h-technology industry, the problems and risks such competition entails for scientific and economic relations, especially made, the forces encouraging greater internanona1 cooperation, and the challenges these cooperative efforts encounter. THE PERMANENCY OF COMPETITION FOR HIGH-TECHNOLOGY INDUSTRY Competition over strategic high-technology industry will continue to be a major source of friction in the international system.2 While a degree of healthy competition is inevitable and desirable, unless sustained and effective attention is given to the complex set of policy issues associated with the programs to develop and nurture high-technology industry within nahona1 economies, the faction generated by these competing national programs could have important 1 Allocating Federal Funds for Science and Technology, National Research Council, Na- tional Academy Press, Washington, D.C., 1995, p. 70. 2 I. is imn~rt~nt to not. ~t the outset that the composition of world trade has changed - 1~ ~ ~ care cv Cave- ~ r- dramatically in the twentieth century. In 1900, world trade was approximately 80 percent agricultural and mineral based; today it is 80 percent based on manufactures and services. This means that the advantage on which specialization and trade is based are roughly 80 percent man-made; trade based on natural resource endowments is of little significance (see Figure 1). High-technology trade is an extreme example of this general development, with government initiatives playing a major role.

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SOURCES OF FRICTION AND COOPERATION 60% 40% 20% 10% 0% 1 13 1970 1 988 Source: GATT, IBIS estimates _ Agriculture I I Minerals _ Manufacturers I I Services FIGURE 1 World trade in goods and services. The chart shows shares held by main commodity groups. Prom B. Scott, "Economic Strategy of Nations." negative consequences for scientific and technological cooperation and for the international trade regime. It is important to note at the outset that the United States, Europe, Japan, Korea, Taiwan, China, and other major trading coun- tries all have extensive national programs to support basic and applied re- search. These programs frequently include the development of core technolo- gies in sectors such as electronics, information systems, aerospace, new matenals, and opto-electronics, sectors that have a decided impact on commerce. While national and regional programs vary greatly by structure, funding, participa- t~on, and rationale, their basic objectives are similar. GROWTH IN REGIONAL AND NATIONAL TECHNOLOGY DEVELOPMENT PROGRAMS The European Community is increasingly concerned about the gap be- tween its acknowledged scientific excellence and its ability to translate this asset into practical economic and commercial achievement. The relative decline in the position of European industry in technology-intensive sectors such as microelectronics and computers and the limited commercialization of biotechnology are of concern to European officials at both the national and regional levels. A recent European Commission report observes that Europe's capacity for innovation has diminished in recent decades. It notes

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14 CONFLICT AND COOPERATION with "alarm" that, "between 1981 and 1993, the number of patents filed in Europe steadily declined in several key sectors: electronics, pharmaceuti- cals, chemicals, the aircraft industry, etc. For Japan in the same period, the number of patents showed a steady increase." The report also notes that "advanced technology products only account for about 30% of the Union's exports, while the corresponding rate for Japan and the United States is over 50%."3 The report cites three features of the European research sys- tem to partly explain these weaknesses: the inadequate translation of re- search results into commercial applications, insufficient investment in re- search and technology development programs in the fields of education and training, and the fragmentation and lack of coordination in European re- search efforts.4 European regional efforts to redress their competitive position include well-known endeavors such as the European Union programs in information technologies (ESPRIT); advanced communications technologies and services (ACTS); industrial and materials technologies (BRITE); standards, mea- surement, and testing (SMT); and the mantle science and technology pro- gram (MAST), as well as transport research (for air, rail, road, and inte- grated transport). These programs, which represent a si ,Il~ficant commitment of Community funds, are focused on the development of precommercial and commercial technologies not basic research.5 These programs were supple- mented in the mid-1980s by the European Research Technology Program (EUREKA). Conducted outside of the European Community institutions, the program consists of joint R&D projects in advanced technologies in- volving more than one member state, such as the Joint European Submicron 3 European Commission, Research and Technology: the Fourth Framework Programme (1994-1998), Brussels, Belgium, 1995, p. 12. 4 Ibid. The lack of coordination and the risk of needless duplication are a recurrent-and understandable theme of the European Commission. While no doubt some wasteful duplica- tion occurs at the national level, given the uncertainties associated with technology develop- ment and the innovation process in general, it is not certain that a centralized approach along the lines of the European Framework model is inherently superior hence the existence of the EUREKA program as well as major programs at the national level (see below). For a review of European Union programs, see W. Sandholz, High-Tech Europe: The Politics of Interna- tiorral Cooperation, University of California Press, Los Angeles, 1992. 5 The European Community programs, such as the Framework programs, are focused not on basic science but on the improvement of industrial competitiveness. This orientation is based on article 130F of the Treaty on European Union, which notes, "the Community's aim shall be to strengthen the scientific and technological basis of European industry and to en- courage it to become more competitive at the international level." European Commission, The European Report for Science and Technology Indicators, 1994, Directorate-General XIII. Tele- communications, Information Marlcet and Exploitation of Research, Luxembourg, October 1994, p. 257.

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SOURCES OF FRICTION AND COOPERATION 15 Silicon Initiative (JESSI). Despite the prominence given to Europe-wide programs, many of the most important policies and programs in teens of resources, focus, and competitive impact remain at the national level.6 The United States is undergoing a structural transformation in its na- tional research programs largely as a result of the end of the Cold War. The structural change engendered by this historic transition has been com- pounded by the more rapid technological advance of the commercial sec- tor a reversal of the leading role previously held by the military produc- t~on base. (See Supplement C on dual use technology below.7) This evolution in U.S. technology development programs has by no means eliminated the government role in technology development. Indeed, dual-use strate- gies emphasize the importance of the commercial-industrial base in the effort to provide the most advanced technologies on a timely, cost-effec- tive basis. Consequently, the military rationale for U.S. government sup- po~t for technology which served to justify government investment throughout the Cold War-is now joined by the growing awareness of the competitive pressures the U.S. economy faces as well as by the dramatic increase in the cost of developing new technologies.8 As a result, the U.S. has a broad and growing portfolio of cooperative initiatives such as the dual-use oriented Technology Reinvestment Project (TRP, which includes programs such as the U.S. Display Consortium), the 6 For a review of the different perspectives on and evolution of national policy concerning "state of the art" technology within Germany, as well as a discussion of the different views on such programs within the KU, see Erhard Kantzenbach and Marisa Pfister, "National Ap- proaches to Technology Policy in a Globalizing World Economy: The Case of Germany and the European Union" in G. Koopman and H.E. Scharrer (ads.), The Economics of H~gh-Tech- nology Competition end Cooperation ir: Global Markets, HWWA Institute for Economic Re- search, Hamburg, Germany, 1996. For a comprehensive overview of European science and technology programs, see The European Report on Science and Technology Indicators 1994. For a review of programs at the national level in semiconductors, see Thomas Howell, Brent Bartlett, and Warren Davis, Creating Advantage: Semiconductors and Government Industrial Policy irz the 1990s, SIA, Santa Clara, Calif., 1992. 7 The term dual-use refers to research and technologies that have both military and civilian applications. In addition to the dual-use section below, see the supplement on the Global Positioning System. ~ A recent report by the National Science Foundation notes that U.S. trade in several advanced technologies, including aerospace, computer-integrated manufacturing, life science, and computer software, produced sizable trade surpluses in the 1990s-yet this surplus has declined every, year since 1991 (italics added). The same report notes that "U.S. technology trade is highly concentrated,'' with 85 percent of total U.S. technology product exports in information technologies, aerospace, and electronics. National Science Board, Science and Engineering Indicators-1996, U.S. Government Printing Office, Washington, D.C., 1996, NSF PR 96-22, 20 May 1996, p. 6-2. The report adds that recent shifts in industrial research and development in the United States and abroad are narrowing the margin of technological advantage for U.S. firms.

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6 CONFLICT AND COOPERATION SEMATECH consortium, the Hi~h-Performance Computer and Communi- cations (HPCC) program, and the multifaceted National Information Infra- structure Initiative (NII), the Small Business Innovation Research Program (SBIR), the Advanced Technology Program (ATP), and the more recent Partnership for the New Generation of Vehicles (PNGV) pro:,ram.9 In addition, there has been rapid expansion of cooperative programs, such as the Department of Eneray's (DOE) Cooperative Research and Development Agreements (CRADAs) for technology cooperation between DOE laborato- ries and private firms. Many of these programs involve aovernment-indus- try partnerships with shared costs, management, and objectives to develop technologies to meet both government missions and commercial goals.l At the same time, there are contradictory trends In the funding of the U.S. R&D effort. Notwithstanding the relatively broad consensus concern- in~ the value of government support for research, the constrained budgetary situation in the United States has resulted in strong pressures for the reduc- tion of important elements of the U.S. federal R&D portfolio, with the multiyear budgets of both parties implying, substantial redutions in funding for research and development. The debate in the United States concerns not only the level of support for R&D, but also the composition of :,overn- ment support. Some influential U.S. policymakers oppose government support for technology development programs, arguing that there should be a clear line between basic and generic research (which all agree government should support) and applied research. Others argue that the research process 9 For a review of the PNGV program, see Review of the Research Program of the Partner- ship for a New Generation of Vehicles (PNGV), National Academy Press-, Washington, D.C., 1994. For the NII, see The Unpredictable Certainty: Information Infrastructure Through 2000, National Academy Press, Washington, D.C., 1996. The much-discussed U.S. Advanced Technology Program (ATP) began under the Bush administration, was increased rapidly under the Clinton administration, and subsequently encountered substantial criticism. However, this program remains relatively small, both in absolute amounts ($340.5 million in 1995) and in terms of the size of the awards. For a discussion of the ATP program in the context of U.S. technology policy, see Robert M. White, U.S. Technology Policy: the Federal Government's Role, Competitiveness Policy Council, Washington, D.C., September 1995. 10 For a review of U.S. partnership programs, including recommendations for improving their effectiveness, see Richard J. Brody, Effective Partnering: A Report to Congress on Fed- eral Technology Programs, Office of Technology Policy, U.S. Department of Commerce, April 1996. 11 The U.S. Council of Economic Advisers ar Sues, however, that investments in R&D are the key to increasing productivity. A recent CEA report notes that "successful R&D invest- ments-from the jet engine to transistors to lasers-can and have transformed the whole economy." See Supporting Research and Development to Promote Ecorzem~c Growth: The Federal Government's Role, Council of Economic Advisers, Washington, D.C., October 1995. p. 8 and passim. 12 Ibid.

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SOURCES OF FRICTION AND COOPERA TION 17 does not fit into neat categories.l3 They argue that, in reality, the process of invention and application is a continuum, with many applied research projects yielding significant returns to society at large.~4 Whatever the merits of the debate, the paradox remains that while U.S. government support for technology development appears to be in an innovative phase, the absolute amount of funding for U.S. research and development is declining 15 Japanese policy has had a long-standing national orientation toward ac- quiring, diffusing, and refining, new technologies. Japanese industrialists and policymakers alike recognize the importance of new technologies for economic growth and national competitiveness and have developed a wide variety of supportive policies. For example, the Ministry of International Trade and Industry (MITI) and its implementing, agencies have carried out major projects in areas such as Supersonic Jet Propulsion, Very Large Scale Integrated Circuits for semiconductors and related materials, and the Fifth Generation Computer Project. They also launched the initial Intelligent Manufacturing Systems Partnership, which has developed into a substantial international cooperative effort. 13 See Allocating Federal Funds for Science and Technology, especially Supplement 4, pp. 70-81. The report observes that major firms such as Sun Microsystems, Silicon Graphics, Genentech. and Amgen "did not exist fifteen years ago. All were started from a base of academic science." (p. 77) The report cites the Nobel laureate Lord Porter, who observed, "there are two kinds of research applied research and not-yet-applied research." See also the discussion of subsidies below. 14 See Box A. Economists argue that R&D has high private rates of return and even higher social rates of return, that is, "benefits which accrue as other researchers make use of new findings, often in applications far beyond what the original researcher imagined." Council of Economic Advisers, Supporting Research and Development to Promote Economic Growth, p. 5. 15 U.S. industrial investment in R&D fell in the first half of the I990s, at the rate of about 1.5 percent a year in constant dollars. NSF PR 96-22, 20 May 1996. See National Science Board, Science and Engineering Educators 1996. This trend in the U.S. R&D effort is a cause for concern at the upper levels of the U.S. government. See, for example, the statement by Anita Jones, director of Defense Research and Engineering, U.S. Department of Defense to the conference Sources of International Friction and Cooperation in High-Technology Develop- ment and Trade, 30-31 May 1995. National Academy Press, Washin;,ton, D.C., forthcoming. 16 For a review of Japanese programs and policies, particularly with respect to the efforts for greater international cooperation that characterized the early 1990s, see Gregory Rutchik, Japanese Research Projects and Intellectual Properh Laws, Office of Technology Policy, U.S. Department of Commerce, Washington, D.C., 1995. For a discussion of the IMS partner- ship, see the presentations by Robert Cattoi and IJzuhiko Uwatoko at the conference Sources of International Friction and Cooperation in High-Technology Development and Trade. Robert Cattoi described the IMS as "a catalytic agent for global manufacturing cooperation involving large and small companies, user and suppliers, universities and governments." See Intelligent Manufacturing Systems, Coalition for Intelligent Manufacturing Systems and the U.S. Depart- ment of Commerce Technology Administration, Washington, D.C.' 1995.

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18 CONFLICT AND COOPERATION Although Japan's technology programs are seen as highly successful by many European and American policymakers, reflecting Japan's rapid move- ment to the forefront of many advanced technologies, Japanese policymakers perceive their economy as facing major challenges both from industrial countries, such as the U.S., and newly industrializing countries, such as Korea.~7 Reflecting this perception, Japan has recently announced ir1 sharp contrast to trends in the United States-plans to double its R&D spending by the year 2000.~8 For example, 1997 funding for industrial research is to increase more rapidly than the overall budget, with MITI's Agency for Industrial Science and Technology (AIST) receiving a significant increase, reflected by AIST's announcement of three new programs.~9 Because of the central role of semiconductors, as the enabling technology for the m~- croelectronics revolution, the long-standing commitment of the Japanese government to this sector is expanding.20 For example, Japan recently l7 For a Japanese view of the problems faced by their industry, see M. Sumita and H. Shin, `'Japan's Semiconductor Industry in the 21st Century," NRI Quarterly, Spring 1996. They observe that "semiconductor demand is booming worldwide, but Japan's semiconductor indus- try is in trouble-squeezed by a resurging American chip industry and the growing inroads of Korean companies." They believe that '`the American semiconductor industry has successfully differentiated its products from those of its competitors, including Japan..." They also affirm that "much of its success can be traced, in particular, to (1) joint projects with the leading users of semiconductors to develop new products; and (2) close cooperation between the public and private sectors in support of the semiconductor industry. The Korean industry has focused on developing and producing commodity-type semiconductors...and the Koreans now have a sig- nificant cost advantage over the Japanese." Ibid., p. 20. 18 The contribution of Japanese industry to the national R&D effort should not be under- stated. In the 1970s, Japanese electronics firms were still acquiring basic technologies but rapidly developed new ways to apply them. By the 1980s and 1990s, the larger firms actively carried out their own basic research while remaining at the forefront of applications. Recog- nizing the importance of creating core technologies, companies such as Hitachi regularly in- vest 10 percent of sales in R&D activities while engaging in a broad range of international alliances. See the presentation by Y. Takeda, "Japanese Technology Acquisition, Diffusion, and Development Firm Strategy: Changes and Challenges" to the conference Sources of ~ter- natronal Friction and Cooperation in High-Technology Development and Trade, 30-31 May 1995. 19 These include (1) an industrial technology and innovation R&D program ($25.2 mil- lion); (2) the ``dream project," which will include a structural biology component and research on next-generation optical memory technology ($1.5 million); and (3) the `'techo-infra" project to establish measuring and testing standards and to create an information infrastructure for biological resources ($9.3 million). See U.S. Embassy, Tokyo, 960306, "Research Budget," in International Market Insight Series. ~ A 20 Japan is by no means the only country to share this policy focus on the semiconductor industry. There are now more than ninety semiconductor industry research organizations worldwide. Current estimates include twenty-five in Europe. eighteen in Japan, seventeen in Korea, fifteen in Taiwan, and some ten in the United States. Currently, China has only two, though this number is to increase. Excluding the United States, total five-year funding for electronics research now approximates $80 billion. (See below.)

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SO URCES OF FRICTION AND COOPERA TION 19 announced a series of new consortia for semiconductor researched Given the competitive pressures faced by Japanese high-technology industry, Japan's positive experience with government-industry programs, and the perception that collective efforts of other nations have proved successful, new and expanded Japanese programs to meet the technical and capital challenges of new technologies can be expected. GREATER NATIONAL COMPETITION This overview suggests that national governments and regional authori- ties are likely to continue and intensify efforts to locate high-technolo~,y industry within national borders (see Table 1~. The widespread conviction that these industries offer the greatest prospect of substantial economic growth, including high wage, high value-added employment, continued tech- nological competency, and enhanced national autonomy, is unlikely to di- minish.22 Among the industrial countries, concerns about structural unem- ployment, particularly in Europe, combined win uneasiness about the employment consequences of increasingly streamlined industries, and the rise of high- quality, low-cost foreign competitors (in both traditional and "new" high- technology industries) generate powerful political pressures which have led governments to adopt more activist policies to nurture and protect national industries, especially in strategic sectors such as aerospace and electron- ics.23 This has added a new dimension to the traditional competition be- tween Europe, the United States, and Japan with regard to certain high- technology industries. 21 They are, inter alla, the program for Semiconductor Leading Edge Technologies (SELETE), the Semiconductor Technology Academic Research Centers (STARC), and the Super Silicon Crystal Research Institute (SiSi). The SECEDE program is a Japanese-only effort to develop the equipment and materials for the move to the 300mm semiconductor wafer standard. Pre- sentation by Hiroyoshi Komiya, executive vice president and chief operating officer, SELETE, at the conference `'The U.S., Japan, and the Rules of the Game in High-Technology: National Policies and International Competition in Semiconductors," the Brookings Institution in coop- eration with Nomura Institute, 9 May 1996. See the section on International Cooperation below and Box D on International Cooperation on the 300mm wafer. Interestingly, these new Japanese programs appear to be modeled on SEMATECH, though with substantially greater funding. 22 Alan Wm. Wolff, Thomas R. Howell, Brent L. Bartlett, and R. Michael Gadbaw (eds.)' Conflict among Nations: Trade Policies in the 1990s, Westview Press, San Francisco, 1992, p. 528. 23 Sylvia Ostry and Richard Nelson, Techno-Natiorzalism and Techno-Globalism: Conflict and Cooperation, The Brookings Institution, Washington, D.C., 1994, pp. 6~78. In addition, the authors observe that, paradoxically, government measures to encourage national industry may also spur greater alliance activity and increased local investment by foreign competitors.

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20 CONFLICT AND COOPERATION TABLE 1. Major Research Consortia in Japan, the United States, and Europe* Government Name Country DatesBudget ($m)a share (ho) VOLS. Japan 1976-80350 40 OMCS Japan 1979-8590 100 VHSIC USA 1980-89900 100 Supercomp. Japan 1981 -89130 100 FED Japan 1981 -9040 100 SO Japan 1982-91426 100 Alvey UK 1983-88500 50 ESPRIT ~Europe 1984-891800 50 ESPRIT II Europe 1988-933800 50 Eureka Europe 1985-967700 50 RACE Europe 1985-963000 50 JESSI Europe 1989-964000 50 MCC USA 1983-80 b 0 NOMS USA 1986-150 b 50 SEMATECH I USA 1987-921000 50 SEMATECH II USA 1993-98200 c 50 ASET d Japan 1996-2001100 b 100 SELETE Japan 1996350 50 STARC Japan 1996-200010 nla SiSi.e Japan 199670 50 I300I f International 1996-?40 (est.) 0 a Total amounts (government plus industry) b per annum c The 1995 government contribution was 585 million. At the request of its Board, SEMATECH will no longer receive government funding after 1996. d Japanese subsidiaries of 3 U.S. firms are among 21 corporate participants. e Super Silicon Crystal Research Institute to develop 400mm wafers. f Current participants in this 300mm wafer project include companies from Korea, Taiwan, Europe, and the U.S.A. SELETE is the parallel Japanese national 300mm wafer program. See Box C. * Drawn from Peter Grindley, David C. Mowery, and Brian Silverman, "SEMATECH and Collaborative Research: Lessons in the Design of High-Technology Consortia," Journal of Policy Analysis and Management, vol. 13. no. 4, 1994, p. 727, with supplemental information from the NRC and Kenneth Flamm, Mismanaged Trade: Strategic Policy In the Semiconductor Industry, The Brookin as Institution, Washington, D.C., 1996, pp. 437 441.

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SO URCES OF FRICTION AND COOPERA TION 21 This competition is increasingly vigorous, and has the potential to place strains on otherwise satisfactory political and economic relationships. However vigorous, it is nonetheless not a military competition, but rather "a peaceful competition among those who were fated by their natures to be economic rivals... More is at stake In this competition than employment; were that the sole issue, macroeconomic means might well accomplish the desired re- sults. The large industrial efforts of the...major trading nations are not evenly spread among the various product sectors for purposes of job cre- ation. They are targeted at certain sectors viewed as strategic. Govern- ments believe that the future of their countries depends on the composition of their economies, and for the most part they see their success as nations defined by their relative success in these specific efforts."24 In addition, the hi=,h-technology competition among the established in- dustrial powers is being, profoundly modified by the emergence of new entrants wishing to compete for the high-technoloay industries which were previously reserved to the most advanced countries. These new entrants are altering the terms of global economic competition with policies different in important ways from the practices and proscriptions of the leading coun- tries. New state-supported producers in Korea, Taiwan, Malaysia, and, increasingly, China are aggressively entering global markets for hiah-tech- noloay products.25 India is also rapidly emerging as a participant in the global software industry and as a recipient of rapidly expanding foreign in- vestment.26 The policy approach adopted by most of these new entrants emu- lates the highly successful Japanese development model-with significant vana- tions rather than following, traditional Western economic precepts.27 24 Alan Wm. Wolff et al., Conflict among Nations, p. 528. 25 See China and the WTO: Economy at the Crossroads, Economic Strategy Institute, Washington, D.C.. November 1994, pp. 7-8 and passim. 96 Between 1991 and 1993 the amount of direct U.S. investment approved by the Indian government jumped from $104 million to $1.1 billion. John Stremlau, "Dateline Bangalore: Third World Technopolis," Foreign Policy, Spring 1996, p. 167. Perhaps more significantly, as a result of the ease of global communications, India has emerged as a major software center. Since 1990, annual software exports soared to 5500 million in the 1994-1995 fiscal year. Some estimates expect sales will reach $5 billion annually by 2000. Ibid., p. 153. At the same time, U.S. exports to India were $3.3 billion in 1995, up 43.6 percent from 1994. See The 1996 National Trade Estimate Report on Foreign Trade Barriers, Office of the United States Trade Representative (USTR), Washington, D.C., 1996. Nonetheless, competition between American programmers and equally well-trained Indian programmers, paid four times less than their American counterparts, is a new phenomenon with potentially significant economic and political consequences. 97 Robert Wade, Governing the Marker: Economic Theory and the Role of Government in East Asian Industrialization, Princeton University Press, Princeton, N.J., 1990.

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22 CONFLICT AND COOPERATION The commercial policies followed by China illustrate the nature of this challenge. China is the world's fastest growing major economy, with real growth at more than ten percent in 1995 and an average growth rate greater than seven percent for each of the past fourteen years.28 However, China continues to maintain one of the world's most closed markets for goods and services.29 A recent report summarizing the challenges the Chinese eco- nomic system and its trade policies pose for the multilateral trading system notes that "the Chinese definition of economic reform and Western con- cepts] are very different. We mean open markets, they mean limited competition...carefully managed by the government." The report adds that, "judging from recent policy, Chinese leaders view trade as a developmen- tal tool and a way of gaining industrial strength rather than an end in itself. Many have suggested China may follow the model of Japan's trade prac- tices seeking exports for strategic, industrial gain and shunning mutually beneficial two-way trade. Surely Beijing is aware of Japan's economic success and, like many other governments, would like to emulate it."30 Regardless of whether the Chinese are emulating a "Japanese strategy," the Chinese trade surplus with the U.S. is rising rapidly, to $28 billion in 1994 and $34 billion in 1995. Nearly 40 percent of total Chinese exports are to the United States. Interestingly, in addition to textiles and footwear, these exports now include billions of dollars of electronic machinery, and an ever-increasing volume of higher-value-added products.3i China is, in effect, using its market power and growing technical sophistication to cre- ate a comparative advantage in targeted high-technology sectors.32 28 Statement of Ambassador Michael Kantor, 7 March 1996, before the Senate Foreign Relations Subcommittee on East Asian and Pacific Affairs and the House International Rela- tions Subcommittee on Asia and the Pacific and International Economic Policy and Trade, p. 2. 29 Ibid. 30 Economic Strategy Institute, China and the WTO. For a description of U.S. trade problems with China (many of which are shared by other industrial countries), see the USTR report 1996 National Trade Estimate Report on Foreign Trade Barriers, pp. 50-55. U.S. Officials cite barriers to imports of computers, medical equipment, heavy machinery, textiles, steel products, chemicals, and pharmaceuticals, and important problems with the enforcement of the 1992 agreement on the protection of intellectual property rights. China's market for services also remains severely restricted. At the same time, China employs a broad range of export subsidies. Statement of Ambassador Michael Kantor, 7 March 1996, p. 6 and passing 31 Statement of Ambassador Michael Kantor, 7 March 1996, p. 2 (italics added). The United States now runs a deficit with China in electrical machinery. 32 For a thorough description of China's policy to target microelectronics, including offer- ing market access in exchange for technology transfers, see Thomas Howell, et al., Semicon- ductors in China: Defining American Interests, Semiconductor Industries Association' Wash- ington, D.C., 1995. The report describes the "863 Plan" which aimed to "concentrate...on a few of the most important high-tech fields to catch up with international standards and narrow the Up between China and the world in the next fifteen years." See Zhon=,guo Keji Luntan No. 5 (September 1990) (JPRS-CST-91-012' cited in Howell et al., p. 55. .

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SOURCES OF FRICTION AND COOPERATION 61 prospect of success when it is built on specific shared objectives and a clear understanding, of the osts and benefits. STRATEGIC ALLIANCES Notwithstanding the intense global competition among companies for market share and new, innovative processes and products, the last decade has seen a rapid expansion in another form of cooperation: international strafe ,ic alliances. The growth and importance of these alliances may in time lead to a reshaping of the way in which companies cooperate and compete. The causes of this phenomenal increase in corporate alliances are diverse and powerful. They include the evolution of modern technology and productive processes, the need to recover rapidly rising, costs in as large a market as possible, and efforts by companies to respond or adjust to government initiatives on the environment, for example-or to overcome exclusionary government practices. Technology acts as a major driver of alliance formation. The diversity, complexity, and cost of new technologies are all major sources of the dra- matic increases in alliances. Alliance formation Is also driven by the need to produce innovative products in an ever-shorter timeframe and to access not only markets and technologies but also the tacit knowledge to deploy them effectively. Technology convergence also plays a growing role. Firms must increasingly manage a diverse array of new technologies, sometimes outside their core competencies. To do so, they seek alliances to aid in managing technology convergence across formerly separate industries. Each of these factors encourages alliance formation as a means of accessing ex- pertise and hedging against technological risk. Governments also play a major, often decisive, role in driving, alliance activity. Government trade, investment, procurement, and regulatory poli- cies present obstacles and opportunities both of which encourage alliances. Restrictions on market access act as incentives for firms to form alliances presentation by Reinhard Loosch, ``EUREKA and the Framework Program'. in C. Wessner (ed.), Sources of International Friction and Cooperation in High-Technology Development and Trade. The Hanover Declaration, the basic charter for EUREKA, states that "the fundamental aim of EUREKA Is to raise the productivity and competitiveness of Europe's industries and national economies on the world market through products, processes, and services which have a worldwide market potential and are based on advanced technologies." Ibid., p. 265. 146 This section draws heavily from the presentations of Carol V. Evans of Georgetown University and Charles White of Motorola to the National Research Council conference Sources of International Friction and Cooperation in High-Technology Development and Trade, 30-31 May, 1995.

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62 CONFLICT AND COOPERATION as a means of bypassing border restrictions.~47 For instance, some ;,overn- ments restrict access to their markets unless would-be exporters supply critical technologies, manufacturing capabilities, and/or distribution rights to domestic producers. Governments also sometimes intervene directly in shaping or encouraging alliances in strategic sectors, such as telecommuni- cations, aerospace, and semiconductors.~48 These interventionist practices raise important policy issues for countries with relatively open domestic markets. In the case of the United States, some industries have benefited from new technologies' processes, and managerial methods learned through strategic alliances. But for the United States and other technology leaders, asymmetrical technology flows pose a long-term challenge. Competitive positioning by firms seeking to monitor or assess the activities of rivals or to learn about new product lines also motivates alliance formation. Si~,nifi- cantly, the scope and intensity of alliance activity are unevenly distributed, with the highest growth occurrin, in such high-technology sectors as aero- space, biotechnology, information systems, and the automotive industry. (Box E reviews the different types of alliance activity.) These trends in alliance formation and their implications are not well understood by pol~cymakers. In some cases, alliances represent innovative efforts to meet technological challenges. In other cases, they are second- best strategies adopted by multinationals to counteract either discriminatory policies of foreign governments or actions by publicly controlled firms. In some special cases, e.g., Airbus, they are the direct result of government action. The growth in corporate alliances paradoxically has the potential to create friction at both the national and international level. Some strategic alliances, involving, taxpayer-supported technologies, may generate friction between domestic companies and national governments. Alliances between inherently unequal partners can result in the transfer of key technologies to forei;,n partners in exchange for short-terTr~ gains.~49 In other cases, compa 147 Multinationals and the National Interest: Playing by Different Rules, Office of Tech- nology Assessment, Congress of the United States, Washington, D.C., 1993, p. 116. The issue of compulsory technology transfers and their impact on the manufacturing base of the United States and other industrial countries is taken up below. 148 Alcatel in France and Airbus In Europe are two cases in point. See the discussion of national champions and sectoral strategies (above) and the encouragement of alliance activity offered by the semiconductor agreement (below). 149 Carol V. Evans' presentation to the conference Sources of International Friction and Cooperation in High-Technology Development and Trade. See also Multinationals in the National Interest, chap. 5. This can also occur with domestic partners, although the conse- quences for national technolo;,y capabilities of such transfers are presumably less significant for technologies transferred domestically than for technologies transferred and developed off- shore. For a discussion of the objectives and assets of entrepreneurial companies and large multinational partners, see U.S.-Japan Strategic Alliances in the Semiconductor Industry: Technology Transfer. Competition. and Public Policy, National Research Councils National Academy Press. Washington, D.C.~ 1995

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SOURCES OF FRICTION AND COOPERATION 63 BOX E. TYPES OF ALLIANCE ACTIVITY R&D Alliances 1. Licensing agreement: legal permission to utilize patents or proprietary tech- nology for an up~front fee andlor royalties. 2. Cross-l~censing agreement: two or more companies give legal permission to use each other's patents or proprietary technology. 3. Technology exchange: a swap of proprietary technologies, which may or may not involve a transfer of money. 4. Visitation and research participation: the dispatch of researchers to visit, observe, and participate in R&O activities of partner firms. S. Personal exchange: an ongoing and reciprocal program in which researchers from one company spend time working at the partner company. 6. Joint development: two or more companies joining forces to develop new products or technology. 7. Technology acquisition investments: foreign investments in companies aimed at gaining access to technology, especially in small, start-up or innovative, medium-size firms. Manufacturing Alliances 8. Original equipment manufacturing (OEt.1~: manufacturing a product for another company, which sticks its label on it and handles all aspects of business activities, including marketing and servicing, as if it had manufactured the product itself. 9. Second sourcing: an arrangement whereby a company is given permission to manufacture a product designed and developed by another company as a second source of supply for customers, using the same qualifications. 10. Fabrication agreement: use of another company's fabrication facilities to manufacture a product (because the partner either lacks its own manufacturing facilities or wishes to subcontract out the task of fabrication). I 1. Assembilr and testing agreement: components and parts manufactured elsewhere are sent to another company where they are assembled and tested. l~larket~ng and Service Alliances 12. Procurement agreement: a commitment to purchase certain quantities of specific goods or services over a specified period of time. 13. Sales agency agreement: exclusive or nonexclusive rights to sell the partner's original products, or products to which value is added, in specified markets. I4.Senricing contracts: the provision of follow-up service in foreign markets (often tied to marketing arrangements). General-Purpose Tie-ups 15. Standards coordination: an agreement on common or compatible technical standards, linking devices, systems, and users of different machines. 16. Joint venture: two or more firms jointly form a company to develop, manufac- ture, or market new products.'50 }50 Prepared by the NRC working, group for the report U.S.-Japan Strategic Alliances in the Semiconductor Industry. p. 10.

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64 CONFLICT AND COOPERATION nies may barter critical technologies developed at government expenses for access to markets, other technologies, or capital. In some countries the costs, risks, and benefits are calculated by the firm; in others, the calcula- tior~ is made in consultation with national authorities. The growth in strategic alliances is changing the traditional terms of international competition. Instead of national champions, international coalitions of diverse national origin may compete for global market share. Similarly, the growth in cross-equity investment and shared production facilities across different countries poses challenges to national technology policy, just as alliances among market leaders, particularly around technical standards, challenge traditional competition policies. These areas require both further analysis and flexible policy responses. Government intervention into the formation of private alliances can significantly affect outcomes, despite the limitations (which vary among countries) on government influence. While the need for government intervention in private alliance activity is no doubt lim- ited, it is important to recognize both that government actions often generate alliances and that these alliances can have a significant impact on the competitive environment. GLOBALIZATION OF R&D? Reflecting the growth in strategic alliances and direct investment, private R&D activity has increasingly taken on global dimensions. Foreign firms have invested heavily in R&D facilities in the United States and, increas- ingly, U.S. firms are conducting R&D overseas. U.S. companies have in- creased their total overseas R&D spending substantially (from $5.2 billion in 1987 to S9.8 billion in 19931.~5i Moreover, the U.S. R&D effort is becoming, more geographically dispersed. While half of U.S. foreign-based R&D spending is located in Germany, the United Kingdom, Canada, France, and Japan, substantial increases in spending have occurred in countries such as Singapore, Brazil, Mexico, and Hong Kong.i52 The United States is also benefiting from these trends. R&D expendi- tures by forei=,n-owned companies in the United States have more than doubled, from $6.5 billion in 1987 to $14.6 billion in 1993.~53 Foreign expenditure now accounts for more than 15 percent of total U.S. private R&D, and the rate of R&D spending, by foreign-owned companies in the United States is increasing more rapidly than R&D spending by U.S. firms. t5] GlobaZi~,ng Industrial Research and Development, Office of Technology Policy, U.S. Department of Commerce, October 1995, p. 8. i53 Ibid.. p. 29. Hong Kon ,. of course, will become part of the People's Republic of China in 1997, presumably strengthenin, the Chinese technology base. i53 Ibid.

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SOURCES OF FRICTION AND COOPERATION 65 This spending reflects the significant R&D presence of foreign companies, which now own more than 645 R&D facilities in the United States. Japan owns 224, Germany 95, and France 52, with new entrants such as Korea having doubled their facilities in the last three years. Together these for- eign-owned companies employ more than 105,000 R&D workers To some extent, motivations for overseas investment tend to be similar across companies and sectors. For example, in the electronics sector, U.S. R&D in Japan and Japanese R&D expenditures in the United States were designed to meet the needs of foreign affiliates; monitor technology devel- opments in the foreign market; and assess, acquire, or generate new tech- noloa~es.~55 More broadly, R&D tends to be the last aspect of corporate activity to move overseas, though foreign production capabilities often result in selective R&D decentralization. Historically, firms move R&D abroad to acquire foreign technology, customize products for local markets, monitor foreign technological developments, and gain access to foreign R&D resources, such as universities, public and private research facilities, and highly trained scientists and en,ineers.~56 The establishment of foreign R&D facilities can also facilitate the adap- tation of products to local product standards and regulations and can result in substantial cost efficiencies. These establishments involve significant benefits to the economy In which they are located through employment, funding of academic research, equipment purchases, and contributions to the national technology base. For example, Japanese-funded R&D in the United States, which increased from $307 million in 1987 to 51.8 billion in 1993, represents a significant addition to U.S.-based R&D.is7 Notwithstanding the importance of these trends, corporate research and development activity remains nationally based. In the case of the United States, for example, the significant expansion of foreign R&D expenditures can be attributed in part to major acquisitions by foreign multinationals of 54 Ibid. 155 Ibid. 156 Multinationals and the U.S. Technology Base, Office of Technology Assessment. p. 76. It is worth noting that the United States benefits from the presence of self-selecting immi- grants, trained in the U.S. university system, many of whom remain after completing, their education. The United States therefore benefits from a net inflow of talent from other coun- tries. Other countries, which have much more restrictive immigration policies, do not, al- thou;,h they also concentrate limited educational resources on their own nationals. [57 GlobaZizir~g Industrial Research and Development, Office of Technology Policy. De- partment of Commerce, p. 29.

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66 CONFLICT aND COOPERATION research-intensive U.S. firms.~58 Moreover, even for companies with exten- sive international operations and investments, core technology development remains largely centralized at company laboratories in the home country.~59 The globalization of R&D therefore lags substantially behind the globalization of production, sourcin,, and other business activities. To some degree, this reflects the "normal" evolution of activity from trade to direct invest- ment in production activities, which eventually require R&D support. It may also be explained in part by the fact that, in some industries, produc- tion facilities can be established and moved relatively quickly in response to changing market conditions. By comparison, R&D facilities have long lead times and high fixed costs and are difficult to move. This encourages the centralization of basic research and product development. It also reflects management's perception that maintaining the company's core tech- nology competency is a task properly carried out in the corporation's home country. i6] TECHNOLOGY COOPERATION AND AN OPEN MULTILATERAL TRADING SYSTEM Greater international cooperation in technology development is fa- cilitated by an open, market-driven trading system. Long-term coop- erative efforts, and the cooperative spirit they presuppose, coexist with difficulty In an environment marked by trade disputes or inadequate respect for the explicit and implicit rules of the game. Consequently, a ~58 Ibid., pp. 10-11. The Office of Technology Policy report notes that in addition to the late 1980s surge in acquisitions of companies in industries such as computers, semiconductors, steel and tires, the largest impact on R&D funding was derived from the acquisition of U.S. pharmaceutical and biotechnology firms with large R&D budgets. 59 Multinationals arid the U.S. Technology Base, Office of Technology Assessment, chap. 4. 160 The OTA observation that leading-edge R&D for core technologies is performed at the central labs of the corporate home country is supported by empirical research, which shows that most of the patents of large multinationals are filed in the home country. See Pari Patel and Keith Pavitt, "Large Firms in the Production of the World's Technology: An Important Case of Non-Globalization," Journal of International Business Studies, First Quarter. 1991. This phenomenon is also supported by R&D expenditure data by U.S. firms which show that about 90 percent of R&D expenditures by U.S. companies occur at their facilities in the United States. See Globali_ing Industrial Research and Development, Office of Technology Policy, p. 31. See also J.A. Cantwell and C. Hodson, "Global R&D and British Competitiveness," in M.C. Casson~ (ed.), Global Research Strategy and International Competitiveness, Oxford, Basil Blackwell. 1991, cited in Globali_ing Indllstnal Research. 161 The analysis advanced by Michael Porter in The Competitive Advantage of Natiorzs supports this perception. He argues that "competitive advantage is created and sustained through a highly localized processes Furthermore, he stresses that as a result of the globalization of competition, the role of the home nation is more rather than less important. The multinational's home base is the nation where a firrnts strategy is set and the core product and process technology are created and maintained. P. 19.

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SOURCES OF FRICTION AND COOPERATION 67 key condition for sustained international cooperation In the develop- ment of new technologies is improved adherence to the principles of a liberal trade regime. Closed national markets, whether through quo- tas, discriminatory standards, or biased public procurement, under- m~ne the political and policy conditions necessary for effective interna- tional cooperation. Reciprocal access to national technology development programs fundamentally requires equal access to end-use markets. Efforts to further technological cooperation, particularly public/pri- vate cooperation, therefore imply parallel efforts to further trade liber- al~zation in areas "within the borders," such as government procure- ment, national treatment for foreign investment, and effective competition policy. Sustainable cooperation implies a competitive, transparent pro- curement regime; the right of establishment for foreign investors, in- cluding roughly comparable regimes for the acquisition of existing firms; and market access for final products resulting from such cooperation. STRENGTHENING INSTITUTIONS TO INTEGRATE TRADE AND TECHNOLOGY POLICIES There are powerful, reciprocal relationships between trade and technol- ogy policies. However, the decree to which national policymaking reflects this reciprocal relationship varies a great deal among, countries. The coor- dination of trade and technology policies, with their far-reaching economic and political ramifications, is always difficult to accomplish, even in coun- tries with an appropriate institutional structure. The absence of such a structure makes the process of effective policy coordination especially diffi- cult. These institutional issues are especially relevant with respect to the United States, both because of the impact of U.S. policymaking on the international system and because government restructuring is currently on the U.S. domestic political agenda. The need for structural reform of U.S. policymaking has been the topic of a growing number of studies recommending a restructuring of the U.S. international economic policy apparatus.~63 The fragmentation of authority i62 See, for example, Alan Wm. Wolff et al., Conflict among Nations, chap. 9. See also the article by Paula Stern, "Reorganizing, Government for Economic Growth and Efficiency" in Issues in Science arid Technology, Summer 1996, pp. 67-72. 163 For one of the most comprehensive reviews of the trade policy background, policy process, and trade strategies of Japan, Germany, South Korea, Taiwan, Brazil and the Euro- pean Community, as well as the United States, see Alan Wm. Wolff et al., Conflict Among Nations. For broadly similar views of the reforms required for the U.S. system, see John J. Murphy and Paula Stern, A Trade Policy for a More Competitive America, Report of the Trade Policy Subcouncil to the Competitiveness Policy Council, March 1993, and Paula Stem, Get- ting the Boxes Right: New Blueprints for U.S. Economic Policymaking, Economic Strategy Institute, Washington, D.C., 1995.

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68 CONFLICT AND COOPERATION which now exists tends to encourage inefficiencies, not least for its "...un- desirable separation between policy development and implementation.'' These structural deficiencies have direct effects on U.S. policy. For ex- ample, a recent study noted the tendency of the U.S. government to rely on trade policy as a means of responding, to broader issues of U.S. competitive- ness, a tendency compounded by a fragmented system of policy develop- ment. i65 Effective policymaking and its execution require appropriate institutions, which take time to build but can have important long-term effects. As competition for high-technology industries becomes more acute, new insti- tutions are needed to better link technology and related economic policies with trade policy formulation and negotiations and with export promotion and control. It is especially important that they have the capacity to assess, coordinate, and implement the various policies impacting the development of national high-technology industries.~67 An integrated approach requires Institutions designed to support national capabilities and national firms, while at the same time preserving market-based competition and strengthen- ~ng international disciplines. 164 Paula Stern, "Reorganizing Government for Economic Growth and Efficiency," p. 68. 165 See Council on Competitiveness, Roadmap for Results: Trade Policy, Technology and American Competitiveness. Washington, D.C., 1993, pp. 5-11. The report observes that U.S. "trade policy has suffered from a lack of effective information exchange between the private sector and government and among the various branches of government, particularly the agen- cies handling, technology and trade policy," pp. 1~11. ~66 Traditional economic analysis often understates the importance of institutions in creat- ing "comparative advantage." This point is made more broadly by Douglass North in "Eco- nomic Performance Through Time," his Nobel Prize acceptance speech, December 1993, as reprinted in The American Economic Review, June 1994, p. 359. North draws the distinction between economic analysis of how markets Unction at a point in time and the corresponding analysis of how economies develop over time: "There is no mystery why the field of develop- ment has failed to develop during the five decades since the end of World War II. Neoclassical theory is simply an inappropriate tool to analyze and prescribe policies that will induce devel- opment. It is concerned with the operation of markets, not how markets develop." He notes that '`theory in the pristine form....gave it mathematical elegance [and] modeled a frictionless and static world..." However, "when applied to economic history and development it focused on technological development and more recently human-capital investment but ignored the incentive structure embodied in the institutions that determined the extent of societal invest- ment in those factors. In the analysis of economic performance through time Zt contained two erroneous assumptions: (1) that institutions do not matter and (2) that time does not matter. "(Italics added.) 167 See Alan Wm. Wolff et al., Conflict among Nations, p. 12, p. 536, and chap. 9. As an example, the author contrasts the information, analysis, and policy tools available in support of U.S. agriculture with the absence of comparable institutions and resources for U.S. manufactured products. From a comparative perspective, Stern notes that "the foreign governments with which Washington negotiates usually combine the functions of trade negotiation, promotion, policy formulation, and compliance investigation within single agencies... If anything, their less frag- mented bureaucracies give them an advantage in pursuing their national economic interests." Paula Stern, "Reorganizing Government for Economic Growth and Efficiency."

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SOURCES OF FRICTION AND COOPERATION 69 In the absence of an integrated approach to international competitiveness in high-technolo~,y industries, U.S. policy can impose costs on its consum- ers and producers while putting unnecessary stress on the international trad- ing regime. In the absence of a strategic vision of high-technology compe- tition, U.S. industry is likely to face competitors supported by a panoply of promotional policies, often including the advantages afforded by a pro- tected home market. In the global competition for high-technology indus- try, this situation is not a recipe for success, nor a means of maintaining long-term support for the multilateral trading system. In the absence of effective foresight or alternative policy mechanisms, the United States has traditionally responded, in extremis, to challenges to strategic industries with trade measures. Such measures, absent a coherent policy framework, can impose costs on U.S. producers dependent on for- eign imports as well as on the consumers of the final product. Yet trade policy measures tend to be selected because they are often the only instru- ment available to policymakers.~69 Trade measures also have the added advantage of being off-budget. Consumers, not the government, underwrite the costs.~70 Improving the coordination of technology and trade policy through institutions with the necessary resources and analytical capacity offers a means to avoid unnecessary friction, while maintaining a clear understanding of the stakes for both the national economy and the interna- tional system.~7~ More effective national policymaking must be complemented by effec- tive international institutions. Because many of the policy questions associ- ated with the promotion and protection of national hi~,h-technolo~,y industry will have to be addressed on a multilateral basis, international institutions are likely to play an expanded role. It is important that the relevant multi- lateral institutions adapt their practices and structures to enable them to effectively engage the international community on these questions. As a first step, improved data collection and better understanding of the nature of international competition in hi=,h-technology industries would be a valuable contribution to the international dialogue. i68 The case of dumping duties on displays imported by U.S. manufacturers Is frequently cited. See Council on Competitiveness, Roadmap for Results, chap. 1. See also Jeffrey A. Hart, 'Anti-Dumping Petition of the Advanced Display Manufacturers of America: Origins and Consequences" paper delivered at the Annual Meeting of the International Studies Association, Atlanta, Gal, 1 - April 1992. 169 Council on Competitiveness, Roadmap for Results, p. 7. The report also concludes that a disproportionate responsibility for addressing U.S. competitiveness has fallen on trade policy, with insufficient attention accorded to technology policy. To some extent, the semiconductor case is an exception in that both trade and technology issues were addressed. (See Supple- ments A and B.) 170 Laura Tyson, Who's Bashing Whom? p. 289. 171 Alan Wm. Wolff et al., Conflict among Nations and Paula Stern, "Reorganizing Gov- ernment for Economic Growth and Efficiency" make similar assessments.

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70 CONFLICT AND COOPERATION BOX F. C01~1PARATIVE ADVANTAGE AND HIGhI-TECHNOLOGY COMPETITION Competition for high-techr~ology industries is quite different from the static, text- book competition between countries with different factor endowments, competing on the basis of "natural" comparative advantage. Competition for these industries is inextricably linked tO and affected by government policies. In many countries, polic~makers recognize that their ob~ec~ve is not jUSt tO profit from the current portfolio of national advantages, but to create these advantages in the first place and to upgrade them over time. In short, comparative advantage in high-technologies is often created by con- scious national effort'= The semiconductor industry, among others (see box D), demonstrates the impor- tance of supportive government policies and their effective exploitation by a dynamic market-oriented private sector. The semiconductor industry "wherever it has devel- oped, has been tan explicit target of industrial Policy-whether a result of military policy of.the.Uni$ed States, or.the objective of commercial policy elsewhere in the world."''3An ou':scanding.example:o.successful government intervention for commercial Objectives m semiconcluc~rs \is the Very Large Scale Integrated (VLSI) ~Pro~ect, initiated in the mid- 197Os- by t~lTl and a. number of major Japanese companies. Focused on : DRAM developmer~t and manufacture, the Project recognized the importance of complemen- tary me':aJ:::c~xide semicnnduaor (CMOS) technology a:nd solid state: memory as tech : nod drive" of die :ent~re: :indu~stry. As noted above, in exchange for a modest investrnent:i:n this ~j~nt:gov.ernment-'ndustry project (some S3.W million over four years), the~]apanese~:pro;ducers: moved from being relatively small players in Else global semiconductor business to become the dominant producers of :DRAMs by the mid- ~1~9.8.0s-: . We ..Japanese semiconductor eq.u~pment .inclustry ;.aiso~ grew~d~madcally as a result of this inYe~mem. ~Moreover, companies such as Nikon were induced. by the government tormenter the semiconductor equipment business and.toddy :domina" photoli~:ograph~e most Expensive and most critical manufacturing techr~otogy.~74: 172 This is especially true of high-technology industries. Leading examples are the semi- conductor and aerospace sectors, both of which have benefited from the highly visible hand of government intervention. For a comprehensive review of national policies to create compara- tive advantage in semiconductors and related industries, see Thomas Howell et al., Creating Advantage. See also Kenneth Flamm' Mismanaged Trade? chap. 2 and 4. For aerospace, government support through infrastructure testing facilities and R&D support played a major role in developing the industry, in the United States and elsewhere. See Mowery and Rosenberg, "The Commercial Aircraft Industry," in Richard Nelson (ed.), Government and Technical Progress: A Cross Industry Analysis, Pergamon, New York, 1982. See also Box H below. 173 Laura Tyson, Who's Bashing Whom? p. 85. 174 For an excellent review of the accomplishments of the VSLI project, see J. Sigurdson, Industry and State Partnership in Japan: The Very Large Scale Integrated Circuits (VLSI) Project, Discussion Paper No. 168, Lund, Sweden Research Policy Institute, 1986, pp. 121- 122. Flamm also provides an overview of the VSLI program. See Kenneth Flamm, Misman- aged Trade? pp. 9~113. See also Spencer, SEMA TECH, p. 3. Spencer also points out,

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SOURCES OF FRICTION AND COOPERATION Supportive government policies, however, are nonetheless not sufficient for inter- national competitiveness. The ability to participat~that is, to compete cffecavely in the world market is of fundamental importance. Moreover, this compe~on is often highly dynamic. Competition, particularly in industries which are knowledge: Intensive, involves close races among firms, witch outcomes depending on human endeavor and continuous learning more than natural endowments.'75 Increases in market share for firms (or national industry) translate into increased volume and experience, which in turn translates into increased advantage.' Short-term sacrifice to build market sliare can lead to reversals in market position; firms can come from behind to capture a leadership position in enabling technologies and high-revenue industries. Markee;pos'- tion -and cost advantages at any given time thus reflect strategies and the skill with which they are implemented, not just a pre-ordained natural order of comparative advantages.'" 71 however, that poorly conceived government-industry programs can drain critical manpower into nonproductive programs, citing the U.S. Department of Defense program on Very High Speed Silicon Integrated Circuits (VHSIC) in the mid-1980s. Jay Stowsky supports this point, arguing that military specifications and security requirements impede the diffusion of poten- tiaIly valuable technologies. See Borrus et al., The Highest Stakes, chap. 4, "From Spin-Off to Spin-On: Redefining the Military's Role in American Technology Development." 175 While not the focus of this analysis, the human factor cannot be understated. In the case of Korea, for example, the availability of well-trained engineers-a result of state policy- and the preference of Korean management for engineers over administrators, coupled with a tight check on overhead, limited middle management, and well-educated labor, have been key elements in the success of the chaebol, the diversified business groups which have led much of Korea's development. Amsden, Asia 's Next Giant, pp. 9-10. 176 Scott, Economic Strategies of Nations, p. 28. 177 Ibid. See also Borrus et al., The Highest Stakes, chap. 1 and pp. 179-184.