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MAIN POINTS OF THE SUMMARY REPORT Main Points of the Summary Report THE IMPACT OF COMPETITION FOR NEW TECHNOLOGIES AND NEW INDUSTRIES ON INTERNATIONAL RELATIONS 121 For the reasons outlined in this report, the competition for high-technol- ogy industry shows every sign of intensifying as governments seek to cap- ture the benefits of economic growth, high-wage jobs, and political au- tonomy for their citizens and of the "political space" successful programs offer governments. Moreover, in the absence of the bonds provided by the Cold War need for a common defense, the political saliency of these com- peting policies and programs and the tensions they engender will become an increasingly important element of international relations. Insofar as the political tensions created by these national programs are unlikely to dimin- ish, it is important that they receive sustained attention from policymakers. Improved understanding of the rationale for government support for high- technology industry and the recognition that governments will continue to actively support high-technology industry within their borders are essential for effective policymaking. An open discussion of the effectiveness of these programs, including their effects on the multilateral system, could provide the basis for reducing the friction these programs generate. Better documentation of the goals of such programs and of the nature of the mea- sures designed to achieve them can make the teas of the current competi- tion among nations more transparent, and thereby improve the possibility of international agreement on appropriate means and limits for such programs. Developing "rules of the game" for programs supporting high-technolo:,y industry cannot, however, be seen as a substitute for open and contestable markets for these industries. Effective national and international competi- tion within a transparent policy framework is an important means of en- couraging the rapid development of new products and processes. RECOGNIZING THAT DIFFERENT ASSUMPTIONS AND GOALS MEAN DIFFERENT POLICIES Reducing, international friction resulting from governments' efforts to promote national industries requires that full recognition be given to the differences in national objectives and values. Many countries do not seek to maximize short-term consumer welfare, although the assumption that they do often underlies discussions of Anglo-American policymaking. Instead, a growing number of countries seek to create national comparative advantage to capture the special benefits that hi~h-technolo~y industries impart to an
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122 CONFLICT AND COOPERATION economy and its workforce Understanding that countries' objectives le=,iti- mately differ is an essential step in effective policymaking, both to advance national economic interests and to reduce international friction. THE IMPACT OF HIGH-TECHNOLOGY COMPETITION ON TEIE STRUCTURE AND DISPOSITION OF RESEARCH The increased emphasis on short-term research with a focus on commer- cially relevant applications is changing the modes of operation of major corporate R&D facilities, with the phase-out of large research laboratories and the reduction of the basic research effort of large companies. Similar pressures and concerns are changing the way universities and other research institutions fund, carry out, and publicize research. Universities and re- search institutes face challenges in terms of funding, mission, and relation- ship to national programs. The exploitation of commercially relevant uni- versity research, a concern accentuated by the financial pressures faced by universities, raises complex questions as to the appropriate disposition of results and associated benefits. Because of the importance of these devel- opments~: further work on the impact of changes in public and private sup- port for basic research is required. Similarly, further work on the role of university and research institutes in national and international science and technology research should be undertaken. NEW TECHNOLOGIES AS A SOURCE OF COOPERATIVE ALLIANCES The race to exploit the opportunities inherent in new technologies gener- ates powerful incentives for greater cooperation between otherwise compet- ing companies and national programs. New product development increas- ingly involves companies in a broad array of complex technologies and production processes with high capital costs and special expertise, encour- agin~ alliances across sectors and national boundaries. Some of these alli- ances are technology driven; others result from the actions of governments. In the latter case, these policies often explicitly target the acquisition of new technologies for the domestic economy. While the need for govern- ment intervention in private alliance activity is limited, it is equally impor- tant to recognize the role of government action in creating alliances and the impact of alliances on the competitive environment. In some cases, where government action is the driver of alliance activity, other governments may have legitimate concerns as to the goals, distribution of benefits, and com- petitive consequences. Further data collection and analysis in this area could improve understanding of the causes and consequences of different types of strategic alliances.
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MAIN POINTS OF THE SUMMARY REPORT THE CHALLENGES POSED BY INCREASED COOPERATION 123 The costs, complexity, and risk associated with the development of new technologies will continue to encourage greater international cooperation by public and private entities. As the scope and intensity of this international interaction increase, the potential for friction will rise as well. Further work should be undertaken on the problems and prospects of international cooperation, particularly in commercially relevant areas. It should focus on principles to guide international cooperation, incorporating the lessons of existing international programs for the organization of cooperative research; it should also recognize that such cooperation is a valuable option and an opportunity, not a right TECHNOLOGY DEVELOP5IENT PROGRAMS WILL REMAIN NATIONALLY BASED Technology development programs will continue to be driven by national goals, whether for missions such as defense, energy, or the environment, or broader economic objectives of the nation. These motivations will continue to constrain, though not eliminate, opportunities for international coopera- tion. Successful international cooperation requires that the limitations of national objectives and other factors be taken into account. These limiting factors include · asymmetries in the structure and funding of national programs, · the different technological competencies and assets nations or firs bring to a cooperative enterprise, · the related perception that some countries are not contributing their "fair share" to basic research, and . inadequate and ineffective intellectual property protection and invest- ment regimes which discriminate against foreign acquisition and fail to provide national treatment (formally or informally). The frictions generated by the asymmetries in national technology pro- grams may become more acute as advanced high-technology companies based in countries with significantly less-developed research infrastructures seek to participate in national programs of the leading industrial countries. FURTHERING COOPERATION THROUGH AN INTERNATIONALLY AGREED NATIONAL BENEFITS TEST Given the underlying differences in rationale, structure, funding, and accessibility of national programs, a formal international agreement "guar
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24 CONFLICT AND COOPERATION anteeing access" is unlikely. Less formal understandings may offer a means of assuring greater transparency, and ultimately result in greater foreign participation in =,overnment-funded civilian R&D programs. For example, a sustained effort to reduce conditionality, perhaps through the construction of an objective, internationally accepted national benefits test, Right be undertaken on a multilateral basis. would be to . The advantage of a multilateral effort make national performance requirements more transparent, · establish agreed-upon guidelines, and · focus on contributions to the national technology base rather than on corporate "nationality ." A sustained multilateral effort could also seek to improve understanding of differences among national technology development programs. For ex- ample, it could gather improved data concerning formal rules for participa- tion in national or regional technology programs, supplemented by objec- tive assessments of current administrative practices, i.e., actual foreign participation and its rationale, rather than theoretical "openness." CONDITIONS FOR SUSTAINABLE INTERNATIONAL COOPERATION The growth and success of international cooperation will thus be deter- mined by the terms and conditions of proposed cooperation as well as by the history of previous cooperation. The degree of agreement on shared priorities, equitable technical contributions (not merely financial contribu- tions), and a shared capacity to exploit the results of cooperation will deter- mine the willingness of both firms and public authorities to participate in international cooperative ventures. The perception of decisionmakers con- cerning their opportunities to exploit the results of cooperation is a key consideration. Consequently, the contestability of the end-product markets is likely to become an essential condition for productive and sustainable international cooperation. THE LINKAGE BETWEEN INTERNATIONAL TECHNOLOGY COOPERATION AND A LIBERAL TRADE REGIME Greater international cooperation in technology development will there- fore be determined in part by developments in the multilateral trading sys- tem An open, market driven, international trading system provides an environment conducive to sustainable international cooperation for the shared development of new technologies. Lon=,-term cooperative efforts, and the
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MAIN POINTS OF THE SUMMARY REPORT 125 cooperative spirit they presuppose, coexist with difficulty in an environ- ment marked by trade disputes or inadequate respect for the explicit and implicit rules of the game. Consequently, a key condition for sustained international cooperation in the development of new technologies is improved adherence to the principles of a liberal trade regime. Closed national markets, whether through quotas, dis- criminatory standards, biased public procurement, or private anticompetitive practices, undermine the political and policy conditions necessary for effective international cooperation. Reciprocal access to national technology develop- ment programs presumes equal access to end-use markets. DOMESTIC POLICIES WITH INTERNATIONAL CONSEQUENCES Efforts to further technological cooperation, particularly public/private cooperation, therefore imply parallel efforts to further trade liberalization in areas "within the borders," such as government procurement, national treat- ment for foreign investment, and effective competition policy. Sustainable cooperation implies a competitive, transparent procurement regime, the right of establishment for foreign investors, including roughly comparable re- gimes for the acquisition of existing firms as well as market access for final products resulting from such cooperation. EFFECTIVE POLICYMAKING REQUIRES INTEGRATED INSTITUTIONAL STRUCTURES Because there are powerful, reciprocal relationships between trade and technology policy, effective national policymaking requires institutions which reflect this relationship. Institutions which link trade and technology policy are most effective. Many countries have established national institutions with the capacity to assess, coordinate, and implement the various policies impacting the development of national high-technolo=,y industries. Coun- tries such as the United States, which often do not follow an integrated approach to international competitiveness in high-technology industries, can impose needless costs on their consumers and producers while putting un- necessary stress on the international trading regime. The absence of effective foresight or alternative policy mechanisms to support a promising industry has led some countries to impose protectionistic measures, often because few other policy tools were available to decisionmakers. And protectionist border measures, in the absence of a coherent policy framework, can impose significant costs on those domestic producers de- pendent on imports of foreign components, as well as on the consumers of final products.
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26 CONFLICT AND COOPERATION CHALLENGES FOR THE WTO The new World Trade Organization will face significant challenges in seeking to contain and adjudicate the disputes arising from fierce competi- tion for high-technology industry. The legitimate desire of countries to encourage high-technology industry through a variety of largely domestic measures collides with the legitimate concern of other countries that these measures will disadvantage their national industry. For example, one country's program of technology diffusion can appear to its competitors as an effort to support domestic producers at the expense of foreign exporters. Simi- larly, policies to encourage technological innovation by national firms can be seen as an effort to create national advantage in international markets. When "normal policies" of support for innovation and diffusion are supple- mented by systematic restrictions on access to markets for trade and invest- ment, bilateral policy approaches are likely to be adopted while multilateral solutions are sought. Pressures to seek trade agreements with measurable outcomes are likely to become more frequent. Indeed, in the short term they may be the only market-opening alternative available to policymakers. As the absence of investment opportunities generates greater pressure for negotiated outcomes concerning access to and shares of regional markets, the need for progress on an effective, enforceable investment accord be- comes more compelling. It is widely accepted that governments should support research. Simi- larly, government support for R&D for government functions is also widely accepted. There is less consensus on government support for applied re- search. Yet the distinctions between basic and applied research are often difficult to make and rarely decisive in defining the appropriate government role. Existing GATT definitions and exemptions for these categories of state aid involve considerable ambiguity. Definitional difficulties for the current exemptions for R&D and the environment are therefore likely to become a source of international controversy. International initiatives to refine definitions and advise on disputes are unlikely to prove satisfactory. Consequently, the decision to provide such an exemption should be revis- ited. This is not to suggest that government R&D subsidies are necessarily improper. But where such subsidies distort international trade and cause injury, they should remain actionable. PROGRESS ON GOVERNMENT PROCUREMENT Public procurement remains a major means of government support for national industries and a significant source of friction in the international system. Because a significant share of markets for high-technology prod- ucts is derived from public purchases, discriminatory public procurement of
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MAIN POINTS OF THE SUMMARY REPORT 127 high-technology products has sparked major trade disputes. Governments continue to see public procurement as a means of supporting, national cham- pions through noncompetitive contracts and government procurement deci- sions continue to have an important impact on trade flows. A reexamination of the way the multilateral trading system addresses government procurement is now necessary. In the aftermath of the Uruguay Round agreement, government purchases are one of the few areas not cov- ered in a thorough manner by international trade disciplines. To a large extent, this is because the existing, Government Procurement Agreement (GPA) requires its signatories to make the leap to full national treatment in government procurement, a leap that most countries remain unwilling to make. The alternative described in Supplement E-would include all WTO contracting parties as members of a new GPA and would adopt the GATT tariff reduction procedures as a model that could be applied to achieve steady market-access improvements in the government procurement area. A broader, more effective agreement would also offer a means to reduce a major source of friction in high-technology trade while providing, the benefits of transparent competition to government acquisitions of hi~,h-tech- nology products. In addition, such an agreement would be a major step toward improving the transparency and due process in government procure- ment which would help reduce the impact of corruption on trade in hi:,h- technology products. With respect to international cooperation, proponents of such coopera- tion must recognize that cooperation to develop new technologies implies transparent and competitive procurement regimes. Reserving markets for national champions is ultimately incompatible with sustained cooperation. This is especially true when firms benefiting from protected home markets seek access to the publicly financed technology development programs in countries with more open markets. Consequently, the contestability of par- ticipating firms' home markets may become a de facto condition for coop- erative activity. A revised Government Procurement Agreement could thus reinforce efforts to encourage international cooperation. MUTUAL RECOGNITION ON STANDARDS Discriminatory or exclusionary standards practices are also incompatible with efforts to improve international cooperation in the development of new products. International cooperation is an excellent means to avoid conflict over differing national standards for key technologies. Recent calls for negotiations on a full and complete mutual recognition agreement for medi- cal devices, telecommunications terminal equipment, information technol- ogy products, and electrical equipment, as well as a common registrations dossier for new drug products, should be supported.
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128 CONFLI CT AND CO OPEN TI ON INTELLECTUAL PROPERTY PROTECTION There is a pressing, need for sustained international commitment to the protection of intellectual property rights, which underpin much of the tech- nological progress in sectors such as electronics and biotechnology. At the same time, a cooperative effort should be undertaken to adjust existing intellectual property rules to the needs of new fields such as global info~a- tion systems and biotechnology. Multilateral efforts to constructively ad- dress these issues should be encouraged. THE SPECIAL DYNAMICS OF COMPETITION IN HIGH-TECHNOLOGY INDUSTRY MEANS EFFECTIVE ANTIDUMPING POLICIES REMAIN NECESSARY In technology industries characterized by scale and learning economies, forward pricing, strategies can be indistinguishable from predatory pricing. The high cost, rapid innovation, and short product cycles characterizing these industries make it possible for significant damage to domestic indus- try to occur in relatively short periods. Moreover, the higher returns which accrue to national firms benefiting from these practices can provide the resources to fund additional research, more rapid product development, ex- panded marketing,, and overseas acquisitions of competitors. Even when practiced for relatively short periods, these strategies provide substantial competitive advantage in high-technology markets. For the recipients of dumped products, the revenue losses from both reduced exports and re- duced domestic market share are compounded by the loss of the dynamic efficiency gains, i.e., learning by doing, that characterize these industries. The cumulative effect of these practices can permanently alter the terms of international competition by forcing competing firms to exit a product mar- ket or by deterring new entrants. In these circumstances, the need for prompt and effective antidumpin=, policy at the national level is heightened. This may be a second-best policy solution, but it is likely to prove essential for countries with relatively open markets in hi=,h-technology goods. From the international perspective, uni- lateral national action could be usefully supplemented by improved consen- sus and standards on competition policy and its enforcement. INVESTMENT POLICIES: THE NEED FOR A MULTILATERAL ACCORD While the policymakers in some countries welcome the benefits of for- eign direct investment and consequently have relatively open investment
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MAIN POINTS OF THE SUMMARY REPORT 129 regimes, many other advanced industrial countries and rapidly industrializ- ing countries do not share this view or apply the same open policies toward foreign investment. The explanations for this policy divergence among the industrialized countries, as well as those rapidly industrializing, are many and varied. However, the effect of these "structural impediments" is to make foreign direct investment difficult' even exceptional in these coun- tries, especially for the acquisition of existing firms in leading high-tech- nolo=,y sectors. As a result, many high-technolo=,y companies are obliged to settle for licensing agreements or find themselves excluded from impor- tant markets. COMPULSORY LICENSING Licensing a:,reements, especially compulsory agreements, may work to the serious detriment of the innovating firm. And restricted market access can have powerful negative effects on the competitive position of compa- nies denied the economies of scale and other competitive benefits so impor- tant to high-technology industries. INVESTMENT INCENTIVES Better understanding of the scope of these incentives, their aggregate costs and their impact on decisionmaking at the level of the firm would be useful to national and regional policymakers. Within national jurisdictions it may be possible to establish norms-with legislative underpinnings if required to limit excessive public-private transfers in the competition for new investment. At the international level this subject should be explored as a potential element for inclusion in the negotiations for a multilateral agreement on investment. REDUCING NATIONAL DIFFERENCES IN INVESTMENT ACCESS The sharp differences in rational investment regimes are an important source of friction and a destabilizing element in the global system. Unequal access undermines the basis for sustainable international cooperation in the development of new technologies. These asymmetries in national invest- ment policy are a major source of trade imbalances and also gene ate pres- sures for restrictions on investment in countries which do have relatively open investment regimes. Finding a means to address these asymmetries is therefore an important instrument for both improved cooperation and re- duced trade friction. Progress requires a two-track approach: (1) a deter- mined and sustained effort to improve access on a bilateral basis and (2) the conclusion of a workable multilateral accord on investment.
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130 CONFLICT AND COOPERATION In the case of the United States, the systematic collection of information and sustained policy level attention to direct foreign investment, particu- larly acquisitions, in high-technology sectors would improve understanding, of their impact on the U.S. defense base and the U.S. competitive position. In the case of Japan and the industrializing East Asian economies, more open investment regimes would offer substantial benefits while also con- tributing to more balanced, and therefore more sustainable, trade flows. In the case of Europe, Basin=, the costs and administrative burden involved in establishing new firms, as well as acquisitions of existing firms, would offer enhanced opportunities for economic growth and employment.
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