National Academies Press: OpenBook

Conflict and Cooperation in National Competition for High-Technology Industry (1996)

Chapter: Sources of Friction and Cooperation in High-Technology Industries

« Previous: IV NRC Summary Report on the Project - FOREWORD TO THE NRC SUMMARY REPORT
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 12
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 13
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 14
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 15
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 16
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 17
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 18
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 19
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 20
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 21
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 22
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 23
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 24
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 25
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 26
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 27
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 28
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 29
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 30
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 31
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 32
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 33
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 34
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 35
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 36
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 37
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 38
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 39
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 40
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 41
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 42
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 43
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 44
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 45
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 46
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 47
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 48
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 49
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 50
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 51
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 52
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 53
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 54
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 55
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 56
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 57
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 58
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 59
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 60
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 61
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 62
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 63
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 64
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 65
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 66
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 67
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 68
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 69
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 70
Suggested Citation:"Sources of Friction and Cooperation in High-Technology Industries." National Research Council. 1996. Conflict and Cooperation in National Competition for High-Technology Industry. Washington, DC: The National Academies Press. doi: 10.17226/5273.
×
Page 71

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

12 CONFLICT AND COOPERATION Sources of Friction and Cooperation in High-Technology 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.”1 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 bring 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- gendering competition which holds the twin potential of greater excellence and debilitating conflict. This Report reviews some of the sources of inter- national competition for high-technology industry, the problems and risks such competition entails for scientific and economic relations, especially trade, the forces encouraging greater international 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 national economies, the friction 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 It is important to note at the outset that the composition of world trade has changed 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.

SOURCES OF FRICTION AND COOPERATION 13 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1888 1950 1970 1988 Source: GATT, IBIS estimates Agriculture Minerals Manufacturers Services FIGURE 1 World trade in goods and services. The chart shows shares held by main commodity groups. From 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 materials, and opto-electronics, sectors that have a decided impact on commerce. While national and regional programs vary greatly by structure, funding, participa- tion, 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

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 marine science and technology pro- gram (MAST), as well as transport research (for air, rail, road, and inte- grated transport). These programs, which represent a significant 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- tional 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 Market and Exploitation of Research, Luxembourg, October 1994, p. 257.

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 terms 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- tion 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- port 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 EU, 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 (eds.), The Economics of High-Tech- nology Competition and Cooperation in 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 in 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. 8 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.

16 CONFLICT AND COOPERATION SEMATECH consortium, the High-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) program.9 In addition, there has been rapid expansion of cooperative programs, such as the Department of Energy’s (DOE) Cooperative Research and Development Agreements (CRADAs) for technology cooperation between DOE laborato- ries and private firms. Many of these programs involve government-indus- try partnerships with shared costs, management, and objectives to develop technologies to meet both government missions and commercial goals.10 At the same time, there are contradictory trends in the funding of the U.S. R&D effort. Notwithstanding the relatively broad consensus concern- ing 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.11 The debate in the United States concerns not only the level of support for R&D, but also the composition of govern- 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.12 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 argues, 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 Economic Growth: The Federal Government’s Role, Council of Economic Advisers, Washington, D.C., October 1995, p. 8 and passim. 12 Ibid.

SOURCES OF FRICTION AND COOPERATION 17 does not fit into neat categories.13 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.14 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.16 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 1990s, 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 Indicators 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, Washington, 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 Property 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 Uzuhiko 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.

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.17 Reflecting this perception, Japan has recently announced—in sharp contrast to trends in the United States—plans to double its R&D spending by the year 2000.18 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.19 Because of the central role of semiconductors, as the enabling technology for the mi- croelectronics revolution, the long-standing commitment of the Japanese government to this sector is expanding.20 For example, Japan recently 17 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 Inter- national 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. 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.)

SOURCES OF FRICTION AND COOPERATION 19 announced a series of new consortia for semiconductor research.21 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-technology 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 with 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 alia, the program for Semiconductor Leading Edge Technologies (SELETE), the Semiconductor Technology Academic Research Centers (STARC), and the Super Silicon Crystal Research Institute (SiSi). The SELETE 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-Nationalism and Techno-Globalism: Conflict and Cooperation, The Brookings Institution, Washington, D.C., 1994, pp. 60–78. 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.

20 CONFLICT AND COOPERATION TABLE 1. Major Research Consortia in Japan, the United States, and Europe* Government Name Country Dates Budget ($m)a share (%) VOLS. Japan 1976-80 350 40 OMCS Japan 1979-85 90 100 VHSIC USA 1980-89 900 100 Supercomp. Japan 1981-89 130 100 FED Japan 1981-90 40 100 SG Japan 1982-91 426 100 Alvey UK 1983-88 500 50 ESPRIT I Europe 1984-89 1800 50 ESPRIT II Europe 1988-93 3800 50 Eureka Europe 1985-96 7700 50 RACE Europe 1985-96 3000 50 JESSI Europe 1989-96 4000 50 MCC USA 1983- 80 b 0 NOMS USA 1986- 150 b 50 SEMATECH I USA 1987-92 1000 50 SEMATECH II USA 1993-98 200 c 50 ASET d Japan 1996-2001 100 b 100 SELETE Japan 1996 350 50 STARC Japan 1996-2000 10 n/a SiSi.e Japan 1996 70 50 I300I f International 1996-? 40 (est.) 0 a Total amounts (government plus industry) b per annum c The 1995 government contribution was $85 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 Brookings Institution, Washington, D.C., 1996, pp. 437–441.

SOURCES OF FRICTION AND COOPERATION 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 high-technology competition among the established in- dustrial powers is being profoundly modified by the emergence of new entrants wishing to compete for the high-technology 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 high-tech- nology 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 varia- 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. 26 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 $500 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. 27 Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton University Press, Princeton, N.J., 1990.

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, “[j]udging 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.31 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 passim. 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 gap between China and the world in the next fifteen years.” See Zhongguo Keji Luntan No. 5 (September 1990) (JPRS-CST-91-012, cited in Howell et al., p. 55.

SOURCES OF FRICTION AND COOPERATION 23 The strategy adopted, with its emphasis on exports and its restraints on investments and imports, and the trade problems these policies create are by no means unique to China. Active government programs in Korea, and more recently Taiwan, have been instrumental in the rapid creation of glo- bally competitive advanced-technology industries. Korea is now a leading producer of semiconductors, e.g., Dynamic Random Access Memory chips (DRAMs), with a cost advantage over Japan, and is the second largest consumer, after Japan, of U.S. technology sold as intellectual property.33 Taiwan has had equally remarkable success. Its national strategy has fo- cused on personal computers and related information products and has made substantial progress toward that goal. Taiwan now holds a leading position as a supplier of a broad range of components and is now the world’s largest supplier of CPU boards, monitors, document scanners, graphic cards, mice, keyboards, fax/modems, and most recently laptop computers. Its position is advancing as a supplier of memory chips, logic chip-sets, flat panel dis- plays, and CD ROM drives.34 These accomplishments are extremely sig- 33 For a comprehensive review of the Korean miracle, see Alice H. Amsden, Asia’s Next Giant: South Korea and Late Industrialization, Oxford University Press, New York, 1989. For an excellent discussion of the role and perspective of one of the companies that has achieved a global role in high-technology industry, see the presentation by Y.S. Kim, of the Samsung Electronics Company, to the conference Sources of International Friction and Cooperation in High-Technology Development and Trade. Samsung began memory production in 1983 and capitalized on the tremendous growth in demand for DRAMs to emerge as the world’s leading supplier of semiconductor memory chips as well as color monitors, with $14 billion in sales in 1994 and 6,000 employees. While government policy certainly helped, this level of success in a fiercely competitive global market involves elements of managerial brilliance, good business practice at every level, and sustained collective effort. For a discussion of the interaction of public policy and private action, see Competing Economies: America, Europe, and the Pacific Rim, Office of Technology Assessment, Congress of the United States, Washington, D.C., October 1991, p. 9 and Amsden, Asia’s Next Giant, pp. 9–10. On U.S. technology purchases, see the National Science Board’s Science and Engineering Indicators, p. 6-2. 34 Presentation by Lionel Johns, Office of Science and Technology Policy, The White House, at the National Research Council, 21 May 1996. Government support plays a major role in Taiwan. The successful government program to develop the microelectronics industry was outlined by David C. Hsing, vice president and general director, Industrial Technology Research Institute, Taiwan, 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 cooperation with Nomura Institute, 9 May 1996. The program, started in 1974, has proven to be a highly effective model of government-industry cooperation for Taiwan. The program has acquired, developed, and spun off to the private sector a series of fabrication facilities (including the facility, the staff, rights to the technology, and an estab- lished market share), each at a more complex level of technology. See also the recent work by Karl J. Fields, Enterprise and the State in Korea and Taiwan, Cornell University Press, Ithaca, N.Y., 1995.

24 CONFLICT AND COOPERATION nificant. Nonetheless, with respect to China, the scale and growth rate of the Chinese economy, coupled with its current economic strategy and its desire to accede to the World Trade Organization (WTO) as a developing country, pose major challenges to the multilateral trading system.35 As this discussion suggests, the level of activity, the number of pro- grams, the substantial funding being made available, the emergence of ag- gressive new entrants, and most of all the concentration of these programs on similar, if not identical, sectors suggests that the prospect of increased international friction is real. In light of the importance of these national and regional programs and the policy issues they raise, increased and sustained attention should therefore be accorded to these questions by policymakers within national governments and relevant international organizations. NATIONAL STRATEGIES: PRODUCERS VERSUS CONSUMERS Despite the similarity in long-term goals, there are major differences in national approaches. Some nations are pursuing consumer welfare as an implicit if vaguely defined national goal, while others have adopted quite explicit national economic strategies, designed to pursue national economic strength through producer-oriented policies.36 A distinctive feature of national policymaking in this latter group is the conscious adoption of a national eco- nomic strategy, particularly with respect to high-technology industries. In implementing this strategy, the more producer-oriented countries seek to profit from dynamic opportunities offered by new knowledge-based industries, such as aerospace and semiconductors, and rely on export-led growth to bring their industries down the learning curves that characterize high-technology indus- tries. These producer-oriented countries have enjoyed sustained, high growth 35 Because China is expected to become one of the six biggest traders in the world over the next decade, the policies and practices will have system-wide consequences. See Paul Blustein and Steven Mufson, “A China Trade Question: Is It Ready for Rules?” The Washington Post, 19 May 1996, p. H1. The authors, citing Nicholas Lerdy of the Brookings Institution, note that “if you have one major player that doesn’t play by market rules and conventions,...then the risk is that the international system will break down...The system can tolerate countries like that if they are very small, but not countries that are such large traders.” 36 Bruce R. Scott, “Economic Strategies of Nations,” in Charles Wessner (ed.), Sources of International Friction and Cooperation in High-Technology Development and Trade. See also Robert Wade, “Managing Trade: Taiwan and South Korea as Challenges to Economic and Political Science,” Comparative Politics, vol. 25, no. 2, January 1993, pp. 147–167.

SOURCES OF FRICTION AND COOPERATION 25 rates.37 Collectively, these economies, by their scale, rate of growth, increas- ing regional integration, and impact on the world economy, pose a major challenge to the current international economic order.38 The growing impact of these producer-oriented countries on the world trading system makes it important to understand the assumptions, policies, and institutions which some describe as the “developmental state.” In broad terms (i.e., with significant variations among nations), the concept of “the developmental state defines a new set of arrangements between the state, society and industry designed to change the structure of the nation’s com- parative advantage.”39 First developed in Japan, but now imitated, with varying degrees of success in other countries. To a number of analysts, the developmental state has three identifying characteristics: (1) the state plays the role of gatekeeper, determining the terms and conditions for entry of technology, investment, and products into the national economy; (2) there is vertical integration and cross-ownership within large industrial groups; (3) the state has the capability to target key technologies and promote domestic industry—through low-cost capital, the acquisition of foreign technology, and the promotion of lively domestic competition—while encouraging ex- ports. It is important to emphasize that these performance-oriented indus- trial strategies are quite different from the Western European strategies of 37 The East Asian Economic Miracle: Economic Growth and Public Policy, World Bank Policy Research Report, Oxford University Press, New York, 1993. This report outlines the main features of the East Asian economic success story. For the best early analysis of this phenomenon and the role of what he calls the “developmental state,” see Chalmers Johnson, MITI and the Japanese Economic Miracle: The Growth of Industrial Policy, 1925–1975, Stanford University Press, Stanford, Calif., 1982. See also note 39 below. For an alternative view that places more emphasis on macroeconomic forces in the East Asian record, emphasizing the importance of high savings rates and the rapid diversion of resources from agriculture into manufacturing, see Gary Saxonhouse, “What Is All This About ‘Industrial Targeting’ in Ja- pan?” The World Economy, vol. 6, 1983, pp. 253–273 and Philip Trezise, “Industrial Policy Is Not the Major Reason for Japan’s Success,” Brookings Review, vol. 1, Spring 1983, pp. 13–18. 38 James Fallows, presentation to the conference Sources of International Friction and Cooperation in High-Technology Development and Trade, 30–31 May 1995. See also Fallows, Looking at the Sun: The Rise of the New East Asian Economic and Political System, Pantheon Books, New York, 1994, chap. 10, p. 496, note 1 and passim. 39 Citing Chalmers Johnson, Stephen Cohen emphasizes that the rise of the “developmental state” has had a profound effect on international competition. Martin Carnoy, Manuel Castells, Stephen S. Cohen, and Fernando Henrique Cardoso, The New Global Economy in the Informa- tion Age: Reflections on Our Changing World, Pennsylvania State University, University Park, Pa., 1993, pp. 97–100. For other recent work on related topics, see Thomas M. Huber, Strategic Economy in Japan, Westview Press, San Francisco, 1994; Linda Weiss and John M. Hobson, States and Economic Development: A Comparative Historical Analysis, Policy Press, Oxford, England, 1995; and Ha-Joon Chang, The Political Economy of Industrial Policy, St. Martin’s Press, New York, 1994.

26 CONFLICT AND COOPERATION the 1960s—sometimes described as “picking losers” because of their focus on ailing national champions.40 European national policies were (and are) designed to advance national capabilities in strategic sectors such as computing, communications, and aerospace. Beginning in the 1960s, these national programs focused on the creation of domestic national champions in sectors such as computers. In a number of major European countries, the strategy was based on the premise that larger national firms would have the economies of scale to compete with the large U.S. firms, seen as the principal competitive threat at the time.41 In pursuit of this concept, European governments created and sup- ported national champions, through a combination of mergers to achieve the necessary scale of operations, direct subsidies, and indirect support pro- vided by favorable national procurement policies.42 40 For a discussion of more traditional state aid to industry, see B. Hindley (ed.), State Investment Companies in Western Europe, Macmillan Press, London, 1983, passim. (See also the section on Dual-Use Technology in Supplement C below.) In the consumer-oriented countries, government decisionmaking is often hampered by a tendency to emphasize political and social factors rather than economic considerations (see OECD Economic Policy Commit- tee, Working Party No. One, Industrial Subsidies in OECD Countries: September 1989, p. 49). Unless programs are constructed with appropriate safeguards (e.g., cost sharing), it can also be politically difficult for governments to withdraw from open-ended commitments to support advanced-technology projects. For a discussion of problems with open-ended programs, see Linda Cohen and Roger G. Noll, The Technology Pork Barrel, The Brookings Institution, Washington, D.C., 1991. For a discussion of current U.S. partnering programs and safeguards, see Richard J. Brody, Effective Partnering. 41 See, for example, the 1967 study by Jean-Jacques Servan-Schreiber, Le Defi Americain, Edition de Noël, Paris. These concerns were shared in Germany: “The German policy for aiding its domestic computer industry grew out of a concern about the technology gap with the United States, and is a means of ensuring an indigenous industry capable of meeting the demands of German companies, hiring German engineers, and exporting to the rest of the world.” Michael Kende, “Government Support of the European Information Technology In- dustry,” paper presented at the CEPR-WZB conference held in Berlin 19–20 April 1996, p. 5. The author also cites Brian Murphy, The International Politics of New Information Technol- ogy, Croom Helm Ltd., United Kingdom, 1986, pp. 65–67. 42 Michael Kende, “Government Support of the European Information Technology Indus- try,” cites a 1968 U.K. policy on procurement which provided a 25 percent preferential margin over U.S. computer products. Kende adds that both European and U.S. domestic firms ben- efited from R&D subsidies and government procurement purchases of computer equipment. However, the U.S. policy goal was to create cutting-edge technology for government use, mainly in defense; the U.S. commercial computer industry was a by-product of this policy. In contrast, Kende sees the European policies as largely defensive, with the goal of creating a computer industry per se. This reflects a rather static view of IBM’s success—that size leads to success, rather than the more dynamic view that success leads to size. This led to a focus on creating large firms rather than firms with competitive products. Kende attributes the failure

SOURCES OF FRICTION AND COOPERATION 27 While the record is mixed, these national policies often altered market out- comes, albeit at considerable cost to the public purse. For example, in computers, the national champion policies largely failed, though the subsidies and favorable procurement practices ensured a market share for national champions, such as Machines Bull, to the detriment of foreign and any remaining domestic competi- tors. In some cases, these nationally based policies were replaced by regional efforts in the 1970s. The example of Airbus, a major regional success, is perhaps paramount. Though currently much emphasis is placed on European regional approaches, in many cases national efforts to develop or sustain national champions have continued. Indeed, some of the national efforts of the 1980s, though expensive, had considerable technical success, especially in large projects or where procurement could play a supportive role.43 For example, in the view of some analysts, French national development programs have generally proven most effective when the objective required large-scale mobilization of resources, when the number of technological results could be limited, and when competitive market forces could be sup- pressed or contained by the state.44 French technological successes under this strategy include participation in the Ariane launch program and Airbus, as well as the TGV (the high speed train), the national nuclear energy program, and the rapid modernization of the telephone system. The central- ized French approach has proved much less successful in circumstances where a company is required to rapidly adapt its products and processes to changing international market conditions.45 of this policy to the lack of attention to technology (rather than firm size) and to competitive applications of existing technologies, as well as to the absence of a supportive policy frame- work for entrepreneurs. Passim. (Government procurement continues to be a source of aid for national firms. See Supplement C.) Kende also argues that European governments continue to give insufficient attention to the creation of a policy framework conducive to the development of innovative, entrepreneurial firms. Ibid., pp. 26–29. 43 See Douglas Webber, “Alcatel, Francetelecom, and the French Government,” in Olivier Cadot et al., European Casebook on Industrial and Trade Policy, Prentice Hall, New York, 1996, pp. 219–237. In a similar approach, current U.S. government policy is to encourage rational downsizing of the defense industry through the reimbursement of some restructuring costs incurred as a result of mergers and acquisitions. See Lawrence J. Korb, “Military Metamorphosis,” Issues in Science and Technology, Winter 1995–1996, pp. 75–77. 44 For an elaboration of this analysis, see John Zysman, Political Strategies for Industrial Order: State, Market and Industry in France, University of California Press, Berkeley, 1977. 45 Ibid.

28 CONFLICT AND COOPERATION THE IMPORTANCE OF CONDITIONAL GOVERNMENT SUPPORT A key element in the success of these government programs may be the degree to which the government can make its support conditional.46 Recog- nizing the deficiencies of previous “no strings” aid to national champions, the early Mitterand government in France negotiated extensive performance requirements with corporate recipients of state aid.47 Similarly, to some observers of the East Asian experience, a distinguishing feature of East Asian practice is the provision of conditional government support, with the expectation that investment and export targets will be met by domestic firms benefiting from a broad array of government support.48 The industrialization of Korea, and particularly its success in moving into high-technology, high-value-added industries, has been especially re- markable. Some analysts attribute this to the terms and conditions the government has been able to impose on industry in exchange for preferen- tial national and international credits. “Throughout most of the 25 years of Korean industrial expansion, long-term credit has been allocated by the government to selected firms at negative real interest rates in order to stimulate specific industries.”49 However, the government also imposed performance standards, which included export and investment targets as well as price controls, restrictions on capacity expansions, limits on market entry, prohi- bitions on capital flight, and restraints on tax evasion buttressed by govern- ment control over the banking system. In this view, the foundation of late industrialization is the subsidy (defined to include both protection and fi- nancial incentives), but a crucial condition for the success of these policies 46 It is important to underscore that other factors such as tax policy and legal and financial institutions play a critical role in the performance of individual firms. For example, the policy framework in some regions of the United States supports an entrepreneurial culture through the interaction of a well-developed system of higher education, a highly mobile skilled labor force, and networks of local specialized suppliers and venture capitalists, plus the well-developed national capital markets such as the NASDAQ. This policy framework is further strengthened by a business ethic which places relatively low social penalties on failure. 47 See D. Webber in Cadot et al., European Casebook. Alcatel is a case where an aggres- sive, company-led policy of mergers and acquisitions, bolstered by grants, state-supported R&D, and massive public procurement resulted in both world-class technologies and a strong, internationally competitive position in telecommunications equipment. 48 Alice H. Amsden, Asia’s Next Giant, chap. 6, especially pp. 143–146. See also Fallows, Looking into the Sun, p. 445 and p. 497, note 2. Fallows also cites Amsden, Diffusion of Development: The Late Industrializing Model and Greater East Asia, Papers and Proceedings of the American Economic Association, May 1991, pp. 284–285. See also the World Bank Policy Research Report, The East Asian Economic Miracle: Economic Growth and Public Policy. 49 Amsden, Asia’s Next Giant, p. 144.

SOURCES OF FRICTION AND COOPERATION 29 is a government sufficiently strong politically “to impose performance stan- dards on the interest groups receiving public support.”50 THE IMPORTANCE OF SUSTAINED EFFORT These policies have yielded results. Indeed, to a considerable degree, the emerging Asian countries have proven more successful, in specific sectors, in developing technologically advanced industries able to compete in rap- idly evolving global markets than have some countries with more estab- lished technological infrastructures. Importantly, much of the East Asian success has involved the emulation and effective commercialization of ex- isting technologies, rather than efforts to develop new technologies, while the latter approach has characterized a number of European regional pro- grams.51 The record of government policies to develop new technologies and sup- port high-technology industry is by no means one of endless success, in East Asia or elsewhere. In the United States, national security and govern- ment mission programs have had remarkable success, sometimes across en- tire sectors, as well as notable failures. The national champion strategies of France and Germany have encountered failures and successes, and now include highly successful regional efforts. The sector-specific, multifirm strategies adopted in East Asia, with pervasive support by governments eager to capture the benefits of advanced industries, have had considerable success, though this achievement is also the result of great collective effort 50 Ibid., p. 145. In the case of Korea, government discipline in terms of its vigorous insistence on meeting export targets, regardless of political connections, had major positive implications for efficiency. These pressures were backed by (1) the government’s control of the banking system; (2) limitations on the number of firms per industry; (3) negotiated price controls to curb monopoly power; (4) controls on capital flight; and (5) taxation of the middle classes with limited social services available to the lower classes. Amsden, Asia’s Next Giant, pp. 16–18. 51 While it is beyond the scope of this study to compare these programs, some observers have noted that no European firm has matched the success of American or Asian firms in assembling and marketing IBM-compatible personal computers based on widely available technologies. Kende, “Government Support of the European Information Technology Industry,” pp. 20–21. European policymakers increasingly recognize the importance of these factors. A “Green Paper on innovation” recently issued by the European Commission notes that “one of the great paradoxes of the European Union is that, despite its internationally acknowledged scientific excellence, it launches fewer new products, services and processes than its main competitors,” adding that “this state of affairs results from structural obstacles such as a complex legal and administrative environment, unsuitable financing systems, etc.” See RTD Info, European Commission for Science, Research, and Development, Brussels, Belgium, February 1996.

30 CONFLICT AND COOPERATION in a favorable international environment.52 The common thread in each of these cases is that policymakers accept possible setbacks, even failure, as a fact of life when investing in new technologies. To a considerable extent they share a common goal. Most importantly, they recognize that the international market standard is not perfection, but rather the ability over time to make better decisions than their competitors.53 Making better decisions than one’s competitors is not self-evident, for either private or public investors. Moreover, investments in R&D are inher- ently risky. Consequently, some government-supported R&D efforts, like those in the private sector, will be unsuccessful. (Indeed, the absence of any failure would suggest excess caution.) But as noted above, successful R&D investments can change, and have changed, the capability—and the competitive position—of an entire economy. For example, in the United States “government support was crucial in areas such as computers and integrated circuits, jet engines and airframes, and biotechnology and medi- cal equipment. The result has been entire fields of productive wealth- enhancing, job-creating economic activity.”54 Japan has achieved similar success, albeit with a different approach.55 52 The current international environment is conducive to rapid industrialization in the sense that late-industrializing countries have a backlog of technologies to draw on and, in industries such as electronics, benefit from a rapidly growing market which eases the way for new entrants. Relatively open markets, in the United States and Europe for example, and access to advanced manufacturing equipment also make rapid industrial growth possible in high-technol- ogy industries. The process remains difficult, for both private actors and public policymakers. Amsden highlights the difficult trade-offs faced by policymakers in late-industrializing coun- tries, e.g., the need for low interest rates to stimulate investment, and high rates to encourage savings; for undervalued exchange rates to boost exports, and overvalued exchange rates to lower the cost of foreign debt and imports; and for protection from foreign competition, but a free trade environment for exports and access to imports of capital equipment. Amsden, Asia’s Next Giant, p. 13. 53 Bruce Scott, personal communication with National Research Council, March 1995. A recent OECD study makes a similar point, noting that “governments’ track record in picking winners is not good, but that a very few winners may be worth many losers.” Martin Brown, Impacts of National Technology Programs, OECD, Paris, 1995, p. 21. 54 Council of Economic Advisers, Supporting Research and Development to Promote Eco- nomic Growth, p. 8. 55 For example, Japanese efforts to develop their national semiconductor industry in the 1970s achieved great success. See William J. Spencer, SEMATECH, 20 November 1995 contribution to Steering Committee deliberations. The author cites the highly successful Japa- nese VLSI project focused on dynamic random access memory (DRAM) development and manufacture, initiated in 1975 at a cost of about $300 million. In four years, the program helped bring the Japanese industry “from a small player in the total semiconductor business to become the dominant semiconductor producer by the mid-1980s.” P. 3. For an excellent recent discussion of the rise of the Japanese semiconductor industry, see Kenneth Flamm, Misman-

SOURCES OF FRICTION AND COOPERATION 31 EXPORT-ORIENTED ECONOMIES Another relevant feature of producer-oriented countries is their active promotion of exports. Their policymakers are interested in specific market outcomes, not just maintaining the rules of the trade regime and ensuring their proper enforcement. Typically, these countries vest more power, (i.e., the ability to claim scarce resources) in the hands of producer institutions— at the expense of their consumers—and thus mobilize a higher fraction of their incomes for productive purposes than is the norm among the estab- lished industrialized countries. And, as noted above, the government em- phasizes exports as a means both of encouraging efficiency in targeted industries and of repaying the external debt used to finance their expansion. In consequence, this policy orientation significantly enhances the export capacity of these economies.56 Moreover, the impact of these different assumptions and objectives is compounded by the tendency of the consumer-oriented economies, such as the U.S. and western Europe, to allocate resources to address income in- equality,57 whereas producer economies, especially those aided by a sup- portive social system and more even income distribution, are allocating resources and following export-oriented policies to capture the knowledge- aged Trade? especially chap. 2. Flamm emphasizes the importance of the VLSI project, describing it as the “largest infusion of R&D subsidies ever received by the Japanese semicon- ductor industry in both absolute and relative terms.” P. 96. (See also Box F below.) For a discussion of the national objectives of Japan—and other nations—in the aerospace industry, see Box H. 56 Bruce Scott, Economic Strategies of Nations, p. 27. Some analysts see the impact of national policies, especially coherent national strategies, as an increasingly important element in global competition. In this view, the implicit competition between the North Atlantic area and East Asia is not a locational competition based on shifting comparative advantage. “To a degree, it is a competition between differing economic strategies . . . with the producer econo- mies” focused on achieving higher growth as a way to enhance their economic and political power, not their short-term standard of living. Global economic competition is, therefore, in part between neo-classical strategies focused on short-term consumer welfare and neo-mercan- tilist strategies focused on development of economic power.” Ibid. See Robert Wade, “Man- aging Trade,” Robert Wade, Governing the Market, and Amsden, Asia’s Next Giant. See also James Fallows, Looking at the Sun, Chalmers Johnson, MITI and the Japanese Economic Miracle, Stephen Cohen and Pei-Hsiung Chin, Tipping the Balance, and Thomas Huber, Stra- tegic Economy in Japan. See also Robert A. Blecker, Beyond the Twin Deficits, M.E. Sharpe, New York, 1992, chap. 5 and 6. 57 This tendency seems to be changing. In many countries, social spending is falling in real terms (as a percentage of GNP share) in the 1990s.

32 CONFLICT AND COOPERATION intensive industries that they believe offer the best prospects for future growth and income-generating employment.58 In addition, these industries are seen as strategic because they provide inputs that greatly enhance productivity throughout other sectors of the economy. For example, the electronics and materials industries provide critical inputs for downstream industries. These inputs are essential for the international competitiveness of the user industries. Moreover, the devel- opment of the strategic industries themselves is critically dependent on their relationships with the downstream industries which employ their products as production inputs. Because high-technology industries are believed to have unique charac- teristics (which can make intervention effective) and tremendous growth potential (which makes investments worthwhile), high-technology indus- tries are the target of the industrial policies of many participants in the multilateral trading system. The national practitioners of these promotional policies, i.e., those who hold responsibility for national economic develop- ment, do not accept the logic of free trade theorists, or even moderate trade policy practitioners. Instead, they are convinced that high-technology in- dustries are strategic in terms of their impact on economic growth and national autonomy.59 (See Box A.) In consequence, they bring to bear a host of policy measures to protect and promote these industries. (See Box B.) A number of these countries also have divergent policy preferences and national traditions with respect to intellectual property protection, open in- vestment regimes, and competition policy. (Each of these issues is dis- cussed below.) In combination, these anticompetitive practices, policies, and traditions can give substantial economic advantages to the nations that directly support strategic industries.60 58 Bruce R. Scott, presentation to the conference Sources of International Friction and Cooperation in High-Technology Development and Trade, 30–31 May 1995. See also Scott, Economic Strategies of Nations, op. cit., pp. 42–49. Scott notes that under these policies, consumers are forced to subsidize producers to accelerate capital formation, but if the national strategy is successful, consumers also gain enormously, in the medium term, as their incomes rise dramatically. Amsden, Asia’s Next Giant, emphasizes that although the Korean govern- ment has spent more than it has collected, “it has spent more on long-term investment, not on short-term consumption.” (Italics in original), p. 92. 59 Stephen Cohen and Pei-Hsiung Chin, Tipping the Balance: Trade Conflicts and the Necessity of Managed Competition in Strategic Industries, paper delivered at Kiel Conference, Towards a New Global Framework for High-Technology Competition, 30–31 August 1995. The authors argue that these industries are strategic in every sense that a government might understand: that is, in terms of their ultimate impact on power, wealth, and culture. The same dynamic characteristics of these industries that defy normal market equilibria also give lever- age and consequence to government intervention. 60 Laura Tyson, Who’s Bashing Whom: Trade Conflict in High-Technology Industries, Institute for International Economics, Washington, D.C., 1992, p. 45. See also the recent OECD review by Martin Brown, Impacts of National Technology Programs, Paris, 1995, p. 21.

SOURCES OF FRICTION AND COOPERATION 33 Together these policies pose a philosophical and practical challenge to the current trading regime. Government support for selected industries, and especially high-technology industries with their perceived potential for rapid growth, is philosophically at odds with the principles of open international competition. As a recent study of U.S.-Japanese competition in semicon- ductors observes, “the post-war trading system aspired to an ideal of free competition among firms from all nations operating in a single, open, global market, with market outcomes determined only by the efficiency and effec- tiveness of individual companies. How can this vision be reconciled with the realities of a world in which national governments make large invest- ments in new technologies, which may totally alter the industrial landscape, and inevitably favor those firms with the easiest access to the innovations created with these subsidies.”61 While some would argue that in the past these principles were often honored in the breach, the practical implications of the current level of government intervention, the increasing number of governments practicing such intervention, and the concentration of govern- ment support on a limited range of sectors make the challenge to the current multilateral trading system and its supporting assumptions an increasingly critical issue for policymakers. BOX A. WHY ARE COUNTRIES CONCERNED ABOUT THEIR HIGH-TECHNOLOGY INDUSTRIES? Throughout this report, attention is focused on firms that develop and produce advanced technological products. As noted above, not all economists accept the view that high-technology industries are significantly different from traditional industries (potato chips versus computer chips) and therefore deserving of greater attention from policymakers. There is, however, a growing body of economic thought that argues that the composition of the economy matters and that high-technology industries bring special benefits to national economies.62 The benefits attributed to high-technology industries rest on a number of interlock- ing observations. continued 61 Kenneth Flamm, Mismanaged Trade, p. 3. 62 For a summary of the new trade and growth theory, see Luc Soete, “Technology Policy and the International Trading System: Where Do we Stand?”; paper presented at the confer- ence Towards a New Global Framework for High-Technology Competition, 30–31 August 1995, Kiel, Germany. For an early exposition of the strategic trade argument, see James Brander and Barbara Spencer, “Export Subsidies and International Market Share Rivalry,” Journal of International Economics, February 1985. For an overview of strategic trade theory and its increasing attraction to national governments, see Jeffrey A. Hart and Aseem Prakash, “Implications of Strategic Trade for the World Economic Order,” paper prepared for the An- nual Meeting of the International Studies Association, San Diego, Calif., 16–20 April 1996. For a critique of the strategic trade concept, see Paul Krugman, Peddling Prosperity, W.W. Norton Press, New York, 1994, pp. 239–244 and chap.10.

34 CONFLICT AND COOPERATION First, high-technology firms are associated with innovation. Firms that are innova- tive tend to gain market share, create new product markets, and use resources more productively. This proposition is supported by the findings of a recent National Research Council conference on the impact of innovation on productivity, wages, and employment.63 Second, high-technology firms perform larger amounts of R&D than more traditional industries. High-technology firms are identified by the very high percent- age of their revenue devoted to research—often more than 10 percent—as compared with a 3 percent level for more traditional industries. Collectively, high-technology industries constitute a disproportionate share of total private R&D spending in the U.S. And the social returns of such R&D spending are widely believed to far exceed the private returns.64 Third, these positive spillover effects benefit other commercial sectors by generating new products and processes that can lead to productivity gains and generate new manufacturing opportunities.65 Advances in electronics have made it a key enabling industry responsible for new methods of manufacturing in steel, automobiles, aerospace, and even agriculture, as well as the creation of a whole gamut of consumer electronic and defense related products. There is substantial economic literature underscoring the high returns of technological innovation, with private inno- vators obtaining a rate of return in the 20 to 30 percent range with the spillover (or social return) averaging about 50 percent.66 Fourth, the positive spillover effects are often locally concentrated. Firms frequently concentrate in particular locations to benefit from the externalities associ- ated with a qualified labor supply with appropriate skills, specialized suppliers of inputs and supporting services, and informal horizontal information networks for the exchange of the “tacit” knowledge required for the exploitation of new techniques and processes. These “network systems flourish in regional agglomerations where repeated interaction builds shared identities and mutual trust while at the same time intensifying rivalries.”67 63 National Research Council conference Technology, Wages, Productivity, and Employ- ment, 1–2 May 1995, Conference Proceedings (forthcoming). See also Gregory Tassey, Tech- nology and Economic Growth: Implications for Federal Policy, NIST Planning Report 95-3, U.S. Department of Commerce, Washington, D.C., 1995, p. 12. 64 Martin N. Baily, and A. Chakrabarti, Innovation and the Productivity Crisis. The Brookings Institution, Washington, D.C., 1988, and Zvi Griliches, The Search for R&D Spillovers, Harvard University, Cambridge, Mass., 1990. 65 Lawrence M. Rausch, Asia’s New High-Tech Competitors, NSF 95-309, National Sci- ence Foundation, Arlington, Va. 1995. 66 Ishaq Nadiri, Innovations and Technological Spillovers, NBER Working Paper No. 4423, 1993, and Edwin Mansfield, “Academic Research and Industrial Innovation,” Research Policy, February 1991. See also Council of Economic Advisers, Supporting Research and Develop- ment to Promote Economic Growth. 67 Annalee Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Harvard University Press, Cambridge, Mass, 1994, p. 4. The author identifies two broad types of industrial systems: independent firm-based systems typically associated with capital-intensive industries, such as oil and automobiles, versus network-based systems, orga- nized around horizontal networks of firms where producers deepen their own specialized capa- bilities while cooperating with other specialists. See also Nitin Nohria and Robert G. Eccles (eds.), Networks and Organizations: Structure, Form, and Action, Harvard Business School Press, Boston, Mass., 1992.

SOURCES OF FRICTION AND COOPERATION 35 Because these local externalities tend to be self-reinforcing, the competitive position of the relevant industry tends to improve over time. Conversely, the decline in an industry’s position tends to erode the specialized infrastructure as well.68 Fifth, high-technology products are a major source of national economic growth in all of the major industrialized countries, because the global market for high-technology manufactured goods is growing at a faster rate than are the markets for other manufactured goods.69 For example, in the United States, sectors such as aerospace, information systems (software, computers, and semiconductors), chemicals, pharmaceuticals, biotechnology, and medical equipment are all leading sources of U.S. exports. Moreover, as noted above, these high-technology industries also account for a disproportionate amount of total industrial R&D. Sixth, as one would expect from the above, high-technology firms are associ- ated with high value-added manufacturing and, importantly, the creation of high wage employment. The firms that innovate rapidly, introduce new technolo- gies, develop new products, and expand exports are also the firms that increase employment and contribute disproportionately to the national R&D effort.70 Seventh, many high-technology industries have important consequences for core government missions. Foremost among these is national defense. Early, assured access to advanced, low-cost technologies is viewed by many as a critical element in a viable defense strategy for the next century.71 As one informed observer remarked, without technological superiority, military superiority becomes a question of numbers and training.72 The impact of new enabling technologies can be equally crucial for major government missions in energy development, environmental protection, and health care (where new technologies offer major advances in methods, drugs, devices, and equipment). 68 Jay Stowsky, “Regional Histories and the Cycle of Industrial Innovation: A Review of Some Recent Literature,” Berkeley Planning Journal, vol. 4, 1989; Michael Porter, The Competi- tive Advantage of Nations, Free Press, New York, 1990; and Lester Thurow, Head to Head: The Coming Economic Battle Among Japan, Europe, and America, Morrow, New York, 1992. 69 See 1993 Science and Engineering Indicators, National Science Foundation, Arlington, Va., 1993, pp. 159–160 and chap. 6. For example, in constant 1980 dollars, one recent study found that “production of high-tech manufactures by the major industrialized nations more than doubled from 1981 to 1992, while production of other manufactured goods grew by just 29%.” In 1981, U.S. high-technology manufactures represented 15 percent of total U.S. manu- factured output. By 1992, this figure rose to an estimated 27 percent. In Japan in 1981, high- technology manufactures represented nearly 17 percent of total Japanese production; the figure in 1992 was over 31 percent. For European Community members, the comparable figures were 12 percent in 1981 and 17 percent in 1992. See also the 1993 U.S. Industrial Outlook, International Trade Administration, Washington, D.C., 1993, p. 21; and Lawrence Rausch, Asia’s New High-Tech Competitors, p. 7. 70 Laura Tyson, Who’s Bashing Whom? p. 32. It is also true that, in some cases, the introduction of new technologies may displace some workers by making certain types of skills obsolete. This can lead to structural unemployment through a mismatch between the skills of the workers displaced and the (new) skills demanded by the marketplace. 71 See Flat Panel Display Task Force, Building U.S. Capabilities in Flat Panel Displays: Final Report, U.S. Department of Defense, Washington, D.C., October 1994. 72 Rear Admiral Marc Y.E. Pelaez, Chief of Naval Research, is the source of this observa- tion. See C. Wessner (ed.), Sources of International Friction and Cooperation in High- Technology Development and Trade.

36 CONFLICT AND COOPERATION CREATING COMPARATIVE ADVANTAGE Collectively, these policies can be powerful tools for creating compara- tive advantage. This is because intervention can change the operation of the market in these highly dynamic, learning-based industries, resulting in long-term sectoral advantage. (See Box F.) Given that many of these sectors represent large markets, often experiencing significant growth, the economic benefits to be garnered by successful government interventions can be substantial. Moreover, success in one strategic industry can also enhance a nation’s capacity to acquire other technologies and achieve other national objectives in the international arena.73 In short, many governments in the industrial and industrializing world believe there is tremendous growth inherent in many high-technology in- dustries and often see these industries as strategic national assets as well. “The payoff is to national governments from such investments is that the local economy can become internationally competitive while maintaining national autonomy and—more important—such investments lead to higher levels of local productivity, providing greater political space for any gov- ernment.”74 Private companies share the government’s interest in support- ing these sectors because these policies generate demand for their more sophisticated products while increasing the supply of more highly skilled technicians, workers, and scientists—which in turn allows national corpora- tions to be more competitive globally.75 Whatever the rationale, it is clear that there are genuine differences in national attitudes concerning a nation’s knowledge and technology base. Industrial policy in Japan, for example, is designed to maintain and enhance the nation’s technological capability, a matter which is normally not a sub- ject of ongoing, integrated policy concern within the United States, except for defense needs or when the results of the absence of policy become apparent.76 Though belated, U.S. policy responses, in key areas such as 73 Stephen Cohen, Tipping the Balance, p. 5. For a broader, penetrating analysis of the relationships between American economic strength, national goals, and the current interna- tional political system, see Michael Borrus, Wayne Sandholtz, John Zysman, Ken Conca, Jay Stowsky, Steven Vogel, and Steve Weber, The Highest Stakes: The Economic Foundations of the Next Security System, Oxford University Press, New York, 1992, passim. 74 Martin Carnoy, “Multinationals in a Changing World Economy: Whither the Nation- State?”; chap. 3 in Carnoy et al., The New Global Economy, p. 89. 75 Ibid. 76 See the presentation by John P. Stern, “Japan: The Philosophy of Government Support for Information Technology,” in Charles Wessner (ed.), Symposium on International Access to National Technology Programs, 19 January 1996. National Academy Press, Washington, D.C., forthcoming.

SOURCES OF FRICTION AND COOPERATION 37 semiconductors, have proved successful.77 Reflecting a relative decline in key technologies such as electronics, Europeans have launched—with mixed success—a broad range of programs, at both the national and Community levels, intended to redress their competitive position.78 Notwithstanding these similarities, there are genuine differences in perspective. The differences in perspectives are perhaps most evident between the United States and Japan. Two American analysts characterized these differ- ences as follows: Japan, we believe, values industries differently than does America...[and believes] that industries have importance beyond the goods they produce. Acting on this belief, the Japanese are driven to procure or develop skills and knowledge that they may lack for their domestic economy so that non- production benefits—especially learning and diffusion—can be realized at home. Industrial policy in Japan is guided by the effort to maintain the nation’s knowledge and technology base rather than to produce a specific product to which a domestic firm might affix a nameplate... The U.S., in contrast, does not value industries in this way,... leading to wholesale ca- pacity losses, or even domestic skill displacement from the American economy that Japan would never tolerate... As we have seen in the aircraft industry, Japan is willing to pay (and pay dearly) for the same technical knowledge that the U.S. is willing to transfer abroad because it values the ancillary industrial results of that knowledge as much [as], or more than, the ability to make specific goods.79 Whether it is the perception that these industries are strategic, or merely crucial opportunities for employment and growth, the combination of these factors gives powerful support to the contention that strategic and locational competition, based on a wide array of diverse policy measures, is likely to accelerate for the foreseeable future. 77 The increase in the global market share of U.S. semiconductor firms as compared with Japanese firms is frequently cited as a sign of the resurgence of the U.S. industry. Stern notes that the 1993 U.S. share of the semiconductor market was 2 percent larger than the Japanese share. While this is an improvement, from the U.S. perspective, over the 10 percent lead the Japanese industry enjoyed in 1990, it is “nowhere near the 53 percent of the world market” held by the U.S. semiconductor industry in 1984. Ibid, p. 3. 78 See the European Commission, European Report on Science and Technology Indicators, 1994. For a discussion of different approaches to industrial policy in Europe, Japan, and the United States, see Jeffrey A. Hart, Rival Capitalists: International Competitiveness in the United States, Japan, and Western Europe, Cornell University Press, Ithaca, N.Y., 1992. 79 David Friedman and Richard Samuels cited in Charles H. Fine and Daniel E. Whitney, “Is the Make-Buy Decision Process a Core Competence?”; MIT Center for Technology, Policy, and Industrial Development, Cambridge, Mass., January 1996, p. 6. For a broader discussion of the longstanding Japanese approach to the acquisition or indigenization, diffusion, and nurturing of technology as a means of ensuring national technological capabilities that enhance that nation’s security, see Richard Samuels, Rich Nation, Strong Army: National Security and the Technological Transformation of Japan, Cornell University Press, Ithaca, N.Y., 1994.

38 CONFLICT AND COOPERATION INTERNATIONALIZATION OF “DOMESTIC” POLICIES In this context, seemingly domestic concerns about how best to support innovation, sustain the development of science and technology for indus- trial productivity, and promote advanced technologies become issues on the forefront of the international political and economic agenda.80 Indeed, indi- vidually, the policy components for technological development are already contentious international issues. “There are disputes over the reach of intel- lectual property rights, over dumping practices, and subsidies. When taken together, they raise an international debate about national development, about how to generate and retain advantage in the technologies and industries on which future development and security will rest.”81 In this view, the poli- cies, instruments, and practices which have traditionally been considered domestic prerogatives—especially in conjunction with “traditional” trade barriers—could become the basis for more serious conflict among the prin- cipal regions of the global economy. Trade barriers are already a major source of friction in the international system. The “normal” frictions resulting from different national practices and uneven implementation of international accords already require sus- tained, professional attention. It may be that the task of resolving, or con- taining, trade disputes will become steadily more difficult as a result of the growth in trade, foreign direct investment, and the accompanying interpen- etration of national economies. Trade disputes in high-technology sectors have proved persistent, being difficult to resolve with any finality, espe- cially when the strategic economic interests of trading partners are engaged. These high-technology trade frictions emerge, at least in part, because governments employ a wide variety of policy measures designed to sup- port high-technology industries. Indeed, one of the explanations for the recurrence of market access frictions in technology-intensive industries lies in the fact that, for many governments, trade and investment in these industries take on a strategic meaning.82 Consequently, the competitive process in such industries is affected by a host of formal and informal national policies. Despite a clear worldwide trend toward liberalization of trade and investment regimes over the last decade, national governments have throughout this period revealed a clear preference for maintaining the ability to support, attract, or retain high-technology producers in their territories.83 International friction may well increase in frequency and intensity as a growing number of nations compete for what they perceive to be the technologies and industries of the future. 80 See Michael Borrus et al., The Highest Stakes, p. 178. See also Sylvia Ostry and Richard Nelson, Techno-Nationalism and Techno-Globalism, preface, pp. xvii–xviii, and USTR, 1996 National Trade Estimate Report on Foreign Trade Barriers. 81 Borrus et al., The Highest Stakes, p. 178. 82Market Access and Competition in Technology-Intensive Industries: Issues Paper. OECD, Paris, 26–27 October 1995, p. 4. 83 Ibid.

SOURCES OF FRICTION AND COOPERATION 39 BOX B. HOW DO GOVERNMENTS SUPPORT HIGH-TECHNOLOGY INDUSTRIES? Governments support high-technology industries through a vast array of policy measures, often addressing seemingly quite disparate policy objectives. Trade-related measures continue to play a central role. Though trade measures elude fixed defini- tions, they include a panoply of laws, regulations, policies, and practices that protect domestic products and markets from foreign competition or stimulate exports of selected domestic products.84 A recent U.S. government report identified nine differ- ent categories of government measures that “restrict, prevent, or impede” interna- tional commerce. These categories include restrictive import policies, such as tariffs, quotas, import licensing, and customs barriers; standards, testing, labeling, and certifica- tion; government procurement, such as “buy national” policies or practices (see Supplement E); export subsidies; the lack of intellectual property protection as a result of inadequate patent, copyright, and trademark regimes; services barriers; investment barriers involving limitations on foreign equity participation and on access to government-funded R&D programs and other restrictions; and anticompetitive practices with trade effects which are tolerated or encouraged by governments.85 Other common policies, which are either designed, or provide the opportunity, to improve the competitiveness of national firms, include deregulation, privatization, re- laxation of product and environmental standards, encouragement of mergers and strategic alliances, and targeted tax measures designed to encourage innovation and investment. Governments also support high-technology industry under an exceedingly broad range of policy objectives and implementing financial instruments. For almost a decade, the Organization for Economic Cooperation and Development (OECD) has sought to assemble detailed internationally comparable data on national support to industry.86 On the basis of this analysis, expenditure by OECD member countries was in excess of $66 billion per annum in the period 1986–1989. The total amount spent on these measures declined in that period, primarily because of an overall reduction in targeted tax expenditure. However, government support is increasingly focused, with greater use of direct grants, government guarantees, and support for exports for selected industries. While regular and comparable reporting on subsidies to manufacturing industries does not yet exist, the OECD work captures the scope and diversity of national policy objectives and instruments. Policy Objectives In addition to support for investment in particular high-technology sectors, such as microelectronics, biotechnology, and aerospace, governments often pursue what the OECD describes as “horizontal objectives” such as support for regional development, continued 84 USTR, 1996 National Trade Estimate Report on Foreign Trade Barriers, p. 1. 85 Ibid, pp. 1–2. 86 The OECD exercise has succeeded in creating three major assets: a database of national support programs for industry with calculations of “net subsidies” for each measure, a “peer review” mechanism for collectively reviewing the data submitted, and an improved under- standing of the scope and diversity of government support mechanisms. For a discussion of different types of national technology support programs, see Martin Brown, Impacts of Na- tional Technology Programmes, chap. 2.

40 CONFLICT AND COOPERATION aid to small and medium-size enterprises, aid for employment and training, support for “enterprises in difficulty,” export incentives, and other trade-related assistance, as well as support for research and development. R&D support includes both traditional government support for research through grants to universities and research institutes and support to industry, either through direct subsidies (e.g., in the electrical and aerospace sectors) or more indirectly through defense contracts. Data collection has recently expanded to include government support for energy efficiency and for environ- mental protection. Currently, more than 1500 programs and measures of support are available to manufacturing in OECD countries.87 Instruments Financial instruments include direct grants to companies; preferential loans; govern- ment guarantees for loans; equity capital infusions by government entities or govern- ment-controlled banks (often to cover recurrent losses); preferential government procurement policies, and targeted tax concessions for specific sectors, for “underde- veloped” regions (where high-technology industries may be located), and for specific activities, such as R&D. Government goods and services (e.g., electricity) are also provided at below cost, and domestic industries (especially when they are state-owned or -controlled) can be required to purchase domestic products (e.g., electric turbines or telecommunications equipment) at prices exceeding those available on world mar- kets, thereby providing an important source of funding for other activities such as R&D investment or export support. Government policy guidance and the activities of its agencies also contribute to the support of high-technology industry through policies such as government sponsorship (with or without financial contributions) of research consortia, selective antitrust exemptions for joint R&D efforts and cooperative production arrangements (important in countries where there is not a systematic failure to enforce antitrust policies), transfer to industry of intellectual property resulting from government-financed re- search in countries with adequate and effective intellectual property protection, the transfer of defense-related technology for civilian use, the setting of industrial stan- dards, and the design of rules of origin. Governments use the above policy instruments in different combinations. Indeed, these measures are most effective in combination, as part of an integrated strategy to support a particular industry. Countries deploy these measures differently, reflecting historical differences in systems of corporate governance, levels of direct state inter- vention in the economy, and relative openness of the national economy toward foreign investment and imports. Whatever the rationale and policy guise under which these measures are deployed, “they all aim at the objective of spurring the development of new technologies by domestic industries and strengthening the competitive position of national (or domestically established) firms.”88 87 OECD, Industrial Subsidies: A Reporting Manual, Paris, 1995. 88 OECD, Market Access and Competition in Technology-Intensive Industries. In addition to discussing targeted measures of the type described above, the OECD Issues Paper under- scores, inter alia, the importance of market access, rules of origin, quantitative restrictions of imports, performance requirements, and patent protection, noting that this set of trade practices is a significant source of trade friction, not least because these measures are actively used to

SOURCES OF FRICTION AND COOPERATION 41 NATIONAL LOCATIONAL COMPETITION AND ITS IMPACT ON SCIENTIFIC RESEARCH AND COOPERATION Strategic competition will remain a source of tension among nations and may threaten international norms in areas such as international scientific cooperation for the development of new technologies and for the mainte- nance of the multilateral trading system, particularly with respect to trade in high-technology products.89 The risk of negative impact on public support (i.e., funding) for basic research and on the willingness to participate in international scientific co- operation is believed to be real, although this area requires further analy- sis.90 Pressures for closer government direction and control over publicly- supported science have grown from two sources: (1) the pressure of government deficits; and (2) the specific concerns of politicians and administrators that the scientific establishment has not been addressing national needs. This has resulted in pressure to work on applied projects that would bring the work of scientific researchers into closer connection with market-oriented, industrial R&D projects. Some anecdotal evidence suggests that a decline in scientific cooperation in some commercially relevant disciplines may already be present. For example, it is increasingly common for scientific publications to not fully disclose relevant findings that would permit replication by other scientists and for restrictions to be adopted on access to “intermediary results” for research-related material that cannot be published in journals, such as ex- perimental materials, innovative instruments, software, and data sets.91 Moreover, the traditional emphasis on cooperation in basic research may no longer have the same applicability, particularly in those sectors such as computer science or biotechnology where the basic/applied dichotomy has eroded.92 build national or regional production bases in high-technology industries. These issues are taken up in the discussion below. 89 Stephen Cohen and Pei-Hsiung Chin, Tipping the Balance, passim. 90 Partha Dasgupta and Paul A. David, “Toward a New Economics of Science,” Research Policy, vol. 23, 1994, pp. 487–521. While noting the lack of clear evidence, Ostry agrees that “the internationalization of technology and heightened competition in high-technology indus- tries together seem to be eroding the support of basic and long-run research programs, both private and public.” See Sylvia Ostry, “Technology Issues in the International Trading Sys- tem,” OECD, Paris, 26–27 October 1995, p. 16. 91 Paul David and Dominique Foray, STI Review, OECD, Paris, 1995, p. 48. The authors also give the examples of the “reduced ratio of publications of molecular structures whose coordinates are disclosed to total published structures and reduced disclosures of algorithms used in mass spectrographic analysis.” Also see Dasgupta and David, “Toward a New Eco- nomics of Science.” David and Foray also cite S. Hitgartner and S.I. Brandt-Rauf, “Control- ling Data and Resources: Access Strategies in Molecular Genetics.” 92 Paul David and Dominique Foray, STI Review, pp. 16–17.

42 CONFLICT AND COOPERATION A recent Academy report highlights the difficulty of making a policy-rel- evant distinction between basic and applied research, particularly with re- spect to federally funded research, while underscoring the importance of public investment in research.93 In this environment, the Western system of publicly funded, open scien- tific endeavor, especially the rapid publication of research, may face serious challenges in the decades to come.94 This is a cause of profound concern, not least because the current system of open scientific inquiry has been the source of enormous human progress. The asymmetric development of open and proprietary scientific research efforts may not be sustainable over the long term, in terms of either interna- tional interchange or taxpayer support. The exploitation of university re- search, although usually accomplished with substantial direct and indirect public support, often requires the stimulus of private patents. The appropri- ate disposition of these patent rights poses complex policy questions which merit further analysis. For example, in some cases publicly funded re- searchers carrying out work in publicly supported research facilities believe they should maximize the return for their work by licensing it to the highest corporate bidder, whether foreign or domestic. Moreover, at the level of international exchange, without the perception of widespread reciprocal ac- cess to equivalent work, pressures to intervene in the free flow of ideas, and ultimately in the functioning of research institutes and universities them- selves, are likely to mount, presumably to the eventual detriment of global welfare and scientific advance. The pressure of global competition is also profoundly transforming in- dustrial research. In the United States, research managers are redirecting resources away from fundamental science and pioneering technology and toward “activities that are more relevant to current product and process development, more likely to produce results that can readily be kept propri- etary, and more certain to produce a commercial payoff in the near fu- ture.”95 These changes in emphasis, combined with a restructuring of re- 93 Allocating Federal Funds for Science and Technology, National Research Council, p. 76. 94 Dasgupta and David, “Toward a New Economics of Science.” See also Paul A. David, David C. Mowery, and W. Edward Steinmueller, “Government-Industry Research Collabora- tions: Managing Missions in Conflict,” paper presented at CEPR/AAAS conference University Goals, Institutional Mechanisms, and the ‘Industrial Transferability’ of Research, Stanford, Calif., 18–20 March 1994. 95 Richard S. Rosenbloom and William J. Spencer, “The Transformation of Industrial Research,” Issues in Science and Technology, Spring 1996, pp. 68–74. For a more complete review of the evolution of the U.S. R&D effort, see Richard Rosenbloom and William Spencer, Engines of Innovation: U.S. Industrial Research at the End of an Era, Harvard Business School Press, Boston, Mass., 1996. For an industry perspective, see especially chap. 6, “Rein- venting Research at IBM” by John A. Armstrong and chap. 7, “Research and Change Manage- ment in Xerox” by Mark B. Myers.

SOURCES OF FRICTION AND COOPERATION 43 search organizations, reflect in part broader changes in innovation systems in the United States and other countries as a result of the end of the Cold War. However, they also reflect the current competitive environment where firms compete in a global marketplace with rivals that do no fundamental research but are quick to exploit the developments made elsewhere. The success of these free-rider strategies and the corresponding reduced ability of traditional innovators to capture returns are reducing incentives for es- tablished firms to make significant, and risky, investments in new technolo- gies.96 This trend may have far-reaching consequences insofar as the inno- vations brought to the market through industrial research laboratories have been a driving force in the growth of the global economy. As an initial step, further work on the problems and prospects of international cooperation, particularly in commercially relevant areas such as new materials, information and telecommunications systems, and biotechnology should be undertaken. Further study on the chal- lenges faced by research universities in terms of funding, mission, and relationship to national programs should be undertaken. New modes of cooperative research activities involving both industries and universi- ties should be explored. More fundamentally, an assessment of the extent to which alternative scientific research systems are emerging, and of the potential consequences for the existing system of scientific inquiry and exchange, should be undertaken. GREATER INTERNATIONAL COOPERATION MAY GENERATE INCREASED FRICTION The costs, complexity, and risk associated with the development of new technologies provide great opportunities for international cooperation in both the public and private sectors. Common national objectives, and in some cases the scope of these objectives (e.g. assessing global warming), provide strong incentives for cooperation among national programs.97 In other cases, close public-private cooperation is essential to fully realize the benefits of innovative technologies and systems. This is especially true when critical public service functions, such as civil aviation, are involved, as is the case with the Global Positioning System (GPS).98 The character of 96 Ibid., pp. 69–71. Rosenbloom and Spencer point out that “there is a logical fallacy in every firm planning to be a ‘fast second’ with the next new technology” (italics added). 97 For an excellent review of issues associated with large science projects, see Josef Rembser, Intergovernmental and International Consultations/Agreements and Legal Co-operation Mechanisms in Megascience: Experiences, Aspects, and Ideas, OECD, Paris, 1995. 98 For a discussion of the progress and issues associated with the Global Positioning System, see Supplement D.

44 CONFLICT AND COOPERATION private innovation is also changing, with the nature and scale of investment now required for the commercialization of fundamentally new technologies such that a single firm is rarely able to dominate.99 Increasingly, firms with comparable technological capabilities coordinate their activities in order to share costs, risks, and ultimately benefits.100 These powerful drivers of cooperation are at the same time a source of greater system friction. As cooperation has become more widespread, ad- dressing more technologies deemed to be of strategic national interest, acute policy differences have emerged among industrial countries. Burden-sharing, equitable technical and technological contributions, and effective and adequate intellectual property protection are all sources of friction. The potential for friction is likely to rise as the importance, scope, and intensity of international interaction increase, unless an international consensus can be reached on ap- propriate principles and practices for such cooperation.101 For example, a number of Japanese technology development programs envisage an important international component. Several large U.S. firms such as Motorola, IBM, United Technologies, General Electric, and the Stanford Research Institute have participated in joint research and develop- ment programs designed to pursue Japanese national research objectives.102 These projects, which range from micromachine technology, to supersonic propulsion systems, to new models for software architecture, offer opportu- nities for foreign companies to participate in significant development pro- grams. However, the “basic rule” for intellectual property resulting from Japanese government-sponsored research projects is that the intellectual property, including patents and copyrights, is first owned by the Japanese govern- ment.103 Project administration also involves close control by the sponsor- 99 Richard S. Rosenbloom and William J. Spencer, “The Transformation of Industrial Research,” pp. 69–70. 100 Ibid., p. 70. See the section on Strategic Alliances for a discussion of the motivations and types of cooperation among firms. 101 The issues involved in international cooperation are currently under review at the OECD. The OECD Committee for Scientific and Technological Policy met in September 1995 to review, inter alia, the importance of devising mechanisms to facilitate effective international cooperation both on large-scale science programs and on technology development among na- tional programs and at the enterprise level. See the Ministerial Communique and related discussion papers, DSTI/STP/MIN (95) 1, 2, 3, OECD, Paris, 1995. 102 Gregory Rutchik, Japanese Research Projects and Intellectual Property Laws, p. 8 and appendix 2. This trend toward greater internationalization of Japanese technology programs may be reversing. A number of recently announced programs, in semiconductors for example, are confined to Japanese producers, although this development may be mitigated by the numer- ous strategic alliances in this sector. 103 Ibid., p. 31. Work done completely independently of the research project is excluded. However, the Japanese government retains full ownership of copyrights created under directly sponsored research. Similarly, patents resulting from nationally sponsored research projects are subject to the regulations of Japanese patent law. In some cases, lower government ownership provisions can be negotiated.

SOURCES OF FRICTION AND COOPERATION 45 ing institutions, including regulation of participating researchers, account- ing requirements, and “the right of the supervising government agency to inspect the research program.”104 This is not to say that this kind of coop- eration cannot be mutually beneficial; it does highlight the importance of different national practices and their potential for friction among both project participants and the home governments of participating companies. As international cooperation continues to expand, particularly coop- eration involving both public and private participants, agreed proce- dures for dispute settlement are likely to become increasingly impor- tant. Explicit mechanisms to resolve disputes between the program participants and the sponsoring government should be established. Moreover, where negotiations are unable to resolve disputes, the wide variation among national laws suggests the need for a clear determination at the outset con- cerning which law will be applicable.105 DIFFERENT MODES OF COOPERATION The growth in cooperation in the development of new technologies and products can mask significant differences in the way in which that develop- ment is organized. The requirements for cooperation and the potential for intergovernment friction are quite different, depending on the form the co- operation takes. At the most basic level, it is important to differentiate among three broad, though conceptually distinct, categories: (1) public- public cooperation among national or supranational authorities; (2) public- private cooperation between public authorities or quasipublic entities on the one hand and private corporations or universities on the other; and (3) cooperation among private entities. The second category, cooperation in- volving national objectives, public funds, and private entities, is often the most complex. [See the section on eligibility for participation in national programs below.] The third category, involving “purely” private sector alliances, is, however, both the most rapidly growing and probably the least understood. PRINCIPLES OF INTERNATIONAL COOPERATION Multilateral institutions have a role to play in developing widely ac- cepted principles for cooperation in the development of new technologies. In this context, cooperative programs such as the Real World Computer Partnership (stressing new applications of opto-electronics technology), the 104 Ibid., p. 34. This pervasive requirement raises intellectual property issues which, while surmountable, necessitate early negotiation among participants. 105 Ibid., p. 46.

46 CONFLICT AND COOPERATION BOX C. DRIVERS OF COOPERATION IN THE SEMICONDUCTOR INDUSTRY106 Costs, Risks, and Dispersed Expertise The semiconductor industry typifies the pressures for increased cooperation. The high costs of product development and of building new factories have led to increased international cooperation in semiconductor product development. Most major semi- conductor manufacturers have international joint ventures aimed at producing next- generation memory, logic, and other semiconductor devices. These ventures generally result in factories to produce product and in the sharing of current manufacturing processes. Standards Partly as a result of growing private cooperation (see Box E), there is greater international cooperation in the development of standards on semiconductor materials, test methods, microchip interfaces, and other areas where standards can promote industry growth. While international participation in standards development is without doubt beneficial to the semiconductor industry as a whole, how to carry out such cooperation is a major issue which the semiconductor industry and the nations which are leaders in this area must address.107 Education and Research While there is little controversy over international participation in support of basic science and education, there is some concern that the United States is carrying the major cost of research in universities, especially because the technology and graduates flowing from this research investment are often used effectively in other countries which do not maintain comparable research establishments. The training of students is of course a global good, and their U.S. experience and training in the United States may ultimately benefit U.S. suppliers. The growth in research contracts between foreign-based compa- nies and U.S. universities raises complex questions which merit further research. Environment, Safety, and Health A growing international consensus on environmental protection has contributed to the belief that cooperation on standards and on environment, safety, and health (ES&H) on an international basis is worthwhile. The global nature of the semiconductor business and the establishment of manufacturing facilities all over the world are power- ful incentives for corporations to seek, and governments to encourage, common ES&H standards. For example, the number of countries that are willing to compromise ES&H standards and that are attracting manufacturing sites is decreasing, reflecting the grow- ing global awareness of ES&H issues and the emerging consensus that the elimination of certain chemicals and materials in semiconductor manufacture is a common interest. Similarly, there is increased international interest in standards for “green products” in the computer industry and the ISO 9000 and 14000 production standards. 106 This section draws heavily from William J. Spencer, SEMATECH, 20 November 1995 contribution to Steering Committee deliberations. See also the discussion of the new interna- tional cooperative initiative on the next-generation wafer standard—the I300I program—in Box D below. See also the discussion of the origins and accomplishments of SEMATECH in Supplement B. 107 This point was underscored by Samsung’s Y.S. Kim, who observed that “in

SOURCES OF FRICTION AND COOPERATION 47 Intelligent Manufacturing Systems (IMS) Partnership, the Super Sonic Jet Pro- pulsion Project, and the numerous European Union (EU) cooperative programs are of great relevance.108 The IMS Partnership, for example, provides a framework for international collaboration in advanced manufacturing involving six indus- trialized regions.109 These multilateral efforts offer useful lessons regarding the principles and organization of cooperative research. Work on principles which incorporate the lessons of these programs should continue. Further efforts to improve understanding of differences between national programs should be undertaken. Effective treatment of these questions will require coordination among trade and technology policymakers at both the national and international level. The negotiation now under way at the OECD on a Multilateral Accord on Investment may provide an opportunity to undertake further work on related issues (see below). CHALLENGES TO COOPERATION Despite the many potential benefits offered by collaborative research, collaboration can also involve costs and risks. For example, the coordinat- ing mechanisms required for international cooperation may increase total project costs (though these may be offset in part by increased benefits of access to greater expertise). In addition to increased management complex- ity, there are other obstacles to international cooperation, such as: • the challenge of identifying cooperative projects of equal interest to all parties; • the difficulty of distributing costs and benefits in an equitable manner; • the related problem of ensuring that participants are providing their most advanced technologies and top-level personnel for collaborative projects; • the transfer of critical scientific and technical knowledge to foreign participants, especially the tacit skills necessary for commercial applica- tions; • socio-cultural differences and divergent expectations among the part- ners; and, • the absence of reliable mechanisms guaranteeing long-term commit- ment to projects (this is especially true for cooperative efforts involving public authorities). semiconductors...we have come to a point where we have no choice but to cooperate,” a perspective supported by Nortel’s Claudine Simson and Motorola’s Owen Williams in their presentations to the conference Sources of International Friction and Cooperation in High- Technology Development and Trade, 30–31 May 1995. 108 For a review of the issues associated with participation in Japanese technology pro- grams, see Gregory Rutchik, Japanese Research Projects and Intellectual Property Laws. 109 See Coalition for Intelligent Manufacturing Systems and the U.S. Department of Com- merce Technology Administration, Intelligent Manufacturing Systems.

48 CONFLICT AND COOPERATION Lastly, the desire for cooperation, and the increased resources and expertise it can bring, is frequently offset, particularly among bureaucratic elites, by a sense of loss of national leadership, prestige, and control of the coopera- tive enterprise.110 National security considerations can also be an impediment. The risk of the transfer of technologies with proven or potential military applications can raise obstacles both for high-technology firms and for government-to- government military-related research. Even when the partner is an ally, it can be difficult to design a framework that prevents transfer of technologies to third parties or proliferation of technical capabilities.111 In an age of dual-use technology applications, the United States and other countries are increasingly seeking to integrate the rapid advances in commercial techno- logical capabilities in weapons systems, while benefiting from rapidly de- clining costs (see below). Separating out the commercial developments from the military applications can be difficult. This adds further complex- ity to international efforts to cooperate. NATIONAL AND INTERNATIONAL CONSORTIA Given the powerful pressures driving public-private cooperation, indus- trial consortia are likely to become more important (not less) as vehicles for managing the costs and risks associated with developing new technologies, processes, and standards. Though there are significant costs associated with the establishment and management of consortia, returns on investment can be significant.112 Some analysts find that national consortia have resulted 110 International Partnerships in Large Science Projects, Office of Technology Assess- ment, Congress of the United States, July 1995, p. 101. 111 Ibid., p. 110, and Arming Our Allies: Cooperation and Competition in Defense Tech- nology, Office of Technology Assessment, Congress of the United States, May 1990. The FSX controversy, which concerned the joint production agreement between Japan and the United States for the production of a new-generation fighter aircraft, is a case in point. 112 See Peter Grindley et al., “SEMATECH and Collaborative Research,” p. 725. Citing several recent studies, the authors note that “the hypothesized advantages of collaboration in research include the ability of participating firms to lower costs and spread risks, reduced duplication in their R&D investments, and the exploitation of economies of scale in the R&D process. Research consortia also may be able to appropriate more of the returns to their R&D investments and internalize more of the interfirm spillovers that discourage R&D investment by individual firms...” See B. Bozeman, A. Link, and A. Zardkoohi, “An Economic Analysis of R&D Joint Ventures, Management and Decision Economics, 1986; M.L. Katz and J.A. Ordover, “R&D Cooperation and Competition,” Brookings Papers on Economic Activity, 1990; and David Mowery and Nathan Rosenberg, “New Developments in U.S. Technology Policy: Implications of Competitiveness and International Trade Policy.” California Management Re- view, vol. 32, no. 1, Fall 1989.

SOURCES OF FRICTION AND COOPERATION 49 in the “bundling” of company R&D efforts, with the result that duplicative efforts at the firm level are reduced and program goals accomplished at a lower cost to the industry as a whole.113 Cooperative efforts can also serve to stimulate international cooperation by providing “easy mechanisms” for identifying technological obstacles best met through international collabo- ration. Moreover, national consortia are highly effective mechanisms for the diffusion of technological advance derived from collaborative activities and can contribute to the conditions necessary to capitalize on the fruits of such collaboration.114 The operation of effective consortia requires, above all, agreement on achievable common goals based on a sense of shared interests. It also requires skilled management and a strong long-term commitment on the part of participants to make available adequate resources in terms of both high-quality personnel and financial support. Senior management of participants must be regularly involved in the strategy of the consortium, with meetings and transparent communication with all levels of member companies.115 Given the rapidly rising costs of developing new technologies, the geo- graphic dispersal of expertise, and the need to agree on common standards as a means of assuring market access for final products, international col- laboration—including consortia—is likely to become more prevalent (see Box D below). This is, however, less likely to involve the internationaliza- tion of existing national consortia than to generate new cooperative mecha- nisms. Applying the lessons of effective consortium management to these 113 Douglass A. Irwin and Peter J. Klenow, SEMATECH: Purpose and Performance, Paper Prepared for the NAS Colloquium on Science, Technology and the Economy, Irvine, Calif. 20– 22 October 1995. The authors also point out that the GAO survey of executives from SEMATECH found that members were generally satisfied (though a few founding members left the consor- tium). They also cite a report stating that “Intel believes it has saved $200 to $300 million from improved yields and greater production efficiencies in return for annual Sematech invest- ments of about $17 million” (pp. 5–6). For a summary review of the nature and accomplish- ments of the SEMATECH program see Supplement B below. 114 William J. Spencer, SEMATECH. See also Daniel I. Okimoto, Between MITI and the Market: Japanese Industrial Policy for High-Technology, Stanford University Press, Stanford, Calif., 1989, p. 67. The author observes that Japanese national research projects, which bring together talent from leading companies and government laboratories, offer an excellent way to leapfrog ahead of the competition. However, Glenn R. Fong argues that the VLSI consortium (and especially its central research facility) proved ineffective in developing a cooperative research effort among participating companies. Government subsidies played a crucial role in forcing the pace of technological advance, but program efforts were dominated by individual firms pursuing different technological approaches. See Glenn R. Fong, “State Strength, Indus- try Structure, and Industrial Policy: American and Japanese Experiences in Microelectronics,” Comparative Politics, vol. 22, no. 3, April 1990, pp. 290–293. 115 William J. Spencer, SEMATECH.

50 CONFLICT AND COOPERATION endeavors will pose a significant but surmountable challenge to the interna- tional R&D community. BEST PRACTICE FOR NATIONAL PROGRAMS OF TECHNOLOGY DEVELOPMENT The success of national programs to support the development of new technologies and associated industries depends on a variety of conditions, some of which reflect significant historical, cultural, and economic differ- ences among the major trading nations.116 There are, nonetheless, features common to the most successful national policies. These may include some, but not necessarily all, of the following characteristics: • Broad agreement on the need for public-private cooperation to shoulder the costs and risks of developing new technologies; • An effective and diverse organizational structure. Successful pro- grams are usually backed by extensive resources, including respected gov- ernment institutions with well-trained, highly motivated staff who see their core mission as the improvement of their nation’s competitive position through effective technology policies;117 • Substantial resources are allocated, with a high degree of predict- ability over extended periods of time, to develop core technologies, usually through government-industry partnerships and contracts. Usually these ar- rangements involve multiple, often competing, firms willing to participate in high-risk, high-payoff precompetitive research; • Multiple mechanisms are deployed. The best government-industry relationships are flexible, with different policy instruments and mixes avail- able to address the needs of particular industries and technologies;118 • Project selection is carried out cooperatively with industry. Projects are developed in pursuit of government missions, or to ensure the develop- 116 Richard R. Nelson (ed.), National Innovation Systems: A Comparative Study, Oxford University Press, New York, 1993. 117 See Alan Wm. Wolff et al., Conflict among Nations., pp. 8–12. The authors observe that “some of the most successful trading partners—such as Japan, Korea, the European Com- munity, and Germany—are characterized by a fragmented trade policy structure and weak horizontal mechanisms for resolving conflicts, yet have generally been able to implement trade and industrial policies that have advanced the national commercial interest. This is attribut- able in part to the existence within these countries of individual bureaucracies with sufficient strength to advance nationalist economic objectives despite internal opposition, and in part to an underlying consensus, transcending bureaucratic conflicts, that the successful performance of national industries in international competition...is important to the nation and should be fostered.” Ibid., pp. 8–9. 118 See also Sylvia Ostry and Richard Nelson, Techno-Nationalism and Techno-Globalism, chap. 3. See also Gregory Tassey, Technology and Economic Growth.

SOURCES OF FRICTION AND COOPERATION 51 ment of new, enabling, or broadly applicable technologies.119 Public offi- cials work closely with industry on an iterative basis both to identify the appropriate technology focus and to select projects;120 • Projects and programs involve substantial private contributions to share the cost of the project. The interest and financial support of multiple firms is a key condition for government contributions; • Governments rely on private management of projects and programs. Government plays a major role in the development of new programs and projects, but the final selection process, the management of the projects, and the exploitation of the results are left to industry;121 • Efforts are long-term. This is critical to the success of national technology programs. As with private sector strategies, programs of na- tional economic development sometimes fail and sometimes succeed. When they succeed, the positive consequences for the national economy (and the negative consequences for competitors) can be dramatic. Moreover, as with the strategies of private corporations, the success or failure of national development strategies is a process of constant learning and innovation, not a one-time event. The sustained commitment of many nations to these programs, even in the face of frequent failure, attests both to their commit- ment to develop new sources of economic growth and to the competitive benefits these programs can bring their citizens.122 PRODUCER VERSUS CONSUMER ECONOMIES: DIFFERENT GOALS Criticism of targeted support for technology development is unlikely to diminish, regardless of the success or failure of these programs. Indeed, both may elicit criticism. It is important to recognize, however, that this 119 Allocating Federal Funds for Science and Technology, p. 21. 120 Michael Porter believes that Germany has a good record in updating technology be- cause most government-funded research takes the form of joint projects, with research insti- tutes involving firms or incentives for company research. See Michael Porter, The Competitive Advantage of Nations, p. 620. See also Jeffrey A. Hart, Rival Capitalists, especially chap. 5, which discusses the strengths and limitations of the decentralized German approach to indus- trial policy. Hart stresses the importance of the Fraunhofer Institutes as a bridge between universities and industry and a provider of alternative channels for the diffusion of information and technology. P. 185. 121 Several of these points are discussed in Key Foreign Industrial Competitors: Selecting Core-Technology Products, U.S. Technology Administration, Department of Commerce, Washington, D.C., October 1992, pp. 2–6. See also the discussion of SEMATECH in Supplement B. 122 For a discussion of “Leading Indicators of National Competitiveness” see the National Science Board Science and Engineering Indicators 1993, chap. 6. One of the indicators is national commitment, that is, “evidence that a nation is taking directed action to achieve technological competitiveness.”

52 CONFLICT AND COOPERATION criticism, at least in its most articulate form, is concentrated largely in a few Western countries. Other major technologically advanced countries— or those aspiring to become so—benefit from a broad (or broader) societal consensus on the need for a wide range of government support for national efforts to acquire, develop, and disseminate new, enabling technologies.123 Criticism of national technology policies may also mask a philosophical rift between participants in the international economy. As noted above, some countries have consciously adopted policies designed to favor growth over consumption, and producers over consumers; they see the acquisition of high-technology industry as a major national goal to be aggressively pursued. In the pursuit of this high-technology prize, decisionmakers in countries as diverse as Korea, Germany, France, Japan, Singapore, Malaysia, Taiwan, and now China do not accept the premises of Anglo-American economics with its emphasis on the importance of consumer welfare and global allocative efficiency. Decisionmakers concerned with national economic development focus on the role of government in creating the conditions and providing direction for the development of the national economy. They do not accept the premise that the market alone, composed of the individual decisions of consumers, would necessarily encourage development where it will do the nation the most good—that is, in terms of national production capacity in leading sectors.124 Instead, they believe economic development, even by private capital, often requires a coordinated exercise of central power.125 123 Richard Samuels, Rich Nation, Strong Army, p. 319 and passim. Some countries, such as Germany, have long-standing, multifaceted, and often effective technology programs, but nonetheless do not enjoy such consensus. Personal communication to National Research Council from J. Nicholas Ziegler, MIT Sloan School of Management, 6 December 1995. See also Ziegler, “A Capabilities-Based View of German Technology Policy,” commissioned by the National Research Council for the project Friction and Cooperation in High-Technology De- velopment, Competition, and Trade, 1995. U.S. technology development programs tend to be justified on national security grounds, or for specific missions such as space exploration, health, or energy development, with limited support for economic development programs per se, except at the state level. 124 James Fallows, Looking at the Sun, p. 183. In addition to Friedrich List, this view was, of course, advocated by Alexander Hamilton in his Report on Manufactures and reflected policies practiced by England such as the “Act of Navigation,” which required that goods going to and from England be carried by English ships—a policy endorsed by Adam Smith in The Wealth of Nations. 125 James Fallows, Looking at the Sun. In addition to government direction, institutional factors also play a major role with respect to private investment. In the United States, for example, a recent study found that “although U.S. financial markets are highly efficient, there are significant distortions in the allocation of capital within the private sector” that act to reduce business investment, and especially long-term and intangible investments, thereby re- ducing the pace of innovation in the U.S. economy. These distortions are exacerbated by the failure of federal regulations to keep pace with change in the global economy. For a broader

SOURCES OF FRICTION AND COOPERATION 53 The focus of these producer-oriented national policies is therefore not on maintaining rule-based competition, either domestically or internationally, but on economic results in terms of the national capacity to generate wealth and therefore national power. Particularly in Asia, the countries that be- came subservient to the European powers in the eighteenth and nineteenth centuries saw this loss of autonomy as a result of their inability to match the European capability in manufacturing.126 Consequently, this view of eco- nomic relations among states does not correspond with the traditions of Adam Smith and David Ricardo, which view trade as a positive-sum game. It corresponds better with Friedrich List’s more zero-sum conception of national economic interactions. In this view, trade is not just a game re- quiring “a level playing field” for “fair” competition, but is rather a contest in which some nations lose their independence and control of their destiny as a result of their relative economic performance in the community of nations.127 The tensions that are often associated with trade disputes in high-tech- nology industries are often exacerbated by the belief, widely held in Anglo- American circles, that countries whose trade practices do not reflect certain (Anglo-American) assumptions are “cheating,” that is violating the rules of the trading system and thereby undermining the system itself.128 Other discussion of these issues, see Robert Denham and Michael Porter, Lifting All Boats: Increas- ing the Payoff in the Private Investment of the U.S. Economy, the Report of the Capital Allocation Sub-Council to the Competitiveness Policy Council, Washington, D.C., September 1995, p. 1 and passim. 126 James Fallows, Looking at the Sun, p. 184. 127 List emphasized the productive power of manufacturers as central to national security, arguing that “war or the very possibility of war makes manufacturing power an indispensable requirement for a nation of the first rank.” For a comparison of the views of the early political economists, see Richard Samuels, Rich Nation, Strong Army, pp. 4–20. This view has long been the rationale for U.S. defense programs (see Supplement C). For a historical view of the defense contributions to American development, see Geoffrey Perret, A Country Made by War: From the Revolution to Vietnam—The Story of America’s Rise to Power, Random House, New York, 1989. 128 James Fallows, Looking at the Sun, pp. 189–190. Robert Malpas also addresses the tendency of British electronics companies to complain that their competitors in other countries are subject to different rules or expectations, such as the lower returns on capital required of German and Japanese companies. Malpas observes simply that since these economies are doing well, one must draw the appropriate policy consequences. See Robert Malpas in R. Landau and N. Rosenberg, The Positive Sum Strategy, National Academy Press, Washington, D.C., 1986, p. 111. More broadly, Fallows characterizes the difference in perspective between the two systems as follows: “One economic system (consumer-oriented economies) operates as if it does not have to make the largest decisions about national purpose, except when the system is being attacked from the outside in time of war. The other (producer-oriented econo- mies) operates as if the state always has a role in continuing to guide [the economy]. It is the interaction between these visions, rather than the rightness or wrongness of either of them, that creates problems...” Fallows, Looking at the Sun, p. 223.

54 CONFLICT AND COOPERATION nations see economics “not as a matter of right or wrong, of cheating or playing fair, but rather merely a matter of being strong or weak.”129 Behind the moral judgments is the presumption that there is only one way to play the game fairly.130 While some nations seem to be concerned more about fair play and obeying the rules than about results, other nations observe the principle of defending their own interests and seek to ensure results conso- nant with their national objectives.131 From this perspective, national decisionmakers may decide to channel capital, usurp patented products or processes, or discriminate against foreign products. These national policies may be shortsighted—but they do not represent violations of a moral code. They are national decisions. Recognizing the differences in national perspective, and moderating the moralistic tone with which these issues are often discussed, would contrib- ute to reduced international tension and, for some countries, perhaps lead to improved policymaking. INTERNATIONAL ELIGIBILITY FOR PARTICIPATION IN NATIONAL TECHNOLOGY PROGRAMS132 In this competitive environment, international participation in national technology programs will be subject to conflicting pressures. As noted above, there are often powerful public and private incentives for increased international cooperation. A recent OECD analysis notes three separate, but not mutually exclusive, rationales for international cooperation. For example, cooperation in technology development can reduce technical risk and capital costs and also serve as a means of achieving mutually accept- able international standards to facilitate commercialization. A second cat- 129 Ibid. 130 This is not the case. Views differ within as well as between countries. For example, even in countries that have long-standing programs to support high-technology industry, there is no consensus on the appropriate role for the state. Kantzenbach and Pfister point out “the discrepancy between theory and practice of German economic policy,” contrasting the nonin- terventionist statements of federal economic ministers with the interventionist policies prac- ticed by departments for energy, steel, shipbuilding, and aircraft manufacturers. Kantzenbach and Pfister in Koopman and Scharrer, The Economics of High-Technology Competition and Cooperation in Global Markets, p. 273. Similar discrepancies are also found between the policy statements and practices of other nations. 131 Fallows, Looking at the Sun, p. 448. 132 In policy debates in the United States the terms “foreign eligibility” and “foreign access” are sometimes used interchangeably. The use of the term access implies a level of automaticity that in fact exists for neither American nor foreign-owned companies. A range of criteria is applied to eligible companies. Particularly in collective undertakings (e.g., consor- tia), there is no guaranteed access even for American companies. A variety of factors apply, as noted in this section.

SOURCES OF FRICTION AND COOPERATION 55 egory arises from the special interest that smaller or less technologically advanced countries have in accessing the R&D programs of more advanced countries.133 A third and rather different category is the promotion of international collaboration among R&D institutions (for example within the European Union). All of these factors are likely to grow in importance in the decades ahead. At the same time, nationalistic approaches to tech- nology development are likely to continue to pose obstacles to increased cooperation.134 For the technologist, the policy dilemma is that some element of condi- tionality may be a sine qua non for continued public support for publicly financed programs. Completely unrestricted access to national programs for all potential participants is likely to prove politically fatal to such pro- grams, with potentially serious welfare losses in absolute and relative terms for that nation. On the other hand, candidate companies in possession of technological assets able to meet the requirements of a program will remain attractive to the program managers, regardless of nationality. Similarly, government measures to restrict the global application of the output of cooperative national programs are self-defeating. Companies with world- wide operations are unlikely to participate in overly restrictive programs, and in any event would be hard put to compartmentalize “national” tech- nologies within their global production systems.135 International participation is likely to remain constrained by the need to justify the allocation of public funds for the development of technologies by having ownership and exploitation of the technologies and processes 133 Martin Brown, Impacts of National Technology Programmes, pp. 41–42. Brown points out there is an implicit trade-off between promoting national competitiveness, and the econo- mies of scale to be gained from participation in international programs. Ibid. For countries with less-developed research infrastructures or for companies in need of cutting-edge techno- logical solutions, the attraction of international cooperation is evident. 134 The longstanding reluctance of the Japanese defense industry to cooperate on a recipro- cal basis was described in a recent National Research Council assessment. See Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force, National Academy Press, Washington, D.C., November 1995. This point is discussed in the section on dual-use technology below. 135 Efforts by the Department of Energy in 1992–1993 to require U.S. companies partici- pating in cooperative research and development agreements (CRADAs) to apply the resulting innovations primarily to production within the United States created substantial delays in expanding DOE cooperation with high-technology companies. While U.S. production is seen as a fair return for public support to innovation, the realities of global production networks make the applications of such restraints impractical. See also the remarks by Patrick Windham to the Symposium on International Access to National Technology Programs, 19 January 1995. For an assessment of the issues associated with CRADAs, see Rose Marie Ham and David Mowery, “Improving Industry-Government Cooperative R&D, Issues in Science and Technol- ogy, Summer 1995.

56 CONFLICT AND COOPERATION developed remain—at least in part—within the boundaries of the national economy. National benefits tests, whether de facto or de jure in applica- tion, are likely to continue. These tests are also likely to continue to include conditions such as a national presence, local production, and a local research capability. 136 Reciprocal access to national programs is likely to remain a de facto policy consideration, especially in the United States. Participating compa- nies, administrators, and politicians are unlikely to welcome national com- panies based in countries whose national governments seem to systemati- cally deny foreign access to desirable programs, unless the candidate company is seen as bringing major technological assets to the collaboration. The imposition of other criteria, such as adequate and effective intellec- tual property protection, investment regimes providing national treatment137 and effective rights of establishment, as well as reciprocal access to na- tional programs, will continue to be seen by some as necessary conditions for sustainable cooperation. Indeed, some would argue that these criteria for participation can and do serve as implicit norms for participation in cooperative programs. Moreover, these conditions pose little risk for pro- gram objectives if sufficient administrative discretion is retained. For oth- ers, these government-imposed conditions are a source of international fric- tion and may undermine important principles of the trading system such as national treatment. Whatever the merits of these views, there are some practical constraints to the “carrying capacity” of national technology pro- grams, though it seems unlikely these limits have been exceeded.138 Still, 136 Ostry notes that there are usually standard, if unofficial, performance conditions applied for participation in EU programs, in contrast to the reciprocity-oriented conditions applied to U.S. programs. See Ostry, “Technology Issues in the International Trading Sys- tem.” p. 12. Despite its long-standing European presence, IBM was initially rebuffed in its efforts to participate in JESSI (Laura Tyson, Who’s Bashing Whom? p. 150), although on Siemens’ insistence IBM was allowed to later join. In contrast, the purchase of ICL by Fujitsu resulted in ICL’s expulsion from JESSI and from the European Roundtable Group, which guides ESPRIT. Kende, “Government Support of the European Information Technol- ogy Industry,” p. 26. 137 The term “national treatment” reflects the principle that foreign investors, whatever form their investment takes, should be accorded the same treatment as domestic investors. Multinationals and the National Interest, Office of Technology Assessment, p. 48. 138 In this context “carrying capacity” refers to the practice of adding overt requirements for participation of foreign companies in national programs as a means of advancing other policy goals. These include, for the ATP program, considerations concerning the investment and intellectual property regimes of the home countries of multinational companies seeking to participate. These requirements can, in effect, be seen as signals by the Congress concerning appropriate policies for participation in U.S. national programs. See the presentations by Pat Windham and Daniel Price to the Symposium on International Access to National Technology Programs, 19 January 1995.

SOURCES OF FRICTION AND COOPERATION 57 national investment regimes are unlikely to change solely as a result of a national company’s being barred from participation in a cooperative project. These considerations are compounded by other factors which collectively undermine the conditions for successful international cooperation. These include • asymmetries in the structure and funding of national programs; • the different technological competencies and assets nations or firms 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—formally or informally—national treatment. The problem of asymmetries in national technology programs may become more acute as advanced high-technology companies in countries with sig- nificantly less-developed research infrastructures seek to participate in na- tional programs of the leading industrial countries. Even in programs formally open to foreign participation there is consid- erable latitude for administrative discretion with respect to participation by foreign firms. Because rules governing U.S. technology programs tend to be transparent, they are therefore subjected to criticism. In other countries and regions, unofficial criteria for participation are frequently applied.139 These criteria can range from the perceived technological capabilities of the candidate company, the reputation of its management, and its competitive practices and position, to the candidate company’s willingness to agree to performance requirements. All these factors condition both the enthusiasm with which a company’s candidacy is received and its prospects for success. Notwithstanding recent calls for negotiations on access,140 a formal agreement may prove difficult in light of the underlying differences in scope, ratio- nale, structure, funding, and accessibility of national programs. Less for- mal international understandings, however, may offer a means of assuring greater transparency, and ultimately greater foreign participation in govern- ment-funded civilian research and development programs. However, even informal international commitments may prove ineffective in furthering in- ternational cooperation unless there is a sense of shared burdens and equivalent contributions. While efforts should be made to reduce discriminatory restrictions on foreign participation in national technology programs, formal declarations 139 Ostry, “Technology Issues in the International Trading System.” 140 Trans-Atlantic Business Dialogue: Overall Conclusions, 11 November 1995, Seville, Spain, recommendation III-9, p. III-3.

58 CONFLICT AND COOPERATION are not likely to be effective in advancing international cooperation. More usefully, a sustained effort to reduce conditionality, perhaps through the construction of an objective, internationally accepted national ben- efits test, might be undertaken on a multilateral basis.141 A multilater- ally agreed national benefits test might take into account conditions such as the level of a company’s R&D presence in the country funding the technol- ogy program, specific technological and financial contributions the com- pany would undertake to make to the project, and agreement by participat- ing companies to conduct the R&D funded under the project in the sponsoring country and to manufacture some agreed-on portion of the products derived from the research within the host country.142 Many of these conditions are already applied on a de facto basis in some jurisdictions. The advantage of a multilateral effort would be to make these requirements more transparent, establish agreed-upon guidelines, and focus on the contributions to the na- tional technology base rather than on corporate “nationality.” In addition to the considerations noted above, international cooperation will continue to be conditioned by the degree of agreement on shared priori- ties, equitable technical contributions (not merely financial contributions), and a shared capacity to exploit the results of cooperation. These and other factors, such as the contestability of end-product markets, are fundamental elements of sustainable cooperation. One avenue to improved international cooperation is better information and more transparency. As a first step, an appropriate multilateral organi- zation, such as the OECD, should gather improved data concerning formal rules for participation in national or regional technology programs, supple- mented by objective assessments of current administrative practices—i.e., actual foreign participation and its rationale—rather than theoretical “open- ness.” A better understanding of the rules, current practice, and in some cases the absence of rules would be helpful.143 Ultimately, the basis for sustainable international cooperation is likely to be derived from the combi- nation of support by private sector participants within the host country, the technical or financial needs of the program or agency mission, and a sense 141 This policy option and its rationale are outlined in greater detail in Multinationals and the U.S. Technology Base, Office of Technology Assessment, Congress of the United States, September 1994, pp. 33–34. The list of criteria advanced by the OTA authors is more elabo- rate and potentially more restrictive than the criteria summarized here. 142 Ibid. 143 Ostry, “Technology Issues in the International Trading System,” p. 12. As noted, the author correctly underscores the lack of complete information on either rules or actual partici- pation by foreign companies in national programs and cites, as an example, the case of the European Commission Framework Program, where “there are no formal guidelines for partici- pation in projects.” Membership is negotiated on case-by-case basis or bilaterally, with “unof- ficial” conditions, including performance requirements, usually a standard feature.

SOURCES OF FRICTION AND COOPERATION 59 of fair and equitable contribution. When the overriding national goal is autonomous national capability, opportunities for long-term foreign partici- pants will necessarily remain limited. A sustained multilateral effort could also seek to improve understanding of differences among national technol- ogy development programs. For example, it could gather improved data concerning formal rules for participation in national or regional technology programs, supplemented by objective assessments of current administrative practices, i.e., actual foreign participation and its rationale, rather than theo- retical “openness.” A CASE-BY-CASE APPROACH Despite these caveats, there are substantial benefits to be gained from increased international cooperation. Their realization is most likely to oc- cur on a case-by-case basis, directly related to other factors such as program goals and investment regimes. Private motivations will remain powerful drivers. An important current example is the semiconductor industry, which now offers a significant opportunity for a major cooperative initiative as the industry moves to the 300mm wafer for semiconductor devices. This is a major technological challenge, which many in the industry believe will best be met collectively. The American semiconductor consortium SEMATECH has played an instrumental role in establishing an international consortium to meet this challenge. (See Box D.) The desire of otherwise fierce competitors, such as the major semicon- ductor firms, to cooperate on a common standard underscores the technical and financial challenges the industry is facing in moving to a new standard. Industry-initiated efforts at cooperation are most likely to succeed when backed by a supportive policy framework. In some cases, public initiatives can provide a critical catalyst for cooperative efforts to achieve goals iden- tified by industry.144 Efforts initiated by public officials less attuned to the complexities of a given industry may experience corresponding difficulty setting and achieving proper objectives.145 Cooperation offers the greatest 144 See Richard Brody, Effective Partnering, Office of Technology Policy. Programs involving partnering among multiple companies can serve to remove barriers to public-private collaboration, but also to collaboration between firms. “Companies report that...just applying for federal programs” can be immensely valuable regardless of whether the firms actually receive funding. Pp. 53–54. For a similar view, see European Commission European Report on Science and Technology Indicators, 1994. 145 The EUREKA initiative, launched in 1985 by France, was intended to provide an alternative to more bureaucratic European Community programs. EUREKA is designed to be more bottom-up and driven by the interest of firms; although usually encouraged by the pros- pect of public support, EUREKA has no independent funding. The Framework program mobi- lizes about 5 billion ECU per year; EUREKA mobilizes up to 2 billion ECU per year. See the

60 CONFLICT AND COOPERATION BOX D. A REAL-WORLD CASE: INTERNATIONAL COOPERATION ON THE 300MM WAFER The growth and increasing productivity of the semiconductor industry are fueled partly by increasing wafer size. The silicon wafer is the platform on which microchips are built. The standard wafer size in 1970 was about 30mm. Today the standard in modern semiconductor manufacturing facilities is 200mm. The next generation wafer will be 300mm, and it is expected to become the dominant platform for manufacture early in the 21st century. The conversion to 100mm wafers in the mid-1980’s led to an interesting situation in the United States. While there was some work on international standards, most of the world converted to 100mm wafers while the United States in some instances converted to four inches, i.e., 101.6mm. This meant that fixtures and tools could not handle both sizes of wafers. It is important that this error not recur in the transition to the 300mm wafer. Agreement on an international standard is important because making and using larger wafers necessitates change in a whole range of technical characteristics of the materials and manufacturing methods. The cost of changing from 200mm to 300mm wafers is expected to exceed $10 billion, with the highest estimates at $30 billion. By comparison, the last conversion from 6 inch to 8 inch wafers was believed to have cost on the order of $2 billion and was managed largely by IBM, which then made the new technology widely available. Today, however, Intel—the industry giant—is a $14 billion company unable to assume these costs. Moreover, the fabrication facilities which will run the 300mm wafer will be dedicated facilities, unable to accommodate the older wafer size. These facilities are likely to cost on the order of one to one-and-a-half billion dollars each. The standard- izing of wafer size is therefore driven in part by the need to avoid imposing customization costs on the tool-making industry. This dramatic cost escalation has given birth to cooperative efforts in both Japan and the United States. The Japanese effort is principally a national program focused on the Japanese equipment industry, with substantial public funding. The 300mm program launched by a SEMATECH subsidiary is completely funded by industry and open to participants from other nations. The consortium’s funding is to be based on equal contributions from participating companies, which now include members from Europe, Korea, and Taiwan as well as the United States. Though a separate entity, the new consortium will have the major advantage of being able to use SEMATECH facilities. The program will focus on international standards, on setting international requirements for 300mm wafers at 0.25 and 0.18 µ geometries (256 Mb DRAM and 1 Gb DRAM), and on the evaluation of critical equipment for 300mm manufacture. This cooperative program is expected to last for 18-24 months, at which point an evaluation will be made to determine whether it should continue for the development of additional technology related to 300mm wafers.

SOURCES OF FRICTION AND COOPERATION 61 prospect of success when it is built on specific shared objectives and a clear understanding of the costs 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 strategic alliances. The growth and importance of these alliances may in time lead to a reshaping of the way in which companies cooperate and compete.146 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.

62 CONFLICT AND COOPERATION as a means of bypassing border restrictions.147 For instance, some govern- 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.148 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. Signifi- cantly, the scope and intensity of alliance activity are unevenly distributed, with the highest growth occurring 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 policymakers. 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 foreign partners in exchange for short-term gains.149 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 technology 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 Council, National Academy Press, Washington, D.C., 1995

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 and/or royalties. 2. Cross-licensing 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&D activities of partner firms. 5. 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 (OEM): 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). 11. Assembly and testing agreement: components and parts manufactured elsewhere are sent to another company where they are assembled and tested. Marketing 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. 14. Servicing 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.150 150 Prepared by the NRC working group for the report U.S.-Japan Strategic Alliances in the Semiconductor Industry, p. 10.

64 CONFLICT AND COOPERATION nies may barter critical technologies developed at government expense, 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- tion 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 $9.8 billion in 1993).151 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.152 The United States is also benefiting from these trends. R&D expendi- tures by foreign-owned companies in the United States have more than doubled, from $6.5 billion in 1987 to $14.6 billion in 1993.153 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. 151 Globalizing Industrial Research and Development, Office of Technology Policy, U.S. Department of Commerce, October 1995, p. 8. 152 Ibid., p. 29. Hong Kong, of course, will become part of the People’s Republic of China in 1997, presumably strengthening the Chinese technology base. 153 Ibid.

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.154 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- nologies. 155 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 engineers.156 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 $1.8 billion in 1993, represents a significant addition to U.S.-based R&D.157 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 154 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- though they also concentrate limited educational resources on their own nationals. 157 Globalizing Industrial Research and Development, Office of Technology Policy, De- partment of Commerce, p. 29.

66 CONFLICT AND COOPERATION research-intensive U.S. firms.158 Moreover, even for companies with exten- sive international operations and investments, core technology development remains largely centralized at company laboratories in the home country.159 The globalization of R&D therefore lags substantially behind the globalization of production, sourcing, 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.160 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. 161 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 158 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. 159 Multinationals and 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 Globalizing 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 Globalizing Industrial Research. 161 The analysis advanced by Michael Porter in The Competitive Advantage of Nations supports this perception. He argues that “competitive advantage is created and sustained through a highly localized process.” 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 firm’s strategy is set and the core product and process technology are created and maintained. P. 19.

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- mine 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- alization 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 degree 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.162 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.163 The fragmentation of authority 162 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 and 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 Stern, Get- ting the Boxes Right: New Blueprints for U.S. Economic Policymaking, Economic Strategy Institute, Washington, D.C., 1995.

68 CONFLICT AND COOPERATION which now exists tends to encourage inefficiencies, not least for its “...un- desirable separation between policy development and implementation.”164 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.165 Effective policymaking and its execution require appropriate institutions, which take time to build but can have important long-term effects.166 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.167 An integrated approach requires institutions designed to support national capabilities and national firms, while at the same time preserving market-based competition and strengthen- ing 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. 10–11. 166 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 function 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 it 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.”

SOURCES OF FRICTION AND COOPERATION 69 In the absence of an integrated approach to international competitiveness in high-technology 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.168 Yet trade policy measures tend to be selected because they are often the only instru- ment available to policymakers.169 Trade measures also have the added advantage of being off-budget. Consumers, not the government, underwrite the costs.170 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.171 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 high-technology 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 high-technology industries would be a valuable contribution to the international dialogue. 168 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, Ga., 1–4 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.

70 CONFLICT AND COOPERATION BOX F. COMPARATIVE ADVANTAGE AND HIGH-TECHNOLOGY COMPETITION Competition for high-technology 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, policymakers recognize that their objective 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.172 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 an explicit target of industrial policy—whether a result of military policy of the United States, or the objective of commercial policy elsewhere in the world.”173An outstanding example of successful government intervention for commercial objectives in semiconductors is the Very Large Scale Integrated (VLSI) Project, initiated in the mid- 1970s by MITI and a number of major Japanese companies. Focused on DRAM development and manufacture, the project recognized the importance of complemen- tary metal oxide semiconductor (CMOS) technology and solid state memory as tech- nology drivers of the entire industry. As noted above, in exchange for a modest investment in this joint government-industry project (some $300 million over four years), the Japanese producers moved from being relatively small players in the global semiconductor business to become the dominant producers of DRAMs by the mid- 1980s. The Japanese semiconductor equipment industry also grew dramatically as a result of this investment. Moreover, companies such as Nikon were induced by the government to enter the semiconductor equipment business and today dominate photolithography—the most expensive and most critical manufacturing technology.174 172 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. 94–113. See also Spencer, SEMATECH, p. 3. Spencer also points out,

SOURCES OF FRICTION AND COOPERATION 71 Supportive government policies, however, are nonetheless not sufficient for inter- national competitiveness. The ability to participate—that is, to compete—effectively in the world market is of fundamental importance. Moreover, this competition is often highly dynamic. Competition, particularly in industries which are knowledge intensive, involves close races among firms, with outcomes depending on human endeavor and continuous learning more than natural endowments.175 Increases in market share for firms (or national industry) translate into increased volume and experience, which in turn translates into increased advantage.176 Short-term sacrifice to build market share can lead to reversals in market position; firms can come from behind to capture a leadership position in enabling technologies and high-revenue industries. Market posi- 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.177 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- tially 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.

Next: System Integration and System Friction: New Challenges in Trade Policy »
Conflict and Cooperation in National Competition for High-Technology Industry Get This Book
×
Buy Paperback | $60.00 Buy Ebook | $48.99
MyNAP members save 10% online.
Login or Register to save!
Download Free PDF

This unique volume contains a powerful set of recommendations on issues at the center of international discussions on investment, trade, and technology policy. They take into account the globalization of industrial activity and the special characteristics of high-technology industries while recognizing the continued policy role of national governments.

The book identifies the rationale for promotional measures for high-technology industries, delineates sources of friction among the leading industrial countries, and proposes policies to enhance international cooperation and strengthen the multilateral trading regime.

This volume also examines the factors driving collaboration among otherwise competing firms and national programs, highlights the need to develop principles of equitable public and private international cooperation, and emphasizes the linkage between investment, government procurement, and other trade policies and prospects for enhanced international cooperation.

  1. ×

    Welcome to OpenBook!

    You're looking at OpenBook, NAP.edu's online reading room since 1999. Based on feedback from you, our users, we've made some improvements that make it easier than ever to read thousands of publications on our website.

    Do you want to take a quick tour of the OpenBook's features?

    No Thanks Take a Tour »
  2. ×

    Show this book's table of contents, where you can jump to any chapter by name.

    « Back Next »
  3. ×

    ...or use these buttons to go back to the previous chapter or skip to the next one.

    « Back Next »
  4. ×

    Jump up to the previous page or down to the next one. Also, you can type in a page number and press Enter to go directly to that page in the book.

    « Back Next »
  5. ×

    To search the entire text of this book, type in your search term here and press Enter.

    « Back Next »
  6. ×

    Share a link to this book page on your preferred social network or via email.

    « Back Next »
  7. ×

    View our suggested citation for this chapter.

    « Back Next »
  8. ×

    Ready to take your reading offline? Click here to buy this book in print or download it as a free PDF, if available.

    « Back Next »
Stay Connected!