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96 CONFLICT AND COOPERATION Different National Ir~vesiment Regimes and Their Consequences NATIONAL INVESTMENT REGIMES DIFFER Inward foreign direct investment, especially in high-technolo=,y indus- tries, can bring substantial benefits to the host country. For example, in the United States the rapid expansion of foreign direct investment has helped compensate for the low rate of domestic U.S. savings through both large numbers of acquisitions and the construction of Oreenfield distribution and manufacturing facilities. Investment by technologically advanced compa- n~es can also bring new technologies, processes, products, managerial skills, and organizational techniques to joint venture partners, suppliers, and ulti- mately competitors. New companies also create substantial employment, often in sectors with higher-than-average wages and value added. The skills and training imparted by such employment have further positive spin- off effects throughout the national economy. In addition, improved prod- ucts and services can mean greater benefits for host-country consumers. Reflecting these views, countries such as the United States and the United Kingdom have maintained open investment regimes. With some excep- tions, albeit in major areas such as telecommunications, civil aviation, and broadcasting, the U.S. investment regime is among the most open on the planet, with the principle of national treatment generally applied.26i For many policymakers in the United States, the benefits of foreign direct in- vestment are an article of faith and, as noted above, there is considerable justification for this view.262 It is significant, especially with respect to high-technoloOy competition, that so few of the advanced industrial coun- tn~.c Inch the r~nirilv industrializing countries seem to have the same confi -^,~ r~~~' dence in this policy approach. In fact, many influential participants in the world trading system have quite different investment regimes, particularly with respect to the most 26i Multinationals and the National Interest, p. 48. In 1991, the Bush administration af- firmed that "the United States has lone, recognized that unhindered international investment is beneficial to all nations, that it is a positive-sum game." Economic Report of the President, U.S. Government Printing Office, Washington, D.C., February 1991, p. 262. 262 Ibid. For a comprehensive review of the issues associated with foreign direct invest ment, see Edward Graham and Paul Krugman, Foreign Direct Investmerrt in the United States, Institute for International Economics, Washington, D.C., 1996. See also David Bailey, George Harte, and Roger Sudden, "U.S. Policy Debate Towards Inward Investment," Journal of World Trade, vol. 26; Allgust 1992, pp. 65-93.
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DIFFERENT NA TIONA ~ INVESTMENT REGIMES AND THEIR CONSEQ UENCE:S 9 7 technologically advanced industries.263 While national investment regimes vary considerably by country and sector, none is as receptive to foreign direct investment in high-technology sectors as the United Kingdom and the fruited States. Despite attempts by the OECD to win acceptance for the principle of national treatment, countries as diverse as France, Italy, and Germany, and to a greater extent Japan, either formally regulate foreign direct investment or permit informal barriers which impede it.264 Among the advanced industrialized countries, Japan is by far the most restrictive. For many years, structural and cultural obstacles joined Japa- nese government policy in making foreign investment, especially acquisi- tions, exceedingly difficult.265 Unfortunately, the situation remains largely 263 Many countries, such as Japan, France, Taiwan, Canada, Korea, and Australia, require government notification and/or the screening of high-value investments. While formal prohi- bitions on the acquisition of domestic firms by foreigners have declined, many governments retain the power to review-and effectively block foreign acquisitions, a capability but- tressed by exclusionary private business practices. See Defense Science Board, Industrial Base Committee, Report of the Defense Science Board Task Force: Foreign Ownership and Control of U.S. Industry, Washington, D.C., June 1990, pp. 29-30. The United States also limits foreign investment in sectors such as telecommunications and nuclear energy. See James K. Jackson, Foreign Direct Investment in the United States, U.S. Library of Congress, Congressional Research Service, CRS Report IB9301 1, Washington, D.C., 1993. 264The European countries are more open to greenfield investments; acquisitions are more difficult. Reich emphasizes the competitive consequences of these differences in investment opportunities, noting that "Anglo-American firms have often encountered a different pattern of regulation when investing abroad. They have often been forced by host governments to invest in fully-integrated production facilities, exchange market access for patents, or have often been denied any investment access at all. Recent evidence suggests, for example, that a series of 'structural barners' continue to deny U.S. firms the kind of reciprocal access to some foreign markets that their rivals enjoy in the United States." See Simon Reich, "Asymmetries in National Patterns of Forei;,n Direct Investment: Consequences for Trade and Technology Oe- velopment," p. 31, in C. Wessner (ed.), Sources of International Friction and Cooperation in High-Technology Development, Competition, and Trade. 265 This is not to say that foreign investment in Japan is impossible. However, successful foreign investments remain the exception. These constraints are outlined in detail in the second annual working report of the U.S.-Japan Working Group on the Structural Impediments Initiative. Companies such as IBM, Texas Instruments, and Motorola have penetrated the Japanese market often only after exhaustive efforts, and sometimes in exchange for proprietary technology. Multinationals and the National Interest, p. 71. See also Robert Z. Lawrence, ``Japan's Low Levels of Inward Investment: The Role of Inhibitions on Acquisitions," Transnational Corporations, vol. l, no. 3, December 1992, p. 47, who notes that, in contrast to most coun- tries, new foreign investment in Japan occurs primarily through greenfield establishments and/ or joint ventures. For an elaboration of this point, see Simon Reich, "Asymmetries in National Patterns of Foreign Direct Investment," p. 12. Citing an internal U.S. Treasury assessment, Reich concludes that '`hostile takeovers are rare, and foreign takeovers usually occur only after all domestic possibilities have been exhausted," p. 13. See also Dennis Encarnation, Rivals Beyond Trade: America versus Japan in Global Trade, Cornell University Press, Ithaca, N.Y., 1992, and Mark Mason, American Multinationals and Japan: The Political Economy of Japa- nese Capital Controls, Harvard University Press, Cambridge, Mass., 1992.
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98 CONFLICT AND COOPERATION unchanged, notwithstanding efforts by the Japanese government to address the problem.266 In a 1995 White Paper, the Japan External Trade Organiza- tion (JETRO) noted that "whereas Japan has 15.4 times as much cumulative direct investment abroad as foreign investment at home, U.S. external in- vestment is just 1.2 times the foreign investment within the (U.S.~...and the "comparable] figure for Britain is 1.3.-267 A recent U.S. government report supports this assessment, noting that "Japan's stock of inward foreign direct investment (FDI), relative to the overall Japanese economy, remains minus- cule compared with that of other industrialized countries."268 The report also notes that Japan's outward investment flows dwarf in- vestment into Japan, with a ratio of around ten to one throughout the 1990s. This contrasts with the investment flows of other OECD countries, which are much more balanced, with the ratio of outward to inward investment below two in every case substantially below in most cases. These asym- metries continue. `'In 1994, Japanese overseas FDI was $41 billion," while Japan's inward FDI was $4.2 billion.269 This lack of receptivity to foreign investment on the part of Japan is considered a major trade barrier.270 If Japan stands out among the industrialized countries for its barriers to foreign direct investment, it is by no means alone in having barriers. As 266 USTR, 1996 U.S. National Trade Estimate Report on Foreign Trade Barriers, pp. 195- 196. The report states that Japan has acknowledged that its inward investment lags far behind that of other industrialized economies and notes that the government of Japan has established a high level council charged with promoting measures to improve the investment climate. In 1995, the United States and Japan signed an agreement which commits Japan to take additional actions to promote foreign direct investment. 267 Ibid. 268 Ibid. In 1991 the OECD estimated Japan's share in global inward foreign direct investment to be under 1.5 percent, as compared with the 36 percent of FDI hosted by the United States. The Office of Technology Assessment also found that foreign investment in Japan is by far the most restricted, with foreign affiliates controlling 0.9 percent of total assets in Japan compared with 20.4 percent in the United States. See Multinationals and the National Interest, Office of Technology Assessment, p. 79. See also Robert Z. Lawrence, "Japan's Low Levels of Inward Investment." 269 In part, this imbalance in flows reflects Japan's large trade surpluses, although others would argue, also in part, that the trade surpluses are to some extent the result of investment barriers. See the presentation of L. Chimerine to the conference Sources of International Friction and Cooperation in High-Technology Development and Trade. Chimerine suggests that while macroeconomic factors, such as the low U.S. savings rate, unquestionably play a role in the U.S. trade deficit, the causality can run both ways. He notes, for example, that Japan has trade imbalances with countries with both high and low savings rates as well as high and low budget deficits. See also Robert A. Blecker, Beyond Twin Deficits, p. 1. This view contrasts with that of many economists who maintain that the excess of domestic investment over domestic savings, plus some accounting identities, fully explains the trade deficit. Blecker argues that "poor trade performance or low foreign demand can cause both a widening trade deficit and a low national savings rate (including a high fiscal deficit), as well as the reverse." Ibid. 270 USTR, 1996 U.S. National Trade Estimate Report on Foreign Trade Barriers, p. 195.
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DIFFERENT NATIONAL INVESTMENT REGIMES AND THEIR CONSEQUENCES 99 noted, in a limited number of sectors, the United States restricts investment to some degree. In France, heavy state participation in the economy, in- cludin=, direct equity investments by the central government in leading com- panies as well as indirect investment through state controlled banks, coupled with formal and informal investment screening ire strategic sectors, com- bines to create substantial barriers to freedom of entry in high-technology sectors. In Germany, extensive cross-holdings among banks and major corporate groups, with representatives of national banks serving on the boards of companies to which they provide loans, make acquisition of existing companies problematic.27~ China welcomes foreign investment critical to China's economic development plans, though often with strict conditions concerning technology transfer (see below), and prohibits a wide range of other foreign investment, especially in the service sector. And In newly industrializing Korea, there are fewer foreign multinational investments than in almost any other late-industrializing country.272 The explanations for this policy divergence among We industrialized countries, as well as those rapidly industrializing, are many and varied. In some cases the divergence reflects different traditions of corporate governance, espe- cially in Japan and, to a lesser extent, Germany.273 In the case of Japan, there are "considerably more regulations on business than tin] most other countries, and this undoubtedly obstructs the entry of new firms, both do- mestic and foreign, into the market. Many foreign firms, which are able to enter other markets, face greater difficulties in entering the Japanese market due to "government] regulations and administrative guidance."274 In other 271 Multinationals arid the National Interest, p. 59. 272 For a discussion of current Chinese policy, see 1996 Foreign Trade Barriers, USTR, p. 56. For Korea, see Alice Amsden, Asians Next Giant, p. 147. See also Robert Lawrence, "Japan's Low Levels of Inward Investment," p. 53. With only 18 percent of its FDI invest- ment foreign majority-owned, Korea joins India (14 percent) and Japan (34 percent), "as conspicuous outliers," cited in Simon Reich, "Asymmetries in National Patterns of Foreign Direct Investment." 273 Sylvia Ostry, "Technology Issues in the International Trading System." p. 15. The author observes that bank-centered governance arrangements are more resistant to mergers and acquisitions than are equity-oriented arrangements. Since equity markets are much more accessible through mergers or acquisitions, the result is significant asymmetry in the ability of companies to acquire new technologies and obtain market access. 274 The Report of the Ad-Hoc Committee on Foreign Direct Investment in Japan, Keidanren Committee on International Industrial Cooperation, Committee on Foreign Affiliated Corpora- tions, entitled Improvement of the Investment Climate and Promotion of Foreign Direct Invest- ment into Japan, p. 5, cited in Multinationals and the U.S. National Interest, p. 76. See also Simon Reich, `'Asymmetries in National Patterns of Foreign Direct Investment," p. 11 and passim. In recent years, analysts and managers of U.S.-based multinationals have argued that official government restrictions have been supplanted by private sector impediments. The USTR's 1996 Foreign Trade Barriers report notes that the current low level of FDI in Japan
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00 CONFLICT AND COOPERATION cases, it reflects a tradition of a broader, more direct role for the state, particularly with respect to multinational companies.275 The effect of these "structural impediments" is to make foreign direct investment difficult, even exceptional, especially for the acquisition of ex- isting firms in leading, high-technology sectors. The administrative diffi- culty can provide, at a minimum, the opportunity to oppose unofficial per- formance requirements of the type pursued by European governments.276 These obstacles also permit the exclusion of direct foreign investment in strategic sectors.277 Indeed, in the case of Japan, the time and cost associ- ated with overcoming the reluctance of the national administration and the constraints on mergers and acquisitions mean that many high-technology companies are either excluded or obliged to settle for licensing agreements.278 979 INVESTMENT BARRIERS, LICENSING AGREEMENTS, AND TECHNOLOGY TRANSFER Licensing agreements, however, limit market access for firms with com- petitive products, particularly in Japan. Licensing is designed to ensure that the host-country firms gain access to the advanced technology of their for- eign competitors. This is one explanation for the large, nonreciprocal flows reflects years of exclusionary business practices, high market-entry costs, discriminatory bu- reaucratic practices, and the cumulative effect of years of formal restrictions on inward invest- ment. P. 195. 275 Carnoy et al., The New Global Economy, p. 91. For example, in 1985, forty-one of the world's largest 200 industrial enterprises were state owned (of these, eighteen were multina- tionals, of which seven were French). These included French flagship companies such as Elf- Aquitaine, Renault, CGE, St. Gobain, and Thompson. O7A ~ _,- bee uslry, -~lecnnology Issues In the 1nlernarlonal 1raalng System,- p. in, Laura Tyson, Who's Bashing Whom? and Multinationals and the U.S. Technology Base. 277 Martin Carnoy notes that "government policies are crucial in determining how locally based MNEs are protected from foreign competition," with policies ranging from direct protec- tion (i.e., reserving telecommunications or energy markets for domestic companies) to oovern- ment procurement and ideological protection through antiforeign competition propaganda. Carnoy et al., The New Global Economy. 278 Some acquisitions do take place in Japan, but they have been generally confined to domestic firms. See Multinationals and the National Interest, pp. 7075. Citing Japanese Fair Trade Commission sources, the report notes that "in contrast to the limited number of merger and acquisition activity by foreign investors in Japan, such activity among domestic Japanese Finns is vibrant and unhindered." Ibid., p. 74. 279 Reich points out that determined foreign investors essentially have two options: greenheld site construction or licensing. Simon Reich, "Asymmetries in National Patterns of Foreign Direct Investment," p. 14. However, the high cost of land, unfavorable exchange rates, and regulatory roadblocks make the greenf~eld option available to only a few companies. The result is licensing and/or joint ventures which frequently involve the transfer of technology, leading to what Reich describes as "widescale, non-reciprocated technology transfers from the United States to Japan." Ibid., p. 15.
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DIFFERENT NA TIONAL INVESTMENT REGIMES AND THEIR CONSEQ UENCES 101 of technology from American to Japanese firms.280 This outflow of tech- nology from U.S. and European firms to Japan is compounded by the tech- nology transfer requirements of many rapidly industrializer, countries.28i Meeting these performance requirements can be a sine qua non for invest- ment and even sales of advanced products. As noted above, in strategic sectors such as aerospace, telecommunications, and automobiles, the impo- sition of compulsory technology transfer continues to grow. In the United States, the relative openness of the investment environment became a source of growing, concern in the latter half of the 1980s, a period of very rapid growth in direct foreign investment.282 For example, the rapid acquisition of U.S.-based suppliers of semiconductor equipment and materi- als led the U.S. semiconductor consortium SEMATECH to oppose unsuc- cessfully the transfer of these suppliers of strategic inputs to foreign own- ership.283 The acquisition of companies and technologies of direct relevance to U.S. national security led to the Exon-Florio provision in the Omnibus Trade and Competitiveness Act of 1988. This provision empowers an inter- a:,ency group, the Committee on Foreign Investment in the United States (the CFIUS) to veto the takeover of U.S. companies on national security grounds.284 However, this authority has been narrowly interpreted by the Treasury, and the CFIUS process has been criticized for its reactive, case 280 Ibid. 281 See the section Compulsory Technology Transfers above. While many countries seek to upgrade their technological capability, some analysts argue that China, "because it enjoys tight governmental control of a huge potential market, has taken the practice to a new level." See the article by Blustein and Mufson, The Washington Post, 19 May 1996, citing Greg Mastel. 282 In 1989, for the first time, foreign multinationals invested more in the United States than U.S. corporations invested abroad. Much of this inward investment flow was concen- trated on the acquisition of U.S. high-technology companies. For example, from October 1988 to March 1993, 722 such companies were acquired, with Japanese investors accounting for 437, the United Kingdom 82, France 49, and Germany 29. The acquisitions of Japanese investors included 108 computer firms, 52 in semiconductors, 42 in materials, 36 in electron- ics, and 34 in semiconductor equipment. See Proctor P. Reid and Alan Schriesheim (eds.), Foreign Participation in U.S. Research and Development: Asset or Liability? National Acad- emy Press, Washington, D.C., 1996, p. 80. See also Robin Caster and Clyde V. Prestowitz, Jr., Shrinking the Atlantic: Europe and the American E;cor~omy. North Atlantic Research, Inc. and Economic Strategy Institute, Washington, D.C., June 1994. 283 Howell et al., Creating Advantage, p. xiii. See also Andrew A. Procassini, Competitors rn Alliance: Industry Associations, Global Rivalries and Business-Government Relations, Quo- rum Books, Westport, Conn.' 1995. 284 First created in 1975 by President Ford and formalized in the 1988 Omnibus Trade and Competitiveness Act, the CFIUS is composed of officials from the Departments of State, Commerce, Defense, Justice. and Treasury; the Office of the United States Trade Representa- tive; the Office of Management and Budget; and the Council of Economic Advisers. In the 1988 Act, the president was granted the authority to investigate and block foreign investments that threaten national security.
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02 CONFLICT AND COOPERATION specific approach.285 Moreover, the CFIUS currently lacks the authority or resources to assess broad concerns about foreign investment in technologi- cally strategic industries of great relevance to the defense base.286 FOREIGN DIRECT INVESTMENT IN HIGH-TECHNOLOGY INDUSTRY U.S. policy has long held that foreign direct investment brines benefits in the form of jobs, capital, technology, tacit knowledge, and choice and price advantages for consumers. This view reflects the technological and commercial preeminence of the U.S. economy in the postwar world which sought to insure overseas investment opportunities for U.S. companies as well as the traditional American policy goal of maximizing consumer wel- fare. In the case of high-technology industry, there may be occasions when more nuanced views are required. Given the dynamic, learning-by-doing characteristics of leading high- technology industries, some informed critics argue that broad generaliza- tions are inadequate, especially as a guide for national policy. They point out that in certain specific circumstances, foreign investment can also have significant disadvantages for the host country.287 For example, existing companies, and the benefits they furnish to the local economy, can be dis- placed by the arrival of foreign companies with significant competitive 28s In 1990, the report by the Defense Science Board, Foreign Ownership and Control of U.S. Industry, recommended improvement of the CFIUS review process. In her 1992 analysis of high-technology trade, Laura Tyson raised the same concern, describing the CFlUS as "remarkably passive" in the exercise of its responsibilities. Laura Tyson, Who's Bashing Whom? p. 147. She notes that in some 700 notifications of investment, 600 involved acquisi- tions of foreign high-technology fields. Fourteen of these were investigated and one, the Chinese acquisition of an aerospace components manufacturer, was blocked. Ibid. The CFIUS does not have the authority to require foreign investors to notify the Committee of proposed investments, nor does the law require review of foreign investments in nonpublicly traded companies. U.S. General Accounting Office, Foreign Investment: Analyzing National Security Concerns, GAO/NSIAD-90-94, Washington' D.C., 1990. 286 For a useful discussion of the CFIUS, see Reid and Schriesheim (eds.), Foreign Partici- pation in U.S. Research and Development. This recent study also notes the limitations of U.S. government data concerning foreign acquisition of U.S. high-technology firms, and calls for the development of "more sophisticated capabilities for assessing and addressing the risks and capitalizing on the opportunities presented by the growth of foreign involvement in the nation's dual-use technology base." Ibid., pp. 78-79. 287 Laura Tyson, Who's Bashing Whom? pp. 42~5. See also Alan Tonelson, who attacks what he calls "a techno-globalist assumption," i.e., that inward foreign direct investment is always good for the recipient; therefore any attempts to restrict or channel it are necessarily foolish. Tonelson points out that while foreign investment can add to the recipient country's wealth and to its wealth-creating capabilities, for a phenomenon as large and complex as foreign direct investment, broad generalizations about its effects offer little policy-relevant
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DIFFERENT NATIONALINVESTMENT REGIMES AND THEM CONSEQUENCES 103 advantages conferred by the national policies of the investing company's home government, e.g., subsidies or protected home markets.288 The pres- ence of well-financed, technologically advanced foreign companies can also deter the expansion of domestic companies or the entry of domestically based competitors through aggressive pricing made possible by more inte- grated corporate structures, more patient stockholders, and a willingness to tolerate losses in pursuit of a long-term strategy. In these conditions, for- eian investment may actually reduce market competition, through either the elimination or purchase of domestic firms. This can result in more concen- trated market power at both the national and global level.289 In some cases, the outright purchase of relatively small companies providing key technol- ogy components for industries, such as semiconductors, can increase na- tional dependency on foreign-owned suppliers while also augmenting the possibility of anticompetitive behavior.290 guidance, especially for high-technology competition. Alan Tonelson, "The Perils of Techno- Globalism," Issues in Science and Technology, Summer 1995. The OTA analysis cited above observes that ~reenfield investments in facilities for manufacturing, design, and R&D add more to an economy than does an investment in distribution networks, whose main effect is to make imports available, often to the detriment of local producers of such products (although to the benefit of consumers). The OTA analysis suggests that because "FDI can be concentrated in different sectors and deployed to very different effects...different forms of FDI can and do have different implications for the U.S. technology base." Multinationals and the U.S. Tech- nology Base, p. 150 and chap. 6. The need for nuanced assessment does not imply that FDI is not generally benefit cial to the recipient economy. See, for example, P. Reid and A. Schriesheim (eds.), Foreign Participation in U.S. Research and Development, pp. 6~80. For an analysis highlighting the benefits of foreign direct investment to the U.S. economy, in particular tech- nology inflows and industrial "best practice," see Richard Florida, International Investment: Neglected Engorge of the Global Economy, American Enterprise Institute, Washington, D.C., 1994. For a provocative discussion of U.S. policy on foreign direct investment, see Robin Gaster, "Guiding Foreign Investment," Foreign Policy, Fall 1992. 288 This is especially true when the investing companies benefit from the direct support of their home government through equity investment, debt forgiveness or favorable loans by state controlled banks. See Laura Tyson, Who's Bashing Whom? p. 43. These conditions also suggest that market considerations are not dominant. "When a foreign government is the investor, however, foreign national interests are at play, and these may conflict with American national interests." Ibid. 289 Ibid., p. 146. Much of the concern over foreign direct investment focused on the possible adverse effects of acquisitions in the U.S. semiconductor industry on market competi- tion and national security. "Because semiconductors are an indispensable input throughout the electronics complex, strategic control over their supply by concentrated Japanese oligopoly poses a threat to downstream producers throughout the world." Ibid. See also Linda H. Spencer, Foreign Investment in the United States: Unencumbered Access, Economic Strategy Institute, Washington, D.C., 1991, and U.S. Department of Commerce, Foreign Direct Invest- ment in the United States, Washington, D.C., 1993. 290 Laura Tyson, Who's Bashing Whom? p. 146. For example, industry observers note that a sudden shortage of epoxy resin for semiconductor packaging (due in this case to an accident
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104 CONFLICT AND COOPERATION CONSEQUENCES FOR COMPETITION POLICY AND FOREIGN POLICY This dependency can have significant consequences in terms of both national competitiveness and national security.29i For example, a number of studies indicate that American companies relying on foreign suppliers for crucial components, such as DRAMs and displays, have been put at a com- petitive disadvantage because they cannot obtain the latest technology in the narrow timeframes that characterize competition in high-technology prod- ucts.292 Failure to obtain critical components in a timely manner can seri- ously disadvantage producers dependent on foreign supply. Indeed, geo- graphically concentrated supply of key components, along with the relevant tacit knowledge, assigns suppliers of these vital inputs considerable strate- gic leverage. When supply is concentrated among a small number of pro- ducers. or a single country, to a significant extent suppliers can determine access to relevant technologies, the rate at which they can be incorporated into new products, and the price their customers must pay.293 Technological dependency heightens the risk of slower product evolution and of lower revenues to fund marketing and R&D for the next generation of products. More fundamentally, producers who depend on innovations in a distant foreign economy may have reduced opportunities to profit from destroying a key plant) caused considerable concern among U.S. semiconductor producers who are dependent on foreign suppliers. In addition to epoxy for plastic packages, the U.S. indus- try relies on a limited number of Japanese suppliers for high-purity silicon, ceramic packages, and, to a lesser extent, the steppers which imprint circuits on semiconductors. See John P. Stern, "Japan: the Philosophy of Government Support for Information Technology," p. 3 and passim. 291 A recent National Academy of Engineering report notes that the United States, much more than any other industrialized country, has relied on technology niche companies for a disproportionate share of major product and process innovation, adding that from the mid- 1980s to early 1990s foreign acquisitions of these firms increased significantly. See P. Reid and A. Schriesheim (eds.), Foreign Participation in U.S. Research and Development, p. 70. 292 Michael Borrus and Jeffrey A. Hart, "Display's the Thing," p. 24. Delays in access can have significant consequences. For a new electronics product, a six months' delay to market can cost up to one-third of its potential revenue stream. See George Stalk and Thomas M. Hoot, Competing Against Time, Free Press, New York, 1990. Studies documenting the delay in the delivery of key components, such as semiconductor manufacturing equipment to Ameri- can producers by Japanese suppliers, include the Defense Science Board Task Force's Foreign Ownership and Control of U.S. Industry, June 1990; the National Advisory Committee on Semiconductors' report Preserving the Vital Base: America's Semiconductor Equipment and Materials Industry, 1990; and the General Accounting Office's U.S. Business Access to Cer- tain Foreign State of the Art Technology, GAS/NSIAD-91-278, September 1991. European users encountered similar problems. See also Howell et al., Creating Advantage, pp. 116- 132, especially pp. 129-130. 293 Borrus and Hart, "Display's the Thing," p. 24.
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DIFFERENT NATIONAL INVESTMENT REGIMES AND THEIR CONSEQUENCES 105 spillovers and localized tacit knowledge.294 In some cases this can be overcome, a prospect aided by the rapid advance in electronic communica- t~on. However, the sustained efforts to acquire and apply new foreign technologies are more easily undertaken by large multinationals in the most advanced countries. Such efforts are more difficult for small and medium- size firms.295 On the other hand, the success of newly industrializing coun- tries such as Korea and Taiwan particularly in electronics-suggests that industrial groups with effective government support can overcome locational disadvantage. The presence of multiple, competing suppliers of equipment embodying the most recent technology is a crucial dete~inant of their success.296 In addition to the competitive risks of technological dependency on con- centrated foreign suppliers, the transfer of control over strategic military technologies through foreign purchase of U.S.-based suppliers of key com- ponents raises important national security issues.297 When foreign govern- ments are the investors or when an acquisition threatens to concentrate market power among few suppliers, some analysts believe careful review by the CFIUS is warranted to determine if the acquisition should be blocked or subject to conditions.298 As noted above in the section on dual-use technol- ogy, a key feature of America's defense strategy is superiority in high- technology weapons systems. Concentrated market power in the hands of 294 For example, Jonathan Eaton and Samuel Kortum find that distance appears to inhibit the flow of ideas between countries, although trade relationships enhance such flows. Also, increased levels of education significantly facilitate a country's ability to adopt technology. See J. Eaton and S. Kortum "Trade in Ideas: Patenting and Productivity in the OECO,~' Journal of International Economics, 1996 forthcoming. 295 Borrus and Hart, "Display's the Thing," p. 24, note 5. 296 SEMATECH's development of advanced equipment technologies for semiconductor manufacture contributed importantly to the development of the Korean semiconductor industry by generating alternative sources of supply equipment for manufacturing, which led to a more competitive market for DRAMs. In addition, some U.S. firms reportedly transferred DRAM designs to Korean firms, presumably to ensure alternative sources of supply. 297 See the report of the Defense Science Board Task Force Foreign Ownership and Con- trol of U.S. Industry. The report cites a number of instances where assured access to military technologies has been threatened by foreign acquisition of U.S. firms and the subsequent transfer of the government-supported research offshore. Pp. 15-19. The report also under- scores the relationship between national security and the long-term economic competitiveness of U.S. industry. P. 14. The "dual-use" strategy described by the Under Secretary of Defense for Acquisitions, Paul Kaminski, explicitly relies on commercial technology as the leading agent of change in technology areas critical to U.S. defense capabilities. See the presentation by Paul Kaminski in C. Wessner (ed.), Sources of International Friction and Cooperation in High-TecJ:nology Development and Trade. 298 Laura Tyson, Who's Bashing Whom? p. 44. The conditions imposed on Huts' acquisi- tion of MEMC is an example. See the contribution of Charles Cook, MEMC vice president for strategy and acquisitions to the NRC symposium, in International Access to National Technol- ogy Promotion Programs, 19 January 1995 Symposium Proceedings.
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106 CONFLICT AND COOPERATION foreign producers, even close allies, can significantly reduce national au- tonomy in the implementation of foreign policy goals.999 The lack of consensus which characterizes post-Cold War foreign policy initiatives creates uncertainty about assured supply of components for mili- tary systems. For example, foreign producers may not be willing to supply the components to be utilized in military actions, either as a result of home government "guidance" or through the reluctance of foreign firms to disrupt supply schedules to meet military surge requirements.300 National compa- nies, no matter how multinational in operation, are responsive to the policy preferences of their home governments.30~ And foreign policy goals deemed central in one polity may have considerably less resonance in another, espe- cially if compliance involves financial loss or market disruption. Because technological dependence poses substantial risks to national au- tonomy, whether the national goal is competitive markets or the ability to project military force in support of national interests, the state of the national technology "supply base" is a 1egibmate concern of government. In the case of the United States, policymakers should recognize that national technologi- cal competency is a central concern of U.S. competitors. Consequently, na- tional policies designed to maintain national technological capabilities may become as normal a part of U.S. policymaking as they are for most other governments, with specific attention directed to foreign direct investments.302 299 Jeffrey A. Garten, A Cold Peace: America, Japan, Germany, and the Struggle for Supremacy, Times Books, New York, 1992, p. 227. The author points out that U.S. trading partners could exercise real leverage over the United States as creditors, as suppliers of vital technology, or as hard-to-please partners in endeavors that Washington finds important. 300 For example, a recent NAE report cites a 1983 case where the Japanese government reportedly pressured the leading Japanese producer of ceramic materials, Kyocera, to stop supplying ceramic nose cones to the U.S. Tomahawk Missile program through its U.S. subsid- iary. See P. Reid and A. Schriesheim (eds.), Foreign Participation in U.S. Research and Development, p. 77. 301 Carnoy et al., The New Global Economy in the information Age, p. 84. Citing Stephen Cohen, the author points out the unwillingness of U.S. corporations to cooperate in the develop- ment of the French independent nuclear deterrent, or to construct the Soviet-European pipeline. Formal export controls on technologies, such as U.S. restrictions on the Soviet purchase of modern telecommunications equipment (e.g., fiber-optic cable), or the stated reluctance of major Japanese producers to supply flat panel displays to the U.S. military, or the difficulty in acquiring key components during the Gulf War, illustrate both the risks of dependency on foreign supply and the responsiveness of corporations to the policies of their home government. 302 Multinationals and the U.S. Technology Base, pp. 150-153. The report identifies five basic types of Foreign Direct Investment in ascending order of their contribution to the U.S. technology base: distribution facilities for imported products; final assembly facilities for imported components; manufacturing facilities that use a mix of imported and locally manu- factured components; integrated design, engineering, and manufacturing facilities that provide customized products for the local market; and fully integrated research and production facili- ties that are a strong strategic component of a firm's global R&D, sourcing, and manufacturin,, operations. P.; 150.
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10 CONFLICT AND COOPERATION ers. The fundamental virtue of the agreement is that it provided a mecha- nism to open the Japanese market rather than closing the American market. It also provided a measurable target for access and a monitoring mechanism to promptly address dumping in the United States or third-country markets. The Agreement also set the stage for much-improved relations between the U.S. and Japanese semiconductor industries.3~3 Initially as a result of MITI encouragement, the industry also witnessed a proliferation of design-in projects between foreign suppliers and Japanese users. Subsequently, these relations expanded exponentially in response to market demands with an explosion of joint ventures and other long-term alliances between Japanese and for- eign companies.3~4 After a difficult start, the Agreement also largely re- moved, or at least contained, a major source of tension within the overall U.S.-Japan bilateral relationship. The successful conclusion of the August 1996 negotiations on the re- newal of a modified Semiconductor Agreement between Japan and the United States underscores the desire of both countries to avoid renewed trade con- flict in this strategic sector. While the Japanese government was initially reluctant to renew the government-to-government agreement, a compromise was reached which included two separate but interdependent agreements: an agreement between the U.S. and Japanese industry associations on interna- tional cooperation in the semiconductor sector and a related agreement be- tween the U.S. and Japanese governments. (See Box I for a summary of the agreements). The inter-industry agreement encourages continued industry- to-industry cooperation and includes the monitoring of shares in key mar 313 For example, Japanese government sources point out that design-ins, in which foreign semiconductor devices are specifically designed for inclusion in commercial products (such as camcorders or VCRs), increased nearly ninefold in Japan since the first agreement was con- cluded in 1986. See Ministry of Foreign Affairs, Japan, Salient Points and Data Related to the Japan-U.S. Semiconductor Arrangement, p. 4. Reflecting the title, the Ministry's report states that, "the Arrangement's historical role has been fully achieved." Despite this accomplish- ment, the report does not recommend continuing the agreement, a view which corresponds closely with a January 1996 Electronics Industry Association of Japan (EIAJ) report, Mission Accomplished: Why There Is No Need for a Semiconductor Agreement with Japan. Somewhat to the surprise of the American government, in early 1996 the Japanese government rebuffed the initial U.S. effort to renew a modified agreement, i.e., one which would not have a specific target figure. See Susumu Maejima, "Ending Chip Pact Is Shortsighted...," Asahi Evening News, 5 February 1996. 314 As examples, the EIAJ cites the case of Toshiba and Motorola, which have a long- standing joint venture, established in 1987, in Sendai in northern Japan. More recently, Hitachi and Texas Instruments agreed on a new joint venture in 1995, located in Richardson, Texas, although their collaboration dates back to 1988. EIAJ, Salient Points. For a valuable industry perspective on the considerations relevant to joint ventures, see the presentation by Motorola's Charles White in C. Wessner (ed.), Sources of International Friction and Cooperation irz High- Technology Development and Trade.
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DIFFERENT NATIONAL INVESTMENT REGIMES AND THEIR CONSEQUENCES 1 1 1 BOX I. THE U.S.-]APAN SEMICONDUCTOR AGREEMENTS OF 1996. The United States and Japan faced the~possibility of renewed conflict in the semicon-- ductor sector as they approached they scheduled expiration of the 1991 U.S.-Japan Semiconductor Agreement on 31 July 1:996. The t;J.S. semiconductor industry and government, while acknowledging that tremendous progress had been made in in.creas- ~ng U.S.-J?pan industry cooperation and foreign market access in:Japan~ under the 1991 Agr~em:em and.its 1986 predecessor, were seeking a renews of :the Agreement to ensure: continuation of the government-to-government and industry-to-industry mecha- nisms that had led to the progress of the previous decade. Lee Japanese industry land government argued that, inasmuch as the foreign : share in the: Japanese market hat reached more than 30 percent by the first quarter of 1996, the objectives of the earlier agreements: had: been fulfilled and no new:'greement was necessary. . ~ ~ I: : in particular, while *'e U;:;S. governmene.and ~ndusuy wamed a-continued~govern- mental role: in :monitoring:~progress~ in .~market: access And industry :-cooperation, the Japari;ese :govern:ment resisted any cont0id :government: role.: The 1991 Agreement praY'd.ed~: that the two ~ernm~ joined ~Q~dI=e: foreign rnaricet share in Japan on a quarterly Isis and used :~a: 20: perter foreign share .ta~get against Rich to measure progress in :increasing foreign market: shared ~.:~ . ~ .: ~ : ~ :: : - ~ :: . fluter mot-is of :negotiations between Ash Me two :induseries:.and the two govern- mends, a compromise was reaccede ton 2 A-avoiding renewed conflict in this: sector and permitiing.:condnued ~nclussry-to~n.dusiry coope~'on :w~h :a continued but ret . . .. ... . . , , ,~ ~ . ? ~ Aces . eve ~or.government~monl:tor~ng.~: ~e~rto.t 3iS :compmmme ~ =.~eement~t tat the. To industries, rather than the To governmenis,..would calculate -~reign. shares in key: mark ts around *e~worl:d, and :~en~rep~:inf rmation to :0 ~.govern- m:ents. :In Addition, no new market~iLr..e target was set Miese~provisions, wok met Moths: sides, ob~ea~es, were Inch: fit: thivo separate IBM i~erdependent.agreements: an agreement between the US. and Japanese industry associations on international cooperation in the semiconductor sector and an agreement between the U..S. and Japanese governments concerning semiconductors. Inter-ladustry :Agreement The inter-industry. agreement provides for a continuation of the cooperative activi- ties between semiconductor: users and suppliers begun under the t986 and 1991 Agreements. A joim industry steering committee is to continue :as under the previous agreements to review developments in joint industry cooperative actuates to promote the designing of :fore~gn semiconductors in new products in specific sectors and in emerging applications. .. in Addison, the agreement provides for. new-cooperation between semiconductor suppliers in areas such as standardization; environment, worker health.and safer; intellectual property rights; trade and investment liberalization; and market development. The new agreement also creates a Semiconductor Council made up of senior execuiives-of the U.S. and Japanese industries, which is to meet once a years The agreement also provides that industry experts are to prepare quarterly markets trade How reports, which are to include data on market shares of foreign semiconduc- tor products in major semiconductor markets. The reports are to be based on a number of data points, largely from industry surveys and government data, allowing the two industries joindy~r, if necessary, each acting-independently to measure the foreign share of the Japanese and other markets. These quarterly reports are to be continued
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2 CONFLICT AND COOPERATION provided to the governments for their review, thereby ensuring a government role in monitoring developments In foreign market access in Japan. While the initial inter-industry agreement is bilateral, ~ provision is included that is to permit the European and other semiconductor industries to join the Semiconductor Council once their respective governments have eliminated or agreed to eliminate expeditiously all tariffs on semiconductors. No term is set on the inter-industry agreement, although the two industry associations agreed to review the agreement in three years. Government-to-GoYernment Agreement The government-to-governn~ent agreement welcomes the inter-industry agreement and affirms the intention of both the U.S. and Japanese governments to support industry-to-industry cooperative efforts. It further provides that the two governments are to hold consultations at least once a year to receive and review the reports on data collected by the industries; to review and discuss the cooperative activities conducted trader the inter-industry agreement and market trends and developments, incluciing those relating to competitiveness and foreign parUcipa~on in major marked; and to discuss government policies and activities affecting the semiconductor industry. The U.S. and Japanese governments also agree to establish a Global Government:al Forum made up of governments of major semiconductor-producing countries and other interested economies. This Forum is to meet annually to discuss issues that may affect the global semiconductor industry. The organization is to be ope n to governments without any precondition, and its first meetmg it to be held no later than I January 1997. The two governments also reaffirm in the agreement the need to avoid the problem of injurious dumping through effective arid expeditious an~dumping measures, consis- tent with the GATE and the WTO Ant~dumping Agreement The term of the govern- ment-to-government agreement is three years, expiring on 31 July 1999. Lets, but without a new foreign market share target for the Japanese market. Interestingly, while the inter-industry agreement is bilateral, it provides for the possibility of participation by other semiconductor industries on the condition that their national tariffs on semiconductors are eliminated. The government-to-government agreement affirms the support of both govern- ments for cooperation by their respective industries and provides for regular consultations on the evolution of the semiconductor industry and policies affecting it. The success of the Semiconductor Agreements to date and the continued difficulty in obtaining market access for other high-technology products has led some analysts to conclude that similar agreements offer a pragmatic and effective means of resolvin;, long-standing trade conflicts.3~5 In this view, 3~5 For one of the most complete statements of the rationale for this approach, see Michael Bonus et al., The Highest Stakes, pp. 197-205. See also Stephen Cohen and Pei-Hsinng Chin, "Tipping the Balance." For an industry view, see Council on Competitiveness, Roadmap for
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DIFFERENT NAHONA f INVESTMENT REGIMES AND THEIR CONSEQUENCES 113 arguing that U.S. trade partners should change their domestic policies or their enforcement is less likely to produce desirable results, for either party, than is a focus on reciprocal access to markets, investment opportuni- ties and technologies.3~6 Whatever the merits of this view, in the absence of significant advance in a multilateral context, pressure for bilateral solu- tions focused on specific outcomes is likely to grow. Whatever solutions are proposed multilateral talks, bilateral in~tia- tives to reduce structural impediments, or regional cooperation-the sharp differences in national investment regimes are an important source of friction and a destabilizing element in the global system. As dis- cussed above in the section on cooperation, unequal access for trade and investment undermines the basis for sustainable international co- operation in the development of new technologies. These differences in access, or asymmetries, are also a major source of trade imbalances, and generate pressures for restrictions on foreign investment in coun- tries which do have relatively open investment regimes. Finding a means to address these asymmetries is therefore an important instrument for both improved cooperation and reduced trade friction. Progress in reducing these asymmetries in national practices requires a two-track approach: (1) a determined and sustained effort to improve access on a bilateral basis and (2) the conclusion of a workable multilateral accord on investment. Reflecting the importance of investment issues for the continued health of the international trading system, a multilateral effort to reach an interna- tional investment accord is now under way. In May 1995, members of the OECD decided to launch negotiations among the twenty-five OECD mem- ber countries, with the aim of reaching a Multilateral Agreement on lnvest- ment (MAI) by mid-1997.37 The objective of the negotiations is to "pro- vide a broad multilateral framework for international investment." This involves both a broad definition of investment and a broad coverage of Results, p. 55. For a discussion of the advantage of a results-oriented approach in terms of Japanese perceptions and practices, see James Fallows, Looking at the Sun, pp. 448-450 and 497~98, and Laura Tyson, Who's Bashing Whom? pp. 133-136 and chap. 7. For a succinct review of the strategic trade theory underlying this approach, see Luc Soete, `'Technolo:,y Policy and the International Trading System: Where Do We Stand?" pp. 3-7. For an informa- tive discussion of views of past and current "strategic trade" theorists, see Jeffrey Hart and Aseem Prakash, "Implications of Strategic Trade for the World Economic Order." 316 In some cases, bilateral solutions may be the only recourse possible, not least because barriers to market entry can include collusive private arrangements, informal government guid- ance, focal regulations obstructing access to investment, discriminatory standards, and issues of competition policy and its enforcement, none of which are under the purview of the WTO or any other multilateral mechanism. 317 See the June 1995 OECD Ministerial Communique. SO/PRESS (95) 41. Paris, 24 May 1995.
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114 CONFLICT AND COOPERATION sectors, levels of government, and types of laws and regulations. The goal of the OECD negotiations is to achieve "high standards for the liberaliza- tion of investment regimes and investment protection," including effective dispute settlement procedures, with limited general exceptions, such as na- tional security.3ig This is the major reason for the decision to first negotiate amoral, OECD members rather than among, the members of the more broadly based WTO, though it is not clear that this strategy will prove successful.319 The ultimate goal of the negotiations is a "free standing international treaty" that, though negotiated at the OECD, will not be confined to OECD mem- ber countries. If an effective multilateral accord on investment, such as that envisaged in the OECD negotiations, can be obtained, it would represent a major step forward on investment issues. For the United States, it is essential to con- tinue to actively pursue this multilateral approach, while seeking to extend to nonmembers acceptance of the principles and standards to be agreed at the OECD. At the same time, systematic review of the impact of foreign acquisitions on the U.S. defense base and related consequences for the U.S. competitive position should be conducted.320 This is especially important in oli~opolistic industries where foreign competitors have a history of anticompetitive behavior or where the foreign investor is, in effect, a for- eign government.32i Indeed, in neither case can the interests of the partici- pants in the transaction be considered paramount.322 It is therefore appropriate that sustained attention be given to the nature and sectoral concentration of inward foreign investment, a practice already adopted by many governments. 318 See the presentation "Progress toward a Multilateral Agreement on Investment" by William WitherelI in Peter S. Rashish, (ed.), Building Blocksfor Transatlantic Economic Area. European Institute, Washington, D.C., 1996. Witherell describes a wide range of mechanisms available to the OECD for consultations. Ibid., p. 32. 319 Some analysts believe this decision to have been an error, because non-OECD members are skeptical of negotiations to which they are not party, though as noted the OECD is to undertake consultations with interested nonmembers. For a critical assessment of the OECD initiative, see E. M. Graham, presentation to the Institute for International Economics confer- ence on the World Trading System: Challenges Ahead, 24-25 June 1996. 320 See Laura Tyson, Who's Bashing Whom? pp. 145-149. The author was quite critical of the operation of the CFIUS. In her 1992 analysis, she argues that "a prudent policy toward foreign direct investment when it involves a product or industry deemed critical to national security should follow two basic principles. First, it should use requirements for national ownership or local production by foreign suppliers to enhance national control over suppliers regardless of their nationality. Second, it should seek a diversity of suppliers to maintain a competitive global supply base." Ibid., p. 147. At that time, the author faulted the CFIUS for having ignored both the potential national security threat and the strategic economic threat posed by foreign oligopolistic control over critical industries such as semiconductor producers and its major equipment and materials suppliers. Ibid., p. 148. 321 See the section Foreign Direct Investment in High-Technology Industry above. 322 Laura Tyson, Who's Bashing Whom? p. 43
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DIFFERENT NA TIONA ~ INVESTMENT REGIMES AND THEIR CONSEQ FENCES 1 15 For example, many countries have implemented investment policies designed to maintain advanced manufacturing and the associated high-wage employ- ment.323 Given the importance of high-technology industry for the U.S. de- fense base and future economic growth, an enhanced awareness of other coun- tries' policies toward foreign investment could prove valuable to U.S. policymakers.324 Moreover, in light of the role of the United States in the world economy, a better understanding, of inward foreign investment in host countnes abroad as well as in the United States, and policy decisions taken on the basis of that infonnation might well contribute to the success of ongoing, ne ,otiations on a multilateral investment agreement. Better informed decision- making offers the prospect of strengthening the U.S. technology base and improving opportunities for high-wage employment. COMPETITION POLICY- CONVERGENCE? Market concentration in high-technology industries poses special chal- lenges to national policymakers. The dangers of oligopolistic control in high-technology industries are not well-understood. As noted above, na- tional policies and instruments to defend domestic industries from predatory pricing or concentrated market power can encounter substantial opposition both on grounds of principle and as a result of their impact on other com- mercial interests. Ant~dumping duties are often seen as an imperfect and incomplete response to the conditions effective closure of the national markets of major exporters, despite commitments to liberalize that give rise to injurious dumping,. However, existing international rules do not adequately address the market barriers and competition policy failures that make antidumpin~, remedies necessary. Ultimately, what is needed is a network of enforceable commitments by trading nations to have and to enforce laws against private restraints of trade. The actual convergence of those national laws, beyond the core anticompetitive practices which they all must prohibit, may take considerable time. To the 323 See R. Gaster, "Guiding Foreign Investment,~' pp. 97-100. As a result of these policies, "foreign firms in Europe have been forced to raise the local content of their finished products." Caster also notes that European politicians have pressured foreign firms to produce sophisti- cated goods, train local workers, introduce advanced management practices and "explicitly called on foreign firms to conduct more R&D in Europe and encourage them to set up design facilities and use local suppliers, training the suppliers to meet international standards." Ibid., p. 98. Robert Scott notes the European concern with maintaining employment in manufactur- ing and the policies adopted to encourage high-wage employment in high-value manufacturing. See Scott,"Trade: A Strategy for the 21st Century" in Todd Schafer and Jeff Faux (eds.), Reclaiming Prosperity: A Blueprint for Progressive Economic Reform. M.E. Sharpe, New York, 1996, pp. 249-250. For a proactive policy approach, see the Commission Green Paper on innovation, p. 23. 324 A recent National Academy of Engineering study recommends the U.S. government improve its capability to assess and track foreign investment. See P. Reid and A. Schriesheim (eds.), Foreign Participation in U.S. Research and Development, p. 78.
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16 CONFLICT AND COOPE:RATION extent convergence is eschewed or delayed, however, there will be potential for friction, and pressure for other policy remedies will ~row. In addition, there is increasing recognition that concern over oligopolistic behavior in high-technology industries should be extended "to include con- trol over strategic assets and capabilities."325 As electronics pervade the modern economy, industrial innovation depends on the components, materi- als~ automated machinery, and control technologies (i.e., software) that are combined to create new products and processes. A domestic economy's effective access to those technological inputs depends crucially on the na- tional supply base. CUMULATIVE CONSEQUENCES The supply base affects producers in several ways. A robust supply base provides access to relevant technologies at affordable costs and in a timely fashion while offering opportunities for essential interaction between sup- pliers and producers. The quality of the supply base can therefore be a crucial determinant of domestic firms' ability to compete in rapidly evolv- in~ hi~h-technolo~y products.326 However, the flows of technical know-how across national borders are determined by the distinct national characters of local markets. For ex- ample, markets in the United States tend to be relatively open, employee mobility is high, forei an firms can acquire technologically advanced Ameri- can firms, and the capital constraints of U.S. firms often encourage the licensing of core technologies.327 This contrasts with East Asian countries such as Japan or Korea where markets are less open, the mobility of skilled labor is low, direct acquisition of firms is virtually impossible, integrated ind~lctnn1 ct~l~tilre.~ (in Skirt or chaebol) Drovide firms with patient capital, and national institutions are less open to foreign access.328 The result of these structural differences is that accrued technological know-how tends to be re- tained locally and tends not to diffuse rapidly across national boundaries.329 _ _ _ . ~ ~7 _. . An, _ _~ ,^ ~^ _ ~ A ~ ~ - ~-~ ~ r 325 Laura Tyson, Who's Bashing Whom? p. 275. 396 Dependence on distant producers of key components poses unique competitive chal- len~e,es. Perhaps the most important concerns the nature of the dependency. Some companies outsource to expand capacity and thereby leverage their own knowledge. Other firms rely on outsourcina for knowledge, that is, the company needs a component but lacks the in-house skill to produce it. The second form of dependency leaves the firm open to competitive challenge. Charles Fine and Daniel Whitney, `'Is the Make-Buy Decision a Core Compe- tence?" pp. 17-18. It is assumed that companies cannot avoid some degree of dependence; the point here is that the form this dependency takes has quite different competitive consequences. Ibid., p. 21. 327 Borrus et al, The Highest Stakes, p. 22. 328 Ibid. 329 Ibid.
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DIFFERENT NATIONAL INVESTMENT REGIMES AND THEIR CONSEQUENCES 11 7 GLOBAL COMPETITION AMONG NATIONAL COMPANIES There is a paradox in that as economic activity expands across the ~lobe, the role of national policies and practices continues to play a major role, sometimes even determining, competitive outcomes. The globalization of economic activity is, however, very real.330 At the risk of underscoring the obvious, many hi~,h-technolo=,y enterprises are multinational in operation, performing research, manufacturing, assembly, and sales at many sites in many countries. And, as noted above, the number and variety of interfirm relationships continues to expand. For technology, they range from licens- ing agreements to joint development and acquisition. For manufacturing,, they range from original equipment manufacturing, to second sourcing, to assembling and testing with similar diversity in marketing and service agreements as well as formal joint ventures to develop and manufacture new products. (See Box E.) These transnational relationships have become so numerous and pervasive that some observers have concluded that they portend the end of national commercial rivalry, to be supplanted by a system of global cooperation leading, to enhanced global welfare.33~332 Without disputing the growth in the scope of economic competition, and 330 As one analyst notes, "Texas Instruments' hi,h-speed telecommunications chip is a model of the efforts of technology enterprises to marshal! global resources in the desi;,n, manufacture, and delivery of a product. TI's TCM9055 chip was designed with Ericsson engineers in Nice, France, using software developed in Houston, Texas. The chip is produced in Japan and the U.S., tested in Taiwan, and included in Ericsson products that monitor sys- tems in Australia, Mexico, Sweden, and the U.S. Chip-testin~ [for] assembly plants in the Philippines is done by engineers at terminals in Dallas. Marketing is organized into world- wide product teams rather than by country; technology glitches are solved by engineers from multiple countries communicating with each other from work stations around the globe." Daniel M. Price, Investment Rules and High-Technology: Toward a Multilateral Agreement on Invest- ment. OECD, Paris, France, 2~27 October 1995, p. 4. The author concludes from this global activity that "while geographic location is important to customer service and product support, national borders appear increasingly irrelevant." 331 Howell et al., Creating Advantage, p. xiv. This view is in fact often encouraged, for good reason, by foreign investors wishing to blend into local economies as good corporate citizens subject to the same treatment as domestic firms. 332 While the reality of global economic activity is incontestable, its meaning is subject to different interpretations, with substantial relevance for national policy. For example, a recent Japanese industry publication states that. "given the borderless nature of many fundamental operations in this [the semiconductor] industry, the era in which it made sense to distinguish the nationality of a semiconductor chip has long since passed." Electronic Industry Associa- tion of Japan, Mission Accomplished, Tokyo, January 1996, p. 1. The recent Japanese Ministry of Foreign Affairs report makes a similar point, arguing that in light of the many alliances in the industry "the [semiconductor] Arrangement, which attempts to identify the nationality of semiconductors, is now obsolete and meaningless." February 1996, p. 1. The same report. however, then describes the market in terms of national shares.
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llg CONFLICT AND COOPERATIOlV therefore the scope of operations of global corporations, others argue that economic globalization "simply expands the dimensions and complexity of the competition being waned between national systems."333 In this view, most multinational corporations, though not all, remain profoundly national in char- acter even while operating on a global scale.334 This national character is the result of a complex yet powerful combination of factors. First and foremost the corporations are subject to the norms and policies of the home nation. More pervasively, to the extent that board members, senior executives, and key employees are nationals of the same country, they tend to reflect its values, beliefs, culture, and historical experience. This gives meaning and effect to the norms and accentuates the importance of national policy, for example, on antitrust, bribery, or export controls. Corporations also depend on the national educational and technological infrastructure, as well as on the trade and investment policies of a given country and in some cases on specific government support.335 From this perspective, far from being rendered irrel- evant by the globalization of competitive functions, government policies can play an instrumental role in determining competitive outcomes in the rivalry between national enterprises competing on a global scale.336 NATIONAL STRATEGIES FOR MULTILATERAL SOLUTIONS Systematic differences in access to national markets for trade and invest- ment pose serious risks for the international system. Mutual reductions of tariff barriers, while valuable in opening markets to trade, afford only part of the resolution of international trade and investment issues for high-tech '~ Howell et al., Creating Advantage, p. xiv. 334 There are, of course, cultural variations-which underscores the basic point. U.S. and British multinationals, more than any other country's, are philosophically antistate and there- fore tend to be more "footloose." Although distinctly "American" or "British" in modes of operation (e. ,.' employment patterns or local sourcing, and especially when in need of govern- ment help in securing economic interests) "they are first and foremost profit-making private enterprises, obligated to their...stockholders' not to any nation-state." Carnoy et al., The New Global Economy in the Information Age, p. 86. 335 Martin Carnoy argues that Japanese and certain European multinationals may not be state-owned but they tend to be '~state-tied," that is, their operations may be shaped by state policies that allow them to gain advantage over competin;, firms. More generally, he argues that large international companies "are rooted in national economies and national systems of production.' as they operate through affiliates in other countries. Carnoy et al., The New Global Economy, p. 87. 336 Howell et al., Creating Advantage, p. xiv. Michael Porter also supports this view. He suggests that `'differences in national economic structures and institutions contribute profoundly to competitive success." 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 Competitive Advantage ojCNations, p. 19.
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DIFFERENT NaTIONA~INVESTMENT REGIMES AND THEIR CONSEQUENCES 1 19 nology industries. Intervention by government in hi~h-technology industry is on the increase, as is the number of countries employing these practices, with each country seeking to alter the composition of its national economy to achieve a competitive edge.337 In addition, the United States, which continues to be the leader and the initiator of proposals to improve the international economic system, must do so in the face of a decline in its relative weight in the world economy, the special concerns of European policymakers for their hi=,h-technolo=,y sectors, and the markedly different investment and trade practices of some East Asian economies. All these factors suggest that if further progress is to be achieved, a coherent, long-term strategy will be required. At the outset, this report recognized the inevitability of friction as coun- tries seek to acquire and maintain the advantages of hi:,h-technology indus- try in an increasingly global economy. This "competitive friction" can, as noted above, have its virtues insofar as it stimulates human endeavor and productive national investment. Yet, friction also has its risks. It can easily degenerate into conflict. Multilateral agreements and mechanisms to elimi- nate practices which generate friction, and contain or mitigate it when it occurs, are essential. However, they may not be sufficient; indeed, they are not likely to be reached if current trends in the targeting of hiah-technolo:,y industry continue. And these practices are likely to continue to the extent that they are seen as successful and relatively costless. Sustained attention at the national level, supported by institutions and policies designed to address these issues, will prove necessary to contain friction and help give positive direction to the competition among nations. In fact, international friction over these practices need not be inevitable. Where either a country has avoided the competitive challenge by exiting the industry (e.g., the United States In color televisions) or where the industries involved do not recognize or do not accept the challenge (e.:,., automobiles in the United States in the 1970s and perhaps today in Europe), friction can be avoided or at least delayed. However, the absence of friction and con- flict does not indicate the absence of harm to national interests. In econo- mies open to trade, the industrial base can be eroded and future develop- ment compromised, through both the loss of productive capability in high-growth industries and the loss of related research and development activity, thereby narrowing future technological and political choices. Some level of friction may therefore be positive. For example, the pro- cess of granting access to national technology programs in Europe and the United States must be informed by the realities of access to forei;,n technol- ogy and markets through both trade and investment. To gain reciprocal access to technologies, export markets, direct investment opportunities, and 337 See OECD. Indlustrial Subsidies and Box B above.
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20 CONFLICT AND COOPERATION the balanced trade they engender, a pragmatic approach, adjusted to the special conditions of hi:,h-technolo:,y competition, is required. In the case of the United States, a pragmatic approach might also contribute to moder- atin~ the moralistic tone that sometimes characterizes U.S. commentary on countries whose positions or practices differ from those of the United States, while helping to assure that the United States has the economic strength to negotiate effectively and provide essential global leadership. In the case of Europe, structural reform to facilitate the creation and ease the operation of small innovative firms could contribute substantially to economic growth and employment.338 Indeed, the continued growth of the advanced econo- mies, and the corresponding ability of the governments in Europe and the United States to maintain their unparalleled research infrastructure and lib- eral trading policies, are key conditions for sustained, global economic growth and the progress this implies for mankind. To meet this challenge, the consistent application of result-oriented poli- cies offers the prospect of opening markets for investment and trade for all participants in the global economy, and of curbing abuse in areas essential to industrial Innovation, such as intellectual property protection. Sustained attention on the part of major participants in the international system to the special characteristics of high-technology trade could contribute to strengthening the multilateral system. The major participants in the international trading system already have policies designed to improve the attractiveness of their national economies to high-technology industry In sectors such as microelectronics and aero- space. In some cases, further efforts to improve the regulatory environment in sectors such as telecommunications and biotechnology could offer sub- stantial benefits to national economies. Investment in infrastructure, espe- cially in universities and other research institutions, is a form of competi- tion which is likely to enhance both national and global welfare In contrast? national policies which, over a sustained period, emulate the corporate strategy of always being a "fast second," presume that countries with well-devel- oped research infrastructures both will have the economic means to sustain investment in these systems and will continue to have the necessarily public support to maintain open access. Similarly, roughly reciprocal access to markets, investment opportunities, and enabling technologies appears fun- damental to the continued health of the multilateral system, as does some international understanding on the appropriate rules-of-the-game for the support of targeted industries. To achieve these goals, countries are likely to pursue both bilateral and multilateral agreements, an approach that holds out the prospect of the incremental success necessary to the maintenance of the system as a whole. 338 See European Community, Green Paper on innovation, pp. 5-7
Representative terms from entire chapter: