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Session 11
Strategic Alliances Among Private Firms

Moderator:

Stephen Merrill, National Research Council

STEPHEN MERRILL: The purpose of this session is twofold: One is that, of course, we want to understand what the dynamics of high-technology development, competition, and trade are, and how they are evolving. We heard yesterday a compelling rationale from the semiconductor industry for strategic alliances. There has been an increasing amount of research on this intriguing and rather new phenomenon.

The second reason, an equally simple-minded articulation of it, is simply that this competition makes some people nervous. And if people are nervous, there is the potential for spillover to have a policy agenda and political debate.

So to discuss these two aspects we have today first Carol Evans, who is an assistant professor of international business diplomacy at Georgetown University. In addition to serving as an advisor to the Central Intelligence Agency, she has participated in two major projects of the Office of Technology Assessment, including the one that we have heard mentioned several times in the past two years on multinationals and the U.S. national interest.

Second, we are pleased to welcome Charles White from Motorola. In that company he has fulfilled a number of roles, from strategic and capital planning to technology acquisition and transfer, to public policy, particularly trade policy through his chairmanship of the U.S. Semiconductor Industry Association's public policy group and advisory committee on the U.S. and Japan semiconductor trade agreement.

Finally, we will hear from Alan Tonelson, who is a fellow of the Economic Strategy Institute and a former associate editor of Foreign Policy magazine and a prolific writer on foreign policy and its relation to economic interests.



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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Session 11 Strategic Alliances Among Private Firms Moderator: Stephen Merrill, National Research Council STEPHEN MERRILL: The purpose of this session is twofold: One is that, of course, we want to understand what the dynamics of high-technology development, competition, and trade are, and how they are evolving. We heard yesterday a compelling rationale from the semiconductor industry for strategic alliances. There has been an increasing amount of research on this intriguing and rather new phenomenon. The second reason, an equally simple-minded articulation of it, is simply that this competition makes some people nervous. And if people are nervous, there is the potential for spillover to have a policy agenda and political debate. So to discuss these two aspects we have today first Carol Evans, who is an assistant professor of international business diplomacy at Georgetown University. In addition to serving as an advisor to the Central Intelligence Agency, she has participated in two major projects of the Office of Technology Assessment, including the one that we have heard mentioned several times in the past two years on multinationals and the U.S. national interest. Second, we are pleased to welcome Charles White from Motorola. In that company he has fulfilled a number of roles, from strategic and capital planning to technology acquisition and transfer, to public policy, particularly trade policy through his chairmanship of the U.S. Semiconductor Industry Association's public policy group and advisory committee on the U.S. and Japan semiconductor trade agreement. Finally, we will hear from Alan Tonelson, who is a fellow of the Economic Strategy Institute and a former associate editor of Foreign Policy magazine and a prolific writer on foreign policy and its relation to economic interests.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings The Growth in Strategic Alliances: Rationales and Types Carol Evans, Georgetown University What I would like to do in my presentation is talk about some of the emerging trends in international strategic alliances. For most people in the field of business such as myself, or even in economics, we have often talked about competition traditionally being between company A in one particular country and company B in another particular country. Currently, however, there are some very important implications for international interfirm teaming arrangements, such as those characterized by strategic alliances. There has been a tremendous amount of strategic activity during the 1980s. In particular, the greatest jump or increase in alliance partnering internationally has been in biotechnology, the automotive industry, and the information technology industry. These three make up the large core of alliance partnering among the advanced industrialized countries. Traditionally, the aviation and military industries have had international cooperative programs, many of which are on a government-to-government sponsored basis. Nevertheless, there is now a tremendous amount of private sector initiative in terms of collaboration. One issue that I want to address is why international strategic alliances are on the rise. One way of looking at this is to look at an explanation from several different angles—an obvious angle being technological. There are a lot of very important technological factors driving strategic alliance partnering internationally. Other factors that I suggest are very much related to considerations inside firms. We have heard a lot from, for example, Motorola, Siemens, and a number of distinguished companies, as to why they perceived the need for collaboration. When I talk about primary motivations, I want to discuss some of the generic ones that would apply pretty much across the high-technology field. I will also address the need to look at the role of government. Government is extraordinarily important in shaping alliances, not only in terms of influencing the types of alliances that are being formed—an easy and obvious example is Airbus—but governments also shape which companies are going to be partners with whom, for example, the telecommunications industry. Governments are very important in the partnering decisions of companies. TECHNOLOGICAL FACTORS Obsolescence: One is the fast rate of technological obsolescence. This is very important in the semiconductor industry and in the computer industry, combined with escalating costs of R&D. This means that you have to get to the market quickly and you have to be able to generate those economies of scale so as to drive your prices down.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Diversity: One of the most important technological factors that has not been touched on in this conference is that companies are being faced with an increasingly diverse array of new technologies that they have to manage. Sometimes, these new technologies are outside their core competencies. Some of these core technologies lie in the very basic fields of science and research. So for many companies, technology is driving them to partner so as to gain access to a very diverse portfolio of technologies. And this is very important to appreciate, particularly if you are in the information technology industry or if you are in an aircraft industry, or even in an older industry, such as automobiles. Convergence: A related trend that I believe is important to identify in looking at alliance partnering is technological convergence. This is especially true in the information technology industry that relies on satellite telecommunications, semiconductors, and telecommunications equipment integration. And again, companies do not necessarily have these core competencies in such a diverse array of fields. And as technologies converge, they need to be able to pool that technological capability together. Very few firms are capable of doing that in-house. IBM, for example, is making a corporate policy of separating out a lot of these activities. But for small-or medium-sized companies, it is very difficult to build an array of technologies in-house. So partnering can be a very important factor. Asset pooling and market access: Again, many of these technology factors are self-evident, and I am not going to go over cost and risk sharing, generations of economies of scale, and scope. But one area that I will briefly touch on is asset pooling. Asset pooling could be a technology, but it could also be human beings. It could be access to a particular distribution network. So companies have a number of assets. Again, pooling them is very important internationally. And this relates closely to market access. You need to get to a market if you might have a particular technology or a project. If you do not have market familiarity or that market is closed to your product, you need to form an alliance so as to gain entry into that market. Speed and flexibility: Although some of these factors are obvious, some are often ignored. In today's fast-paced global economy, companies need to move quickly and flexibly. So the issue of speed and flexibility is important in looking at why alliances are so critical to firm-level strategies, unlike, say, mergers and acquisitions. We have seen Siemens acquire a number of companies and gain market entry into various types of products. For a number of companies, however, mergers and acquisitions are a very expensive proposition. You are going to put a lot of resources into a technology or a project that you are not sure will be essential to your core product line. So an alliance is a nice in-between strategy of developing other product lines or other types of technologies without incurring the necessarily more expensive fixed costs related to a merger and acquisition strategy. So speed and flexibility are very important in motivating firms to form alliances internationally.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings COMPETITIVE POSITIONING Finally, what we in the business area spend a lot of time thinking about is competitive positioning. What do I mean by competitive positioning? Here a company might want to monitor a particular rival. For example, General Motors's alliance with Toyota to form NUMMI [New United Motor Manufacturing Inc.] in Freemont, California. This alliance was much geared around General Motors trying to figure out what the Japanese lean production technology was and how to you integrate it. You can do that by forming an alliance. You might want to gain information in terms of what new product lines your competitors might be developing. Again, a good way of doing that is to get close to your competitor and monitor their activities. So competitive positioning is increasingly important, particularly in markets that are oligopolitically structured—for example, the automotive and aircraft industries. This is a key motivating factor for firms. THE GOVERNMENT'S ROLE Another factor driving international strategic alliance activity is clearly the government. In this conference we have talked a lot about the role of government. What I want to do is break out what I believe are a group of government policies that drive alliance activity. Trade and investment policies: The first area is in trade and investment policies. Today we have talked here about how some markets are closed; there are restrictions on direct foreign investment. Equal national treatment policies across, for example, the triad countries do not exist. You can have other nontariff barriers, such as the voluntary export restraints [VERs] that were enacted during the late 1970s and 1980s against the Japanese automotive industry here in the United States. Those VERs were instrumental in bringing Japanese automobile manufacturers to form strategic alliances with U.S. auto manufacturers. If you look at any U.S. auto manufacturer today, you will see a very intricate and tight web of alliances with Korean and Japanese companies. Industrial policies: The second area is in regard to industrial and technology policies. We had an entire session in this conference dedicated to Airbus. This is the clearest example of a government-sponsored strategic alliance, and an international one at that. SEMATECH is another example of a type of strategic alliance, a precompetitive R&D alliance. Procurement policies have played a very important role, obviously, in the telecommunications and defense industries. And so government procurement policies will provide a barrier, if you like, for a lot of companies trying to enter into each other's markets. So, again, one way that companies can enter the market, given those types of discriminatory procurement policies, is to ally with a national champion or with a domestic company.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Regulatory policy: Regulatory policies have a much more indirect but extremely pervasive effect on promoting international strategic alliances among multinationals as well as smaller companies. The first set of policies that we can look at are the competition or antitrust policies. We heard from William Spencer about the emergence and rise of SEMATECH. That would not have been possible had it not been for the weakening of our antitrust legislation here in the United States and the passage of the National Cooperative Research Act. So the American government has used antitrust as a way to sponsor a particular strategic alliance, a domestic alliance. But that also has an international impact in spurring other countries, as we have seen with JESSI and ESPRIT, to do likewise. Deregulation is clearly important in the telecommunications industries, as was the case in the United States. Deregulation created a big market for European companies to enter into the U.S. market, but they did not have market familiarity. So there is a lot of alliance partnering occurring. Similarly, AT&T was then freed up to compete in European markets, where previously because of U.S. antitrust considerations, it had been banned from competing in those markets. For example, within two years AT&T formed alliances with almost all the top national champions in Europe in the telecommunications industry, approximately 50 alliances in all. So deregulation policies are critical. They are becoming less critical as governments liberalize their industry and companies are able to compete more freely. But deregulation is a critical factor for companies intending to enter the big emerging markets, such as China, India, or Russia. The markets in those three countries are still highly regulated and highly closed in the telecommunications field. Technical standards: Finally, standards are an extremely pervasive influence on alliance formation. A good example is the European, Japanese, and American battle over HDTV [high-definition television]. The setting of the technical standard using the digital versus the analog standard threw into the ring an entire new reordering of different alliances formed between U.S., Japanese, and European companies. So technical standards will continue to be a driving element and will be an influence in a number of industries for strategic alliance formation. These are some of the most important factors that are driving alliances. IMPLICATIONS Now what are some of the implications? Strategic alliances are creating both interdependence between international firms as well as a tremendous amount of rivalry. Charles White, our next speaker, will give you some insight from a corporate level when he discusses Motorola's important alliances, especially with Toshiba. We see tremendous synergies now in many important high-technology industries, because industries are all teamed with one another. And that creates an underlying pattern of trade, which is a very different type of matrix or network of different companies involved with one another.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings The second point to consider is that we really do not have any especially clear implications because strategic alliances have only flourished since the 1980s. The implications for U.S. policy are still a bit unclear and ambiguous. But I would like to break out what are some of the implications of international strategic alliances for companies and some of the implications for the U.S. government. What we are finding is that pitting firms against firms in different countries, or policymakers in different countries, is not the source of friction. Increasingly, strategic alliances are generating friction between domestic companies and their national governments. This is a very different type of trend than what we are seeing today when we talk about competition policies and different types of direct foreign investment policies. Let me start with the firms. International strategic alliances have helped improve the productivity of a number of key U.S. industries. The most obvious one is the U.S. automotive industry. The transfer of lean production technology through strategic alliances was vital to the rekindling of the U.S. auto industry in the 1980s. So in a number of industries you can easily see the tremendous gain in terms of national economic competitiveness that strategic alliances has brought U.S. companies. Risks of alliances: At the same time, not all companies are capable of using strategic alliances effectively. Motorola stands out as a stellar example of how to enter into an alliance and safeguard technology very carefully, particularly from important competitors. But what we found in a number of U.S. and other companies is that there is not that type of safeguarding mechanism going on. And at times a number of companies have been hollowed out by the transfer of key technologies through alliance partners. So you can lose competitiveness at the national level if various companies and key industries are being hollowed out. There is a recently published report that looked at and tried to assess the ability of many foreign companies to dominate the active-matrix liquid-crystal display technology field and the impact of strategic alliances on U.S. competitiveness. This particular report concluded that foreign acquisition of advanced U.S. active-matrix liquid-crystal display manufacturing technology through alliances may limit U.S. companies' ability to translate their technology advantages into competitive advantages. So there is a growing concern, not only within companies but within the government, about how to safeguard this process. How can companies not only use alliances effectively but prevent transfers of critical technologies? This issue is especially relevant to those alliances such as SEMATECH that have been developed at the taxpayers' expense. POLICY IMPLICATIONS Some of the implications for firms lead to some of the implications for U.S. policy. Let me give you a couple of examples.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Critical asymmetries: For the past two days at this conference we have been talking about critical asymmetries across a range of government policies. These asymmetries between the Japanese, between the Europeans, and between the Americans, have not only, in essence, helped create international strategic alliances, but at the same time there is the potential that these asymmetries are leading to the competitive disadvantage of U.S. companies. The reason for this, as we have heard for the last few days, is that our markets are relatively open, that the European and Japanese markets are not as open. In different industries there is not the type of liberalization that has occurred in our particular market. What does this mean? It can mean that American companies are exchanging, for short-term reasons, market access, and this could be wrong from a national perspective, but from a firm's perspective that desire for market access is driving the company. While you may be trading market access, you may be trading publicly some key technology or product base. So this asymmetry, as a consequence, does put some U.S. firms at a disadvantage. The policy challenge: The challenge for U.S. policy makers, whether it is here, or in Europe, or in Japan, is how to address such asymmetries. If the issue is the asymmetry, do you address it in terms of seeking harmonization, greater liberalization? Or do you pursue an industrial policy? Do you create SEMATECH, at the same time that you have a semiconductor agreement, to help boost the competitiveness of firms when markets remain a little bit closed? This is a really important new trend that not many people think about—the nature of what international competition is about. I began my talk stating that competition is based less on individual companies competing in the international economy, but rather is about competing coalitions of firms. This has tremendous implications for governments. I will give you an example. In regard to semiconductors, in 1991, all of the alliances in the semiconductor industry within the triad were too complex. There were and still are too many companies organized and linked with each other. We have a number of alliances within Asia (e,g, Samsung and NEC). In the United States we have SEMATECH. But at the same time we have competing coalitions—Motorola and Toshiba, Hitachi and Texas Instruments. It is difficult to get at key policy issues when the entire issue of what constitutes a U.S. firm is a difficult thing to assess, particularly as more and more strategic alliances involve cross-equity investment exchanges. Coalitions and national treatment: When we look at coalitions, devising national treatment policies can be very tricky in terms of how to assess the national identity of a particular company, particularly if you are sharing production facilities across a range of different countries, which is what is occurring in many industries. From the consumer perspective of the United States, will such big international coalitions emerge in a number of industries to lead to greater cartelization? Are they going to lead to collusion, or the potential for collusion?

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings What happens if Boeing and Airbus, who have been engaged in talks, do decide to go into very large transport aircraft? One aircraft in the market, two big companies. What will happen to McDonnell Douglas? McDonnell Douglas and Boeing obviously cannot collaborate at present. So, in some sense, our antitrust policies are driving a lot of our international alliance activity. This is also important in terms of cartelization and collusion around technical standards. In areas where technical standards are very important, what is the impact of a particular coalition of companies, which gets ahead of a particular standard? That may have a dangerous precedent, again, for consumers. So I believe that these issues pose new challenges for U.S. policymakers in the area of competition policy, in the area of antitrust. Finally, we have talked a lot about business-government relationships, such as the EUREKA project and other types of R&D consortia. One of the issues that we have not touched on effectively is, can a nation's policymakers be sure of capturing national technological gain when its domestic firms are completely allied with and permeated by strategic alliances internationally? In essence, are international strategic alliances making obsolete any attempt at national technology or industrial policies? Thank you. CHARLES WESSNER: Your last question may have been addressed to William Spencer and others. Do the ISAs [international strategic alliances] make national technology programs obsolete? Some argue that to form an ISA you have to have something to trade. To work interdependently you have to not be dependent. We have had some discussion of the previous weakness of the U.S. semiconductor industry. Some of these alliances resulted from the MITI policy guidance after the 1987 sanctions. Some of the alliances reflect the success of SEMATECH and the technological rebound of the U.S. industry. For example, would Toshiba want to work with Motorola if Motorola had a declining market share and no access to the latest technology? CAROL EVANS: There is no question that, in terms of the particular example of SEMATECH, a lot of small American companies, through their participation in SEMATECH, have become very valuable targets of opportunity for alliance activity simply because of their participation in a key government-sponsored R&D consortium. That is a benefit and it can also be a disadvantage, depending on how companies use technologies and safeguard them responsibly. At the same time, however, we do not see many examples of SEMATECH elsewhere in other industries. We have a lot of underlying technology programs, whether it is around aerospace or a number of other programs that place firms in a difficult position. On the one hand, they are enjoying the access to some of the basic R&D, but they are being pressured to transfer some of their core technologies to foreign competitors.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings And this is the danger. This is the balancing act that companies must manage. On the one hand, in order to have a successful alliance, you need to transfer technologies. You need to develop a trust and make these relationships work. But at the same time, how do you not develop a potential and future competitor? Not all companies do this successfully. In key areas we have to be concerned about whether there is sort of a net failure. In certain critical industries we should be concerned. The active-matrix liquid-crystal display area is a very critical area that we should be concerned about. ERHARD KANTZENBACH: Do you have the definition of what a strategic alliance is? It could be a cartel agreement, it could be a joint venture, it could be another cooperative agreement in R&D. CAROL EVANS: There are many definitions that exist for international strategic alliances. There is no single definition. The one that I am using indirectly here today is that, on the one hand, you have transactions such as licensing agreements. These are not strategic alliances. On the other hand, at the other extreme you would see mergers and acquisitions. In between, as you rightly point out, there is a huge role, and that can include precompetitive R&D consortia; it can be different types of informal cooperation; it might include exchange of distribution markets—this is happening a lot. Companies decide to allocate globally what markets they will compete in. Fuji and Xerox have a very important strategic alliance that has been going on for 30 years, a very successful alliance. They have agreed not to compete in each other's markets. So that is an example of exchanging marketing distribution. You can have a joint venture, a joint venture without the cross-equity sharing, or you can have equity involved. I have done some research on this question in which the definitions are expanded on. WILLIAM SPENCER: One of the questions I get asked regularly is, how can companies that are in SEMATECH form strategic alliances with foreign countries and not share the information that SEMATECH has developed that is just for members only? There is very little of that, but the answer that I get—and I am interested in seeing whether it relates to the other strategic alliances you have looked at—is we have been, in SEMATECH, focused on manufacturing technology. It does not matter what type of microchips you manufacture, technology should be useful. But the strategic alliances in the semiconductor industry quite often focus on products—joint development of the 64-mg or 256-megabyte DRAMS or flash memories. Does that tend to be true in other alliances as well, where the strategic alliances are product oriented?

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings CAROL EVANS: Increasingly, because of all the technological factors and the market, it is the cost of technology and the constraints of markets that are often driving alliances. One of the important things for companies to be aware of is that a lot of companies go into alliances thinking that they are a shortcut to competitiveness. You can employ them quickly. And the shortsightedness comes from a lot of companies not reinvesting in their actual technologies. They just let the foreign partner take care of it. And that is the worst thing for companies to do. So it is the reinvestment, it is the ability to learn. These are very critical elements to building a successful alliance. It makes you stronger as it makes your partners stronger. It is an important base for cooperation. Issues for Alliance Partners Charles White, Motorola As I listened to Dr. Evan's presentation, I reflected upon Motorola's relationship with most of the major electronic companies around the world—Siemens and Phillips in Europe; Sony, Toshiba, and Matsushita in Japan; Hewlett-Packard and IBM in the United States—and I realized that we are creating a big problem for public policy makers. The firms I just mentioned are examples of companies that are simultaneously suppliers, customers, partners, and competitors to Motorola. This is a fairly recent phenomenon in world trade, and it adds a complexity to the formation of public policy that our predecessors did not have to worry about. Now I will discuss the rationale for industry alliances, followed by some detail on Motorola's alliance with Toshiba. The first and most important reason for the increase in alliances between semiconductor companies is the rapid pace and proliferation of technological change. The first 36 years of the semiconductor industry's history, ending in 1994, resulted in a $100 billion market. Within the next five or six years, our industry will generate its second $100 billion in annual sales growth, which means that we will double our revenue in just five to six years. Also, technological change is growing at a rapid rate. The average desktop PC today has 1,200 times the computing power of the computer that guided the lunar lander during the Apollo mission. Simultaneously, the cost of that computing power has been dramatically reduced. In 1986, the early days of desktop computers, the cost per million instructions per second (MIPS) was approximately $5,000. The cost per MIPS today is approximately $180. So you can see, costs are declining rapidly, promoting fast-paced change. In addition, the accelerating cost of R&D and plant and equipment have increased to the point where alliances are being formed to share the necessary investments. The semiconductor industry routinely spends 25-30 percent of sales dollars on R&D, plant, and equipment. As we continue to pack more and more capabil-

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings ity onto a single chip, using finer and finer geometrics, the cost of the factories to manufacture semiconductors will continue to accelerate. For example, in 1970 a single wafer fabrication facility cost approximately $10 million. Today it is over $1 billion, and this will climb to nearly $2 billion by the year 2000. Alliances also are being driven by the global nature and persuasiveness of our industry. For example, users of DRAMs have little regard for where they are manufactured, because the parts meet worldwide standards, are very portable, and have a high value-to-weight ratio. Also, most nations are eager to participate in this high-growth industry, which is at the heart of the information age. To illustrate, I recently received a letter from an official in Zimbabwe who was looking for a partner to assist in starting up a chip factory. Which emerging country will be next? Chip applications continue to grow at a fast pace. The average person, for example, encounters at least 50 microcontrollers a day. There are seven to ten in today's cars, and it is estimated that a car will have 50 microcontrollers by the year 2000. Other usage includes VCRs, camcorders, kitchen appliances, remote controls, printers, cellular phones, and virtually all electronic devices. In addition to the obvious need to share cost and risk, alliances are formed frequently to speed market entry, establish de facto standards, and gain access to restricted markets. Finally, customers enter alliances to gain guaranteed supply, whereas governments participate to ensure that their citizens are not just consumers of high-technology, but producers as well. This leads to a discussion of Motorola's alliance with Toshiba, which was established in 1986, and was the first alliance between major U.S. and Japanese semiconductor companies. Since then, numerous Japanese-American alliances have been formed, several of which were patterned after our experience. In addition to our objectives to re-enter the DRAM business and gain increased access to the Japanese market, Motorola hoped to win wider acceptance of its microprocessor architecture. Toshiba's objectives were to gain access to a mainstream microprocessor technology, while sharing the cost and risk of building a DRAM factory and ramping it to full production. The alliance was structured to pace the release of Motorola's microprocessor technology to Toshiba, as Motorola assimilated DRAM capability from Toshiba and achieved specific marketshare targets in Japan. When transferring Toshiba's DRAM technology to Motorola's U.S. factory, care was taken to duplicate exactly the equipment set and materials, including gases and chemicals. By doing so, we were able to achieve comparable manufacturing results. The Motorola-Toshiba alliance includes a 50-50 joint venture factory, which is managed jointly. Each of the three phases to date started with DRAMs and included plans to migrate to logic products as new generations of DRAMs required new facilities.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings During the early years of the alliance, revenue earned by Motorola from Toshiba's DRAM technology was substantially larger than Toshiba's revenues from Motorola's processors. Both parties then agreed to restructure the alliance to substitute royalty payments instead of microprocessor technology for Toshiba's DRAM technology. Fortunately, both partners had the wisdom to build flexibility into the original agreement to ensure fairness and preserve the partnership. From the beginning, the Motorola-Toshiba alliance was intended to be a long-term relationship held together by substantial shared investment. It has been financially successful for both parties, and we continue to broaden it with additional joint activities. Motorola has benefitted through increased sales and profits, most of which were reinvested in R&D, design, and facilities for new generations of products. In summary, the partnership has provided Motorola increased local presence and acceptance in Japan, where our marketshare has more than tripled. Thank you. National Technology Programs and Strategic Alliances in a Global Economy: A Challenge for Public Policy? Alan Tonelson, Economic Strategy Institute I would like to thank the National Research Council for the chance to make some brief remarks about the public policy challenge of national technology programs, corporate strategic alliances, and their interaction. Before the 1994 election, I would give a rather conventional pro and con analysis of different responses to specific public policy problems created by these new arrangements. But today, given the level of ideologically driven, indiscriminate opposition to any government involvement and economic activity and technology development that we see in Washington, I believe that it is more important to review the rationale for any policy responses at all; in other words, for the American body politic to act collectively to meet needs and to achieve goals that simply cannot be addressed adequately by market forces and private actors. It is also critical at this point to emphasize that the purpose of these policies is not, as is so often supposed, to stop globalization, to slow globalization down, but to ensure that globalization, cooperation, and interdependence can continue by ensuring that they continue to work to raise living standards around the world. Sometimes we lose sight of that goal. Why, then, do we need public policy responses in the related areas of access to national technology programs and corporate strategic alliances? My answers will proceed from the mundanely political to the loftily conceptual. First, should the U.S. government support technology development? We all assume that this support will continue at some level. Most legislators and certainly taxpayers will insist that most of the benefits flow to the American people in very concrete ways in a reasonable time frame.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Many Americans have been disappointed too often in the past when the benefits of traditional trade liberalization policies fell short of the promises made about them over many, many decades. And they will clearly no longer be satisfied with the argument that market forces eventually will give Americans their share of the benefits of these arrangements, especially if market principles are so often honored in the breach around the world. We can argue about measuring and defining the various benefits of these programs, but there will have to be eligibility requirements of some type, and yes, it is harder to define national interests in an age of rampant corporate strategic alliances and international technology cooperation. But this means that it is all the more important to think harder about them. And in that vein, we need much better data gathering and also data analysis capabilities in the public sector. We simply do not know enough about these new arrangements at this point to make truly informed decisions. We are really proceeding in something of an information vacuum. And I am especially concerned that the various proposals to reduce or even to eliminate those agencies that have served as the public policy eyes and ears of the American people will make this task even harder than it has ever been before, at precisely the time when its importance has never been greater. The second reason is, because Kant was right, and because men are not angels, the United States is going to need leverage if it wants to persuade other countries to reduce their own barriers to capital and technology flows. We will need bargaining chips in the form of certain comparable restrictions of our own. A wise man once said that there may be good policy in retaliations of this type when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate for the transitory inconvenience of paying dearer during a shorter time for some sorts of goods. Now, that comment was not made by Frederich Liszt, it was not made by a Senator, it was not even made by Pat Buchanan. It was made by a fellow named Adam Smith, who wrote a book called The Wealth of Nations. Third, and here we get a bit loftier and more conceptual, the failure to develop adequate public policy responses to globalized capital and technology flows will have staggering economic, social, and political implications that few are thinking about systematically today. Just one example. The creative destruction sparked by unfettered economic flows can certainly stimulate innovation and productivity and raise living standards. But it can also hinder them by destabilizing and even sweeping away the institutional underpinning—legal, political, and social—required by all constructive economic activity. Business, let alone countries, cannot flourish in a world of total chaos and total flux. Look at the problems that we are suddenly discovering with flows of hot money around the world. For decades, free market advocates said that we

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings would be so much better off if all the restrictions on capital flows were just lifted, if investors had a perfect capability to invest and withdraw from investments whenever they wanted. And all of a sudden, due to the widespread financial deregulation starting in the early 1980s, that is what we have. And we find that a world of hot money is not such a great world after all. Fourth, I will make explicit some points that I believe have been a little bit too implicit in other sessions of this conference. Everyone in the economic, business, and political science fields throws around words such as interdependence, integration, globalization, even cooperation. In my view, without fully recognizing their implications, the prevailing assumption seems to be that these are forces that are strangely one dimensional in their nature, in the sense that they can only unfold naturally in ways consistent with the worldwide triumph of pure laissez faire and comparative advantage, whether static or dynamic or whatever form of comparative advantage you happen to believe in. And the only thing that could mess this up would be if governments step in and try to capture advantages for their own particular community. What is too often forgotten is that these words describe relationships, and that all relationships, especially relationships as complex as the ones we are talking about, have terms. They have structure, they have content. Even cooperation has terms in the private sector. That is why we have contracts. Contracts are not simply a jobs program for lawyers. We have contracts because different parties want to make sure that cooperation works as well as it possibly can for them. And because these terms have to be shaped by someone or something, and because the actors playing this role will inevitably bring different experiences, interests, values, and economic structures to this process, the terms will not always be equally desirable for everyone involved. Let me just give you one quick example. The master-slave relationship is an interdependent relationship. But it is not equally desirable for both parties. Therefore, the process of shaping the terms of interdependence will inevitably be political in nature to a very large extent. So my closing thought is that we should spend less time discussing whether interdependence, integration, and globalization are good or bad in the abstract. We need to understand that they can turn out in many different ways, and we should spend more time figuring out how actively to shape the terms of interdependence to favor whichever community or communities we happen to feel loyalty to. In my view, that is the main public policy challenge involved here. Thank you.