Lionel Johns, Office of Science and Technology Policy
STEPHEN MERRILL: I would like to introduce Lionel Johns, who will be giving the concluding remarks. Mr. Johns joined the White House Science Office in the very earliest days of the Clinton administration, having come from the Office of Technology Assessment. Mr. Johns was instrumental in defining the Office of Technology Assessment and its work on industrial technology.
LIONEL JOHNS: Fair and open international trade is important to competitive success in U.S. high-technology firms, and it is a goal worth fighting for. However, there is one thing we have learned in the past 15 or 20 years. When U.S. firms lose marketshare in one important industry after another and then, in some cases, laboriously regain it, we learn that it is what we do at home that matters most.
Success in a fiercely competitive global marketplace depends most on all the abilities to develop and quickly bring to market well-designed, highly reliable goods for sale at reasonable prices.
A great deal of this success depends, in turn, on private sector managers, the ability to learn and to put into practice the lessons of lean management and good use of human resources. This includes high-quality training, assignment of responsibility, a shop full of workers, dedication to continuous improvement, commitments to in-line quality control, and getting it right the first time. It also includes small inventories and just-in-time delivery of parts to uncover hitches in production, rather than fat inventories, replacement of defective parts, and extensive rework.
Private companies cannot do it alone in this fast-moving and intensely competitive world. Industry needs help from and partnership with government. Our
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Concluding Remarks National Investments and Global Economic Competition Lionel Johns, Office of Science and Technology Policy STEPHEN MERRILL: I would like to introduce Lionel Johns, who will be giving the concluding remarks. Mr. Johns joined the White House Science Office in the very earliest days of the Clinton administration, having come from the Office of Technology Assessment. Mr. Johns was instrumental in defining the Office of Technology Assessment and its work on industrial technology. LIONEL JOHNS: Fair and open international trade is important to competitive success in U.S. high-technology firms, and it is a goal worth fighting for. However, there is one thing we have learned in the past 15 or 20 years. When U.S. firms lose marketshare in one important industry after another and then, in some cases, laboriously regain it, we learn that it is what we do at home that matters most. Success in a fiercely competitive global marketplace depends most on all the abilities to develop and quickly bring to market well-designed, highly reliable goods for sale at reasonable prices. A great deal of this success depends, in turn, on private sector managers, the ability to learn and to put into practice the lessons of lean management and good use of human resources. This includes high-quality training, assignment of responsibility, a shop full of workers, dedication to continuous improvement, commitments to in-line quality control, and getting it right the first time. It also includes small inventories and just-in-time delivery of parts to uncover hitches in production, rather than fat inventories, replacement of defective parts, and extensive rework. Private companies cannot do it alone in this fast-moving and intensely competitive world. Industry needs help from and partnership with government. Our
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings best competitors in Europe and on the Pacific Rim certainly know this. Many of us know it, too, although right now it seems we have a lot of educating to do with the new majority in Congress. Some of the positive things government can do to foster competitive success are broadly enabling, such as a stable, predictable business environment, a tax structure that encourages long-term private investment in new technology and productive equipment, regulation that reduces costs and unnecessary burdens but still achieves widely agreed-on goals of protecting public health and the environment. We also need a first-class education for all children and lifelong learning opportunities, including adult retraining when needed. We need shared public investment in high-risk, but potentially high-pay-off new technologies. The accelerating pace of technology, the ever-shortening product cycles, and the rapid worldwide diffusion of technologies means that many companies are finding it harder to justify investment in risky R&D than in the past. This means that government R&D partnerships with industry in growth-enhancing technologies are more important than ever. Without government to share the risk, individual companies are reluctant to take the plunge. Government partnership fosters a technological advance that might otherwise not be made, or would be made in foreign countries with most of the benefits going to their citizens. The United States has had some outstanding successes with government-industry partnerships. Agriculture is a good example, starting with the Merrill Act in 1862. Aeronautics is another example, and it dates back to 1916 with the creation of the National Advisory Committee on Aeronautics. Other examples are the semiconductor industry and SEMATECH. And early returns from the advanced technology program, which started in 1990, are highly favorable. Of course, our national investments in technology have always included infrastructure that supports commerce and industry: canals, roads, railroads, and, since the turn of the twentieth century, standards of measurement—the sine quo non of technological advance. You might think that the government provision of technically superb measurements and assistance to voluntary private sector standards development might be sacrosanct. But the plans of at least some of the Republicans in the current Congress include putting the laboratories of the National Institute for Standards and Technology up for sale. Most of the U.S. government-industry partnerships are in research, development, and provision for facilities for R&D, such as NASA's wind tunnels and one-of-a-kind scientific equipment in the Department of Energy laboratories. We have also recently begun to share costs with local governments and industries and extension services that help 370,000 small-and medium-sized manufacturers adopt up-to-date technologies and business practices. Our best competitors in Europe and the Pacific Rim do all of this and much
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings more. Besides sharing in R&D investments, besides supporting industrial extension services that are much larger and more experienced than ours, they have also provided subsidies for actual commercialization, such as the success-dependent loans that European countries gave Airbus and that the Japanese provided through a spin-off for private industry ventures in aircraft engines. Production and export subsidies are not in the U.S. tradition, and they are either discouraged or banned under the new world trade agreement. Of course, government-industry investments and research and development and deployment of new technologies are in a different category. They are blessed by the world trade agreement. They are part of an old and sturdy American tradition. In today's world, corporate cost cutting has led to targeting of in-house research in technologies that are close to commercialization at the expense of longer-term or riskier research. That makes investments in technology critical to economic growth more vital than ever. I would like to share with you some data from the World Economic Forum's 14th Annual World Competitiveness Report of 1994. This data provide a sense of how the U.S. government and U.S. industry compare with other nations in nondefense R&D in the recent past. For total expenditure on R&D in the public and private sector as a percentage of GDP [gross domestic product] in 1992, the U.S. was at 2.62 percent. The larger percentage of this is on the government's side for defense spending. If we did not include defense spending then the United States would drop down around Austria and Belgium. If we look at nondefense R&D as a percentage of government spending allocated to nondefense research in 1992, the United States was at 41.4 percent, which put the United States 28th among other nations. All of our formidable competitors are well above us. For Spain or Taiwan, 80 percent or more of their investments are in nondefense R&D. The United States would like to believe that it has an aggressive private sector area and that it does not have to worry because, while other nations' governments make investments in R&D, U.S. corporations make up the difference. This is one of the fallacies in the U.S. Congress at the moment. As any U.S.-based company will tell you, their attempts to invest in longer-term R&D are sure to be punished in Wall Street. The United States was 19th in actual real compound percentage growth in 1988 to 1982. These were good years and bad years for other countries as well. During the Clinton administration, we have passed a three-year R&D tax credit, which has changed the way accountants look at R&D investment. And the good news is that U.S. investment, as a result, is up. Unfortunately, the data indicate that, of that R&D investment, less than 8 percent is long term. And again, if one looks at our formidable competitors, their numbers are imposing indeed, compared with our negative numbers. To find out how the United States is doing in terms of world competitive-
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings ness, we would have to look at the balance of trade. I realize that economists have macro explanations for these things. Some will say that the United States imports $50 billion worth of oil. That is about a third of what we consume. The Japanese import virtually all of their oil and still have a positive balance that is very impressive indeed. The reasons for these variations are complex. Nevertheless, if the United States is underinvesting as a nation, if it is underinvesting in the private sector and the results indicate that we are not doing so well, this does not seem to be a very good time to be cutting those investments and increasing the investments in the defense area by sacrificing those in the nondefense areas. We will be doing our best to encourage Congress to understand the danger of this to our nation and to our economy. And I hope that others will support that notion. Thank you. WILLIAM SPENCER: I agree with you that the industry investment in R&D has gone down in the last couple of years. Someone made the point earlier today that one of the problems is that we had a series of some type of natural monopolies in the United States—IBM, AT&T, Xerox, Kodak-Polaroid. And as those monopolies have gone away, those companies have been forced to roll back R&D. My hope is that this will not continue. Certainly in the semiconductor area, the industry is growing so rapidly that they are having a hard time keeping up a 10 or 12 percent investment in R&D because the industry is growing 25 percent per year. All this is a long preamble to the question of what is the right level of R&D in the United States. Currently it is somewhere between $160 billion and $200 billion, depending on what you count and who you listen to. Is that enough? Is it a problem of not enough investment in R&D? Do we have the wrong set of priorities? The Clinton administration is moving $10 billion out of defense into commercial areas. What is the real problem—too little spent in the wrong directions? LIONEL JOHNS: For anyone who looks at R&D investment, the importance of consistency is fundamental. To be unpredictable will certainly not attract the best and the brightest in any of the areas that are involved. In fact, you drive them away. My own view is that we are indeed underinvesting, and I believe that U.S. companies will underinvest until we devise a way for them to make longer-term R&D investments without punishing them. There is no easy solution to this problem. Even though we would rather have capital gains go to a very low number, to reduce it for short-term holdings is to encourage to those who hold stock for short periods of time and who trade rather than invest. We need to solve this problem. If we do, it will greatly reduce the imperative for a federal partnership or a federal investment. I would argue that with the great
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings reduction in our defense spending over the past few years, if we intend to sustain a world-class technology capability so as to provide for our national security, we will have to make investments in critical technologies. And we will have to make them consistently, cooperatively with industry, and in a manner that is not the DoD buying for special purposes, but the DoD depending increasingly, to the degree that it is possible, on the private sector markets as other nations do. STEPHEN COONEY: Despite what was said yesterday about causality, the fact is that the very large trade deficits began in the United States after the very large budget deficits started. Most of the executives that I talk to both in Germany and in the United States believe that it does not matter how the United States cuts the trade deficit—the first priority is to cut the budget deficit. And unless you start cutting the budget deficit substantially, you are really trying to swim up Niagara Falls with respect to getting the trade balance back in order. My final comment is a political one, which is that there has been an underrepresentation in this conference of the Republican views on this matter. I would also say that I believe that everyone in this room agrees that heavy cuts in nondefense technological R&D are not good. My company, Siemens, is fighting it in certain areas. But the first obligation of the Clinton administration is to show that, if the overall goal is to reduce the budget deficit, where are you going to reduce it elsewhere so as to save the nondefense R&D investment? I believe that the Clinton administration has not shown leadership in that area. LIONEL JOHNS: Let me disagree with you and disagree strongly. First of all, in the past three years this administration has reduced the deficit. This is the first time that such a reduction has occurred since the Truman administration. There have been very sizable reductions, in fact there has been over $600 billion in reductions. I certainly do agree that we need to reduce the deficit. But we delude ourselves if we think we cannot get costs under control for health care, get the costs under control for Medicare and the other entitlement programs, and just deal with solving the problem by cutting the discretionary budget. Why it is that other nations have very positive balances of trade when they have deficits that are comparable? Compared with other central governments' total debt, the United States was 17th. I imagine that this shocks a lot of people, because we have had the characterization that the United States was off the scale with regard to our deficit. Japan was 12th and they had a very positive balance of trade. I would agree with the arguments that the U.S. savings rate is a serious problem, and there is no doubt that that is the case, because the corollary of not saving is spending, and that is part of the problem. But it is too simple to say that it is the size of the debt and the relationship of
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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings the debt to GDP. And you have to look at it in that manner, because we are a $7 trillion economy and Japan is next with $4 trillion. So you have to look at that as a percentage. Nevertheless, we certainly agree that we must continue to reduce the deficit. It should not be done irresponsibly. The country will pay long and dearly if we proceed along the path we are presently going. ERHARD KANTZENBACH: I must admit that I am concerned about the implications of these strategic alliances with respect to competition. My question is directed to Charles White. I would like to know how many competitors you have in the world market for your alliance, and is there any clearance of these alliance by the American antitrust authorities? CHARLES WHITE: There is no antitrust concern about Motorola's DRAM alliance with Toshiba because it is not anticompetitive. Worldwide, there are more than 20 DRAM suppliers, and their prices have historically declined in accordance with the semiconductor learning-curve theory. This strong competition, which is clearly present today, is a primary cause of declining prices for personal computers and other electronic products powered by semiconductors. The IBM-Toshiba-Siemens alliance was established for the joint development of manufacturing process technology. Almost all major semiconductor participants are involved in some form of joint process development. Of the major players, only Motorola comes to mind as one that is not involved in some type of process development alliance. We mentioned earlier the Texas Instrument-Hitachi alliance, and Intel recently joined with Hewlett-Packard. You have already covered the IBM-Toshiba-Siemens alliance, AMD [Advanced Micro Devices] has joined with Fujitsu on flash technology, and NEC and AT&T are allied, for process development, etc. The type of consolidation that would cause concern about monopoly or oligopoly does not exist in semiconductors. The only potential exception to that assertion is that some might argue that Intel's dominance of the microprocessor used in DOS Windows platforms is cause for concern. Precompetitive cooperation, such as cost-sharing and semiconductor alliances, as we have discussed, serve to benefit the consumer because of lower prices, which result from that cost-sharing, as opposed to each competitor funding 100 percent of its R&D. HORST SIEBERT: I want to thank the National Research Council for their hospitality, for putting together such an interesting conference, and for giving us some insight into some practical aspects from the industry point of view. I also want to thank our hosts for providing us some exposure to policymakers in Washington, which has been an interesting insight to the U.S. political arena. Thank you very much for this conference and I hope that this research project will come to some interesting conclusions.
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