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financial flows promoted by the postwar international institutions, as discussed below.) So one source of the technology focus of the 1980s was rising concern in the United States about challenges to American technological preeminence in both medium-technology (capital-intensive sectors such as autos and technology-intensive components and equipment) as well as high-technology sectors.

Thus, as can be seen from Table 1, the U.S. postwar dominance in both medium technology as well as high-technology has been increasingly challenged by Japan, and even more so by Europe. Furthermore, as is clear from Table 1, the real impact of the Japanese challenge over the past two decades has been rising import penetration rather than declining export share. But Japan's import shares did not follow this trend. Thus, one consequence of le defi Japanais was a marked increase in international friction that centered on export access rather than import protection in these technology-intensive sectors.

But there is more to the story than opening international markets for particular goods. High-technology industries became a domestic concern as well, both in the United States and Europe, in part as a response to what were believed to be successful Japanese industrial policies, especially industrial R&D consortia targeted at advancing new generic technologies. In the 1980s there was a change in the climate of ideas among economists and policymakers that generated a lively (and still ongoing) debate about why high-technology matters and what governments should do about nurturing high-technology industries located in their own countries.

Although European technology and industrial policies had started much earlier in member states, in the 1980s there was a new drive at the European Community level. And in the United States, a traditional aversion to such policies gave way to new initiatives by both the Reagan and Bush administrations that have continued in recent years. In both Europe and the United States a major focus has been R&D consortia.2

The rationale for fostering domestic-based high-technology—the change in the climate of ideas—rested on economists' notion of market failure. A firm that performs R&D usually is unable to keep the technology behind its new products and processes completely private, and sooner or later its competitors will be able to draw significantly from the new technology it has created to fashion their own substitutes. If a firm is unable to appropriate fully the returns to its investments, it will tend to underinvest in that activity from a social point of view. Hence government action, for example through patents or by research subsidies, can improve public welfare.

Furthermore, in the 1980s it became clear that patents were ineffectual in some leading sectors, such as semiconductors, computers, telecommunications, and aircraft. In these sectors, companies reap return mainly by achieving a head


For a full discussion of these developments, see Ostry and Nelson (1994).

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