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Technology arid Trade: A Study of U.S. Competitiveness In Seven Mousses N. BRUCE HANNAY In the aggregate, the U.S. economy is less dependent on foreign trade than many other nations, but more and more U.S. industries are finding that they must compete internationally to survive. Despite Ike emerging competitive situation, international trade and rela- nonships with other economies simply are not yet accorded the same importance in the United States as in Japan and Western Europe. It is essential that public policy take into account the international implications of any new initiatives, not only in policy formulanon but also in administrative practice. For some years after World War II, the leadership of the United States in the development and application of technology, and in world trade that stemmed from it, was unchallenged. At least in part, this resulted from the circumstances Mat left us as the only major industrialized country with a manufacturing capability Mat was intact at the end of the war. But, as other countries rebuilt their economies over the next two decades, they employed Me best available technology in modern, efficient production facilities. With active participation by their governments, weir industries developed along lines that not only took care of national needs, but also gave Hem an ad- vantage in world trade competition in selected market areas. The United States actively encouraged and supported this rebuilding with bow financial and technical assistance. By Me early 1970s, doubts about our competitiveness began to emerge, and they have been expressed with increasing urgency since then. Our pro- ductivity growth rate was significantly lower Man Mat of other countnes, and it was declining. Our ~ndusmal plant was aging. Our historically favor- This chapter is adapted from The Competitive Status of U.S. IndustryAn Overview (Washington, D.C.: National Academy Press, 1985) by Lowell W. Steele and N. Bruce Hannay. 479

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480 N. BRUCE HANNAY able trade balance first diminished, then turned negative. Our trade in tech- nology-intensive products began to reflect a shrinking share of world markets. It was evident that we were not using technology as effectively as we might, or perhaps as well as some other countries were using it. Our innovative capacity was, for the first time, in doubt. A large part of our R&D was for defense and space, and without commercial objectives. Key industries, like steel, autos, and consumer electronics, were in deep trouble. Countries we had been assisting were becoming, to an ever greater extent, successful competitors in world trade. The unanswered question then, and to a certain degree today also, was whether this trend reflected only an inevitable closing of the gap, as the war- damaged economies of Europe and Japan recovered, or whether it was a sign of inherent weakness in our own system, weakness that would eventually undermine our preeminent world position and even bring a loss of leadership. There were those who thought they saw such weakness in our educational system, or in industry's management practices, or in government policy and the relationship between the public and private sectors. Compounding the difficulty in understanding We implication of trade shifts has been the per- sistent imbalance in exchange rates. When these concerns first emerged, the National Academy of Engineering (NAE) undertook what turned out to be a series of studies that examined central issues relating to technical and international economic and trade is- sues.~ - The studies were conducted by a committee, established in coop- eration win the National Research Council, of experts from industry, academia, labor and government scientists, engineers, economists, business and fi- nancial experts, labor representatives, and government specialists. The first major study of the committee was a broad examination of the relationship among technology, trade, and U.S. competitiveness.2 The pur- pose of the study was to reach an understanding of the issues and to determine priorities for the committee's future work. The main conclusion was that our national perfo~ance with respect to technological innovation, productivity improvement, and competitiveness in world trade was primarily determined by the health of the domestic economy and the constraints put on it, rather Can by events outside the United States. Based on this examination the committee subsequently studied He effects of federal tax policy, regulation, and antirust policy on technological innovation and recommended modifi- cation of those policies in ways that would be likely to increase our rate of technological change.3 In certain areas, policies have since moved in ways consistent with those recommendations, to some extent at least. The conclusions reached in these studies tended to be generalizations. Even Cough federal policies have a unique impact on each industrial sector, very little research had been done to disaggregate industry in the analysis of governmental policies in the areas of technology and trade. This led Be

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A HI UDY OF U.S. COMPETITIVENESS lN SEVEN INDUSTRIES 481 committee to embark on industry-by-industry sectoral studies, choosing seven industries that represented a broad spectrum of characteristics. Each of the sectors contributes significantly to employment and to the GNP; the industries range from high to low technology, from rapidly growing to mature, from capital-intensive to those that are not, from industrial to consumer products, and from industries dominated by large firms to those with many small companies. The industries selected were automobiles, electronics, pharma- ceuticals, machine tools, fibers and textiles, steel, and commercial aircraft.4 The committee's belief in undertaking these studies was that by under- standing specific industrial sectors better, public policies could be more effectively formulated. The study program was designed to identify global shifts in production and in trade, to relate shifts in international comparative industrial advantage to technological and other factors, and to assess the probable impact of public policy options on He rate and nature of techno- logical change and on the international competitiveness of the U.S. industry. There follows a very brief review of some of the results of these sectoral studies. First, specific findings are presented, by sector, then some similar- ities and differences among the sectors are noted, and finally some general conclusions are drawn. FINDINGS OF INDUSTRY STUDIES Automobiles At the time of the study, the automobile industry had recently undergone major changes, and there was great uncertainty as to the outcome of those changes. The U.S. automobile companies faced severe foreign competition at a time when they had to deal win restructuring their products in the face of great market uncertainty. Huge amounts of capital were required at a time when future profits were in doubt. It was unclear whether the prevailing situation was temporary, whether maturation of the industry was forcing a long-term shift to lower-cost foreign manufacture, or whether new technology and production practices would fundamentally alter the industry. For some years prior to the mid-1970s, technological change had been incremental in the industry. Key competitive factors in He mass market were cost, styling, and a strong dealer network. Over the course of the last several years, however, the industry had once again introduced new technological concepts, including, for example, downsizing, new materials, electronic con- trols, and engine design. The imposition of government regulations regarding safety, pollution, and energy efficiency also had a major impact on the industry These mandates claimed both resources and management attention at a time of competitive upheaval, high interest rates, inflation, and a slu ,gish economic growth.

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482 N. BRUCE HANNAY The study also analyzed foreign competition in detail. In Me early l980s We Japanese automobile fins had an estimated landed cost advantage of $750 to $1,500 per small vehicle. This advantage reflected differences in labor rates, materials costs, and productivity, as well as the effect of exchange rates. Despite the popular image of Japanese superiority in advanced tech- nology, Me Japanese advantage was found to lie rather in management- management of technology, of operations, and of the work force and in culture attitudes toward work and bow individual and corporate respon- sibility. Over major factors Mat contributed to Me Japanese advantage were Me reliability of parts suppliers' delivery schedules, elimination of downtime, drastic reduction of setup and rework time, and a job structure and workplace environment that placed responsibility for quality and output on the workers. The Japanese simahon contrasts starkly win Me adversarial labor-man- agement relationship in Me U.S. indusmy. Planning and control of work have been performed by staff groups organizationally remote from the workplace, _ and supervision has emphasized the meeting of demanding production goals. This system does not inspire loyalty or commitment, and it fails to take advantage of We knowledge and experience of the work force. The efficacy of available policy options In the automobile industry is strongly influenced by the scenario selected for future events. If, for example, the industry is mature, production is likely to continue to diffuse around the world; the U.S. industry is likely to be much smaller and to emphasize specialty manufacture, with less value added. Without permanent trade bar- riers, cost disadvantages on standard models would be unlikely to be re- versible. If the difficulties are seen as transient, while We industry restructures its product line and manufacturing capacity, then temporary protective mea- sures help. If a new period of technological innovation and perfonnance- oriented competition is emerging, then U.S. management has an opportunity to re-establish leadership. Even so, Me U.S. share of value added is likely to decline, especially on standard models. Electronics The United States was the unchallenged leader in the electronics industry for some years after World War II and has maintained its leadership in much, but not all, of the industry for four decades. A conspicuous loss of leadership to Japan has occulted in consumer electronics, and the United States now faces a major challenge from Japan in other areas of electronics. The development of the industry in the United States differs from that in the rest of the world. Except for defense and space electronics, the govern- ment has had little involvement (although the Defense Depar~nent's VHSIC program is expected to have significant commercial fallout in semicon- ductors). The industry has been characterized by a few dominant, innovative, giant fiITns in telecommuIiicahons and in computers, and by many en~epre-

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A HI UDY OF U.S. COMPETITIVENESS lN SEVEN INDUSTRIES 483 neurial fuTns Mat have excelled at innovating new products and developing new markets in semiconductors, components, subsystems and systems, and, more recently, In telecommunications and computers. In these smaller firms, the level of vertical integration is low. Me consumer electronics industry, before it lost its markets to Japan, was dominated by old-line radio manufacturers. In contrast to Me U.S. situation, Me involvement of foreign governments in supporting and guiding the ~ndus~y is common. Electronics is regarded as vital to future economic grown, national security, and even a self-image of leadership or equality in the industrialized world. Most of the manufacture comes from large, broadly based, highly integrated companies. Japan has advanced dramatically in electronics. Government support is ex- tensive for very large scale integration (VLS~, pattern recognition, artificial intelligence, and fifth-generation computers and supercomputers. The financial structure of Japanese companies and the financial environment in which they operate are very different from Pose of U.S. comparnes in recent years the cost of capital has been little more than half Me U.S. rate. ~ the Undo States, R&D and capital costs In electronics am very high, because the technology is changing extremely rapidly. Volume must be sufficient to generate the needed resources for investing in technology, added capacity, and new equipment. Another industry problem is Me serious shortage of He electronic engineers, computer scientists and engineers, software programmers, and technicians needed to marten a strong competitive position. The U.S. position in four key ~ndusty segments- semiconductors, com- puters, telecommunications, and consumer electronics is summarized below: 1. In semiconductors, the United States retains a lead but is under serious challenge by the Japanese. Japanese trade and investment barriers severely restrict imports, but U.S. firms supply more than half of Europe's total needs. The U.S. industry is changing. New entrants are inhibited by high start-up costs. Systems manufacturers are integrating forward. Major foreign in- vestments are being made in U.S. firms to acquire technology and market share. U.S. strength results from aggressive technology development and a strong equipment industry. Japanese focus on narrow, high-volume markets, such as 16K and 64K RAMs, has enabled heavy penetration in those markets, but the United States is ahead in microprocessors and custom circuits. In the future its lead will depend on its success in resolving capital and human resource problems, in maintaining its present leadership in basic research and innovation, and in removing trade and investment banners. 2. In computers, the United States retains a powerful position in main- frames, minicomputers, and microcomputers, in software, and in distribution and service. In hardware and standardized high-volume manufacture, it faces a severe challenge from Japan. 3. In telecommunications, government intervention plays a crucial role.

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484 N. BRUCE HANNAY The United States has a strong position in switching and transmission. The Japanese are challenging in optical transmission. Competition in digital tech- nology is severe. The structure of the U.S. industry is undergoing profound change, the consequences of which are not yet clear. The ability of the restructured industry to continue to lead the world in basic advances in telecommunications science and in new telecommunications technology re- mains to be seen. Interestingly, both Japan and the United Kingdom are privatizing their telephone monopolies. 4. In consumer electronics, since the m~d-19SOs the United States has fallen from a position of dominance in market share and in pioneer technology arid all but ceded position to Japan. Japanese Grins have been aggressive in adopting integrated circuitry and in developing manufacturing techniques that cost and improve quality. A combination of long-term commitment to con- sumer markets and aggressive application of technology, aided by long-term availability of capital, a well-trained work force, a protected home market, favorable exchange rates, and willingness to use discriminatory pncing, have propelled Japan to a position of world dominance. Any consideration of possible steps to strengthen the competitive position of the U.S. electronics industry should address four issues: long-range re- search, capital formation, human resources, and international trade policies. The management of this industry has a record of innovative, flexible ap- proaches to problems. It should be encouraged to continue its experimentation in cooperative pro grams, joint ventures, and the like. Antitrust policy must recognize the imperative of evolving to meet world competition. Tax and depreciation policies that recognize the large and rapid obsolescence of equips ment are of critical importance. Strengthening the academic base that produces needed skills, from tech- nician to Ph.D. scientist and engineer, warrants high priority. Government support of basic research and increased cooperative industry-university pro- grams should both be strengthened. The high leverage associated with electronics leadership has led virtually all developed countries to undertake programs to foster a domestic industry. Aggressive pursuit of multilateral trade liberalization must receive persistent, high-prionty attention. Steel The study of the steel industry concentrated on the integrated producers, who constitute SO percent of capacity and face the greatest competitive dif- ficulties. The importance of the steel industry to the economy and nanona1 security is universally accepted, but it is far from clear what part of our needs should

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A STUDY OF U.S. COMPETITIVENESS IN SEVEN INDUSTRIES 485 be supplied internally. The industry is no longer technologically progressive. Of 28 process advances currently under development, only 2 direct reduc- tion and continuous casting, both well established technologically are ex- pected to achieve significant adoption in 5 years, and only 5 others are projected to be adopted in 20 years. It appears that capital limitations and the projected rate of return on the investment, rather than the proprietary nature of the technology, are the problems. In recent years some of the principal changes in process technology have been the result of investment in plant that utilizes technology developed many years earlier but not adopted previously. New alloys are introduced more rapidly than new production processes because the plant investment is much lower. For this reason, the specialty steel industry has fared better than the large producers. Leadership in technology does not assure economic success, and tech- nology by itself cannot solve the steel problem. In addition to the pricing and capacity policies of foreign competitors, such factors as labor produc- tivity, the cost of raw materials, energy, and labor, and plant location in relation to markets play a powerful role. In terms of delivered cost, which is the important cnterion, the study estimated Tat most of the scrap-based producers and many current-practice integrated steel plants in the interior of the United States should be able to meet the full-cost delivered price of Japanese competitors. Ten percent or more of domestic capacity is estimated to be nonviable and a candidate for shutdown. Long-term estimates of capacity and consumption suggest an overcapacity problem for many years. Developing and Eastern bloc countries account for most of the additions to capacity. Thus, the domestic industry can expect to face increased pressure from imports and worldwide potential for overpro- duction Mat will lead to lower prices. The problem of chronic overcapacity results from a number of reinforcing circumstances: (1) foreign government investment in capacity, ~rrespechve of demand; (2) foreign subsidies that increase output and reduce the rate of plant closures; (3) protectionism in domestic markets; and (4) growth in the use of steel Mat lags the growth in GNP. Any attempt to revitalize the industry must balance a number of complex and often contradictory factors: determining the minimum domestic capacity needed for national security, achieving the inevitable restructuring while protecting the interests of affected workers and communities, providing U.S. consumers with access to the lowest-cost steel available worldwide, ensuring free and fair global trade in steel, and recognizing the aspirations of devel- oping counties. Irrespective of the policy changes implemented, the industry will encounter some pedant shrinkage and represent a declining fraction of world capacity, and no measures will make all of those involvedsteel producers, steel workers, and consumersbetter off.

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486 N. BRUCE HANNAY Fibers, Textiles, and Apparel Developing countries regard manufacture of fabrics and apparel as an important source of employment and export earnings. They have extensive government programs to encourage investment and growth, to establish fa- vorable terms for exports, and to restrict imports. Conversely, U.S. policies have been designed to slow the decrease in employment resulting from import . . competltlon. Each of the three segments of this textile complex fibers and yarn, textiles, and apparel stands in a somewhat different competitive position. Fibers and yarn are produced primarily by large, powerful concerns that are able to finance investment in technology development and new equipment. The United States enjoys a favorable position in both the technology and trade of these products. The industry is capital-intensive, and its technology diffuses rapidly. The technology for this industry is developed by the fiber producers, who emphasize new fibers first and then reductions in cost. Econ- omies of scale and aggressive R&D have enabled the U.S. fins to maintain competitive leadership, and this leadership can be sustained. Technological advance in textiles is concentrated in the equipment man- ufacturers; little R&D is conducted by the fabric and apparel producers. Advances in textile- equipment diffuse rapidly around Me world and enable the developing countries to upgrade their operations. The U.S. position in textile machinery has weakened dramatically Imports represented 9 percent of shipments in 1963 and 50 percent in 1980, with West Germany and Switzerland accounting for over 60 percent. Many key technical advances are now being made overseas. Technological advances in fabrics have emphasized improved productivity. Many of the major advances have been made abroad, but U.S. firms have adopted them, along with other international competitors. The United States now has a clear technological lead in nonwovens, but that lead is expected to narrow. In general, the United States has a strong favorable balance of trade, but the picture is highly variable. Computer technology has had a substantial impact on apparel manufacture, but the industry is still labor-intensive; economies of scale are not an important driving force. Smaller Sirens have been particularly hard hit by changes in technology and competition. Most have lacked Me expertise, capital, and vision to take advantage of foreign market opportunities and to establish lower-cost foreign manufacturing facilities. As a consequence, these firms have been under severe competitive and financial pressure, and many have disappeared. Japanese firms have responded to changing international competition by following the shifting of comparative advantage to developing counties. By a combination of establishing local facilities and partnerships, licensing,

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A STUDY OF U.S. COMPFIITIVENESS IN SEVEN INDUSTRIES 487 loans, and intricate purchasing and selling arrangements, the Japanese have played an active role in the emerging textile complex in the Asian-Pacif~c area. Ike textile complex in the United States faces a shortage of technical workers and managers at all levels in comparison with what is needed to sustain a strong competitive position. The levels of compensation and [united attractiveness of careers in the industry contribute to the problem. Aggressive pursuit of technological developments and improved competence in inter- nahona1 business are critical to success. The need for developing countries to increase their exports and the high future grown in developing-country markets create political and diplomatic dilemmas that complicate any attempts to change the international framework of trade. Trade in textiles is subject to destabilizing surges. Mechanisms and re- sources for more rapid response to sudden changes could be helpful. Even though tariff bamers are substantial, nontanff barriers, such as customs clearance, inspection, and local-content requirements are often greater de- terrents and more difficult to identify. Present restrictions on offshore pro- cessing of some stages of manufacture reduce the flexibility of producers to achieve lowest cost and thus diminish the U.S. international compen~veness. Machine Tools The very competitive machine tool industry is highly fragmented with many small, independent, family-owned fins. The industry is relatively small. Nevertheless, it is of key strategic importance both to national security and to international economic competitiveness. Continued improvements in productivity are cnucally dependent on a healthy, technologically advanced machine tool industry. The availability of sophisticated but inexpensive new electronic devices, especially microprocessors and sensors, is opening up major opportunities for automation of production equipment. A mlmber of indications of He declining health of the U.S. industry have emerged. The U.S. share of world exports dropped from 23 percent in 1964 to 7 percent in 1980, while imports increased from 4 percent to 24 percent of domestic consumption. The United States now has a negative balance of trade in machine tools, and it is worsening. The major problem facing the industry is the traditional one of extreme cyclicality. The severe swings in volume reduce He investment attractiveness of the industry and lead to undercapitalization. This, in turn, severely impedes the upgrading of facilities and introduction of new technology. The same conditions have led to a persistent inability of the industry to attract skilled manpower at all levels- tool and die makers, industrial engineers, software programmers, and general management. Employment uncertainty has deterred entry. College courses

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488 N. BRUCE MAY pertaining, to manufacturing, technology generally have not been highly re- garded by students, and careers have had a low appeal. There has been little government funding of manufacturing research. Only very recently has at- teniion in the United States been given to these circumstances, which are in sharp contrast to the situation ire both Europe and Japan. The reduction in exports takes on added si:,nif~cance because export sales can help alleviate the extreme swings of the domestic market. Export sales also provide additional revenue to help defray the cost of developing and introducing new products and new manufacturing technology. ~ general, the technology of American machine tools as products is roughly comparable to that of other nations, although American products are regarded as behind competition in the use of electronic controls and the associated software. Also, U.S. manufacturing technology employing machine tools is behind in moving to flexible, computer-integrated manufacture and in ap- plyin~ numerical controls, both of which were first introduced in the United States. Given Me decline in market share and unattractive financial perfor- mance, the prospects are uncertain that the industry will exploit technology to Me extent necessary to attain a competitive edge. Small, family-owned U.S. firms are poorly equipped to pursue interna- iional sales. Moreover, the loan criteria of He Export-Import Bank focus on transactions that are much larger than typical machine tool sales. The long-term viability of the U.S. industry will be strongly influenced by the growth and vitality of the U.S. economy, the level and stability of interest rates, and the development of a coherent export policy. Measures aimed more directly at supporting exports by small business would be es- pecially useful to the industry, as would increased attention to development of applicable human resource skills and of advanced manufacturing tech- nology. Changes in management with respect to pursuit of exports, invest- ment in new technology, human resource development, and closer ties with customers are also called for. Pharmaceuticals The profitability, excellent growth, and dramatic technical advances of Me U.S. pharmaceutical industry have tended to obscure the pronounced deterioration in relative performance of U.S. pharmaceutical firms vis-a-vis Heir foreign counterparts. In part, this unnoticed deterioration results from He long time lagas much as 20 yearsbetween decisions to invest in discovery of new drugs and a perceptible impact of any drugs discovered on the sales and profitability of the finn. In addition, the general and very rapid advance in the basic sciences of human health is generating sales growth worldwide, and this makes the U.S. industry appear to be growing, inno- vative, and profitable. Thus, He relative performance of pharmaceutical Grins

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A HI UDY OF U.S. COMPETITIVENESS IN SEVEN INDUSTRIES 489 vis-a-vis other sections of the U.S. economy looks favorable despite the relative decline internationally. As evidence of our deteriorating relative position, in roughly the past two decades the U.S. share of world pharmaceutical R&D expenditures has fallen by one-half, as have the number of new U.S.-owned drugs entering clinical teal, the U.S. share of world production, and the U.S. share of world exports. Foreign Sirens now market their innovations directly in the United States. For their part, U.S. fimns have invested widely in other countries and this is affecting the planning and conduct of their R&D. The principal determinant of competitive success is the ability to introduce a continuing stream of commercially successful new products through tech- nological innovation. However, the regulatory costs and delays imposed on U.S.-based R&D are significantly higher then elsewhere. The costs associated with the development and introduction of new drugs have become so large that access to the sales volume available from worldwide markets has become a critical consideration in determining competitive viability. Thus, the de- ter~oration of the U.S. share of world markets is cause for concern. Small firms are in an especially precarious position because they lack the financial resources to develop new drugs and clear them through the regulatory agency. Changes in government regulations and in the regulatory climate with respect to R&D, introduction of new therapeutic agents, export of experi- mental drugs, and acceptance of foreign data could have high leverage on competitive position. The process is at present subject to intense political pressure, requires massive amounts of documentation, and tends to delay clinical trial, even under carefully controlled conditions. Reforms Hat clarify and expedite the Food and Drug Administration's (FDA's) new ding-approval process, by providing a more significant role for experts from outside the FDA and by encouraging a more productive dialogue with industry, could significantly reduce the cost and time required to introduce new drugs. Also, the U.S. effort to deter economic concentration can limit He merging of firms that are not large enough themselves to be viable in global competition. The lengthy time required to obtain FDA approval eliminates nearly half of the intended 17-year protection granted by a patent. This led the NAE committee to recommend restoring patent life consumed by regulatory review to increase the incentive for innovation. Very recently, the government has taken a step of this kind. Civil Aviation Manufacturing The civil aviation industry, including both manufacturers and the com- mercial airlines, is in the midst of profound change. Some features of the change result from domestic actions and circumstances, for example, eco- nomic deregulation of air transport, while others result from external mends

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490 N. BRUCE MAY and events, such as the emerging foreign compenhon in commercial trans- ports, civil helicopters, and business aircraft. No other industry plays as crucial a role as aviation in national security, national economic health, and foreign trade. Civil aircraft manufacture provides both the base load for key design and production teams and a huge (15,000 firms) production infrastructure in a high state of readiness for national defense. Export of aircraft continues to be the largest single source of revenue from trade in manufactured goods (and second only to agriculture overall). After dominating world markets since the end of World War II, the U.S. aircraft industry now faces a significantly more challenging competitive environment. Among the factors worthy of special notice are the following: 1. Due to a combination of deep recession and economic deregulation, the financial performance of domestic airlines has deteriorated drastically, and continuation of the airlines' traditional role in launching new aircraft is uncertain. 2. Aircraft manufacture is recognized as an attractive industry worldwide. After decades of persistence the Europeans, Trough Airbus Industries, have demonstrated commercial success. The Japanese have targeted aircraft as a grown industry of the future. Many smaller countries are mounting programs in helicopters and small aircraft. These foreign competitors enjoy a special supportive relationship with their governments that gives them access to sources of financing for developing, production, and sale of aircraft that are not available to a private firm in the United States. 3. Air travel in the United States is projected to grow less rapidly than in foreign markets. Thus, export sales and product planning for export markets will become increasingly important. 4. Countries are demanding a participative role in manufacture as the puce of entry into their markets. The manufacturers seek to spread risks and to develop additional capital. Thus, aircraft manufacture is becoming increas- ingly internationalized. 5. Because of the indusmy's close connection win national security, Be U.S. government plays a determining role in controlling aircraft exports. The task of balancing national security and commercial interests is becoming increasingly complex and controversial. 6. The technology underlying the design and manufacture of aircraft and engines offers major opportunities for improved performance, economy, and reliability. The United States has leadership or panty in all the key tech- nologies. However, the margin of leadership has narrowed, and competitors have the capability to equal or even surpass us if U.S. effort loses momentum either in R&D or in its application to new aircraft. Since trade in aircraft is dominated by foreign governmental actions Cat apply economic and social

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A STUDY OF U.S. COMPETITIVENESS IN SEVEN INDUSTRIES 491 criteria not possible for a privately owned company, trade negotiations be- come central to competitive success. In We competitive env~onrnent Mat is emerging, Me traditional U.S. approach of seeking to create discipline in the rules of internahona1 made faces serious handicaps, unless it is pursued more vigorously with respect to (a) negotiation of agreements that prohibit trade- distoriing practices, (b) inclusion in Me agreements of all counties competing in aircraft markets for all classes of planes, and (c) provision of adequate response mechanisms and deterrents to violators. In cons~denng policy initiatives for Me future, the following areas warrant special attention: Ensunng pursuit of U.S. interests in trade agreements and in mechanisms for timely, effective response to predatory practices. Modifying lending practices of the Export-Import Bank to ensure that its terms and conditions are adequate to meet the behavior of competitors. ~ Preserving momentum in research and technology development. Examining more broadly the trade-offs between technology transfer and the impact of export restnchons on the U.S. competitive position. Ensunng maximum synergy between nahona1 defense and commercial in- terests in Me development, design, and production of aircraft. SECTORAL SIMILARITIES AND DIFFERENCES What similarities and differences appear among these various industries? What lessons can be drawn with respect to public policy, management prac- tices, and academic programs and pnonties? Need for a Global Perspective The most dramatic common theme that emerges is that, despite the dis- parate nature of these various industries, all must now be termed world-scale industries. They must be managed in Mat context, and public policy must reflect the reality of growing and more pervasive international competition. For some industries, escalating costs of R&D, combined with burgeoning demands for large quantities of capital to obtain modern facilities, necessitate tapping global markets in order to generate the needed sales volume. For others, decisions regarding capacity expansion and future demand must be made in a global context; otherwise, serious errors either in creatin, over- capacity or in lacking capacity to serve growthare almost inevitable. Thus, even though, in the aggregate, the U. S. economy is less dependent on foreign trade than many other nations, more and more {J.S. industries are finding that they must compete internationally in order to survive. Moreover, in most

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492 I. BRUCE MAY of the industries studied, foreign markets will be growing more rapidly than domestic ones. Despite the emerging competitive situation, international trade and rela- tionships win other economies simply are not yet accorded the same im- portance in the United States as in Japan and Western Europe. The sheer size and vitality of the U.S. market, combined with the size and richness of the land mass of the United States, make foreign trade and relations with other countries seem remote and relatively unimportant. The low level of proficiency in foreign languages and the limited knowl- ed~,e of foreign cultures and customs provided by our educational system are an unmistakable indicator of the limited importance attached to international trade. Government policies antitrust, regulatory, tax, trade, and many oth- ers mostly reflect concern with domestic issues, and there is little regard for their effect on U.S. competitiveness in international markets. This saline situation is mirrored in U.S. executive development programs, which usually put little weight on international experience, and in the U.S. approach to product planning. Most U.S. firms develop products for the American market and then offer them, more or less as an afterthought, for export. Consumer products reflect American tastes and standards of living. Industrial products are built to U.S. standards and reflect U.S. trade-offs among the costs of labor, capital, and energy. In contrast, the Japanese work diligently and remarkably effectively to achieve congruence between the requirements of domestic and export markets. The recumng hostility between :,ovemment and industry on market mat- ters, and the bureaucratic tangles that ensnarl licensing, certification, ap- provals, and so on, also reflect the low importance attached to trade, as do the limited resources made available to support trade negotiations, to ad- minister customs regulations, and to collect and analyze trade and economic data and infonnation on foreign technology. Control of technology transfer, while legitimate for national security, has not been consistent and imposes delays that call into question the reliability of U.S. shippers. In addition, the control is sometimes imposed without sufficient perspective on the availability to foreign customers of alternatives that could negate the results the United States seeks and without adequate consideration of the potential negative impact on the competitive status of U.S. firms. The value-added tax (VAT) widely used in Europe has a built-in bias that supports exports as compared with our corporate income tax. In the United States continual and extensive education and persuasion are required to pre- serve critical financial supports, such as DISC and Export-Import Bank loans, while, in contrast, foreign government representatives are frequently virtual pawners in the negotiations for large transactions and provide visible evidence of Weir government's support for the transaction.

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A STUDY OF U.S. COMPIETI~IVENESS IN SEVEN lNDU=RIES 493 Inconsistency of Policies, Institutions, and Priorities A second major common theme was the lack of coherence and mutual reinforcement among policies and institutions and the lack of consistency in setting priorities that one generally finds in the United States. This contrasts with the situation in Japan and, to some extent, in West Germany. In those countries monetary, fiscal, export, and tax policies, the educational system, capital markets, and industrial management and labor relations have a con- sistency and coherence of purpose that we lack. This is not to suggest that we should adopt their ways, as Be pluralism of our society and our institutions and a government based on checks and balances have both served us well. Nevertheless, it is imperative for us to scrutinize our own strengths and weaknesses with a realistic eye in the light of both the growing importance of international trade and the strengthened competition we face. Small Firms Handicapped Another sectoral similarity is the handicap of small firms in pursuing international sales. Some important industries, such as machine tools and textiles, are characterized by small firms, and in electronics small firms are prominent. The foreign-language deficiency noted above is one impediment. Inadequate knowledge of foreign markets and foreign business and legal practices is another. Many banks i especially those outside the major coastal cities, have no experience in international finance to aid local businessmen. The NAE studies pointed out that appropriate help for small business is thought to be lacking at government agencies. The priorities and lending practices of the Export-Import Bank in the past have been directed very heavily toward large transactions, which virtually exclude smaller firms; fortunately, that situation is now changing. High Cost of Capital The cost and availability of capital for U.S. companies (particularly in electronics and steel), as compared with foreign competitors, and the pro- jected rate of return on investments increasingly threaten the ability of im- portant U.S. industries to invest Be capital necessary to remain competitive in international markets. In part, the difference in the cost of capital reflects special foreign government tax programs, as well as direct subsidies, to foster exports. In part, it also includes general economic considerations, such as the rate of saving, interest rates, taxes, rate of inflation, and monetary policy. But Be problem of projected rates of return goes farmer. It involves problems of highly cyclical industries (such as steel and machine tools), inadequate rate of return in critical industries, short time frames for evaluating investment

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494 N. BRUCE HANNAY by U.S. managers and U.S. investors, and volatility in flows of capital. This last subject is particularly important because of its impact on the time horizon for planning investmentMe pursuit of higher return on investment, In pnnciple, leads to greater efficiency in the allocation of resources, but it may lead to shortened time horizons and nsk-aversion in investment . . c .eclslons. Role of Developing Countries The developing counties are becoming increasingly important in the com- petitive equation. In some ~ndusmes steel, and fibers and textilestheir impact is evident through increases in capacity. In other industries autos, pharmaceuticals, and aircraft their impact Is a combination of the growing importance of Heir markets, due to He more rapid grown of these less mature economies, and their insistence on domestic content as He price of market access. Shortage of Trained Personnel In several sectors electronics, machine tools, and textiles there is a widespread shortage of Gained people at various levels, from shop floor to management. The shortage applies to specific technical skills in electronics, computers, software, and machine design. Two other broad personnel cat- egories of special importance are people trained ire international business, win direct experience in foreign commerce, and people Pained In sophis- ticated manufacturing. The latter reflects the low status of manufacturing in the United States, in education and as a career, a situation Hat is in striking contrast to that in Japan, West Germany, and elsewhere. The shortage of specific technical skills is particularly acute in electronics. Our production of electronic and other engineers is relatively much lower than Hat of our major international competitors, especially Japan and West Germany. Moreover, the shortage of faculty in electronic engineering aIld computer science, resulting from the competition with industry for these specialists, is serious. The escalating cost of modern equipment and the high proportion of foreign students are also important elements in our inability to provide sufficient numbers of well-educated professionals in these fields. This problem appears not to be severe in the automobile and steel indus- tries, because they have been undergoing major retrenchment, or in phar- maceuticals, because of He massive government support of university research in the life sciences. On the other hand, both machine tools and textiles suffer because they are not viewed as glamorous, high-grow industries. In aircraft the principal concerns involve ameliorating He effects of extreme cyclicality

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A STUDY OF U.S. COMPLETENESS IN SEVEN INDUCES 495 and holding skilled design and production teams together during troughs in volume. Role of New Technology The prospects for the development of new technology are very bright in most of the industries studied. This is particularly Rue of electronics, aircraft, pharmaceuticals, and machine tools, and the opportunity is there in autos and in fibers and textiles. Only in steel was there any real doubt about the possibility Hat new technology could produce a comparative advantage for U.S. industry. These observations point to the importance of strengthening our national capability in the development of new technology through mea- sures ranging from the reinforcement of our science and eng~neenng base in the universities to tax incentives to industry for R&D and for investment in new plants. Some additional common themes were noted with respect to conditions needed for maintenance of technological leadership. The close tie between technological leadership and financial performance, including the ability to obtain capital, was noted particularly in electronics, pharmaceuticals, ma- chine tools, and textiles. Similarly, the requirement for large, well-funded R&D programs for maintenance of the technological leadership needed to achieve and sustain a strong competitive advantage was evident in the in- dustnes electronics, pharmaceuticals, and aircraftthat are experiencing the most rapid technological progress. The competitive leverage obtainable from technology is also very important in machine tools, but in steel, autos, and textiles it is diluted by such factors as labor and energy costs, the cost of raw matenals, and government trade policies. In no case was technological leadership, by itself, an adequate basis for competitive success. Adequate technology is a necessary but not a sufficient basis for success. 1 Other Common Themes Several other common themes were apparent. Managerial skills and prac- tices were highlighted as critical factors in automobiles, machine tools, and textiles. Deficiencies were noted in the U.S. capability to pursue international business and to achieve high productivity and high quality in mass-production industries. In machine tools the tradition of independence in pursuing tech- nological development and relatively limited interactions win customers were noted as special management problems. Three industries, automobiles, textiles, and steel, are projected to expe- rience permanent decline from earlier levels of output, irrespective of public policy. In these cases, policy initiatives should include consideration of

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496 N. BRUCE HANNAY needed restructuring and ameliorating the disruption caused by the transition to a new, sustainable level of operations. POLICY IMPLICATIONS AND CONCLUSIONS The original premise on which the study of the seven industries was based was borne out by the studies themselves; namely, rho two industries are alike in their patterns of technological development, in the problems they must solve in order to remain healthy and competitive in international markets, and in the public policies that would be most helpful to them in achievin, their ends. Despite the differences among the industries, however, it is gen- erally the case that important concerns go beyond the bounds of a single industry. Thus, there is ample opportunity for policy actions that would have broad, if not universal, effects on industry. Several conclusions with respect to policy actions of this kind follow. The first general conclusion drawn from the studies is that government policy must be based on a substantially more informed view of the charac- tenstics, needs, and prospects of individual industries than it has been to date. This is not to say that government policy should amount to nothing more Man an accumulation of responses to perceived or claimed needs of every industry, but rather that it should be an enlightened policy in the sense that it recognizes that no single action can meet all needs, no simple "fixes', exist, and not all sectors can be equally satisfied by any policy. The studies do demonstrate that there are abundant opportunities for policy changes Mat would benefit important segments of industry, the U.S. economy, and the U.S. position in international technology competition. Some examples of such policy actions are changes in regulation in pharmaceuticals, support for exports from small machine-tool manufacturing firms, and steps to lower the cost of capital for the steel and electronics industries. In any efforts to strengthen government policies and actions, Tree overriding requirements must remain paramount: (1) Me need for consistency over time in our ap- proach to issues, (2) the need for persistent, visibly high-priority attention to international trade negotiations and the monitoring of the behavior of foreign competitors, including foreign governments (a particularly trouble- some problem in aircraft), and (3) the need to establish a mutually reinforcing set of policies and actions relating to trade negotiations, monetary and fiscal policy, encouragement of capital fo~ation, export support instruments, ed- ucation, restructuring of industry, and so on Clearly, this implies a need for a continuing, coordinated review and awareness of technology and trade issues at a high enough level in the government that effective action can be taken. It is essential that public policy increasingly take into account the international implications, as well as Me domestic effects, of any new initiatives, not only in policy formulation but

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A HI UDY OF U.S. COMPETrTIVENESS IN SEVEN INDUSTRIES 497 also in administrative practice. While our system of government and the limits of our understanding of He dynamics of the economy certainly do not permit us to adopt a fully articulated "industrial policy" in the foreseeable future, a higher degree of coordination among the many separate policies and policymakers of our government is clearly called for. This same high degree of coordination is needed to provide the knowledge and information base to support policy formulation and administration. A closely related general conclusion is that there must be continuing at- tention at the highest levels of government to the basic contributors to the country's economic healtheducation, science and technology, and a cli- mate that is conducive to the industrial application of new technology being conspicuous among them. Thus, we must address such shortages as those in manufacturing engineering and in the supply of electronics engineers and computer scientists. We must give greater attention to the basic health of science and engineering in our universities. And, we must adopt policies that encourage capital formation and investment in new technology in the private sector. Another general conclusion from the studies is that there is a challenge to U.S. management and labor. We have no monopoly on managerial com- petence, foresight, or competitive drive. Exogenous factors, such as a giant dynamic market, plentiful national resources, an educated, industrious work force, political stability, and private enterpnse, have contributed historically to managerial success. They may also have delayed recognition of managerial weaknesses. These exogenous strengths are no longer the dominant force they once were. Increased attention on the part of both large and small companies to world markets, to foreign competition, to foreign policies on trade and on technology. and to foreign managerial innovation is becoming critical to survival. As a corollary, increased public support for education in foreign languages and foreign cultures, as well as more rigorous standards for public literacy in science and technology, are other dimensions of Be change that is needed. Unless the public comes to recognize the vital role that international trade plays in the nation's economic health and in Be competitive viability of our own industries, the sustained support that is required for progress in other areas is unlikely to emerge. The challenge to labor is to show that American labor can make contn- butions to productivity and to product quality that match those of our principal foreign competitors, especially the Japanese. On the positive side, U.S. labor has generally been more flexible in the acceptance of technological advances than have its counterparts in many European countnes. As the pace of tech- nological change increases, labor and management will need to work together creatively to develop mechanisms for ameliorating the disruptions brought about by technological change. Both management and labor will have to accept job retraining as a way of life.

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498 N. BRUCE HANNAY A fourth general conclusion is that the government needs to give more sustained attention to the problems faced by small companies. Tax policy has alternately favored and discouraged venture companies at present, it mostly favors them, but it is far from clear that this will last. Small companies often need special help from the government in competing in foreign markets, and for the most part this help has not been forthcoming. Small companies, individually, generally lack the expertise and experience to deal successfully with foreign regulations, procedures, and market systems and could benefit greatly from government assistance in those areas. Until recently the financial assistance available from the Export-Import Banl: has been unavailable to smaller companies or for smaller transactions in all companies. Finally, what would the committee now say about the concern that started it on its studies nearly a decade ago? Was it inevitable Hat U. S . preeminence in technology and trade would erode as Japan and Europe rebuilt their econ- omies, or were there basic weaknesses in the U.S. system that were primarily responsible for our apparent loss of momentum? As is usually the case, there are elements of truth in the opposite view- points. Certainly Europe and Japan found it possible to take advantage of existing technology and to use that as an important lever for the rapid eco- nomic growth Hey experienced and the gains they made relative to us after World War B. The-readjustment process seems to have about run its course, and as far as Europe is concerned we may now be in balance. But Japan has gone beyond this and has emerged as our real economic competitor, and the outcome is not at all clear. At He same time, we are no longer complacent. The very fact that we have recognized our previous inattention to our economic vitality has led us to at least some remedial policies and actions, although probably not enough. There are ample signs that we have not lost our ability to innovate, our productivity has turned up, and we are becoming more competitive. However, we have not yet fully met the Japanese challenge, and we will not unto we give more serious national attention to issues of international trade and to its dependence on technology. Not only in He so-called high technology ~ndusmes, but in He others as well, we need a continuing flow of new technology if we are to remain the world's economic leader. Technologists and economists are in essential agreement on the issues and on He directions in which the United States must move- the challenge to them is to make Heir voices heard. NOTES 1. The studies were funded prunanly by the National Science Foundation; pomons were also sponsored by the U.S. Department of Commerce and die National Aeronautics and Space Ad- ministration. See notes 2, 3, and 4 for titles of specific studies. 2. National Research Council and National Academy of Engineenug, Committee on Technology

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A HI UDY OF U.S. COMPETITIVENrESS IN SEVEN INDUSTRIES 499 and International Economic and Trade Issues, Technology, Trade, and the U.S. Economy (Wash- ington, D.C.: National Academy of Sciences, 1978). 3. National Research Council and National Academy of Engineenng, Committee on Technology and International Economic and Trade Issues, The Impact of Regulation on Industrial Innovation (1979); The Impact of Tax and Financial Regulatory Policies on Industrial Innovation (1980); Antitrust, Uncertainty, and Technological Innovation (1980) (Washington, D.C.: National Acad- emy of Sciences). . National Academy of Engineenng, Committee on Technology and International Economic and Trade Issues, The Competitive St of the U.S. Auto Induce (1982); The Competitive Status of the U.S. Machine Tool Industry (1983); The Competitive Status of the U.S. Pharmaceutical Industry (1983); The Competitive Status of the U.S. Fibers, Textiles, and Apparel Complex (1983); The Competitive Status of the U.S. Electronics Industry (1984); The Competitive Status of the U.S. Civil Aviation Manufacturing Industry (1985); The Competitive Status of the U.S. Steel Industry (198S). (Washington, D.C.: National Academy Press, 1982-1985).

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