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America's Industrial Resurgence A?: An Overview DAVID C. MOWERY University of California, Berkeley INTRODUCTION A series of reports in the late 1980s painted a gloomy picture of U.S. indus- trial competitiveness. Perhaps the best-known, the report of the M.I.T. "Com- mission on Industrial Productivity," opined that "...American industry is not pro- ducing as well as it ought to produce, or as well as it used to produce, or as well as the industries of some other nations have learned to produce. . .if the trend cannot be reversed, then sooner or later the American standard of living must pay the penalty" (Dertouzos et al., 1989~. The Commission report criticized U.S. indus- try for failing to translate its research prowess into commercial advantage. Since that report's publication, overall U.S. economic performance has improved markedly. Is this improved performance a result of better performance in the industries analyzed by the M.I.T. Commission?i What are the dimensions of change in U.S. industrial or economic performance since the early 1980s, at the level of the economy as a whole or at the level of individual sectors? Economy-wide measures paint a mixed picture of performance improvements and structural change since the early 1980s. The trade deficit has grown and hit a record high of $166 billion in 1997. Nonfarm business labor productivity growth rates have improved since 1990 but remain below the growth rates achieved dur- ing the 1945-1980 period. Unemployment and inflation are significantly lower than was true of the 1970s and 1980s. Measures of household income distribu iMuch of this improvement in U.S. competitive performance since 1990 is an improvement in performance relative to that of other nations. The severe problems that have hobbled the Japanese economy for much of the l990s, for example, have weakened the performance of many of the Japa- nese firms that were among the strongest competitors of U.S. firms during the 1980s. 1

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2 U.S. INDUSTRYIN2000 lion, however, suggest that households in the lowest quintile of the distribution have fared poorly during the past two decades, while the top quintile of the distri- bution has done well. Other indicators suggest that the structure of the U.S. research and develop- ment system entered a period of significant change beginning in the early 1980s that has yet to run its course. Among other things, industrially financed R&D has grown (in 1992 dollars) by more than 10 percent annually since 1993, but real industrial spending on basic research declined during 1991-1995. Recent growth in industrially financed R&D is dominated by spending on development. Aggregate performance indicators thus are mixed, although broadly positive. But the relationship between this improved aggregate performance and trends in individual industries, especially those singled out for criticism by the M.I.T. Com- mission and other studies, remains unclear. A better understanding this relation- ship requires analysis of trends in these industries. This volume provides a disaggregated assessment of recent performance in 11 U.S. manufacturing and nonmanufacturing industries.2 The papers in this volume were commissioned by the National Research Council's Board on Sci- ence, Technology, and Economic Policy (STEP) as part of a study of the chang- ing innovative performance of the U.S. economy. Ten of the industry studies were prepared by researchers from investigations of individual industries spon- sored during the 1990s by the Alfred P. Sloan Foundation. The Sloan Foundation industry studies, which were in part a response to the reports of the M.I.T. Com- mission and other groups, examined trends in the performance of individual in- dustries that often are not captured by official statistics. By supporting extensive fieldwork on managerial and competitive challenges faced by industries and firms, the Foundation also sought to change the graduate education of engineering, eco- nomics, and management students and thereby influence future research and teaching in U.S. higher education. Two additional papers on the chemicals industry are included in this volume. The papers were produced by a study overseen by faculty at Stanford and Carnegie Mellon Universities. The first paper, by Ralph Landau and Ashish Arora, is broader in its coverage of international developments and covers a longer time period than other papers in this volume. This paper provides an overview of the many levels at which competitive performance must be assessed and the numer- ous factors that affect it. Its historical perspective enables the reader to assess the extent to which the factors singled out in other industry studies are likely to influ- ence performance over the long term. The second paper, by Ashish Arora and Alfonso Gambardella, examines more recent trends in the competitive perfor- mance of U.S. firms in the international chemicals industry. The contributors to this volume have each pursued a different approach to 2The industries are chemicals, pharmaceuticals, semiconductors, computers, computer disk drives, steel, powdered metallurgy, trucking, financial services, food retailing, and apparel.

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AN OVERVIEW 3 analyzing "their" industry, reflecting their interests and background as well as the competitive challenges and issues of greatest urgency for each industry. In draft- ing their papers, contributors were asked to examine several common issues: (1) the record of competitive performance in their industry since 1980, especially vis-a-vis competition from other industrial nations; (2) the influence on this com- petitive performance of new approaches to managing and organizing the innova- tion process in their industry; and (3) the influence of "non-technological" fac- tors, including government technology, trade, and regulatory policies. CHANGES IN COMPETITIVE PERFORMANCE: A SUMMARY The first and striking conclusion from these papers is the extraordinary di- versity in the performance of these eleven industries since 1980. Some, such as the U.S. semiconductor and steel industries, have staged dramatic comebacks from the brink of competitive collapse. Others, including the U.S. computer disk drive and pharmaceutical industries, have successfully weathered stronger foreign competition throughout this period. Foreign competition has been less salient for the nonmanufacturing industries represented in this volume, although domestic deregulation and changing consumer preferences have created a more competi- tive domestic environment. The diversity among these industries is partly a reflection of their contrasting structure. Some, such as powdered metallurgy and apparel, are populated by relatively small firms with modest in-house capabilities in conventionally de- fined R&D. Other industries, such as pharmaceuticals and chemicals, are highly concentrated, with a small number of global firms dominating capital investment and R&D spending. In semiconductors, pharmaceuticals, computer software, and segments of computer hardware, by contrast, one observes a large number of small and large firms that complement one another, often being linked through collaborative R&D relationships. Similar diversity in structure is apparent within the three nonmanufacturing industries. Although entry barriers appear to be high and growing higher in several of the industries discussed in this volume (e.g., chemicals, computer disk drives), in others a combination of technological devel- opments and regulatory change is promoting the entry of new competitors. Despite this diversity in structure and performance, virtually all of the con- tributors to this volume argue that performance in "their" industry has improved during the past two decades. The papers use an array of different measures to measure performance, and not all of them are calibrated against the performance of non-U.S. firms in these industries. Nevertheless, the overall portrait is one of stronger performance, not least in the ability of firms to develop and deploy new products and processes. Importantly, where these chapters discuss improvements in innovative performance, they refer to improvements in the deployment, rather than solely the development, of innovations. As many authors point out, firms have strengthened their ability to exploit their own or externally sourced innova

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4 U.S. INDUSTRYIN2000 lions more effectively, rather than focusing exclusively or even primarily on im- provements in their research or development capabilities. The definition of innovation that is most relevant to understanding the im- proved performance of U.S. firms in these industries thus must be a broad one that includes the adoption and effective deployment of new technology as well as its creation. The chapter on the computer industry refers to the important role of "co-invention," a process in which the users of the products of computer hard- ware and software firms contribute to the development and improvement of inno- vations similar examples can be drawn from other industries. In other indus- tries, specialized suppliers of logistics services, computer "systems integration," and consulting services have played important roles. Many of the chapters also stress the importance of the efficient adoption of technologies from other industries, nations, or firms. In many cases (e.g., fi- nance, apparel, pharmaceuticals, computers) the adoption of new technologies (including new approaches to managing innovation) has required significant changes in organizational structure, business processes, or workforce organiza- tion within the firm. But the essential investments and activities associated with the broad definition of innovation employed here are captured poorly if at all in public R&D statistics. Indeed, many of these activities are not included in even the broader "innovation surveys" undertaken by the National Science Foundation and other public statistical agencies. The intersectoral flow of technologies, especially information technology, also has contributed to the competitive performance of these industries. The importance of this factor underscores the fallacy of separating "high-technology" from other industries or sectors in this economy. Mature industries in manufac- turing, such as apparel, and in nonmanufacturing, such as trucking, have rejuve- nated their performance by adopting technologies developed in other industries. The effects of this intersectoral technology flow are most apparent in the non- manufacturing industries in this volume (trucking, food retailing, and financial services), all of which have undergone fundamental change as a result of adopt- ing advanced information technologies, but there are numerous other examples of this process and its economic importance. Moreover, the management of the adoption process and the effective "absorption" of technology from other sectors are themselves knowledge-intensive activities that often require considerable in- vestment in experimentation, information collection, and analysis. These chapters raise a related point concerning the interdependence of tech- nologies emerging from different industries in the U.S. economy. U.S. competi- tive resurgence in industries such as computers and semiconductors relied on the close proximity of U.S. producers and demanding, innovative users in a large domestic market. In addition, the rapid growth of desktop computing in the United States during the 1980s was aided by the availability of imported desktop systems and components, which kept product prices low and propelled adoption of this technology at a faster pace than in most Western European economies or

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AN OVERVIEW s in Japan, where trade restrictions and other policies kept desktop system prices higher. The rapid domestic adoption of desktop computing contributed to the growth of a large packaged software industry that U.S. firms continue to domi- nate. In other words, the availability of relatively inexpensive complementary technologies supported a process of adoption that spurred further innovation and economic growth. This virtuous circle was further aided by the restructuring of the U.S. telecommunications industry that began in the 1980s. Such restructuring was associated with the entry of numerous providers of specialized and "value- added" services, providing fertile terrain for the rapid growth of firms supplying hardware, software, and services in computer networking. This trend has ben- efited the U.S. computer industry, the U.S. semiconductor industry, and the domestic users (both manufacturing and nonmanufacturing firms) of products and services produced by both. These and other intersectoral relationships are of critical importance to understanding U.S. economic and innovative performance at the aggregate and industry-specific levels. The diffusion of information technology, which has made possible the devel- opment and delivery of new or improved products and services in many of these industries, appears to be increasing the skill requirements of many jobs that for- merly required minimal basic skills. These technologies place much greater de- mands on the problem-solving, numeracy, and literacy skills of employees in trucking, steel fabrication, banking, and food retailing, to name only a few ex- amples. Many U.S. entry-level and older workers in these industries face serious challenges in adapting to these new skill requirements because of weaknesses in their basic skills rather than in their job-specific training. But these studies point out that the adoption and effective implementation of new technologies places severe demands on the skills of managers and white-collar workers as well. Not only do managers need new skills and an ability to implement far-reaching orga- nizational change, but in industries as diverse as computing or banking, they face pervasive uncertainty about the future course of evolution of technologies and their applications. As the chapter by Landau and Arora on long-term growth in the chemicals industry points out, nontechnological factors, such as trade and regulatory policy, the environment for capital formation and corporate governance, and macroeco- nomic policy all play important roles in competitive performance, especially over the long run. The Landau-Arora chapter's analysis of long-term industrial per- formance focuses on a "matrix" of factors that operate at the level of the institu- tional and policy environment within which firms operate as well as at the level of the firm. One of the most important of these factors, which affected the entire U.S. economy and rarely figures prominently in sectoral analyses such as those in this volume, is macroeconomic policy. Both monetary and fiscal policy have been less inflationary and less destabilizing during the 1990s than during the 1980s, as the report of the STEP Board on competitive performance points out (National Research Council, 1998~. Although we do not yet have a well-devel

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6 U.S. INDUSTRYIN2000 oped empirical model of the precise channels through which the macroeconomic environment influences the investment and strategic decisions of managers in the industries examined in this volume, these links appear to be strong and mean that a stable, noninflationary macroeconomic policy is an indispensable component of improved competitive performance. Another common element that has strengthened the ability of U.S. firms in many industries to regain or maintain their competitive performance, especially in the face of strong foreign competition, is rapid adaptation in corporate strategy and operations. U.S. firms in several of these industries have restructured their internal operations and existing product lines and have developed entirely new product lines, rather than continuing to compete head-to-head with other U.S. or non-U.S. firms in established lines of business. In some cases, efforts by U.S. firms to reposition their products and strategies in the late 1980s and early l990s were criticized for "hollowing out" these enterprises, transferring capabilities to foreign competitors, and/or abandoning activities that were essential to the main- tenance of these capabilities. To a surprising degree, these prophecies of decline have not been borne out. The shift by U.S. computer disk drive manufacturers of much of their production and related technology to offshore sites has not "hol- lowed out" their competitive capabilities. Nor has the withdrawal of most U.S. semiconductor manufacturers from domestic production of DRAM components severely weakened their manufacturing capabilities in other product lines. In many U.S. industries, the post-1980 restructuring has been associated with entry by new firms (e.g., specialty chemical firms, fabless semiconductor design firms, package express firms, or steel minimills), and in other cases it has been aided by the entry of specialized intermediaries, such as systems integration firms, con- sultants, logistics firms, or specialized software producers. Thus, many of the factors cited by the M.I.T. Commission and other studies as detrimental to U.S. competitiveness in the late 1980s, such as the high levels of entry by new firms into industries such as semiconductors or the pressure from capital markets to meet demanding financial performance targets, contributed to this strategic adaptation by many U.S. firms. It is important to note that the results of such restructuring are not always successful. The study of financial services in this volume concludes that much of the merger and acquisition activity in U.S. banking since 1980 has diminished shareholder value rather than increased it. Nevertheless, in many of these industries, such as steel, disk drives, or semi- conductors, European and Japanese firms were slower to respond to new com- petitive forces, often because their domestic financial markets were less unfor- giving than those within which U.S. firms operate. This financial environment also has facilitated the high rates of formation of new firms in U.S. industries such as semiconductors and biotechnology. In other words, factors that during the late 1980s were described as sources of competitive weakness appear to have contributed to the recovery of several of these industries in the l990s. This perspective, however, leaves at least two issues

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AN OVERVIEW 7 unresolved. If U.S. firms' restructuring in the 1990s was an important factor in their improved performance, why did such restructuring take so long to begin? And will such restructuring be an occasional or a continuous process in the future? Moreover, the frequency and nature of such rapid structural change have signifi- cant implications for worker skills and employment, an important policy issue that has received little attention in most discussions of "industrial resurgence." CHANGE IN THE STRUCTURE OF THE INNOVATION PROCESS Since 1980, the structure and management of the innovation process by firms in all eleven of the industries discussed in this volume have changed consider- ably. The most common changes include (1) increased reliance on external per- formers of R&D, such as universities, consortia, and government laboratories; (2) greater collaboration with domestic and foreign competitors, as well as cus- tomers, in the development of new products and processes; and (3) slower growth or cuts in research spending. Beginning in the 1980s, a combination of severe competitive pressure, the perception of disappointing returns from their rapidly expanding investments in internal R&D, and a change in federal antitrust policy contributed to the decision by many U.S. firms to "externalize" a portion of their R&D operations. Large corporate research facilities in pioneers of industrial R&D such as General Elec- tric, AT&T, and Du Pont were sharply reduced in size, and a number of alterna- tive arrangements appeared. U.S. firms formed more than 450 collaborative ven- tures that focused on joint R&D and product development, as reported in their filings with the Department of Justice under the terms of the National Coopera- tive Research Act (NCRA), between 1985 and 1994 (Link, 1996~. Collaboration has become a much more important part of the innovation process in industries as diverse as semiconductors and food retailing since the early 1980s. U.S. firms also entered into numerous collaborative ventures with foreign firms during the 1980-1994 period. The majority of these international alliances for which the National Science Foundation has data link U.S. and Western Euro- pean firms (National Science Board, 1998~. Alliances between U.S. and Japa- nese firms also were widespread. Nevertheless, the formation of "intranational" alliances linking U.S. firms with domestic competitors has outstripped the forma- tion of international alliances, according to National Science Foundation data (National Science Board, 1998~. Both intranational and international alliances involving U.S. firms appear to be most numerous in biotechnology and informa- tion technology. In contrast to most domestic research consortia, a large propor- tion of U.S. firms' alliances with foreign firms focused on joint development, manufacture, or marketing of products. In addition to the cost-sharing and tech- nology-access motives that also underpinned the formation of many domestic research joint ventures, the international alliances of U.S. firms have been moti- vated by concerns over access to foreign markets (Mowery, 1988~.

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8 U.S. INDUSTRYIN2000 U.S. firms in many of the industries examined in this volume reacted to inten- sified competitive pressure and/or declining competitive performance by reduc- ing their investments in research. Interestingly, these reductions appear to have accelerated during the period of competitive recovery and significant growth in overall R&D spending. During 1991-1995, total spending on basic research de- clined at an average rate of almost 1 percent per year in constant dollars. This decline reflected reductions in industry-funded basic research from almost $7.4 billion in 1991 to $6.2 billion in 1995 (in 1992 dollars); real federal spending on basic research increased slightly during this period, from $15.5 to almost $15.7 billion. Industry-funded investments in applied research scarcely grew during this period, while federal spending on applied research declined at an annual rate of nearly 4 percent. In other words, the upturn in real R&D spending that has resulted from more rapid growth in industry-funded R&D investment is almost entirely attributable to increased spending by U.S. industry on development rather than research.3 Universities' share of total U.S. R&D performance grew from 7.4 percent in 1960 to nearly 16 percent in 1995, and universities accounted for more than 61 percent of the basic research performed within the United States in 1995 (Na- tional Science Foundation, 1998~. By 1995, federal funds accounted for 60 per- cent of total university research, and industry's contribution had tripled to 7 per- cent of university research. The increased importance of industry in funding university research is reflected in the formation during the 1980s of more than 500 research institutes at U.S. universities seeking to support research on issues of direct interest to industry (Cohen et al., 1994~. Nearly 45 percent of these insti- tutes involve one to five firms as members, and more than 46 percent of them rely on government funds for support in addition to support from industry. The passage of the Bayh-Dole Act in 19804 triggered considerable growth in university patent licensing and "technology transfer" offices. The Association of University Technology Managers (AUTM) reports that the number of universi- ties with technology licensing and transfer offices increased from 25 in 1980 to 200 in 1990, and licensing revenues of the AUTM universities increased from $183 million to $318 million in the three years from 1991 to 1994 alone (Cohen et al., 1997~. U.S. universities increased their patenting per R&D dollar during a period in which overall patenting per R&D dollar was declining significantly.5 3The National Science Foundation reports that industry-funded real spending on "development" grew by more than 14 percent during 1991-1995, from $65 billion to $74.2 billion. Federal develop- ment spending declined during this period, reflecting the cutbacks in defense-related R&D spending. 4The Bayh-Dole Patent and Trademark Amendments Act of 1980 clarified and rationalized federal policy governing the patenting and licensing of the results of federally funded research performed by small businesses, universities, and other nonprofit institutions. The act generally allowed these per- formers to file for patents on the results of such research and to grant licenses for these patents, including exclusive licenses, to other parties.

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AN OVERVIEW 9 Another important shift in the structure of the innovation process within U.S. industry during this period is the increased presence of non-U.S. firms in the domestic U.S. R&D system. Investment by U.S. firms in offshore R&D (mea- sured as a share of total industry-finance R&D spending) grew modestly during 1980-1995, from 10.4 percent in 1980 to 12.0 percent in 1995. Nevertheless, this flat or slightly declining trend obscures significant intersectoral differences. The share of industrial R&D performed within the United States that was financed from foreign sources also grew during this period, from 3.4 percent in 1980 to more than 11.0 percent in 1995. Despite this growth, as of 1993 foreign sources financed a smaller share of industrial R&D performed within the United States than is true of Canada, the United Kingdom, or France. Increased foreign financing of R&D activities in the United States was paralleled by an increase in the share of U.S. patents granted to foreign inventors, from 40.4 percent in 1981 to 47.5 percent in 1989 and 45.9 percent in 1993 (National Science Board, 1998~. Foreign firms also participated in the formation of research joint ventures with U.S. firms. According to Link (1996), 32 percent of the research joint venture filings under the terms of the National Cooperative Research Act during 1985- 1994 listed foreign firms among their members. Finally, a number of foreign firms operating R&D facilities in the United States pursued collaboration with U.S. universities. More than 50 percent of the Japanese R&D laboratories in the United States, more than 80 percent of the U.S.-sited French R&D laboratories, and almost 75 percent of German corporate R&D laboratories in the United States were involved in such collaborative agreements, according to Florida (1997~. This structural change in the U.S. R&D system is transforming the innova- tion process in many of the industries reviewed in this volume, giving rise to a very different structure from that which prevailed for much of the postwar period in U.S. industry. In industries such as semiconductors or computers, complex networks of firms and relationships among domestic and foreign firms now play a more important role in developing new products. The importance of "co- invention" in the computer industry has given rise to close collaboration between users and producers of hardware and software. In other industries, such as steel or powdered metallurgy, collaboration with customers has expanded, while the large corporate R&D establishments of integrated steel firms have been drasti- cally reduced. The diversity of institutional actors and relationships in the indus- trial innovation process has increased considerably, even as the investments by U.S. firms in R&D now appear to focus on shorter time horizons. The restructured innovation process that has contributed to the resurgence of many of the industries reviewed in this volume emphasizes rapid development, 5The ratio of patents to R&D spending within universities almost doubled during 1975-1990 (from 57 patents per $1 billion in constant-dollar R&D spending in 1975 to 96 in 1990), while the same indicator for all U.S. patenting displayed a sharp decline (decreasing from 780 in 1975 to 429 in 1990), according to Henderson et al. (1994).

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0 U.S. INDUSTRYIN2000 adoption, or deployment of technologies, while placing less weight on the devel- opment of the long-term scientific understanding that underpins future genera- tions of these technologies. This shift has produced high private returns, but its long-term consequences are uncertain. We discuss some of the policy implica- tions of this shift in the next section. The discussion in these papers of the changing structure of the innovation process also highlights the difficulty of collecting and analyzing data that enable managers and policymakers to assess innovative performance or structural change. As noted earlier, many of the activities contributing to innovation in these industries are not captured by conventional definitions of "R&D." They include investments in human resources and training, the hiring of consultants or specialized providers of technology-intensive services, and the reorganization of business processes. All of these activities have contributed to the innovative performance of many of the industries examined in this volume. Indeed, the importance of information technology for innovation in many of these industries means that far-reaching organizational changes and investments in numerous complementary activities are essential to successful technology adoption. POLICY ISSUES AND IMPLICATIONS The primary objective of the project that produced these papers was im . proved public understanding of industry-level changes in competitive perfor- mance and the factors that have contributed to them, rather than the development of policy recommendations. Nevertheless, the papers in this volume raise a num- ber of issues for public policy. They include (1) the ability of public statistical data to accurately measure the structure and performance of the innovation pro- cess in U.S. industry; (2) the level and sources of investment in long-term R&D within the U.S. economy; (3) the role of federal regulatory, technology, trade, and broader economic policies in these industries' changing performance; (4) the im- portance and contributions of sector-specific technology policies to industry per- formance; and (5) the worker adjustment issues posed by structural and techno- logical change. The data currently published by the National Science Foundation (NSF) pro- vide little information on the changes in the structure of the industrial innovation process that were described in the previous section. The NSF R&D investment data, for example, do not shed much light on the importance or content of the activities and investments that are essential to the intersectoral flow and adoption of information technology-based innovations in many of the industries discussed in this volume. Indeed, the NSF and other public economic data do a poor job of tracking the process of technology adoption throughout the U.S. economy, de- spite the importance of this process for innovative and competitive performance. Moreover, in many of the nonmanufacturing industries that are essential to the development and diffusion of information technology innovations, "R&D invest

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AN OVERVIEW 11 meet" per se is difficult to distinguish from operating, marketing, or materials expenses. For example, these data do not consistently capture the R&D inputs provided by specialized firms to "low-technology" users such as trucking and food retailing firms. The public statistical data on innovative activity that are widely used by scholars, managers, and policymakers thus omit important activi- ties that contribute to innovation. Moreover, their coverage of even conventional it&D-related activities in many of the firms and sectors contributing to innova- tion in the U.S. economy appears to be imperfect. Over time, therefore, without substantial change in the content and coverage of statistical data collection, our portrait of innovative activity in the U.S. economy is likely to become less and less accurate. These problems were the subject of another workshop sponsored by the STEP Board as part of its overall assessment of the changing U.S. R&D system, and the report on that workshop contains a more detailed discussion of policy issues and options (Cooper and Merrill, 1997). As I noted earlier, improvements in the competitive performance of many of the industries examined in this volume have occurred in the face of reductions in industry-funded investments in long-term R&D. The changing time horizon of industry-funded R&D investment raises complex issues for policy. Specifically, how if at all should public R&D investments seek to maintain a balance within the U.S. economy between long- and short-term R&D? Many of the studies in this volume argue for closer public-private R&D partnerships, involving indus- trial firms, universities, and public laboratories. Yet most recent partnerships of this sort have tended to favor near-term, rather than fundamental, R&D invest- ment. This issue remains an important one for policy, and there are few models of successful partnership in long-term R&D that apply across all industries. A second issue concerns the treatment of the results of publicly funded R&D in the context of such partnerships. A series of federal statutes, including the Stevenson-Wydler Act of 1980, the Bayh-Dole Act, the Technology Transfer Act of 1986, and others have made it much easier for federal laboratories and univer- sities to patent the results of federally funded research and license these patents to industrial R&D partners. Proponents of licensing argue that the establishment of clearer ownership to the intellectual property resulting from federal R&D will facilitate its commercial application. Patenting per se need not restrict the dis- semination of the results of publicly funded R&D, but restrictive or exclusive licensing agreements may do so. As the paper on the U.S. pharmaceuticals indus- try points out, the "open science" performed in U.S. universities, much of which was funded by the National Institutes of Health during the postwar period, has aided this industry's innovative performance. If new federal policies limit the dissemination of the results of this research, however, the long-term competitive performance of the U.S. pharmaceuticals industry could be impaired. Similar issues appear in other industries. The simultaneous growth in industrial reliance on university and publicly funded R&D for long-term research and the increased

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2 U.S. INDUSTRYIN2000 resort by universities and federal laboratories to patenting and licensing of the results of this research create complex dilemmas that have received too little attention thus far from industry and government officials. Although the papers in this volume do not yield a single rank-ordering of the public policies that have been most important to the improved performance of these industries since 1980, federal intellectual property, antitrust, trade, and regu- latory policies have affected the competitive resurgence of a number of these industries. They have been most effective where the combined effects of these and other policies have supported high levels of domestic competition and have maintained open U.S. markets to foreign exports and investment. Vigilance must be maintained to ensure that revisions in policy in the intellectual property, trade, and antitrust areas do not inadvertently protect firms from competitive pressure. For example, relatively liberal policies toward inward foreign investment allowed U.S. firms to benefit from close observation of the management practices of for- eign-owned production establishments in semiconductors, steel, and automobiles, transferring important management and human resources "technologies" to U.S. firms. In addition, as was noted above, the availability and low prices of computer technologies that foreign imports provided to U.S. consumers through much of the 1980s and l990s sparked the growth of new applications and new segments of established industries. The restructuring and deregulation of sectors such as tele- communications, trucking, and financial services also has intensified com- petitive pressure on U.S. firms in these and other industries to improve their performance. The record of technology policy in these industry studies is less clear. The studies suggest that the most effective technology policies involve stable public investment over long periods of time in "extramural" (i.e., nongovernmental) R&D infrastructure that relies on competition among research performers. U.S. research universities are especially important components of this domestic R&D infrastructure. Their importance reflects their role in research and training, as well as the competitive, decentralized structure of this nation's research univer- sity system. In some cases, as in federal support for biomedical research through the National Institutes of Health, these investments in long-term research have had major sectoral effects. But the effects of sector-specific technology support policies, such as the defense-related programs of support for disk drive technolo- gies, or even SEMATECH, appear to be more modest in the small number of industries for which they are relevant. Their lack of dramatic effect reflects the tendency for such policies to be episodic or unstable, the relatively small sums of public funds invested in them, and the extremely complex channels through which any effects of such policies are realized. In light of the importance of federal R&D infrastructure investment, changes in the future structure and size of the federal R&D budget, as well as the policies covering the dissemination of the results of this research (see above), bear close scrutiny. Finally, the effects of industrial restructuring, technology development and

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AN OVERVIEW 13 adoption, and competitive resurgence on U.S. workers, especially low-skilled workers, in the manufacturing and nonmanufacturing industries examined in this volume merit attention. As noted earlier, the effects of technology adoption and development continue to raise the skill requirements for entry-level and "shop- floor" employment in these industries, including those in the nonmanufacturing sector. In addition, the very agility of U.S. enterprises that has contributed to improvements in their competitive performance since the 1980s imposes a heavy burden on workers for adjustment. Moreover, the perception that such adjust- ment burdens are unequitably distributed can have significant political effects, revealed most recently in the 1997 Congressional defeat of "fast-track" legisla- tion to support continued trade liberalization. The United States and most other industrial economies lack policies that can improve the ability of workers to ad- just to economic dislocation and compete effectively for more remunerative op- portunities without increasing labor market rigidity. The political and social con- sequences of continuing failure by policymakers to attend to these adjustment issues nevertheless could be serious, and the issue merits public scrutiny and debate. CONCLUSION The resurgence of U.S. industry during the 1990s is as welcome as it was unexpected, based on the diagnoses and prescriptions of many reports in the 1980s. Indeed, this recovery was well under way in a number of industries at the very time that the M.I.T. Commission report presented its critique. Moreover, in at least some of the key industries identified by the M.I.T. and other studies as competitively threatened, the factors singled out as sources of weakness in the 1980s appear to have become sources of competitive strength in the 1990s. After all, the competitive resurgence of many if not most of the industries discussed in this volume reflects superiority in product innovation, market repositioning, and responsiveness to changing markets rather than dramatic improvements in manu- facturing performance per se. The improvements in manufacturing that have occurred in industries such as steel or semiconductors have been necessary condi- tions for competitive resurgence, but they were not sufficient. This argument raises a broader issue of particular importance for policy- makers. Particularly when the imperfect nature of the data on innovative perfor- mance and processes is taken into account, observers of industrial competitive- ness must accept the reality that performance indicators have a very low "signal to noise" ratio i.e., data are unavailable, unreliable, and often do not highlight the most important trends. Uncertainty is pervasive for managers in industry and for policymakers in the public sector. Government policies designed to address factors identified as crucial to a particular performance problem may prove to be ineffective or even counterproductive, when and if the information on the exist- ence or causes of the problem turns out to be inaccurate. This difficulty is partly

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4 U.S. INDUSTRYIN2000 due to deficiencies in the data available to policymakers, and improvements in the collection and analysis of these data are essential. But in a dynamic, enor- mous economy such as that of the United States, these data inevitably will pro- vide an imperfect portrait of trends, causes, and effects. In other words, policy must take into account the importance and pervasiveness of uncertainty. Ideally, policies should be adaptive to long-term trends rather than attempting to meet short-run problems that may or may not be correctly identified in the available data. If many U.S. industries have in fact enjoyed a competitive resurgence in the 1990s, is this state of grace sustainable or likely to prove permanent? As pointed out in the introduction to this chapter, a portion of the improved performance of many of these U.S. industries reflects significant deterioration in Japan's domes- tic economy. Recovery in Japan's domestic economy may take time, but it will eventually result in an improved business outlook for many of the firms that were effective foreign competitors of U.S. firms during the 1980s. Even allowing for the uncertainties that are inherent in any attempt to predict the future, it seems unlikely that U.S. firms have achieved a permanent competi- tive advantage over their counterparts in other industrial and industrializing economies. The sources of U.S. industrial resurgence are located in ideas, inno- vations, and practices that can be imitated and improved upon by other enter- prises at some cost and investment of technical effort. Global competition in the late twentieth and twenty-first centuries will depend more and more on intellec- tual and human assets that are relatively mobile across international boundaries. The competitive advantages flowing from any single innovation or technological advance are likely to be more fleeting than in the past; economic change and restructuring are essential complements of a competitive industrial structure. Nevertheless, some relatively immobile assets within the U.S. economy will continue to aid competitive and innovative performance. The first is the sheer scale of the U.S. domestic market, which, even in the face of impending monetary unification in the European Union, remains the largest high-income region that is so deeply economically unified in markets for goods, capital, technology, and labor. Combined with other factors, such as high levels of new firm formation and entry in many industries, this large market provides a "testbed" for the many economic experiments that are necessary in the development and commercializa- tion of complex new technologies. Faced with pervasive uncertainty, neither managers nor government personnel are able to predict the future with accuracy. An effective method to reduce uncertainty through learning is to run economic experiments, exploring many different approaches to innovation in uncertain markets and technologies. Over the course of the post World War II period, the U.S. economy has provided a very effective venue for these experiments, and the growth of new, high-technology industries has benefited from the tolerance for experimentation and failure that this large market provides. A second important factor in the process of experimentation that is indis

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AN OVERVIEW 15 pensable to the development of new technologies is an effective domestic mecha- nism for generating such expenments. Here, the postwar U.S. economy also has proven to be remarkably effective. Success has been influenced by large-scale federal funding of R&D in universities and industry as well as a policy structure, including the financial and corporate-governance systems, intellectual property nghts, and competition policies that support the generation of ideas as well as attempts at their commercialization and supply the trained scientists and engi- neers to undertake such efforts. Both of these assets are longer lived and far less internationally mobile than the ideas or innovations they generate. They contribute to high levels of eco- nom~c and structural change that are beneficial to the economy overall while imposing the costs of employment dislocation or displacement on some groups and individuals. The current environment of intensified international and domestic competi- tion and innovation is a legacy of an extraordinary policy success in the postwar period for which the United States and other industnal-economy governments should claim credit. Trade liberalization, economic reconstruction, and economic development have reduced the importance of immobile assets, such as natural resources, in determining competitive advantage. These developments have lifted tens of millions of people from poverty during the past 50 years and are unam- biguously positive for economic welfare and global political stability. Neverthe- less, these successes mean that competitive challenges and perhaps recurrent "cn- ses" in U.S. industrial performance will be staples of political discussion and debate for years to come. This economy needs robust policies to support eco- nom~c adjustment and a world-class R&D infrastructure for the indefinite future. REFERENCES Cohen, W., R. Florida, and R. Goe. (1994). "University-Industry Research Centers in the United States," technical report, Center for Economic Development, Carnegie Mellon University. Cohen, W., R. Florida, L. Randazzese, and J. Walsh (1997). "Industry and the Academy: Uneasy Partners in the Cause of Technological Advance," in Challenges to Research Universities, R. Noll, ea., Washington, DC: Brookings Institution. Cooper, R.S., and S. Merrill, eds. (1997). Industrial Research and Innovation Indicators: Report of a Workshop, Washington, DC: National Academy Press. Dertouzos, M., R. Lester, and R. Solow. (1989). Made in America: The Report of the MIT Commis- sion on Industrial Productivity, Cambridge, MA: MIT Press. Florida, R. (1997). "The Globalization of R&D: Results of a Survey of Foreign-Affiliated R&D Laboratories in the United States," Research Policy 26:85-103. Henderson, R., A.B. Jaffe, and M. Trajtenberg. (1994). "Numbers Up, Quality Down? Trends in University Patenting, 1965-1992," presented at the CEPR conference on "University Goals, Institutional Mechanisms, and the 'Industrial Transferability' of Research," Stanford Univer- sity, March 18-20, 1994. Link, A.N. (1996). "Research Joint Ventures: Patterns from Federal Register Filings," Review of Industrial Organization.

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16 U.S. INDUSTRYIN2000 Mowery, D.C. (1988). International Collaborative Ventures in U.S. Manufacturing, Cambridge, MA: Ballinger. National Science Board. (1998). Science and Engineering Indicators: 1998, Washington, DC: Na- tional Science Foundation. Science, Technology, and Economic Policy Board, National Research Council. (1999). Securing America's Industrial Strength, Washington, DC: National Academy Press.