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Securing America's Industrial Strength

Board on Science, Technology, and Economic Policy

National Research Council

Washington, D.C.

The National Academies of Sciences, Engineering, and Medicine
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Securing America's Industrial Strength Board on Science, Technology, and Economic Policy National Research Council NATIONAL ACADEMY PRESS Washington, D.C.

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NATIONAL ACADEMY PRESS 2101 Constitution Ave., N.W. Washington, D.C. 20418 NOTICE: The project resulting in this report was approved by the Governing Board of the National Research Council, whose members come from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the board responsible for the project were chosen for their special competencies and with regard for appropriate balance. This publication was supported by the National Aeronautics and Space Administration and the National Science Foundation. Support for preparing the industry studies cited in this report was provided by Department of Energy Office of Information Technologies, Alfred P. Sloan Foundation, Ralph Landau, and Lockheed Martin Corporation. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number: 0-309-06448-1 Limited copies are available from: Board on Science, Technology, and Economic Policy National Research Council 2101 Constitution Avenue, N.W. Room FO2014 Washington, D.C. 20418 (202)334-2200 FAX: (202)334-1505 Additional copies are available for sale from: National Academy Press Box 285 2101 Constitution Avenue, N.W. Washington, D.C. 20055 800-624-6242 202-334-3313 (in the Washington Metropolitan area) Cover: The emblem appearing on the cover of this publication is an illustration of the bronze medallion in the floor of the Great Hall in the National Academy of Sciences building in Washington, D.C. The medallion is the wellhead placed in the floor when the spectroscopic case over which the Foucault pendulum swings is lowered below floor level. The design is based on a map of the solar system published in 1661 by Andreas Cellarius Palatinus. The array of the planets is the Copernican system as known to Galileo. Copyright 1999 by the National Academy of Sciences. All rights reserved. Printed in the United States of America First Printing, May 1999 Second Printing, September 1999

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NATIONAL RESEARCH COUNCIL BOARD OF SCIENCE, TECHNOLOGY AND ECONOMIC POLICY Dale JORGENSON, Chairman Frederic Eaton Abbe Professor of Economics Harvard University M. Kathy BEHRENS Managing Partner Robertson Stephens Investment Management James F. GIBBONS Professor of Electrical Engineering Stanford University Ralph LANDAU Senior Fellow Stanford Institute for Economic Policy Research Richard C. LEVIN President Yale University James T. LYNN Advisor (Retired) Lazard Freres Mark B. MYERS Senior Vice President Xerox Corporation Ruben METTLER Chairman and CEO (retired) TRW, Inc. A. Michael SPENCE Dean, Graduate School of Business Stanford University William J. SPENCER, Vice Chairman Chairman SEMATECH Joseph E. STIGLITZ Senior Vice President and Chief Economist The World Bank Alan Wm. WOLFF Washington Managing Partner Dewey Ballantine Ex-Officio Members Bruce ALBERTS President National Academy of Sciences William A. WULF President National Academy of Engineering Kenneth I. SHINE President Institute of Medicine Staff Stephen A. MERRILL Executive Director Charles W. WESSNER Program Director Craig SCHULTZ Program Associate

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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. On the authority of the charter granted to it by Congress in 1863, the Academy has a working mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. William A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is the president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both academies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. William A. Wulf are chairman and vice chairman, respectively, of the National Research Council.

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PREFACE In 1991 the National Academies of Sciences and Engineering established the Board on Science, Technology, and Economic Policy as a forum in which economists, technologists, scientists, financial and management experts, and policymakers could broaden and deepen understanding of the relationships between science and technology and economic performance. In its first three years, the Board's activities focused on the adequacy and efficiency of public and private domestic investment in physical and human capital. The Board's first report, Investing for Productivity and Prosperity, underscored the need for higher rates of national saving and investment. Its principal recommendation was to shift the base for taxation from income to consumption. In the past three years, the Board has turned its attention to more microeconomic concerns—technology policies broadly defined and their relationship to international trade relations, determinants of competitive performance in a wide range of manufacturing and service industries, and changes in patterns of R&D and innovation investments. A series of conferences, workshops, and reports, of which this volume is the fourth, comprises the latter body of STEP work which we are calling, U.S. Industry: Restructuring and Renewal, because it represents a broad assessment of U.S. industrial performance in an international context at a time of domestic economic confidence and optimism but uncertainty about the consequences of fundamental changes in the composition of the economy, processes of innovation, and economic troubles abroad. Previous publications under this title include Industrial Research and Innovation Indicators, the report of a workshop on measurement of industrial research and innovation, and Borderline Case: International Tax Policy, Corporate Research and Development and Invest-

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ment, a collection of papers by leading tax scholars, practitioners, and policy analysts. The third volume in this series, a companion volume to this report, U.S. Industry in 2000: Studies in Competitive Performance, is a collection of papers commissioned by the STEP Board and originally presented at a conference, "America's Industrial Resurgence: Sources and Prospects," held at the National Academy of Sciences in Washington, D.C., on December 8–9, 1997. The chapters analyze the determinants of performance on several dimensions including international competitiveness in 11 manufacturing and nonmanufacturing industries in the United States over the past 15 or 20 years. The single exception was an analysis of shifts in comparative advantage in the chemical industry over four producing countries and a 150-year period. An introduction by David Mowery, professor at the Haas School of Business at the University of California at Berkeley, who edited the papers, synthesizes some of the conclusions from examining cases as diverse as steel, apparel, semiconductors, banking, and trucking. In this report the STEP Board observes that the general picture is one of stronger performance in the 1990s than in the early 1980s, attributable to a variety of factors including supportive public policies, competition and openness to innovation, and changes in supplier and customer relationships. Vigorous foreign competition forced changes in manufacturing processes, organization, and strategy but then receded, making the performance of U.S. industries look even better. None of these favorable conditions, least of all the latter, however, is permanent. U.S. industries' superior records in the past decade are not guaranteed to continue. In addition to its conclusions about factors contributing to improved performance in the 1990s, the Board identifies several concerns for the future. This report and the series of activities preceding it would not have been possible without the financial support of the National Aeronautics and Space Administration and National Science Foundation and the personal encouragement of Daniel Goldin, NASA Administrator. Additional funds for the conference and publication of industry studies were provided by the Office of Industrial Technologies of the U.S. Department of Energy, the Alfred P. Sloan Foundation, Ralph Landau, and the Lockheed Martin Corporation. This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the NRC's Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making the published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their participation in the review of this report: Wesley Cohen, Carnegie Mellon University; Robert Frosch, Harvard University John F. Kennedy School of Government; Robert Hermann,

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Global Technology Partners, LLC; Anita McGahan, Harvard University Graduate School of Business; David Mowery, University of California at Berkeley Haas School of Business; Richard Rosenbloom, Harvard University Graduate School of Business Emeritus. France Cordova, Vice Chancellor for Research at the University of California at Santa Barbara, coordinated the review for the Policy Division. Although the individuals listed above have provided constructive comments and suggestions, responsibility for the final content of this report rests entirely with the authors, the STEP Board, and the institution. A. MICHAEL SPENCE CHAIRMAN (UNTIL JUNE 30, 1998) DALE W JORGENSON CHARMAN (AFTER JULY 1, 1998) STEPHEN A. MERRILL EXECUTIVE DIRECTOR AND PROJECT DIRECTOR

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CONTENTS     Preface   v     Executive Summary   1     From "Pervasive Decline" in the 1980s to "Resurgence" in the 1990s   4     The Step Board's Analysis   7     Industry Studies   9     Other Study Elements   11     Summary Findings   12     Sources of Stronger Performance   15     Stable and Supportive Macroeconomic Policies   19     Favorable Microeconomic Policies   23     Economic Deregulation   23     Antitrust Enforcement   23     Intellectual Property Protection   24     Trade Liberalization   25     Research Support   26     Other Policies   26

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    Industry and Firm Strategies   27     Specialization   27     Consolidation   28     Internationalization   28     Manufacturing Improvement and Cost Reduction   30     Strategic Repositioning   31     Changing Sources of Innovation   34     Other Innovation System Changes   37     Concerns for the Future   42     Industrial Research and Innovation Data   43     Labor Implications   44     Intellectual Property Rights   45     Long-Range Research   46     Conclusion   49     References   50 Appendix A   Recent Trends in Federal Spending on Scientific and Engineering Research: Impacts on Research Fields and Graduate Training Michael McGeary and Stephen A. Merrill   53 Appendix B   Trends in Industrial Research and Development: Evidence from National Data Sources Stephen A. Merrill and Ronald S. Cooper   99