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Japanese Investment and Technology Transfer: Report of a Workshop (1992)

Chapter: 2. Assessing the Evidence- Japanese Investment and Technology Transfer

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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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2

Assessing the Evidence — Japanese Investment and Technology Transfer

DEFINITIONS AND APPROACH

Indices of “foreign direct investment” seek to measure the “extent to which foreign firms and individuals control U.S. production. ”10 The very nature of multinational corporations raises difficulties in defining “foreign” firms, and there are legitimate grounds for disagreement over the extent of ownership necessary to exercise “control.” The approach used by the U.S. Department of Commerce is to count a firm with at least 10% of its capital held by a single foreign owner as a U.S. subsidiary of that company.11 The value of this definition is to clearly distinguish direct investment from portfolio investment, which is not undertaken with the aim of exercising management control.12

10  

Edward M. Graham and Paul R. Krugman, Foreign Direct Investment in the United States (Washington, D.C.: Institute for International Economics, 1989), p. 7.

11  

Ibid., p. 9.

12  

Direct investment itself can be separated into acquisition of an existing company, the purchase of a minority equity stake, “green field” investment to build a new subsidiary from scratch, and new funding for the expansion or modernization of a subsidiary that comes from the home country rather than from the retained earnings of the subsidiary itself.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

There are a number of possible approaches to the analysis of “technology transfer.” Technology is “applied science” or the application of knowledge to the production of goods and services. The most common image of “industrial technology” is proprietary knowledge subject to intellectual property protection through patents or trade secrets. Technology trade statistics measure the flow of licensing fees to the owners of proprietary knowledge from those wishing to use it.

But technology is embodied first and foremost in people — scientists, engineers and technicians employed by companies, universities and research institutes. The timely application of new (or improved) technology to a more efficient production of goods and services requires superior management and marketing practices. Weighing the significance of the organizational context for technology transfer is especially relevant to this discussion. It is widely held that Japan's competitive advantage in manufacturing is primarily due to innovations in organizing and managing the manufacturing process. Attitudes, ideologies and even “culture” affect the receptivity of individuals and organizations to such practices as quality control circles, just-in-time manufacturing and concurrent engineering. Organizational assets outside the R& D lab have a major impact on how effectively companies are able to improve their competitiveness through the utilization of technology.

“Technology transfer” is the process by which organizations learn how to develop and manufacture new products or improve manufacturing processes. In the case of proprietary knowledge, technology transfer may be accomplished through an exchange of documents, equipment, personnel, or some combination. Transfers of “hard technology” between organizations are often accompanied by a financial transaction, but within organizations such as MNCs this is not always the case. “Soft technology” transfer within a single organization is mainly accomplished by training or personnel rotation. Between organizations, transfer of management practices can occur as a result of business relationships, labor mobility or competitive pressure.

In the case of Japanese FDI in the U.S., there are several potential “technology transfer routes” that need to be considered. One route is the transfer of technology from a Japanese parent to an American subsidiary. The second is the flow of technology in the opposite direction, from the U.S. subsidiary to the Japanese parent, including transfers in which the subsidiary is a conduit or intermediary for technology developed by other organizations. The third is technology transfer from the American subsidiary of a Japanese firm to U.S.-owned firms. A fourth route is the transfer of knowledge between U.S. subsidiaries of Japanese companies. This report deals primarily with a review of the evidence concerning the first route and, to a lesser extent, the third route. The second route — technol-

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

ogy transfer from U.S. subsidiaries to Japanese parents — will be addressed to a limited extent because it is a major focus of the concerns expressed by Americans about Japanese investment in the United States. A discussion of the policy implications raised by the workshop would be incomplete without consideration of these concerns.13

AGGREGATE STATISTICS

Table 1 presents statistics that measure aspects of foreign and Japanese control of the American economy. There are at least 1,500 Japanese-

TABLE 1 Measures of Extent of Japanese Control Over the U.S. Economy

 

U.S. Affiliates of All Foreign Firms

U.S. Affiliates of Japanese Firms

FDI Stock as % of Total Net Worth of Non-financial Corporations (1990)

10.5

2.17

Employment of Foreign Controlled Affiliates as % of All U.S. Employment (1989)

5.0

0.57

Assets of Foreign Controlled Mfg Affiliates as % of All U.S. Mfg Employment (1989)

16.8

1.99

Employment of Foreign Controlled Mfg Affiliates as % of All U.S. Mfg Employment (1989)

9.7

1.26

Value-Added by Foreign Affiliates as % of U.S. GDP (1987)*

3.4

0.37

Value-Added in Manufacturing as % of all U.S. Manufacturing (1987) *

8.5

0.47

Note: * preliminary data

Source: Edward Graham, compiled from Bureau of Economic Analysisdata

13  

The workshop did not uncover new evidence of large-scale transfer of technology from the United States to Japan resulting from Japanese FDI, though conferees were invited to provide such evidence. Academic research on this aspect of Japanese investment has not been as extensive as research on other dimensions, such as supplier-manufacturer relationships in the automobile industry. In the absence of concrete data, perceptions will be based on anecdotal evidence. It is likely that concerns about the implications of Japanese FDI for outward technology flow will continue to figure prominently in policy debate.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

affiliated manufacturing firms operating in the United States,14 and the book value of Japanese direct investments in U.S. manufacturing now exceeds $17 billion.15 By these measures Japanese investment, despite rapid growth through most of the eighties, is still not an overwhelming influence on the overall U.S. economy or on U.S. manufacturing.

What about technology transfer? The statistics that most directly measure technology transfer are those that cover licensing between foreign parents and American subsidiaries — the financial transactions that accompany the flow of proprietary technology.16 According to Commerce Department data, in 1989 U.S. subsidiaries paid their Japanese parents over ten times what they received in licensing fees and royalties — which indicates that Japanese firms transfer much more technology to their U.S. affiliates than they take back to Japan. The statistics do not point to a particularly large or rapidly increasing amount of technology transfer from U.S. subsidiaries to Japanese parents. Australian and Canadian companies received more in licensing fees and royalties from their parents than the affiliates of Japanese firms, even though Japan's FDI in the United States is much greater than that of Australia or Canada. 17 Statistics also indicate that U.S. parent companies export much more technology to their Japanese subsidiaries than Japanese subsidiaries in the United States export to their parents.18

14  

See JETRO Monitor, April 1991 for a special issue on the JETRO Survey of Japanese Manufacturers in the United States.

15  

U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, June 1990, p. 64.

16  

Japanese aggregate statistics are summarized in footnote 1. U.S. Department of Commerce statistics are published annually in the Survey of Current Business. Unlike the Japanese figures, the U.S. statistics distinguish between transactions of affiliated and unaffiliated entities. However, because the Commerce Department includes royalties and other fees for intangible assets in its country breakout figures for transactions between affiliated entities, they do not represent a pure measure of technology transfer. That distinction is made for unaffiliated transactions. In practice, usually around three-quarters of total licensing fees and royalties between unaffiliated companies are payments for “industrial processes ” —technology transfer. But special cases can easily distort the picture that emerges from unaffiliated transactions, and serve as a warning that analysts should be cautious about drawing conclusions from statistics on affiliated payments. For example, a large percentage of total 1988 U.S. payments of royalties and licensing fees consisted of payments to South Korea for rights to broadcast the Seoul Olympics.

17  

Anthony J. DiLullo and Obie G. Whichard, “U.S. International Sales and Purchases of Services,” Survey of Current Business, September 1990, p. 47.

18  

For a discussion, see Kan H. Young and Charles E. Steigerwald, “Technology Transfer and Foreign Direct Investment in the United States, ” unpublished paper, 1989.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

TABLE 2 Royalties and Licensing Fees Between the United States and Japan: Affiliated Entities

(millions of dollars)

Year

 

U.S. Receipts

 

U.S. Payments

 

Total

U.S. parents from Japanese affiliates

U.S. affiliates from Japanese parents

Total

U.S. parents to Japanese affiliates

U.S. affiliates to Japanese parents

1987

1,111

1,090

22

217

10

207

1988

1,432

1,404

28

275

5

269

1989

1,518

1,486

32

337

6

331

1990

1,702

1,665

37

397

12

386

Source: Anthony J. DiLullo and Obie G. Whichard, “U.S. International Sales and Purchases of Services,” Survey of Current Business, September 1991.

TABLE 3 Licensing Fees Between the United States and Japan: Unaffiliated Companies

(millions of dollars)

Year

U.S. Receipts

U.S. Payments

 

Total Royalties and Licensing Fees

Industrial Processes

Total Royalties and Licensing Fees

Industrial Processes

1987

839

723

104

88

1988

1,022

883

123

108

1989

1,044

898

129

120

1990

1,205

1,048

184

165

Source: Anthony J. DiLullo and Obie G. Whichard, “U.S. International Sales and Purchases of Services,” Survey of Current Business, September 1991.

Besides the fact that U.S. statistics lump royalties in with licensing fees in reporting transactions between affiliated firms, there are other reasons why data on licensing fees may not be the best measure of technology transfer, especially transfer within an MNC. Technology transfer within a single firm is usually simpler than transfer between firms, and there may be no obvious incentive for formal licensing agreements in such cases. However, MNC's do have a motive for recording licensing transactions between units in different countries because of national disparities in corporate tax rates, foreign exchange regulations, or other aspects of the policy environment. It may be in the interests of shareholders or management to record income in the country with the lowest corporate tax rate or

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

to repatriate earnings in the form of licensing fees from subsidiaries in countries with foreign exchange controls. These motivations bear little relation to the value of the technology itself, so drawing conclusions about the actual technology transfer situation from intra-firm licensing transactions is problematic.

It is at least conceivable that technology transfers from U.S. subsidiaries to Japanese parents are underreported and that transfers in the other direction are overpriced. Even though the rate of corporate taxation is not particularly high in the United States, Japanese companies only pay Japanese taxes on subsidiary income that is remitted as dividends, and do not pay taxes on licensing income.19 Therefore, manipulating the transfer prices used in transactions between the parent and U.S. subsidiary, including licensing fees, may be an effective strategy to minimize the corporate tax bill. 20

Besides technology transfer that can be measured in licensing statistics, there are other facets of the operations of Japanese MNCs that have an impact on the technological level of their U.S. subsidiaries and the U.S. economy generally. In some instances technology transfer is involved. For example, if a Japanese MNC's U.S. subsidiary does a significant amount of R&D or sophisticated manufacturing in the United States, this may contribute to technology development and productivity here. R&D expenditures and employment by Japanese subsidiaries in the United States provide some (admittedly limited) indications of potential technology transfers from Japan to the United States. In the absence of other aggregate indicators that directly measure technology transfer, it is necessary to turn to other statistics that might serve as proxies, or which measure the contribution of Japanese FDI to the technological level of the U.S. economy.

One possible indirect measure is the R&D spending by U.S. subsidiaries of Japanese MNCs. Overall, the figures indicate that subsidiaries of Japanese firms do less R&D per employee than other affiliates but that Japanese manufacturing affiliates are comparable to U.S. manufacturing

19  

Congressional Research Service, Japan-U.S. Economic Issues: Investment, Saving, Technology and Attitudes (Washington, D.C.: The Library of Congress, 1990), p. 44.

20  

A certain amount of manipulation of this type is perfectly legal, but there are limits. A number of Japanese firms have come under increased scrutiny by the Internal Revenue Service recently. For an example, see “Bei, Kogaisha ni 87 Oku En Tsuicho, Fujitsu, Teiso de Taiko” (8.7 Billion Yen to U.S., Subsidiary--Fujitsu Responds to Suit), Nihon Keizai Shimbun, March 17, 1991, p. 1. It is important to point out in this connection that multinationals headquartered in the United States and elsewhere have long been the target of “transfer pricing” accusations by host country governments.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

enterprises as a whole. However, the rapid increase in Japanese FDI in recent years signifies that the situation is in flux and that the statistics should be interpreted with caution.21 There may be a time lag between establishing a foreign manufacturing base and performing R&D at the subsidiary. Table 4 shows that the amount of R&D undertaken by Japanese operations in the United States increased between 1987 and 1988. Indications are that Japanese companies are continuing to increase their investment in U.S. R&D activity.22 The question of whether R&D spending by the American subsidiaries of Japanese companies is a good proxy yardstick for inward technology transfer must also be raised. Some R&D expenditures made by the U.S. subsidiaries of foreign companies may represent technology monitoring or other activities that ultimately promote the flow of technology from the United States to the Japanese or other foreign parent.23 A positive relationship between the performance of R&D by subsidiaries of Japanese companies and technology transfer to the United

TABLE 4 Expenditures on Research and Development (in $ thousands per worker)

 

1985

1986

1987

1988

1989*

All U.S. Affiliates

1.83

1.98

2.02

2.04

2.08

All U.S. Affiliates (mfg)

3.08

3.55

3.61

3.78

3.88

U.S. Affiliates of Japanese Firms

1.26

1.32

1.01

1.34

1.53

U.S. Affiliates of Japanese firms (mfg)

NA

NA

2.88

NA

NA

All U.S. Manufacturing (Business expenditures)

2.60

2.74

2.87

3.11

3.33

Note: * preliminary data

Source: Edward Graham, compiled from Bureau of Economic Analysisand National Science Foundation data

21  

Edward Graham, from his presentation on “Overviews” at the Workshop on Japanese Investment and Technology Transfer: An Exploration of Its Impact.

22  

Ibid.

23  

See Evan Herbert, “Japanese R&D in the United States,” Research-Technology Management, November-December 1989, p. 11-20.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

States no doubt exists, but more study is needed before this complex process is fully understood.

One final statistical measure of the possible contribution of Japanese firms to the level of technology in the United States is the output per worker, or productivity, in manufacturing operations. Since the transfer of both proprietary knowledge and managerial skills should eventually result in increased productivity, this may ultimately be the most useful measure. If Japanese management's vaunted skills in raising manufacturing productivity are transferrable across international borders, then the output per worker in manufacturing subsidiaries will be higher than U.S.-owned firms in the same industry.

The statistics show that the productivity per worker of Japanese manufacturing subsidiaries is indeed higher than the average for all foreign affiliates and for U.S. manufacturing overall. Whether higher productivity is more a result of the relative “newness” of Japanese manufacturing facilities or of better management, it appears that Japanese affiliates are making a more than proportional contribution to U.S. manufacturing productivity. Until more recent data become available, we will not be able to assess the impact of the large acquisitions Japanese firms made after 1987. Some acquisition targets were “laggard” American firms.24 The

TABLE 5 Value-Added (in $ thousands per worker)

 

1985

1986

1987

1988

1989

All U.S. Affiliates

47.1

48.4

48.1*

NA

NA

All U.S. Affiliates (mfg)

43.4

47.1

48.6*

NA

NA

U.S. Affiliates of Japanese Firms

66.3

64.8

59.1*

NA

NA

U.S. Affiliates of Japanese firms (mfg)

42.7

47.3

49.8*

NA

NA

All U.S. Manufacturing

39.3

42.4

44.8

47.2

48.3

Note: * preliminary data

Source: Edward Graham, compiled from Bureau of Economic Analysisand Bureau of Labor Statistics data

24  

Bridgestone's acquisition of Firestone may be a good example. See Thomas F. O 'Boyle, “Spinning Wheels-Bridgestone Discovers Purchase of U.S. Firm Creates Big Problems,” Wall Street Journal, April 1, 1991, p. 1.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

overall productivity growth of Japanese affiliates may stagnate in response to increased acquisition activity of this type.25 The real test will come a few years hence, when it can be determined whether or not Japanese management has succeeded in turning these acquired enterprises around.

Part of the debate over Japanese FDI and the impact that it has on the U.S. industrial technology base relates to the adequacy of existing data. The Bureau of Economic Analysis (BEA) in the Commerce Department compiles the statistics, but some data series are not made public or disclosed to other parts of the government in order to ensure confidentiality of sources.26 Many Americans, including some members of Congress, believe that policymakers do not have adequate information on foreign investment and the activities of foreign affiliates for informed decision making. One key issue is that BEA data are reported on an enterprise rather than establishment basis. This hampers analysis at a detailed industry level. Legislation passed in November 1990 represents a compromise between the Administration and Congress, and is designed to allow the various data-collecting bureaus to make better use of the information that the government already possesses for the analysis of FDI.27 Recent administrations have been reluctant to adopt measures that contain disclosure requirements that place a differential impact on foreign firms. The fear is that such provisions would have a “chilling” effect on foreign investment and violate principles of national treatment.

For the present, proposals affecting Japanese and other FDI will be debated and enacted on the basis of available data. Although there is nothing in those statistics that paints a particularly disturbing or encouraging picture of the impact of Japanese FDI on technology transfer, some experts warn of the danger of “flying blind,” and argue that a small commitment of resources to data collection and dissemination would significantly reduce the risk of policy mistakes based on incomplete information.28

25  

Edward Graham, op. cit.

26  

See Graham and Krugman, op. cit., pp. 135-143 (Appendix A).

27  

The first report to Congress under the provisions of this legislation was released in August 1991. The “data link” project to allow Bureau of Economic Analysis data to be linked with Bureau of the Census and Bureau of Labor Statistics data is expected to produce concrete results in time for the next report, which is expected in late 1992. See U.S. Department of Commerce, Foreign Direct Investment in the United States — Review and Analysis of Current Developments (Washington, D.C.: U.S. Department of Commerce, 1991), pp. 88-89.

28  

Edward Graham, op. cit.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

JAPANESE CORPORATE STRATEGY

Concerns have been raised about large Japanese firms purchasing majority or minority interests in small, high-tech American companies in fields like semiconductors, software and biotechnology.29 Some see Japanese firms as “vacuum cleaners” that invest abroad in order to acquire foreign technology.

What is the evidence for this assertion? There has certainly been an increase in the amount that Japanese companies have invested in U.S. high technology start-ups. According to Venture Economics, Japanese minority investments in U.S. venture businesses increased from $176 million in 1988 to $320 million in 1989.30 This trend has been most pronounced in California's Silicon Valley, where one publication recorded 42 cases of equity investment by Japanese companies in the area from 1986-1990.31 A recent study by the Economic Strategy Institute shows that Japanese investments made up more than half the total high technology investments (across all industries and regions) in recent years.32

These acquisitions may indicate that there are a number of Japanese companies, particularly in electronics, that are using direct investment to acquire technology as well as to diversify and further penetrate the U.S. market.33 Those who argue that “technology gathering” is not an inherent part of Japanese corporate strategy point out that the $320 million in minority investments in high technology start-ups constituted only about 2% of the $16 billion total for Japanese FDI during 1989.

Experts on Japanese corporate strategy cite the figures on licensing transactions between Japanese firms and their U.S. subsidiaries that were

29  

Frank Press, Scientific and Technological Relations Between the United States and Japan: Issues and Recommendations (Washington, D.C.: Commission on U.S.-Japan Relations for the Twenty First Century, November 1990), p. 1.

30  

Venture Economics Inc., “Corporate Venturing News,” May 4, 1990, p. 1. The number of Japanese investments in small U.S. high technology start-ups declined from 60 in 1989 to 56 in 1990, with the amount falling from $320 million in 1989 to $306 million in 1990. It is expected that the number and amount of investments will post another decline in 1991, but the magnitude is uncertain. Communication from Venture Economics to Office of Japan Affairs, January 1992.

31  

See “Digging Our Own Graves?” San Jose Mercury News, December 10, 1990, p. 7D.

32  

Linda Spencer, Foreign Investment in the United States— Unencumbered Access, Economic Strategy Institute paper, May 13, 1991, Table 1. The Spencer report also contains a list of foreign investments in U.S. high technology companies. See “BT 100,” Business Tokyo, May 1991 for another example of a private attempt to compile information on this subject. This article contains a list of the top 100 Japanese investors in the United States.

33  

See Phyllis A. Genther and Donald H. Dalton, Japanese-Affiliated Electronics Companies and U.S. Technology Development: 1990 Assessment, U.S. Department of Commerce, August 1991.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

TABLE 6 Partial List of Japanese Investments in Silicon Valley 1986-1990

Company

Japanese Investor

Equity amount or percentage

Ardent Computer

Kubota

$51.5 million

Akashic Memories

Kubota

100%

Aegis

Olin Asahi

100%

Advantage Prod. Tech.

Sumitomo Metals

5%

Auspex Systems

Nissho Electronics

4.5%

Auspex Systems

Fuji Xerox

4.5%

Atari Games

Namco Ltd.

NA

AG Associates

Canon Sales

30%

Anacomp

   

Magnetic Disc Division

Hitachi Metals

100%

C-Cube Microsystems

Kubota

38.1%

Centerpoint Computers

Kyocera

NA

Cooper Lasersonics

   

Ion Lasers Division

Lexel Laserline

100%

Domain Technology

Kubota

$66 million

Exabyte

Kubota

$7.5 million

Excel Microelectronics

Rohm/Exar

$5.7 million

EICO

Iwatani International

NA

Gould

Nippon Mining

100%

Komag

Kobe Steel

20%

Lam Research

Sumitomo Metals

4.5%

Literal

Kawasaki Steel

21%

Micro Mask

Hoya

$26 million

Mips

Kubota

$36.6 million

Maxoptics

Kubota

25%

Maxtor

Kubota

$17 million

Mountain Computer

Nakamichi

100%

Materials Research

Sony MRC

100%

Mosaic

Sumitomo Metals

10%

Next

Canon

$100 million

National Advanced Systems

Hitachi

100%

Novellus Systems

Seki & Co.

$1.9 million

Poqet Computer

Fujitsu

55%

Precision Image

Graphtec

100%

Rasna

Kubota

15%

Siltec

Mitsubishi Metals

100%

Silicon Graphics

NKK

$35 million

Sprague Semiconductor

Sanken

100%

Telemar Resources

Chikyu Kagaku

NA

Telmos

Rohm

$1.5 million

Varian

   

Special Metals Division

Tosoh

100%

Verbatim

Mitsubishi Chemical

100%

Via Technologies

Fujitsu Microelectronics

24%

Vitelic

Oki Electric

NA

Source: San Jose Mercury News, compiled from American Electronics Association Japan Office and UllmerBros. Inc. data

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

presented above, arguing that technology acquisition is generally not the primary motivation for direct investment by Japanese companies. 34 Japanese manufacturing investment in the United States has historically been prompted by U.S. trade barriers or potential barriers. With the rise in the value of the yen versus the dollar in the mid-1980s, there has been more Japanese M&A(merger and acquisition) and other investment activity not linked to any particular trade problem.35

More information is needed to make an accurate assessment of the current situation and trends regarding the technology transfer effect of Japanese investment in U.S. high technology companies. The fact that many small U.S. firms need to go to Japan for financing is disturbing to some observers. Acquisitions in critical or sensitive industries, such as semiconductor manufacturing equipment, have attracted intense scrutiny in recent years, and raise important policy questions. But Japanese investment may also facilitate technology development in the United States that would not take place otherwise.

INDUSTRY-SPECIFIC EXPERIENCES

An examination of the technology transfer effects of Japanese investment in the semiconductor, consumer electronics and automobile industries reveals significant differences. It is likely that the nature of Japan's technological edge in manufacturing is such that Japanese firms must transfer technology in order for their offshore facilities to enjoy this advantage.36 However, presentations at the workshop indicate that technology transfer has been much less extensive in the consumer electronics industry than has been the case in the automobile industry, with the semiconductor industry perhaps falling somewhere in between. Each of these industries has received a substantial amount of Japanese investment.

34  

Mark Mason, from his presentation on “Overviews” at the Workshop on Japanese Investment and Technology Transfer: An Exploration of Its Impact.

35  

Though dollar volume of Japanese acquisitions in the U.S. fell from $13.7 billion in 1989 to $11.4 billion in 1990, the 50% drop in British takeovers during the same period pushed Japan into the lead. Of the 131 acquisitions in which financial terms were disclosed, over half were valued at below $10 million and a fifth were in the $20-$50 million range. See “Yen Advantage: Japanese Led Foreign Firms in U.S. Acquisitions in 90,” Asian Wall Street Journal, January 20, 1991, p. 16.

36  

Robert Lawrence, from his presentation on “Overviews” at the Workshop on Japanese Investment and Technology Transfer: An Exploration of Its Impact.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

A number of factors give rise to differences in investment and technology flow patterns among the three industries considered here. These include the relative technological levels of American and Japanese companies in a given industry, U.S.-Japan differences in industry structure, the industry's technology intensity, the relative importance and sophistication of product and process technology, and the existence of trade barriers. These elements must be taken into account in assessing the technology transfer effects of Japanese direct investment in particular industries. Depending on the product, company and industry there is a broad range of effects as measured in the proportion of value-added produced in the United States, the productivity of the U.S. subsidiary, the amount of R&D performed in the United States, the amount and sophistication of locally-sourced components, and effects on related U.S. industries.

There is no generally accepted method for assessing industry-specific impacts. As we have noted, technology transfer can be conceptualized, measured and analyzed in a number of ways. Differences in analytical methodologies, as well as inadequate data, may affect the conclusions.

Consumer Electronics

Consumer electronics saw the first significant Japanese manufacturing investment in the United States. Much of the early Japanese FDI in the color television segment was spurred by a desire to circumvent orderly marketing agreements that limited exports from Japan in the 1970s.37 All but a few U.S. companies manufacturing color television sets in the late sixties had been driven out of business or acquired by foreign companies a decade later.

Before evaluating Japan's consumer electronics FDI in the United States today, it is important to note the evolution that the Japanese electronics industry has undergone over the past ten years and the changing role of the consumer segment. While analysts have noted that innovation in the Japanese electronics industry was historically driven by consumer products, the situation has changed over the past decade. Industrial products and components are the sectors presently leading the Japanese electronics industry technologically and in the market.

37  

Michael Borrus, from his presentation on “Industry Specific Experience,” at the Workshop on Japanese Investment and Technology Transfer: An Exploration of Its Impact.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

FIGURE 1 Production of the Japanese Electronics Industry Source: Michael Borrus compiled from Electronics Industry Association of Japan data

The role of consumer electronics, however, remains significant. Although growth in the overall consumer market has slowed, the high-end segment, represented by camcorders and video “watchmen,” is showing strong growth. If these products are combined conceptually with high-demand, industrial-use products that have similar manufacturing and marketing characteristics such as lap-top computers, electronic notebooks, and fax machines, one can identify a new market segment that is almost completely dominated by Japanese companies.38 These products drive component technology development because success in the market depends upon technical sophistication as well as on high-volume, low-cost manufacturing.

The general trend in Japanese direct investment over the past decade has been the movement of low-end consumer electronics manufacturing offshore

38  

Ibid.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

as Japanese factories shift to newer products. The transfer of less sophisticated production to Asia is almost complete, with the more sophisticated operations going to the newly industrialized economies (NIEs) such as Singapore and Taiwan, and the less sophisticated going to Indonesia and Malaysia.39 Some higher value-added production has also been transferred to Europe in response to domestic content and technical sophistication requirements.

The pattern of Japanese consumer electronics FDI in the United States falls between that of the Asian NIEs and Europe. Subsequent to the first wave of investment in color television production, a second wave of consumer electronics FDI in the United States occurred in the 1980s in response to exchange rate shifts and further trade pressures. For example, Japanese companies began cordless phone production in the U.S. following an anti-dumping suit by Motorola in the mid-1980s.

The consumer electronics operations of Japanese companies in the United States manufacture a broad range of products. In contrast to the mixture of “green field” investment and acquisitions that characterized the seventies, the second wave of Japanese consumer electronics manufacturing investment has been directed almost entirely to new facilities. Exceptions include several acquisitions of components manufacturers and the “software” purchases of Columbia Pictures and Columbia Records by Sony, and of MCA by Matsushita. The latter were partially motivated by a desire on the part of the Japanese firms to achieve synergies with the consumer electronics sides of their respective businesses.

Since a large proportion of consumer electronics manufacturing in the United States is foreign-owned, assessment of the technology transfer associated with Japanese FDI in consumer electronics often focuses on the activities of subsidiaries themselves rather than on tech transfer to U.S.-owned companies. Measurable features of subsidiary operations that are likely to have a positive correlation with technology transfer include the domestic percentage of total value-added, the amount of R&D carried out locally, the local manufacture of sophisticated components, and the management practices utilized.

There is a dearth of information on the U.S. consumer electronics operations of Japanese firms. In the absence of detailed study on a factory-by-factory basis, it is difficult to assess impacts. In some cases factories are engaged in less sophisticated activities than company descriptions indicate.

39  

For a recent analysis of Japanese FDI and technology transfer in Asia, see Takao Kiba and Fumio Kodama, Measurement and Analysis of the Progress of International Technology Transfer: NISTEP Report No. 18 (Tokyo: NISTEP, 1991).

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

FIGURE 2 Number of Japanese Consumer Electronics Manufacturing Subsidiaries, Acquisitions and Joint Ventures Begun in the United States, 1968-1989 Source: Michael Borrus

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

TABLE 7 Top 15 Japanese Consumer Electronics Manufacturers in the United States, 1989

Company

Plants

Employees

Products

Matsushita

6

2,467

Color TVs, color picture tubes, VCRs, car audio, pagers, cellular phones, microwave ovens, stereo speakers, etc.

Toshiba Corp.

3

2,440

Color TVs, color picture tubes, VCRs, PCs, cellular phones, microwave ovens, etc.

Sony Corp.

2

1,959

Color TVs, color picture tubes, workstations, monitors, and stereo speakers

Nippon Electric Glass Co. w/Olin III.

3

1,900

Components for picture tubes

Mitsubishi

5

1,610

Color TVs, PCs, cellular phones, and audio/data CD

NEC Corp.

3

1,400

Color TVs, PCs, FAX, pagers, elec. typewriters, disk drives, cellular phones, modems, monitors and printers

Canon Inc.

2

1,390

Portable electronic typewriters, laser printers and copiers

Sanyo Electric Co.

4

927

Color TVs, CD players, PCs and stero speakers

Asahi Glass w/Corning

1

900

TV tube glass

Pioneer Electric Corp.

4

840

Color TVs, video disks, car audio, and stereo speakers

Sharp Corp.

1

830

Color TVs, PCs, and microwave ovens

Alps

2

825

Car audio, computer keyboards, and disk drives

Oki Electric Industry Co.

2

750

Printers, modems, and cellular phones

Seiko Epson

1

720

Printers and PCs

Fujitsu

3

623

Car audio, cellular phones, cables and components for computers and peripherals

Source: Michael Borrus, compiled from Japan Economic Institute data

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

With respect to R&D activities, there is some product specific development work done in the United States. However, even in the most sophisticated R& D operations, such as Sony's, there is little contribution of core technology.40 Some even argue that the U.S. R&D labs of Japanese consumer electronics manufacturers are mainly outposts that gather intelligence on software developments. Japanese companies are doing research related to high definition television (HDTV) in their American labs, motivated by a desire to ensure that Japanese companies can meet whatever HDTV standard eventually emerges from the Federal Communications Commission.41

It is difficult to make precise statements about the levels of domestic content and vertical integration, but the available information on this aspect of Japanese FDI does not paint an encouraging picture either. A 1983 study by Arthur D. Little for the Electronics Industry Association on local content in consumer electronics estimated that 30% of the value-added for all foreign-owned consumer electronics manufacturing in the United States was produced domestically. There is no reason to believe that this has changed a great deal, despite the new Japanese investment since the survey was conducted.42 Key components for products such as car telephones continue to be predominantly sourced in Japan. Japanese firms operating in the United States do not assemble camcorders or other high-end products. The only exception to this pattern is the color television, where local content may be as high as 85%, a situation largely brought about by U.S. trade pressure.

40  

Ibid.

41  

The Federal Communications Commission is scheduled to select a standard in June 1993. Even if the FCC chooses a digital standard representing more advanced technology than the standard that Japan has already implemented domestically, companies such as Sony and Toshiba are optimistic that they can make the necessary jump, partly through work done at their U.S. R&D facilities. See “HDTV Kikaku Senso: Kaihatsu wa Hobo Kanryo, Obei ni Kuikomu” (HDTV Standards War: Development Almost Complete, Eating Into Europe and America), Nihon Keizai Shimbun, January 22, 1991, p. 13. For a discussion of the competing HDTV standards, see Ronald Jurgen, “The challenges of digital HDTV,” IEEE Spectrum, April 1991, p. 28.

42  

Michael Borrus, op. cit.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

TABLE 8 Value-added in U.S. Consumer Electronics Products, 1983

Color TVs (selected companies)

% value-added in U.S.

 

Sony

50%

 

Sanyo

60%

 

Goldstar

60%

Black and white TVs

All manufactured in Asia

VCRs

All manufactured in Japan

Color video cameras

All manufactured outside U.S.

Stereo speakers in cabinets

% value-added in U.S.

 

Many firms

20-25%

Cassette decks

Almost all manufactured in Asia

Compact stereo systems

Almost all manufactured in Asia

Separate audio components

Almost all manufactured in Asia

Radios

Almost all manufactured in Asia

Aftermarket car stereos

% value-added in U.S.

 

Many firms

20%

Stereos for specific car models

% value-added in U.S.

 

Many firms

30%

Video games

Almost all manufactured outside U.S.

Cordless phones

All manufactured outside U.S.

Calculators

All manufactured outside U.S.

Source: Arthur D. Little

Nor is there evidence that Japanese-owned consumer electronics factories transfer very much “soft” or “organizational technology” either. In terms of work force training and management practices, the U.S. subsidiaries of Japanese consumer electronics companies appear to be at least a product generation behind Japanese factories.43

43  

Ibid.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

The unmistakable conclusion is that almost twenty years of accumulated investment by Japanese companies in the U.S. consumer electronics industry has resulted in only limited technology transfer from Japan to the United States. The overall contribution to the American economy has been modest, particularly when compared to what the industry has contributed to the Japanese economy over the same period and the value of Japanese electronic products that American consumers have purchased over those two decades. Such skills as precision mechanical design know-how are almost absent in the U.S. plants operated by Japanese firms, but can be found in abundance in Japan.44 Increased domestic procurement, training and the manufacture of more sophisticated products by Japanese electronics companies in the United States has taken place only as a result of U.S. trade pressure.

Semiconductors

The Japanese semiconductor industry is the world manufacturing leader. 45 The status of the Japanese industry was achieved within a very short time period in the early and mid-1980s, mainly at the expense of U.S. firms. When discussing technology and technology flow in this industry, it is important to distinguish between the capital and technology intensive “front-end” steps in which circuits are processed onto the silicon wafer (“wafer fab”), and the less complex “back-end” assembly and testing steps. The less demanding back-end steps often take place in other locations. It is also important to distinguish between semiconductor design and manufacturing. The comments that follow focus primarily on semiconductor manufacturing.

There are a number of factors that make the semiconductor business inherently global. The high cost of R&D and capital equipment must be

44  

Ibid.

45  

According to Dataquest, Inc., in 1990 Japanese chipmakers held 49.5% of the world market, compared to 36.5% for U.S. firms. The 2.6% Japanese loss of market share and the 1.6% gain for the U.S. were the first since 1982. See Evelyn Richards, “U.S. Firms Boost Share of Chip Market,” Washington Post, January 3, 1991, p. E1. These figures do not include “captive” production of semiconductors by firms for use in their own products. The exclusion of IBM, one of the largest semiconductor producers in the world, and other U.S. firms that do not sell their chips on the open market depresses the actual U.S. share.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

amortized against a global market.46 At the same time, firms must service regionally distinct markets for all but the most undifferentiated commodity products. This is especially true for application-specific integrated circuits (ASICs) and custom-designed chips. The raw materials and semiconductor manufacturing equipment markets are also regional because of the need for frequent, reliable service. Investment decisions are strongly influenced by the fact that technological costs are set at a global level and entry costs are set at a regional level.47 In view of these factors, it is not surprising that the semiconductor industry has witnessed a rise in the number of international alliances over the past several years. While many of these arrangements involve little direct technology transfer, the percentage that do is growing. 48

The rise of the Japanese semiconductor industry in the late 1970s and early 1980s was based on chips fabricated in Japan. Japanese companies did not begin to move the front-end process overseas until trade problems arose in the mid-1980s, and are still not as internationalized as their U.S. and European competitors. Front-end FDI was initially aimed at the United States, but there is increasing investment in Europe as Japanese firms seek to boost local content and establish a European image in anticipation of the unified European market.

There are several exceptions to the general rule that Japanese FDI in semiconductor manufacturing has been largely motivated by political pressure. For example, the production of silicon wafers in the Pacific Northwest is advantageous because of low electricity costs. In the ASIC and custom chip markets the importance of contact with customers and rapid turn-around time necessitate a significant local marketing infrastructure and encourage the localization of some manufacturing capability as well.

46  

These costs are likely to increase. A vice-president at Matsushita predicts that for the 256M DRAM, which will probably be introduced early in the next century, the cost for a wafer fab that could produce 10 million chips per month (twice the corporate-wide capacity of the largest 1M DRAM manufacturer today) could be as high as one trillion yen in current prices, or $7.1 billion at an exchange rate of 140 yen per dollar. See “Kane Kui Mushi Handotai” (Semiconductors: The Worm That Eats Money), Nihon Keizai Shimbun, September 19, 1990, p. 11. But U.S. experts call these estimates grossly inflated. A recent report by the National Advisory Committee on Semiconductors estimated the costs in 2001 of the equivalent of a 4 Giga-bit DRAM line at $2 to 3 billion.

47  

Kenneth Flamm, from his presentation on “Industry Specific Experiences,” at the Workshop on Japanese Investment and Technology Transfer: An Exploration of Its Impact.

48  

Ibid.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

FIGURE 3 Offshore Semiconductor Fabrication — Japan-Based Companies Source: Kenneth Flamm compiled from Dataquest data

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

Technology acquisition can also motivate Japanese investment. There are examples of Japanese companies buying small, U.S. semiconductor firms in order to access their “embodied technology,” but it is fairly uncommon for technology acquisition to be the primary motive in semiconductor manufacturing. 49 Japanese investments that focus on software and design, however, appear to be motivated by technology acquisition. Japanese semiconductor firms also use FDI to acquire technology by setting up an R&D lab to plug into the local technology base.

Does FDI in the United States by Japanese semiconductor manufacturing companies lead to an increased inward technology flow? There is undoubtedly some inward technology transfer resulting from the transfer of wafer fabrication — the front-end steps. Manufacturing low-cost semiconductors is as much an art as a science; important technology is embodied in the organization and management of the facility. If Japanese wafer fabs in the United States are near the state-of-the-art, that know-how is learned by U.S. production engineers.50 In the United States, where industry process technology has traditionally been transferred through labor mobility, it seems likely that some technology is flowing to U.S. companies through the movement of technical personnel between Japanese-owned and U.S. operations. In addition to manufacturing, many Japanese chipmakers are beefing up their R &D operations in the U.S. It is too early to tell whether these moves will lead to significant inward technology flow.

One concern that U.S.-owned chipmakers have about Japanese FDI in the semiconductor manufacturing equipment industry, as opposed to FDI in semiconductor manufacturing itself, relates to “technology security.” Japanese equipment suppliers tend to move offshore with their customers, to which they are often linked by financial and other ties. A number of Japanese companies have acquired U.S. equipment makers. Even in non-acquisition cases, it appears that investment and increasing activity in the United States by Japanese semiconductor equipment and materials firms are leading to further competitive pressure on U.S.-owned suppliers.

49  

Ibid.

50  

Hitachi and NEC were scheduled to begin fabrication of 4M DRAMs at their U.S. facilities in the spring of 1991, a significant step in light of the fact that mass production of the 4M at their Japanese facilities was only launched in the autumn of 1990. See Mead Ventures, Inc., “Hitachi To Begin 4M DRAM Production in U.S.” East Asia High Tech Review, January 1991, p. 2. However, with a world-wide slump in semiconductor sales extending through the autumn of 1991, Japanese companies had announced 4M DRAM production cutbacks in their Japanese facilities, and plans to ramp up production in the United States appear to have been placed on hold.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

U.S. semiconductor manufacturers typically trust equipment suppliers to service installed equipment without telling competitors details of their manufacturing process. Because of the close ties between the Japanese equipment suppliers and semiconductor firms, U.S. manufacturers are concerned that they may not be able to place the same trust in Japanese equipment suppliers.51

In summary, there are both positive and negative implications for technology transfer of Japanese investment in the U.S. semiconductor industry. Japanese-owned wafer fabs may transfer some manufacturing technology to the United States, and R&D facilities may transfer more technology in the future. But the ancillary movement of Japanese semiconductor suppliers to the United States puts strong pressure on the U.S. equipment industry, which may result in long-term problems for domestic chipmakers. Japanese investments in design and software, not the subject of this discussion, appear to be motivated by the desire to strengthen Japanese industry in these areas.

Japanese investment in this industry has been too recent, and evidence is still too limited, to draw a “bottom-line” conclusion. If it were possible to gather additional data and if there were no constraints on resources devoted to analysis, how would one answer the question of how much technology transfer is associated with Japanese investment in U.S. semiconductor manufacturing? One approach would be to examine in detail specific technologies (such as a particular process technology or quality control system) and trace transfer of technology among companies via movement of engineers, licensing, etc. This would provide a finer grained reading. Another approach might be based on econometric analysis. One might focus on measuring productivity of domestic firms and then assess the impacts of growth in nearby FDI on their productivity growth. Neither of these approaches would provide a complete answer to the question, but both promise to contribute to deeper understanding. 52

Automobiles

In the semiconductor and consumer electronics industries, sophisticated processing and component steps can be distinguished from the relatively simple assembly portion of the manufacturing process. In contrast, automobile assembly is itself quite sophisticated. This guarantees a fairly high

51  

Kenneth Flamm, op. cit.

52  

Comments by Kenneth Flamm after the workshop.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

proportion of the finished product's value-added for the country in which a car is assembled. At the same time, auto manufacturers buy a significant proportion of their components from outside suppliers. The price and quality of components have a significant impact on the competitiveness of the end product. Management of the procurement process and supplier relationships is a crucial issue for auto companies.53

Management of relations with automobile components suppliers can embody “soft technology.” The question is whether standard Japanese practices in this area confer a competitive advantage on Japanese firms, and whether or not these practices are being transferred to the United States by the growing operations of Japanese auto companies here, the so-called “transplants.” A recent survey of U.S., Japanese and transplant operations conducted by Michael Cusumano and Akira Takeishi at MIT's Sloan School of Management addresses these questions.

The Japanese transplants currently source critical components such as engines from Japan.54 The MIT study concentrated on four “medium-tech” parts (shock absorbers, gauge assemblies, front seat assemblies and instrument panels). These are not the highest value-added parts, which are usually imported from Japan, nor are they the components normally produced internally by U.S. automobile manufacturers. Automakers have considerable discretion in how much of the design work they assign to the suppliers of these parts. Two of the Big Three U.S. automakers, five of the six transplant operations and three of the top five Japanese automakers participated in the MIT study. Half of the U.S. sample of suppliers were divisions of the Big Three, one company was German-owned and the remainder were independent U.S.-owned. All of the parts were made in the United States. In the case of suppliers to the transplants, 37% were independent U.S. suppliers, and 85% of the parts were sourced in the United States. For the suppliers to Japanese plants, all the parts were sourced in Japan, mostly from independent suppliers.

53  

Michael Cusumano and Akira Takeishi, The Global Challenge of Supplier Management: A Comparison of Japanese, Japanese Transplant, and U.S. Auto Plants, MIT Sloan School of Management Working Paper #3158-90/BPS, 1990, p. 1. Also available as “Supplier Relations and Management: A Survey of Japanese, Japanese-Transplant, and U.S. Auto Plants, ” Strategic Management Journal, Volume 12, No. 7 (November-December) 1991.

54  

Nissan has announced plans to follow Honda and open an engine plant in the United States. See “Nissan, Bei ni Enjin Kojo” (Nissan, Engine Factory in the U.S.), Nihon Keizai Shimbun, January 17, 1991, p. 13. Toyota has announced plans to export engines from its Kentucky factory to Japan. See “Toyota, Bei ni Shinkojo” (Toyota, A New Factory In the U.S.), Nihon Keizai Shimbun, November 28, 1990, p. 11.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

The study indicates that Japanese supplier management practices do differ from American practices and that the differences appear to give Japanese manufacturers an advantage.55 The Japanese procure more parts from outside suppliers, have fewer suppliers per part, maintain longer relationships with suppliers, and assign more of the design and engineering of parts to suppliers than the American manufacturers. An important aspect of Japanese supplier management is the effort that is made by the manufacturer to work closely with the supplier to reduce prices and defects over the lifetime of a model. The Japanese tendency toward longer contracts and fewer suppliers per part leads to other positive results, such as earlier supplier involvement in design. This helps shorten the time needed for product development. The “problem,solving” approach common in Japan can be contrasted with the “bargaining” orientation of American firms.56

In general, the supplier management practices of the transplants fall between the U.S. and Japanese averages, showing more similarities to the practices of Japanese companies operating in Japan. The transplants had even fewer suppliers per part than the Japanese plants, and their contract lengths were longer than the U.S. average. They also appeared to follow the Japanese practice of giving suppliers more frequent feedback and suggestions for improvement than was customary for the U.S. manufacturers.

The survey measured the performance of suppliers on price and quality dimensions. In contrast to the Japanese plants, suppliers to both U.S. and transplant manufacturers did not meet initial price targets on average. However, the transplants achieved a certain amount of success in reducing prices over time, while prices rose at the Big Three plants.

The survey yielded interesting results on the quality dimension as well. Suppliers to the Big Three plants had an average of 1.81% defects. Suppliers to the transplants had a lower defect rate of .05%; the parts supplied to Japanese plants—which were sourced exclusively in Japan— had an even lower rate of .01%. Over the model lifetime, defects dropped at a 30% annualrate at the transplants, 9.5% at the Japanese plants and only 1.7% for the Big Three suppliers.

55  

Cusumano and Takeishi, op. cit., p. 46.

56  

It may also be the case that these business relationships lead to anticompetitive practices and higher prices for consumers. A recent survey by the U.S. and Japanese governments found that installed and uninstalled auto parts were significantly more expensive in Japan than in the United States. See U.S. Department of Commerce, “Summary Analysis, DOC/MITI Automotive Parts Price Survey,” June 27, 1991.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

TABLE 9 Summary of Main Survey Results: Supplier-Manufacturer Relations

Dimension

U.S.

Japan/U.S.

Japan

Number of Suppliers Per Part

Most (1.8)

Fewest (1.2)

Fewer (1.3)

Type of Suppliers

In-house and U.S. Independent

Affiliated U.S./Japan U.S. Independent

Independent & Affiliated Japanese

Length of Relations

Long (> 10 yrs.)

Short (1-4 yrs.)

Long (> 10 yrs.)

Length of Contracts

Short (1.7 yrs.)

Longer (2.5 yrs.)

Longest (3.2 yrs.)

Length of Parts Transactions

Long (3.2 yrs.)

Short (1.6 yrs.)

Longest (3.5 yrs.)

Selection Criteria (Emphasis)

Past contact, Affiliation

Price & Quality

Price

Role in Development

Inquiries at 30 months & selection at 26 months

Inquiries at 33 months & selection at 24 months

Inquiries at 27 months & selection at 23 months

 

70% Blackbox

30% Detail-controlled

64% Blackbox

23% Detail-controlled

96% Blackbox

Source: Michael Cusumano

The authors concluded that the low defect rate achieved by the transplants was partly due to their utilization of parts sourced in Japan and from Japanese-owned suppliers that followed the manufacturers to the United States. However, 85% of the parts covered in the survey were sourced in the U.S., and 37% came from independent U.S. suppliers. Further, U.S.-based suppliers performed better on price and quality for the transplants than they did supplying the Big Three. Anecdotal evidence indicates that this gap in performance may be partially due to more stringent inspection of parts destined for the transplants rather than to real process and productivity improvement.

The price and quality improvements over time that were achieved by the independent U.S. suppliers to the transplants indicates, at least to a certain extent, that the “soft technologies” which comprise Japanese supplier management have a positive impact on performance even in the American context. The results also suggest that technology is being transferred to the U.S. operations of the Japanese automakers. There are positive implications for the quality and price of U.S.-made automobiles.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

TABLE 10 Summary of Main Survey Results: Supplier Performance

Dimension

U.S.

Japan/U.S.

Japan

Pricing Practices

Above Target (109%)

Above Target (110%)

Below Target (98%)

Price Changes

Increasing (+0.9%)

Decreasing (−0.4%)

Decreasing (−2.1%)

Defect Rates

High (1.81%)

Low (0.05%)

Lowest (0.01%)

Defect Rate Change

Decreasing (−1.7%)

Decreasing (−30.1%)

Decreasing (−9.5%)

Information Exchanges

Low, mainly statistical process control

Higher, more on process steps

Higher, more on process steps and costs

Supplier Suggestions

Few

Many

Many

Source: Michael Cusumano

In response to survey questions, the managers of the transplant factories pointed out a number of factors that prevented them from performing even better. Difficulties encountered in the American environment included insufficient product design capability of American suppliers, deficiencies in the abilities of second-tier U.S. suppliers, and a limited manufacturing infrastructure for dies and fasteners. American and Japanese suppliers have different expectations regarding profits and pricing, which raised obstacles for the transplants. Traditional American practices dictate higher profit margins for suppliers, annual price increases for the life of the model and higher prices for higher quality output. Japanese suppliers make lower margins and see no conflict between lower prices and higher quality.

Another interesting finding of the survey is that the supplier management techniques used by Japanese companies and their U.S. subsidiaries are being transferred to the Big Three through competitive pressure. According to the evidence compiled by Cusumano and Takeishi, there is a marked trend among U.S. manufacturers toward fewer suppliers per part and longer contract lengths. The survey also found evidence that U.S. automakers are making progress in obtaining higher quality and lower priced parts.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

TABLE 11 Early Versus Later 1980s Comparisons

 

U.S. Sample

Japanese Sample

 

Pre-1987

Post-1986

Pre-1987

Post-1986

Average Sample Size

8

10

7

20

Performance Variables

Target Price Index

105.0*

116.4*

100.7

97.6

Price Change %

2.38**

.148**

−2.08

−2.07

Defect Rates

2.60

1.37

.014

.008

Defect Rate Change %

−.590

−1.73

−14.3

−7.58

Descriptive Variables

Suppliers Per Part

4.75

1.42

1.00

1.40

Contract Length (years)

1.00

1.58

3.08

3.25

Suggestion Index

2.75

2.46

4.00

4.80

Supplier Selection Criteria

Initial Price Offered

3.63

4.36

5.00

4.90

Target Price Ability

3.88

4.27

4.43

4.75

Quality

4.75

4.82

4.58

4.75

Past Relations

4.63

4.27

3.29

3.05

Financial Affiliation

4.13

3.91

1.86

2.25

(scaled 1-5, 5 = very important; 1 = not important)

Notes: All variables showed significant differences at 0.10 between pre-1987 and post-1986 responses for the combined sample. Pre-1987 = responses on models introduced before 1987; Post-1986 = responses on models introduced after 1986.

* = Difference significant at 0.10

** = Difference significant at 0.05

Source: Michael Cusumano

Overall, the evidence from the automobile industry is encouraging because it indicates that U.S.-based suppliers and the Big Three are capable of change in the direction of superior Japanese practices. 57 Some Japanese automakers are making well-publicized efforts to build long-term relationships with U.S. suppliers.58 In addition, indications are stronger in the auto

57  

There is evidence that the adoption of just-in-time inventory management by American companies — both auto makers and firms in other manufacturing industries — was spurred by the transplants as well. See Gary R. Saxonhouse, “Sony Side Up: Japan's Contributions to the U.S. Economy,” Policy Review, Spring 1991, p. 63.

58  

Paul Blustein, “Doing Business the Toyota Way-Firm Offers Advice to Possible U.S. Suppliers,” Washington Post, November 1, 1990, p. C1.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
×

industry than they are in semiconductors or consumer electronics that the transplants are moving in the direction of greater vertical integration and increased technical activity in their U.S. operations. 59

But doubts remain about how far and how fast technology transfer from transplants to the Big Three will proceed. Technology transfer from Japan to the United States may be indispensable for the transplants to enjoy the same manufacturing edge that Japanese companies do at home.60 Whether or not “soft technology” is transferred from Japanese to U.S.-owned organizations and the impact of this technology transfer on the competitiveness of the domestic industry may depend to a great extent on whether U.S. companies — managers, unions, and suppliers — are flexible enough to change traditional relationships.

59  

In addition to the reports on Nissan and Toyota's plans to build engines in the United States cited above, Honda plans to increase the amount of R&D it does in the United States See “Honda Giken: Bei no Kenkyu Kaihatsu Taisei o Kyoka” (Honda: Strengthening Its U.S. R&D Organization), Nihon Keizai Shimbun, September 10, 1990, p. 9.

60  

Robert Lawrence, from his presentation on “Overviews” at the Workshop on Japanese Investment and Technology Transfer: An Exploration of Its Impact.

Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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Suggested Citation:"2. Assessing the Evidence- Japanese Investment and Technology Transfer." National Research Council. 1992. Japanese Investment and Technology Transfer: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/9508.
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