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4 U.S.-Iapan R&D Collaboration CHANGING GLOBAL CONTEXT The global context for R&D collaboration is under transformai~on.35 Sev- eral factors, working in conjunction, suggest the advent of a "market ac- cess" regime. Although multinational corporations (MNCs) have been around for a long time, the degree of globalization of production, distribu- tion, and R&D is increasing, and this challenges corporations to develop new strategies. National markets are today open to extensive international competition; this compei~i~on is more intense. Protectionism in the ~adi- tional sense of tariffs and ostensible trade barriers is not necessarily grow- ing. Industrial policies, the affirmative measures taken by governments to promote national industries, are becoming more prominent, and these poli- cies create new questions because they are developed to create advantages for national firms. Another important contextual factor is that bilateral trade agreements are under multilateral scrutiny. Taken together, these fac- tors make up a new kind of approach to governance of markets, one in which R&D is a major object of government policy. These changes present a new context for international R&D collabora 35 Peter Cowhey, from his presentation on "Cross-Border Issues," at the Workshop on R&D Consortia and U.S.-Japan Collaboration. See also Lynn Mytelka, ea., Oligopolies and Hierarchies: Strategic Partnerships in the 1990s (London: Frances Pinter, 1991). 25

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26 lion. New sets of questions are posed: Are companies "local," and can the benefits of national industrial policy measures be focused exclusively on national firms? How should trade rules treat purely private R&D consortia that play a policy role? What rules should govern the treatment of consortia that produce quasi-commercial products? How can national differences in antitrust policies be accommodated? How is "effective foreign entry" into consortia to be defined, and does reciprocity really matter? The changes outlined above must be seen in historical perspective. Today's "market access regime" contrasts with patterns of the past. "Classic closed" economies, like most in Latin America until recently, featured restrictions on foreign trade and investments, and tended to license monopolies or duop- olies. "Semiopen" economies, like Japan's in the l950s and 1960s featured competition within the country and substantial restrictions on foreign entry. France in the 1970s, and the European Community (EC) today more gener- ally, exemplify "open industrial policy." The telltale signs are a substantial amount of EC joint research, the development of common policy on stan- dards, and other measures designed to increase the competitiveness of EC- based companies. Mergers and acquisitions in the EC are encouraged to build up efficient competitors, while markets are opened to increased com- petition from outside. In contrast to these examples, the United States after 1945 provides an example of a "classic open" economy. Internal and external competition was left open ended. The government had an arm's length relationship with firms, and firms had arm's length relationships with each other. While there were exceptions to this policy approach, the basic rationale was open access. The telecommunications equipment market illustrates a shift in interna- tional regimes. From World War II until the 1970s telecommunications was not characterized by free trade in any meaningful sense of the word. Mar- kets were semiclosed, and there were national suppliers for national phone companies. The prototype multinational was ITT. Although ITT central- ized its R&D, it did not integrate production and distribution internation- ally. Rather, ITT was a portfolio of national monopolies. As perceived barriers to trade have increased, the market structure for telecommunications equipment has changed drastically, shifting to a regime of "open industrial policies." The essence of this policy approach is to allow international competition while aiding home country firms. As a result, there has been a dramatic restructuring of companies in the industry worldwide. For example, ATT's strategy in Europe today is to induce companies in key markets to buy into a joint holding company, which sells in the partner's market and perhaps third markets as well. In contrast to the pattern typical of Ill in years past, All is developing more joint product lines with other

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27 firms.36 The result is not a monolithic multinational corporate empire, because it does not appear that the alliances or product lines are made up in the same way around the world. Many multinational firms are, however, developing joint products of some types. Not surprisingly, corporate functions are increasingly thought of on an integrated global basis. Access to the local technology networks in key countries is becoming as critical as access to the market itself for global firms. This access requirement is what causes many of the new trade prob- lems. In the traditional free trade arrangements that were the norm in the past, government procurement and R&D were exempted from multilateral rules. These are now considered at the heart of infrastructure building on a global basis. Market access regimes are characterized by open industrial policies and global firms. Government procurement, R&D, and services will all become subject to review under the trade rules because of their impact on global firms. We are now in a period when governments are struggling to build new trade rules that take such factors into account. The future of R&D consortia will be influenced by these developments. Determining whether "foreign" firms can participate in government-sup- ported R&D is a central issue. Government procurement and subsidies, presumably including subsidies to R&D consortia, are now important trade- related issues. Some believe that a firm can be considered a national firm and permitted to participate if it has a local subsidiary and if 50 percent of the content of its products is locally produced. In the EC this argument has been taken one step further with a requirement that the "most substantial transformation" must occur locally. This requirement raises the thorny question of how to value the cost of R&D across a product line or in a 50- 50 joint venture. What might eventually emerge as a working definition of a local firm in critical industries would include a local subsidiary, 50 per- cent local content, and some technical sophistication requirement. This might involve local R&D across products or technical sophistication in the production process. Such an approach, which may be emerging in the EC, allows some flexibility but does not eliminate the potential for disputes. Other policy issues arise from the difficulty in distinguishing between "basic" research and consortia whose work is closely tied to commercial products. Some complaints about foreign subsidies hinge on the distinction between process and product technology, one that is also becoming increas- ingly blurred. The question of which consortia are exempt from trade rules and which are covered will have to be addressed at some point. 36 It is important to recall the historical backdrop: A1l, backed by Bell Labs, exported telecommunications equipment and owned a large share of NEC. ITT was unable to fill the vacuum left by the removal of All from these markets, and ATT, now permitted to compete again in these areas, is less capable.

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28 Problems also arise because R&D consortia have policy-related purposes. Because consortia often include major players in a national economy, they are places where prepolicy advice is given as well as places where precom- mercial research is performed. They often develop basic ideas for policy and standards, and, by the time the formal government body makes its decision, the de facto standard already exists. The role of the R&D consor- tium as government adviser may come under scrutiny, even if its research activities are exempt. The potential for disputes exists because differing national policies on antitrust affect R&D consortia. There is also the question of what constitutes reciprocity in international R&D collaboration. Is there reciprocity if only one firm can enter the foreign market, or must other criteria be met? Do U.S. firms have the resources to benefit from access to Japanese technology in Japan? Is it possible or reasonable to work toward the establishment of multinational standards of reciprocity? Should there be generic U.S. government support for smaller companies to participate in Japanese collaborative research? These are all difficult questions and are precisely the ones that R&D con- sortia will raise in the future. CORPORATE STRATEGY AND INTERNATIONAL R&D COLLABORATION The history of business interactions between Japanese and American firms suggests that there are potential risks and complications as well as benefits. An American company contemplating collaborative research with Japanese firms, either under Japanese government, international, or private auspices, must consider a number of factors. First and foremost, U.S. companies must keep in mind that collaboration is not an end in itself. Corporate planners must be clear about what is being sought through R&D collaboration: access to technology, financing, mar- kets, knowledge, people, and ownership of technology developed. Collabo- ration can be a mechanism for sharing risks. Less attention has been paid to R&D collaboration as a method to tie up Japanese competitors.37 It is useful to ask at the outset what the perspective is of a prospective Japanese partner. Japanese firms believe that the presence of foreigners can enrich the research environment of their laboratories. From the point of view of Japanese firms, membership in a consortium with American firms may also provide a mechanism for exposure to U.S. technology that com- pensates for the fact that some large U.S. firms are taking a tougher stance when licensing out technology. Other potential benefits from cross-border 37 Ellen Frost, from her presentation on "Cross-Border Issues," at the Workshop on R&D Consortia and U.S.-lapan Collaboration.

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29 consortia include gaining U.S. support for jointly developed standards, gaining exposure to `'lead users" of products, and other benefits related to marketing or political image. There is a continuing "vacuum cleaner mentality" toward external tech- nology in Japanese companies. U.S. companies that fail to keep pace with Japanese partners and put the necessary attention and resources into their collaborative projects with Japanese firms will not benefit. Problems also result from mismatched expectations. This is illustrated by polls of Ameri- can and Japanese firms that have participated in joint ventures with com- panies from the other county. Many more U.S. firms are disappointed by the results of their interactions, primarily because they had entered into them with the goal of achieving short- or medium-term profits without adequate staffing with individuals who speak Japanese, while the Japanese companies sought to learn or to build relationships. If U.S. companies do not specify their goals and realistically evaluate whether they can be achieved, they risk ending up with less than nothing. Companies like United Technologies, a conglomerate with over 200,000 employees (half of whom are non-U.S. citizens), are developing new ap- proaches to R&D collaboration. Pratt & Whimey, an aircraft engine subsid- iary of United Technologies, is developing cooperative aerospace projects with Japan. Major opportunities for cooperation are seen in high-speed civilian transport, components, materials, and commercial space. In order to explore cooperation in the development of an engine for a High-Speed Civilian Transport (HSCT) aircraft, Pratt & Whitney formed a consortium with General Electric, Rolls Royce, and the French firm Snecma. Together they negotiated their possible participation in a MITI-led consortium to develop the HSCT jet engine.38 A major challenge has been to reach agree- ment on intellectual property rights, since standard Japanese government practice is to maintain ownership of the intellectual property rights that result from contracts it supports.39 Differences in perspective are also ap- parent between the Japanese and U.S. companies on technical questions such as speed and environmental impacts as well as projections of cost and demand.40 Linkages with Japanese firms to develop aircraft components are pro 38 "Obei Yonsha ga Sanka" (Four U.S. and European Firms to Participate), Nihon Keizai Shimbun, February 14, 1991, p. 13. 39"Tokken Kizoku Meguri Gijutsu Masatsu," (Technology Friction Over Reversion of Patents), Nihon Keizai Shinbun, October 27, 1990, p. 13. p. 13. 40 See "Jisedai SST" (Next-Generation SST), Nihon Keizai Shimbun, March 12, 1991,

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30 ceeding more cautiously. Japanese firms are strong not only in distributed electronics, smart sensors, controls, and interfaces but also in some cutting- edge areas such as optics. Participation in a MITI-led consortium on air- craft components is less attractive to some. Collaboration in advanced ma- terials is another possibility, perhaps via a consortium with Japanese universities and companies to research high-stress materials and fabrica- tion methods. Apart from the Japanese Experimental Module (JEM) being planned as part of the National Aeronautics and Space Administration's space station, there has not been a great deal of U.S.-Japan collaboration in space. It is not certain that much cooperation will develop through consortia or other- wise. However, the long-term, across-the-board, commercial-applications- oriented commitment being made by Japan is appealing to American com- pan~es. Companies like United Technologies are helping to formulate a U.S. private sector response to the Japanese Intelligent Manufacturing System (IMS) proposal. Industry-government consultations to form an American position had been conducted in a cooperative manner. IMS is a Japanese proposal for cooperation in R&D that can have a positive impact if it en- courages new modes of government-industry interaction in the United States.4i A good deal of uncertainty remains about IMS; issues of funding, organizational modalities for cooperation, identification of technical priori- ties, and allocation of benefits must be spelled out in more detail in a feasibility stage if IMS is to become a reality. U.S. industry will play a critical role in this process. There are several lessons that can be drawn from the experiences of U.S. firms in their R&D collaborations with Japanese firms and with MITI. 1. The U.S. firm should survey and categorize its own technology and clarify what it wants from the collaboration. Motorola is a good example in this regard. Division managers identify the technologies that will be impor- tant in their businesses in the future and develop a plan to obtain them. The company should also identify the "family jewels," its most important pro- prietary technologies that will not be shared. 2. The U.S. firm should also be clear about what the Japanese counter- part wants. The best way to do this is to monitor Japanese technology on an ongoing basis. If undertaken properly, the firm will accrue general com- petitive intelligence from this activity in addition to knowledge useful in negotiations with Japanese firms concerning possible R&D collaboration. 4] EHen Frost, from her presentation on "Cross-Border Issues" at the Workshop on R&D Consortia and U.S.-Japan Collaboration.

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31 3. The firm should think long term, anticipating differences in goals with Japanese collaborators and pressures on their own management. Col- laboration should not be undertaken at all if the company will not be able to commit the resources and attention necessary to gain benefits. 4. Differences in the treatment of IPR and accounting should be taken into consideration at an early stage. 5. The division of labor, specifics of technology sharing, and organiza- tion of the research should be defined ahead of time. 6. The firm should always keep its eye on the market and on the rel- evance of the collaborative project for its business. 7. In dealing with Washington as well as Tokyo, nemawashi or prelimi- nary spadework is necessary. There are marked differences in the prevail- ing attitudes toward technology collaboration with Japan within the execu- tive branch of the U.S. government. A firm may have to spend a certain amount of time touching base win the relevant agencies, taking into con- sideration not only the traditional national security concerns but also the newer apprehensions about"economic security" the perception that U.S. firms are licensing away valuable technology to foreign, particularly Japanese, companies and not getting anything valuable in return. 8. Changes in corporate culture may be needed in order to be effective in collaborating with Japan. A top management commitment may be needed to force Japanese technology into the consciousness of headquarters and the divisions. This can be undertaken as part of a larger effort to combat the "not-invented-here" syndrome, but must also encompass the develop- ment of a culture to deal with the Japanese on a personal basis. 9. Finally, it is important for the United States as a country and even for individual U.S. firms to think in terms of"technopatriotism," which is based on the expectation that national firms retain national character and that the future of American-based firms is bound up with the future of America's economy and technological strength. While some instead advo- cate a borderless world in which corporations lose national character, it is clear that national affiliations remain significant. Combining "technopatriot- ism" with the willingness to seek out technology from Japan and the com- mitment to maintaining a global outlook may appear contradictory, but each of these elements will be necessary for U.S. firms to survive and grow into the next century.42 42 Ellen Frost, from her presentation on "Cross-Border Issues" at the Workshop on R&D Consortia and U.S.-Japan Collaboration.