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Policy Considerations JAPANESE PERSPECTIVES The Japanese government is formulating policy toward international par- ticipation in R&D consortia. There has been an about-face to the approach of the recent past when foreign firms were explicitly excluded from partici- pation in government-supported R&D consortia. MITI and other agencies are now actively encouraging foreign participation. From the Japanese perspective, this is one way to "internationalize" the nation's research and development system. It is also a response to charges by foreigners that the country is a "science and technology free rider." The official Japanese position is that international collaboration of all types, especially in basic research, will be critical in spurring scientific progress in coming years.43 According to this view, bringing scientists from different countries together will generate new ideas and concepts. It will also accelerate the international diffusion of knowledge, because no one country or company can go it alone due to the high cost and high risk involved in research. The Japanese government points to the Human Frontier Science Project (HESP) as an indication of commitment to promoting international collabo 43 Yonko Kawaguchi, from her presentation on "Cross-Border Issues" at the Workshop on R&D Consortia and U.S.-Japan Collaboration. 32

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33 ration. Former Prime Minister Nakasone proposed HFSP at the 1987 G-7 summit in Venice. HFSP is basically a funding pool that solicits proposals for international collaborative research on brain functions and basic life processes. Though the funding does not compare with U.S. government support for life science research, it comes in great part from Japan. The headquarters of lIFSP is in S~asbourg, and Japanese officials are anxious to secure funding from other sources and cite awards to non-Japanese as evidence of HFSP's internationality. MITI has opened its large-scale cooperative R&D projects to foreign companies, not only the Japanese subsidiaries of foreign firms. It has been reported that MITI is planning to introduce a bill in the Diet (parliament) that would grant intellectual property rights to foreign firms that participate in joint R&D projects and provide for incentives for companies that hire foreign researchers.44 The most prominent move taken by MITI in recent months is undoubt- edly the Intelligent Manufacturing System (IMS). Japan approaches IMS with the conviction that manufacturing is important and that international collaboration on software standards and other areas of technology develop- ment will lead to faster diffusion of advanced manufacturing technology. A manufacturing enterprise is more likely to buy a computer-integrated sys- tem if a common standard will allow upgrading and the incorporation of new features. Creating a manufacturing environment that is clean, safe, pleasant for workers, energy efficient, and that does not damage the global environment are also goals of the program. Japanese companies are cautious but interested in exploring collabora- tive research programs with U.S. finns.45 One factor seen to inhibit col- laboration is what many Japanese see as "excessive protection" of intellec- tual property rights. Other requirements for successful collaboration are structuring projects so that incentives and contributions are roughly equal, ., . ~ . . . . . . . . . uentltylng contact points In participating organizations, ant ma sing frequent communications. From a Japanese perspective, there is value when companies gain skills in R&D collaboration in the domestic context before . . . . . . participating In International programs. 44"Kokusai Kyodo Kenkyu Sokushin e Hosebi" (Preparing Legislation to Promote Intemational Research Cooperation), Nihon Keizai Shimbun, January 28, 1991, p. 17. See also National Science Foundation Memorandum of February 14, 1991. 45 Yoriko Kawaguchi, from her presentation on "Cross-Border Issues" at the Workshop on R&D Consortia and U.S.-Japan Collaboration.

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34 U.S. DEBATES OVER COLLABORATING WITH JAPAN Today the Bush administration and Congress are in basic agreement that federal support for R&D consortia is appropriate. There remain significant differences in perspective, however, on the scope of projects, funding lev- els, and the role of the government. Perhaps the most contentious issue connected with R&D consortia in the United States concerns policies on foreign participation. One way to formulate the question is whether consor- tia with membership that includes foreign firms or their U.S. subsidiaries have the same opportunities for antitrust exemption and public financial support that consortia consisting of purely domestic firms have. NCRA exemptions were not extended to manufacturing and marketing consortia by the 101st Congress in part because of this issue.46 At this point, there is no clear answer to the question. NCRA has no provisions concerning foreign firms or subsidiaries, the effect of which is to permit consortia with foreign membership to register for the exemption. In some of the programs involving federal financial support to R&D consortia, membership was limited to firms with 51 percent ownership by U.S. citi- zens. In the case of the Advanced Technology Program, a flexible, jobs- oriented standard has been developed.47 46 James Tumer, from his presentation on "The Environment for R&D Consortia in the United States" from the Workshop on R&D Consortia and U.S.-Japan Collaboration. 47 The language from the 1991 Department of Commerce appropriations bill, Section 105, is instructive for the number of factors to be taken into account and the absence of concrete criteria. The bill reads as follows: "(b) (1) A company shall be eligible to receive financial assistance from the Secretary of Commerce only if (A) the Secretary of Commerce finds that the company's participation in the Advanced Technology Program would be in the economic interest of the United States, as evidenced by investments in the United States in research, development, manufacturing (including, for example, the manufacture of major components or subassemblies in the United States); sig- nificant contributions to employment in the United States; and agreement with respect to any technology arising from assistance provided by the Secretary of Commerce to promote the manufacture within the United States of products resulting from that technology (taking into account the goals of promoting the competitiveness of United States industry), and to procure parts and materials from competitive suppliers; and (B) either- (i) the company is a United States-owned company; or (ii) the Secretary of Commerce finds that the company has a parent company which is incorporated in a country which affords the United States-owned companies opportunities, comparable to those afforded to any other company, to participate in any joint venture similar to those funded through the Advanced Technology Program; affords to United States-owned companies local investment opportunities comparable to those afforded to any other company; and affords adequate and effective protection for the intellectual property rights of United States-owned companies."

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35 The foreign participation question will persist as Japanese investment in American high technology-companies continues and publicly funded con- sortia proliferate. Approaches taken to date by U.S. consortia vary. MCC is now open to Canadian companies as well as U.S.-owned firms and de- fines North American ownership as 51 percent equity holding. MCC sees some room for cooperating with foreign consortia in standards and other areas but is not presently contemplating shareholding or participation in projects by firms outside North America. Officials at MCC are uncomfort- able setting policy in this regard and look to Washington for clearer guide- lines. SEMATECH is not contemplating foreign membership. The proposed acquisition of Semi-Gas Systems, which had been working closely with SEMATECH in developing more advanced gas handling systems for wafer fabrication, by its major Japanese competitor Nippon Sanso, has focused attention on the foreign participation question. The acquisition was re- viewed by the Council on Foreign Investment in the United States (CFIUS), which decided not to recommend that the president block the sale. CFIUS, which reviews foreign investments and makes recommendations to the president under the Exon-Florio amendment to the Defense Produc- tion Bill of 1988, operates under fairly strict guidelines. It is instructed to recommend that a foreign acquisition be blocked only if the acquisition will cause harm to U.S. national security. During the time that Exon-Florio has been in effect, CFIUS has blocked only one acquisition. The CFIUS deci- sion to make no recommendation on the Semi-Gas acquisition was criti- cized by SEMATECH and by some members of Congress who favor ex- panding the definition of national security to reflect economic and indus trial security. In the Semi-Gas case, the argument for blocking the sale was that the U.S. firm had developed leading-edge technology by collaborating with SEMATECH, which received public funding to aid the U.S. semicon- ductor industry. Nippon Sanso signaled that it would be willing to separate the gas team at SEMATECH from the rest of the company so that Nippon Sanso would not gain access to that technology, but critics called that op- tion unrealistic. In late 1990 the Justice Department decided to challenge the acquisition on the grounds that it would result in excessive market concentration in gas handling systems for semiconductor production. While efforts continued to find an American buyer for the company, it became clear that Nippon Sanso was willing to pay a substantial premium above what potential U.S. buyers would be willing to pay. The announcement by ATT that it will join with NEC to share basic tech- nologies to make semiconductors presents another question for SEMATECH, since ATT is a leading member of the consortium. ATT officials say that they will not share with NEC know-how developed by SEMATECH. The

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36 case points to the growing pressure on companies to share the rapidly esca- lating costs associated with survival in the semiconductor business and the likelihood that more companies will look to Japanese firms as partners. From the corporate and public policy perspectives, however, the issues be- come more complex. Europeans, like Americans, are grappling with Japanese foreign invest- ment. Both U.S. and Japanese firms are increasing their links with Euro- pean companies in a variety of industries. Examples of this trend include IBM's cooperation with Siemens in semiconductors and negotiations be- tween Daimler-Benz and the Mitsubishi Group concerning collaboration over a range of industries. Fujitsu's acquisition of an 80 percent stake in JCL, a member of a number of European R&D consortia, raised the ques- tion of Japanese participation. The Joint European Submicron Silicon Initia- tive (JESSI) consortium announced in March 1991 that Japanese-controlled ICL would be barred from participating in three of the five collaborative research projects it participates in.48 In the view of some, this puts ICL on the same footing as IBM which also participates in some but not all projects. Establishment of the unified European market in 1992 and the growing integration of the EC may affect U.S.-Japan R&D collaboration. Europe is one of the potential trilateral participants in IMS. Europe appears less en- thusiastic, however, perhaps because a painstakingly structured and funded EC R&D consortia is already under way in advanced manufacturing (in- deed, EC-wide consortia exist in many of the areas where Japan is likely to propose international collaborative R&D). As a result of resources already being committed to projects and differences of opinion between nations and companies within the EC, it may be difficult for Europe to respond to initiatives from Japan. Europe continues to face the "old" foreign participa- tion question (IBM and other U.S. firms) as well as the "new" issue of Japanese participation that is faced by the United States. IMS presents a challenge to U.S. policymakers, public and private. The original vision of a 10-year, billion-dollar effort on advanced manufacturing intrigued some U.S. firms. However, other firms and the Department of Commerce were concerned because MITI had not initiated the project under the U.S.-Japan Science and Technology Agreement and because the pro- posed technical focus included areas where U.S. companies are still gener- ally considered to be ahead of Japan. This initial suspicion about R&D collaboration is certain to arise again in the future. There has generally been a positive evaluation of the efforts by the Commerce Department to incorporate private sector views in building a 48"Europe's Embattled Electronics Industry Delivers Strong Protectionist Message," The Asian Wall Street Journal Weekly, April I, 1991, p. 8.

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37 U.S. response to IMS. An ad hoc industry group and other mechanisms have been utilized to foster dialogue. Those interested in participating see the project as a harbinger of the future; new modes of international col- laboration involving the United States and Japan, if carefully developed, could provide mechanisms for technology transfer from Japan. Despite the evolution of a favorable perspective about IMS, American observers are not unanimous in their optimism. Some worry that it may be inappropriate to enter a "feasibility stage" without a clear technical agen- da and before a U.S. strategy is fully developed. Cntics question whether U.S. firms know how to benefit from collaboration.49 Industry-government cooperation on the U.S. side and Japanese rec.ep- tiveness to American proposals bode well for the IMS project, but active engagement on the part of high-level government and industry officials will be needed to structure the program and move toward joint R&D. IMS brings into shard focus many of the issues that must be resolved if R&D collaboration between the United States and Japan is to involve government support and long-term commitments from companies as well as universities. POLICY OPTIONS FOR THE UNITED STATES For the United States, it is important to consider the domestic impacts of R&D consortia. While there is evidence that R&D consortia can advance innovation, there are also concerns that consortia can foster oligopolies that limit international competition. In truth, there is inadequate analysis and experience to draw firm conclusions at this point about long-term impacts. In order to formulate policy, it will be necessary not only to define "U.S." and "foreign" firmsS but also important to consider the concept of reciprocity.si One approach is specific reciprocity, or a tit-for-tat approach. Specific reciprocity involves an exchange of specific technologies, FSX for high-definition television or more commonly, Japanese funding for U.S. research. One has to look carefully at the short- and long-term impacts to judge whether these specific exchanges are truly reciprocal. In the case of "diffuse reciprocity," foreign firms can be Heated like domestic firms when similar opportunities for participation are available to domestic firms in R&D consortia in a foreign county. Another approach is to provide the same treatment for domestic and foreign firms, regardless of 49 See Richard Florida and Martin Kenney, The Breakthrough Illusion (New York: Basic Books, 1990), pp. 178-181. 50 Robert Reich, "Who Is Us?" Harvard Business Review, January 1990, p. 53. 5~ Comments by Richard J. Samuels, Workshop on R&D Consortia and U.S.-Japan Collaboration.

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38 nationality. In view of the growing linkages between U.S. and foreign firms from Japan and elsewhere, some form of diffuse reciprocity that pro- vides an overall context for cooperation may be more workable than a negotiation of each case on a tit-for-tat basis. Policymakers must consider the possibility that limiting access of foreign firms to R&D consortia in the United States may lead to the erection of similar barriers overseas in a period when U.S. access to technology developed abroad is increasingly important. In working out fair and effective bilateral modes of interaction across a range of projects, asymmetries in research, markets, and resources must be taken into account in order to structure reciprocal efforts. The U.S.-Japan Science and Technology Agreement contains general principles, but every case of R&D collaboration will require serious efforts to structure reciproc- ity in the context of the resources of the participants, their technical capa- bilities, and the long-term impacts on the economies and technology bases of the nations involved. A number of approaches are under consideration today in the United States; there is as yet no firm consensus. The approaches outlined below provide a sense of the range of debate. Approach A: Grant national treatment to foreign firms, except in cases raising narrowly defined national security concerns. Press for national treatment for U.S. firms in Japan, and try to improve this treatment through bilateral negotiations. This is, more or less, the Bush administration's position. This approach is based on the notions of diffuse reciprocity that have been fundamental to U.S. policy in trade, foreign investment, and other areas for some time. National security is defined in the context of the CFIUS process. Efforts to strengthen Japanese enforcement of antitrust and modify regulations on foreign investment are being pursued in the "structural impediments" talks between the two countries. Approach B: Press for international rules governing public support for R&D consortia that would codify national treatment. Consolidate in- vestment policy and R&D support rules within the framework of inter- national trade. This multilateral approach could complement Approach A and provide a focus for future GATT negotiations. The issues would be extremely com- plex. If the Uruguay Round fails, after the United States pushed for consid- eration of nontraditional areas like intellectual property rights and agricul- ture, there may not be a great deal of enthusiasm for this approach. Peter Cowhey has suggested an approach consisting of bilateral agreements sub- ject to multilateral approval. Whether agreements can best be achieved on a bilateral or multilateral basis is a key question for consideration.

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39 Approach C: Designate strategic commercial technologies with the great- est potential for future economic growth, and promote R&D consortia limited to U.S. participation in order to ensure U.S. technological inde- pendence. This would assume the adoption by the United States of a full-fledged technology policy. Although "targeting" is contrary to stated Bush admin- istration policy, funding SEMATECH through DARPA has some aspects of this approach. The Semi-Gas case raised questions that would have to be treated in a more systematic fashion if this approach were to be adopted as a central strategy. More specifically, the issue is how to deal with a buyout by a Japanese firm of one of the firms participating in SEMATECH. Whe- ther the policy is made explicit or remains implicit, some type of "infant industry protection" from foreign competition and takeover would be con- sidered as a natural adjunct to this approach. Approach D: Allow, perhaps encourage, foreign participation in U.S. R&D consortia while actively working with Japan and the EC on IMS and other collaborative projects. Monitor the results carefully and maintain the flexibility to alter policy if it does not advance U.S. inter- ests. This approach could be termed an "internationalist technology/indus- trial policy," in contrast to Approach C, which could be called a "nationalist technology/industrial policy." What would be required is an activist U.S. government negotiating with Japan and other countries to ensure that international collaboration provides benefits to the United States as a country as well as to the U.S. partners. In contrast to a pure "industry-led" approach, the U.S. government would forge a strategy to get the most out of R&D cooperation for the United States as a country. Conditions for foreign participation in U.S. R&D consortia would de- pend on whether U.S. firms are allowed to participate in foreign consortia and the effectiveness of this participation. A conditional approach might feature provisions to screen firms based on the technology that they could contribute to the consortia. "Performance requirements" have been dis- cussed in the context of ATP and the NCRA extension to manufacturing and marketing; these include requirements for domestic content, R&D, and job training. In this context a penalty for firms found dumping on the U.S. market twice in the past five years has been considered that would prohibit them from participation in U.S. government-supported R&D con- sortia. Other considerations may include whether there are reciprocal opportuni- ties for U.S. firms in the home country. In proposed legislation, reciprocity requirements encompass the investment and general business environments of the home country as well as the ability of U.S. firms to participate in

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40 government-sponsored R&D. If foreign firms or their U.S. subsidiaries can clear these hurdles, they could be allowed to participate in supported con- sortia or receive antitrust protection under NCRA. Presumably, the execu- tive branch agency charged with evaluating a proposal (NIST in the case of ATP funding) would make these evaluations. In some of the proposals there are provisions requiring that foreign participation, if approved, be monitored and reported to Congress. Approach E: Do nothing. Interpreted as maintenance of the status quo, this outcome is fairly un- likely because the forces described in this report are already changing the the context for R&D consortia. If "do nothing" is instead interpreted as the logical continuation of present trends, some combination of Approaches A, C, and D could become de facto policy unless there are further shifts of opinion within Congress, the administration, or both. R&D consortia present important and complex policy questions. While some argue that the United States has no choice but to participate and to include "foreign" participation (however defined) in U.S.-based consortia, others favor a conditionality approach that links opportunities here to ben- efits available to U.S. firms overseas. Conditionality approaches, however, must take into consideration the possibility that U.S. firms operating over- seas will be asked to live up to the same standards. From a broader per- spective, we simultaneously live in a world of bilateralism, globalism, and regionalism. How to balance and reduce the frictions and tensions among these three supranational endeavors will be one of the principal challenges of the l990s. Whatever approach is taken, a good argument can be made that these issues deserve serious consideration by U.S. policymakers, public and pri- vate. The uncertainty surrounding R&D consortia today makes it difficult for U.S. organizations to maximize the potential gains. At the same time, it must be recalled that collaborative R&D is everywhere the exception rather than the rule and that the driving force determining success or failure in international market competition will remain the proprietary in-house R&D efforts and their coupling with complementary assets (production, marketing, and distribution).