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4 International Crosscompany Links Although consortia offer opportunities for international technological col- laboration, as will be discussed in more detail in the concluding section, the major mechanisms for industrial R&D cooperation across national borders so far have been joint ventures and licensing. JOINT VENTURES lathe first U.S.-Japan joint ventures were companies established primarily to foster sales and production of U.S.-developed products. Eventually, some of these sales-oriented joint ventures established for purely geographic and market considerations were expanded to include manufacturing and product development. A limited number of these manufacturing/product develop- ment ventures, in turn, moved to take up joint research, the last area to be the focus of joint venture activity. U.S. companies began establishing joint ventures in Japan beginning in the late 1950s and early 1960s, although some U.S. companies had established strong ties to Japanese firms earlier. At this stage many large firms had set up sales bases in Europe, and similar ventures were needed in Japan as part of these companies' global expansion strategies. In most cases the Japanese parent company supplied the workers and provided the interface with the Japanese business community. The Japanese government maintained strict regulations on foreign direct investment during this period and acted as a gatekeeper to encourage licensing of technology to Japanese firms. Japanese 22

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23 companies set up joint ventures and subsidiaries in the United States much later, with the most significant activity occurring in the 1980s. Participants say the rewards of a successful joint venture can include tech- nology sharing and product development, but the failure rate is high. For the venture to be a success, the partners must understand each other's strengths, organizational styles, and problem-solving approaches. Each partner must offer complementary assets, and top-level management must be committed to a long-term perspective in nurturing the relationship. In successful joint ven- tures both partners agree to a clear definition of purpose. However, as the project evolves, particularly when new products are developed, partners must adapt flexibly to changing circumstances, and original licensing and royalty agreements sometimes must be revised. Participants discussed examples of joint ventures in Japan and the United States that have resulted in technology transfer and the creation of comple- mentary new product lines. One is Yokogawa Hewlett Packard (YHP), creat- ed in 1963 as a joint venture between Yokogawa Electric and Hewlett Packard to sell and manufacture Hewlett Packard products in Japan. A major motivation for creating the joint ventures was that Japanese law required that no more than 49 percent controlling interest be held by foreign firms in Japan.38 Yokogawa provided the management, staff support, and liaison with the Japanese business community to YHP, which operated as a separate com- pany. After little discernible activity in the first 5 years, Hewlett Packard expressed dissatisfaction with the management and staff provided by Yokogawa, and the venture appeared to be in serious jeopardy unless signifi- cant change ensued. New and stable management was provided by Yokogawa in response, and U.S. marketing and sales methods were intro- duced. Eventually, these actions had very positive effects on YHP's corpo- rate profits, but marked improvements did not take place for 10 years. As YHP matured, it began to seek opportunities to establish a charter for the development and manufacture of unique YHP products. This occurred at a time of rapid growth and diversification for Hewlett Packard, when there was intense competition among divisions for new product lines. As a nondo- mestic joint venture established for purely geographic reasons, YHP was poorly positioned to negotiate effectively over these issues. Eventually, how- ever, the problems were resolved, and YHP now has the lead in several major product areas worldwide. Hewlett Packard now owns 75 percent of YHP, which manages sales of products in Japan totaling over $1 billion per year. YHP won the coveted Demming Quality Award and was able to alert Hewlett Packard's domestic divisions to rapid improvements in competitors' products and to the need to

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24 improve performance and reliability. In retrospect, the YHP venture is seen as a clear success, but it required patience and persistence on the part of both partners to adjust to changing circumstances. The experience of Sumitomo Electric Industries, Inc. (SEI), in establishing joint ventures with U.S. firms also deserves mention.39 In the l980s joint ventures in the United States were established with a number of North American companies, including: AT&T (Litespec, Inc.), Alcan (Alcan- Sumitomo Electric, Inc.), Lucas (Lucas-Sumitomo Brakes, Inc.), and Eaton (Engineered-Sintered Components, Inc.~. In the last two companies, SKI is a 50 percent partner. It is a 51 percent partner in Alcan-Sumitomo Electric and a 49 percent partner in Litespec. All of the ventures were formed primarily to provide marketing and management support for Sumitomo products, although Alcan-Sumitomo also produces aluminum products. Sumitomo senior executives say that joint ventures are key elements of corporate strategy to promote international collaboration and diversification. In selecting potential partners and sites, Sumitomo views mutual trust as the most important factor and the promotion of a global outlook as a desired result. In keeping with this approach, Sumitomo places a great deal of emphasis on respect for each partner's business and social culture and on the importance of adapting to foreign environments. These factors, in addition to the potential for market expansion or creation and for technology develop- ment and transfer, are seen as essential conditions for a successful joint ven ture. The joint venture Sumitomo 3M is a marriage of 50 percent equity from 3M, a U.S. corporation, and from Sumitomo Electric Industries and NEC of Japan. This joint venture is based on technology developed in the United States; an exclusive right to manufacture was given to Sumitomo 3M, and the joint venture also received nonexclusive rights to import, convert, and sell products. From the perspective of 3M, the joint venture is part of a global strategy of building technology capability that includes strong links to con- sumer requirements in particular locations. The joint venture firm Sumitomo 3M now has its own laboratory where technical sales support, project engi- neering, and modification are carried on. Although the initial impetus for this joint venture was market access, corporate planners believe that a technology development phase now has begun. 3M, like the other parent firm Sumitomo Electric, emphasizes the importance of meshing corporate cultures to the suc cess of a joint venture. Although the Sumitomo 3M experience generally is viewed positively by the partners, leadership from Sumitomo Electric Industries discussed unfavorable conditions that can limit the success of joint ventures in other cases. These include competition for market share between the parent compa

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25 ny and the joint venture; an excess of control from abroad, including the par- ent company; overemphasis on short-term profits; excessive interest in the "money game," as opposed to production and manufacturing; ignorance of local market needs; ignorance of local culture; and hesitation to promote tech- nology transfer. ~ the case of Fuji Xerox, neither parent at first wanted the firm to conduct product or technology development. Recognizing the special requirements of the Japanese market for a small xerographic copier, the joint venture built independent expertise and established its own corporate R&D facilities. The joint venture maintains a close relationship to Xerox by sending researchers to work in the laboratories of the U.S. firm and by other means. In conclusion, corporations everywhere prefer wholly owned subsidiaries to joint ventures, because in such instances they face fewer constraints on technology sharing, decision making, and communication. The initial impe- tus for joint ventures may be to get into a foreign market, but over time the successful joint ventures alert parent firms to changes in markets and com- petitor positions. Some of the best-known joint ventures in Japan provide evidence that they can contribute to improvements in quality and efficiency of production and that technology sharing is possible, particularly through exchange of personnel. LICENSING Licensing has been a major mechanism for acquiring technology relatively quickly and at low cost. Japanese firms made extensive use of licensing in the 1960s and 1970s to acquire American technology. Although transfers of technology from the United States to Japan remain the dominant mode, observers note that cross-licensing and technology transfer from Japan to the United States appear to be increasing. The general motivations for licensing are to reduce costs and risks, fill product gaps, catch up in order to promote growth, and stay competitive. Considerations differ for licensers and licensees. If a firm seeks to buy tech- nology through a license, it is usually because the company has identified a need for a specific type of technology that will reduce the time required for commercialization or market entry. Licensing can compensate for lack of in- house knowledge or skills. Some companies also use licensing for long-term speculative purposes, gambling that a license bought today may be a bargain 5 years down the road. Some observers believe that Japanese companies use this strategy more than American companies. There are a number of reasons why companies sell their technology. For some the sale of technology is an incidental activity for a firm going out of

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26 business or changing R&D directions. For others it is a deliberate element of corporate strategy. In such cases licensing often is seen as an alternative to more expensive options, such as setting up additional manufacturing plants overseas. Some firms establish separate companies devoted to developing technology specifically for licensing. Because both the licensee and licenser must gain something, hard bargain- ing is necessary to achieve the correct balance. The licenser must be able to support the technology, and the licensee must have the capability to use it effectively. If a licenser feels it has sold technology too cheaply, it has no motivation to help the licensee succeed. If the licensee decides it has paid an unreasonable price, it may try to abrogate or circumvent the agreement.40 The biggest problems associated with licensing are those relating to intel- lectual property rights. For example, a company may license technology only to decide later that it is a crucial element of an internally developed product or process. Situations such as this make the question of who owns what very complicated and often result in difficult and protracted litigation. The struc- ture of royalty payments also is a critical issue. Some Japanese observers cite examples to support their view that when royalty payments are structured so that large payments are made in a short period of time, the licensers are more likely to develop alternative technologies. Companies develop contrasting licensing strategies, depending on their market goals. Honda of America was established in 1978 to manufacture motorcycles and moved into auto production in 1982, beginning production of the Accord and Civic in 1986.41 The company purchases parts, materials, and supplies from American vendors at a total annual value of $2 billion. Through these purchasing activities, Honda works with suppliers to develop and produce parts that fit Honda's unique requirements, facilitating tech- nology transfer and information exchange. From the perspective of Honda of America, these relationships have been the stimulus for expanded licensing of Japanese technology to the United States. Honda of America purchases sheet steel, plastics, and other materials in the United States. Strict quality control and innovative design based on incremental improvements to basic parts are Honda's hallmark. The compa- ny has devoted considerable effort in working with American suppliers to explain Honda requirements and specifications. In some cases the company has worked jointly with these suppliers to meet these requirements. In the early l980s it was difficult to obtain sheet steel that met Honda's require- ments from the only supplier, Inland Steel. Samples of Inland's product were sent to Japan for testing. After 3 years of joint consultation, Inland was able to achieve the desired result after engineers from Inland and Nippon Steel worked on production problems together. In a similar manner, Mitsui was

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27 brought in to help U.S. companies produce plastics meeting Honda's specifi- cations. One result of joint development was production of a new, lightweight bumper beam introduced in 1990 Honda models that has also been adopted by other automobile manufacturers. Additional examples of joint development activities include work to reduce engine size so as to increase passenger room and the redesign of air cleaners and oil filters to adapt to the smaller engine compartments. When U.S. companies could not meet Honda standards, Honda transferred its tech- nology for molding paper cartridges for filters with resins to Fram Canada, and after 2 years filter production began in the United States. Honda of America has taken two approaches to technology transfer. One, as noted above, is to engage U.S. suppliers to develop parts. Another is to transfer technology directly, such as production technology for the air filter. Honda worked with 78 suppliers to locally produce 870 parts for its 1990 models. In conjunction with its efforts to expand local purchasing, Honda believes it has expanded technology transfer to the United States. The experience of Centocor illustrates the contrasting licensing strategy of an emerging biotechnology firm.42 Centocor is engaged in biotechnology- based R&D and production of pharmaceuticals and diagnostics. The compa- ny has over 200 research staff members who select and screen antibodies to develop a full line of products in house. Centocor's strategy is to license in technology and antibodies and license out products. Centocor has discerned that Japan presents opportunities both as a market and source for technology and product ideas. While some U.S. pharmaceuti- cal companies have yet to tap lapan's potential to any depth, Centocor has devoted considerable effort to cultivating relations with Japanese companies and has participated both in the Japanese clinical registration process and in marketing activities there. In keeping with its strategy to become a worldwide pharmaceutical com- pany, Centocor has executed agreements for manufacturing and sales with Ajinomoto, Daiichi, Takeda, and Nippon Pharmaceuticals. The firm also has developed a relationship with Toray in diagnostics and therapeutic products. It is hoped that over time, these relationships will form the basis for joint technology development.