Conflict and Cooperation in National Competition for High-Technology Industry (1996) / Chapter Skim
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V National Technology Policies and International Friction: Theory, Evidence, and Policy Options
V National Technology Policies and International Friction: Theory, Evidence, and Policy Options
Pages 187-205
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From page 187... ...
This section of the Report addresses the theory and empirical evidence of national technology policy in globalized markets, and it deals with approaches to multilateral conflict resolution in selected policy areas giving rise to international friction: subsidies and public procurement, market access and structural impediments, and dumping, antidumping, and competition policies. Prepared as an analytical basis for deliberations of the Steering Committee, it is intended to give a theoretical and empirical underpinning to the Committee's Recommendations and Findings.
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From page 188... ...
and the HWWA Institute for Economic Research. The first chapter, The Economics of Technology Policy in Globalized Markets, and the first part of the second chapter, Approaches to Conflict Resolution: Agenda for Action, were written by Karl-Heinz Paqué, Jürgen Stehn, and Ernst-Jürgen Horn of IfW.
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From page 189... ...
JOINT HWWA-IFW ANALYSIS: NATIONAL TECHNOLOGY POLICIES AND INTERNATIONAL FRICTION: THEORY, EVIDENCE, AND POLICY OPTIONS THE ECONOMICS OF TECHNOLOGY POLICY IN GLOBALIZED MARKETS ........................................................................... 190 Analytical Benchmarks, 190 Endogenous Growth Theory, 190 Strategic Trade Theory, 193 Empirical Evidence, 194 External Learning and Growth, 195 The Case of the Semiconductor Industry, 195 Knowledge Diffusion: International and Interregional, 198 Strategic Trade Policy: The Aircraft Industry, 200 Technology Policy: Some Cautious Conclusions, 202 APPROACHES TO CONFLICT RESOLUTION: AGENDA FOR ACTION ..............................................................................
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From page 190... ...
The policy toolbox ranges from overt protectionism and subsidization to more covert barriers to market entry such as discrimination in public procurement, product standards, and distributional networks. Whatever their specific shape may be, the instruments are usually part of a more or less coherent growth strategy that is well summed up under the terms "technology policy" or "industrial policy."1 Many of the more popular arguments for technology policies in hightechnology markets can easily be refuted with standard economic reasoning and are therefore no serious candidates for further scrutiny.2 The more powerful case for technology policy -- and the one that is most likely to dominate future debate on trade frictions in high-technology markets -- comes from two modern strands of economic research that are both analytically important and politically relevant: endogenous growth theory and strategic trade theory.
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From page 191... ...
If, on the other hand, knowledge spillovers remain geographically concentrated and thus essentially national in scope, a cumulative process of what may be called "national learning" may then set in and drive a widening competitive wedge between the respective national industry and the rest of the world. In the extreme, a country starting with a tiny and accidental technological lead may eventually dominate the relevant world market because it profits -- alone and persistently -- from its own knowledge creation, Competition and Corporation in Global Markets held at the HWWA-Institute in Hamburg, 2–3 February 1995; and R
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From page 192... ...
In the case of positive externalities, the modern theories of endogenous growth recommend public support directly of R&D activities rather than general protectionist measures for the respective industrial branch, say, in the form of production subsidies or tariffs. This is in line with the more traditional welfare analysis of externalities in trade theory,6 though the underlying rationale of the result is somewhat different: while traditional theory wants the government to avoid static allocative losses, the modern theory wants it to avoid a (growth-hindering)
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From page 193... ...
If, in the end, national subsidy costs are lower than the gain in rents, then the active policy stance pays off from a national point of view. Note that, in the technology policy debate, the case for a strategic trade policy hardly comes neatly separated from arguments based on endogenous growth theory.
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From page 194... ...
.8 These studies suffer from major methodological deficiencies: despite their wealth of information and interpretation, they offer neither a theory-based empirical account of the diffusion of knowledge or the shifting of rents, nor a reasonably specified counterfactual scenario that would allow pinning down with some conceptual precision to what extent government intervention has in fact altered the path of economic history. The example of Japanese industrial policies is notorious in this respect.9 To qualify as a valuable piece of economic analysis, it is not sufficient to demonstrate that there was some intervention in some industrial branch and that producers in this branch were increasingly successful in world markets; rather, it has to be shown that the relevant path of events was sufficiently different from what could have been expected on the basis of factor endowments and learning processes that went on anyway, independently of government action.
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From page 195... ...
studies that investigate the regional and sectoral incidence of learning effects and externalities, which is the core issue for the design of technology policies. The Case of the Semiconductor Industry In recent years, the semiconductor industry has been at center stage of the technology policy debate, not least because it is widely regarded as a strategic industry in the sense that the production of semiconductors involves strong learning effects (and thus cost reductions)
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From page 196... ...
They find strong learning effects within each chip generation -- on average a 20 percent cost reduction, with a doubling of output over time. However, they find no significant learning effects between chip generations: any new quality stage of technological development in the form of a new generation of memory chips begins with a level playing field.
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From page 197... ...
Prima facie, the simple observation that Japanese semiconductor producers -- after a prolonged period of spectacular world market penetration -- lost world market shares back to American competitors by the late 1980s, seems to point in the same direction. However, the interpretation of this fact is complicated by two major policy shifts that may have influenced the course of events, namely the conclusion of two U.S.-Japanese semiconductor trade agreements, which brought some protectionist relief to American producers, and the establishing of SEMATECH, the joint industry-government research consortium in the American semiconductor industry.
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From page 198... ...
23 attempt to quantify international knowledge spillovers between industrial economies.24 On the basis of annual data for the period 1971–1990 and twenty-two mostly-OECD countries, they estimate how strongly total factor productivity in any country depends on the "research capital stock" (1) in this country itself and (2)
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From page 199... ...
in the narrower context of the semiconductor industry. On interregional knowledge spillovers, there are two major studies that are directly relevant to the policy questions at hand.
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From page 200... ...
Hence, as in the research on patent knowledge diffusion, an empirical case can be made for inter-industrial rather than intra-industrial spillovers dominating the picture.28 Strategic Trade Policy: The Aircraft Industry Rent-shifting in high-technology markets through deliberate government intervention has been an explicit aim of policy in one particular branch of economic activity: the aircraft industry. Naturally, it has been this industry and in particular the economics of the European launching of Airbus as a competitor of Boeing that was subjected to empirical analysis, notably by 27 E.L.
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From page 201... ...
Also, world welfare as a whole is likely to be reduced because the loss of producer surplus in the United States may well overcompensate for the worldwide gains in consumer surplus (net of the tax burden) , a result which reflects the enormous importance of economies of scale in the aircraft industry: given very sharp cost reductions through learning effects, the socially optimal outcome for the world as a whole may simply be a monopoly.
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From page 202... ...
, which explicitly puts the actual Airbus entry against a duopoly with equal market shares of Boeing and McDonnell Douglas, yields the counterintuitive result that a duopoly Boeing/Airbus leaves Boeing with higher profits than the duopoly Boeing/McDonnell Douglas because the latter involves more equal market shares and thus forces Boeing further up the average cost curve. Whatever one may think of this peculiar result -- it depends crucially on the imputed market share of McDonnell Douglas, which is purely speculative -- the Airbus venture loses its antimonopoly rationale once it is assumed that there is no monopoly in the counterfactual scenario anyway.
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From page 203... ...
Hence a fine-structured industrial policy targeted at selected high-technology industries can hardly be recommended.33 On the other hand, the observed regional localization of knowledge spillovers may suggest that a "technol 33 This conclusion is almost a commonplace among economists. See, e.g., the policy conclusions by one of the main advocates of endogenous growth theory: G.M.
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From page 204... ...
(1) In selecting instruments of government intervention, one should aim at supporting R&D itself, and not output or trade, because output subsidies and trade policies invariably have undesirable allocative side effects, not to speak of the potential for political frictions that may come to the fore once countries engage in protectionist warfare in high-technology markets.
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From page 205... ...
An implicit R&D subsidy can be recognized in two distinct elements of the tax code.35 First, labor costs incurred in R&D can be deducted as current expenditure, like labor costs incurred in production, although they are economically more like an investment in future knowledge creation and thus, in a neutral tax code, would have to be treated like an investment in physical capital, which can be deducted only over time, according to some schedule of depreciation. Second, the value of the knowledge output that is not sold in the market for patents and licenses, but kept for exclusive use in the company, is not counted as an asset for tax purposes.
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