Securing America's Industrial Strength (1999) / Chapter Skim
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These studies appear in a companion STEP Board volume, U.S. Industry in 2000: Studies in Competitive Performance, with an introduction by David Mowery, University of California Haas School of Business.
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industry performance. Despite its general satisfaction with the progress of the last decade and guarded optimism about the future, the STEP Board concludes from its investigations that there are four policy concerns that need to be addressed:
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Although questions of feasibility, reporting burden, and cost need to be examined, the STEP Board believes that, in principle, a number of steps should be taken to improve the information base for microeconomic policy design and evaluation. These include collecting data at the business-unit level of the firm, conducting innovation and technology adoption surveys, linking datasets to one another, exploiting data on the training, career paths, and work of technically trained people, and exploring public-private partnerships to produce information useful to both corporate managers and public policymakers.
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It was widely believed that, despite exceptional cases such as biotechnology, U.S. firms were underinvesting in general and, in particular, shying away from new ventures with longer time horizons but the promise of eventual competitive advantage, market share gains, higher returns, and even the creation of new industries.
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contrasted with contemporary studies of the same industries under the auspices of the STEP Board: Pharmaceuticals.
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Stronger U.S. performance is revealed in gains in global market share that rest in part on improvements in product quality and manufacturing process yields.
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THE STEP BOARD'S ANALYSIS To help answer these questions, the National Research Council's Board on Science, Technology, and Economic Policy (STEP) undertook in 1997 an analysis that had an ambitious objective and involved several components.
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With respect to technological factors, of particular interest is the relationship of apparent changes in public and private investment to current and future economic performance. Among the changes frequently cited are the following: .
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Departments of Commerce and Energy, the U.S. International Trade Commission, trade associations, and other organizations.
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Less than truckload (LTL) Package express Mainframes Minicomputers Microcomputers (PCs)
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The STEP Board decided to extend some of its earliest work on tax policy and corporate investment (National Research Council, 1994) to consider how incentives for R&D and U.S.
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division, the workshop was also designed to generate suggestions for improving this information base. A report of the workshop, including participants' recommendations, Industrial Research and Innovation Indicators was published in 1997 (Cooper and Merrill, 1997~.
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The "environment" encompasses a complex mix of institutions and policies, not only government macro- and microeconomic policies but also durable national institutions. These include university systems both performing research and training scientists and engineers, legal systems protecting property (including intellectual)
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Even though more or less enduring national system differences do not figure prominently in these explanations of industries' improved performance, the two perspectives are quite complementary. Competitive strength in the long run rests on a robust institutional infrastructure and a stable, predictable macroeconomic environment rather than on policies that are targeted on particular industries and firms.
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hard disk drive producers have steadily increased their world market share by linking U.S.-based technical and design resources to low-cost efficient Asian production. Another high-technology industry, semiconductors, has recovered from competitive decline, regaining its formerly dominant market share, apparently through a combination of product specialization and manufacturing process improvement.
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6 SECURING AMERICA'S INDUSTRIAL STRENGTH examine the context in which firms operate, starting at the most general national characteristics of industrial countries and proceeding through various levels of governmental, institutional and social factors, and macroeconomic and microeconomic policies to the characteristics of particular industries and firms. The synthesis here follows this analytical framework, termed "levels of comparative advantage," which represent higher and lower levels of aggregation (see Table 2~.
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ad- 4~3 ~[ j~~ TABLE 2 LC~L of [o-~vC Adv~t~c 77 Noons Covem~ce Soc1~-PoDUc~ Came Each Po11cies [lSC~ onet~y Trade T sUtuU~n~ Sexing a.
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It also includes exchange rate policy and the coordination of national macroeconomic policies that affect international transactions. Figures 1 through 7 show a strong correlation between a combination of steady and conservative fiscal policy emphasizing federal budget deficit reduction and cautious monetary policy emphasizing stabilization and low domestic inflation, interest, and exchange rates since the late 1980s.
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. Source: Federal Reserve Bank of St.
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A growing body of empirical evidence at the establishment or firm level, much of it presented to a STEP-sponsored international research conference in 19955 confirms that adoption of new process technologies, especially when preceded or accompanied by worker training and managerial improvements, has spurred productivity growth in many industries. Many of these information tech nologies have also supported development of new products and the appearance of new services, especially in the service industries.
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The following microeconomic policies also exhibit a high degree of consistency. Economic Deregulation Beginning with the airlines in 1978, successive administrations and congresses have scaled back government control of exit and entry and services and prices in a series of major industrial sectors: trucking, railroads, energy/natural gas.
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Subsequently, the Patent and Trademark Office granted innumerable biotechnology product and process patents. In 1982 Congress established the Federal Circuit Court of Appeals to handle patent litigation appeals, limiting the wide variation in circuit appeals courts' treatment of patent infringement cases and generally strengthening the position of patent holders.
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Perhaps with the exception of the biotechnology industry, where new firms with strong patent positions find it easier to attract financing and large established pharmaceutical firms depend on intellectual property protection to protect their enormous up-front drug development investments, the effects of strong IPR protection are far from clear. Overall, there has been an increase in patenting, suggesting that firms are able to appropriate more of their technology investments.
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The evidence presented at the STEP Board's conference on international tax policy is that U.S. tax rules governing foreign income and expense allocations of U.S.-based corporations and the tax treatment of corporate R&D have important economic consequences through their influence on the levels and location of research and innovation and capital investments of multinational companies that account for most of the R&D performed in and most of the goods and services exported from the United States.
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For example, DRI opined in 1984 that the steps to promote a "healthier development of U.S. manufacturing" should include lowering interest rates, exchange rates, and the cost of capital through budget deficit reduction and capital market liberalization; opening up world markets through more aggressive trade policies; stable monetary and fiscal policies, to avoid the cyclical pattern of the postwar period and to encourage long-term investment; support of basic research and training, including support of cooperative research projects to meet world competition; and regulatory and tax policies that favor industrial development (Eckstein et al., 1984~.
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An exception was the U.S. hard disk drive industry, which continued to compete head-to-head with Japanese and European producers, successfully increasing its global market share, by locating production of current-generation products in Singapore and older products elsewhere in Asia.
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semiconductor equipment industry, although not surpassing the yield rates of Japanese semiconductor manufacturers.
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In many cases this pattern has been associated with new entrants (e.g., specialty chemical firms, "fabless" semiconductor design firms that contract out their manufacturing, package express carriers, and steel minimills) or with intermediary firms supplying information technology and engineering services (e.g., consulting and accounting firms, software producers, systems integrators, logistics suppliers)
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32 SECURING AMERICA'S INDUSTRIAL STRENGTH The largest trucking companies first purchased logistics services and later established subsidiaries to provide them to other transportation firms.
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34 SECURING AMERICA'S INDUSTRIAL STRENGTH Changing Sources of Innovation In computers, pharmaceuticals, and perhaps chemicals, innovation processes have changed radically, and U.S.-based firms, not necessarily the industry leaders of a decade or two ago, have capitalized on the shift to achieve a strong competitive advantage. Bresnahan describes how in the computer industry a "Silicon Valley" system of organizing innovations multiple innovative companies excelling in components, hardware, software, networking, and other specialized parts of the industry replaced the integrated, hierarchical, more self-contained "IBM" system of innovation.
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SECURING AMERICA'S INDUSTRIAL STRENGTH 35 In pharmaceuticals, the revolution in molecular biology was exploited as a production tool by small biotechnology start-up firms and as a research and drug discovery tool by the large established pharmaceutical producers.
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New corporate linkages to university research have been created, through direct funding by a single company of a particular university center, institute, or laboratory, through consortia such as the Semiconductor Research Corporation, or through faculty involvement in launching start-up companies. Although the incidence and value to firms of outsourcing R&D are unclear, the increase in their frequency extends to the proliferation of joint research ventures, strategic alliances with foreign and other U.S.
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38 SECURING AMERICA'S INDUSTRIAL STRENGTH Increasingly, however, innovation in many industries is not traceable directly to any source, inside or outside a firm, with formal research as a major activity but is introduced from:
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SECURING AMERICA'S INDUSTRIAL STRENGTH 39 · intermediary firms such as specialized engineering firms (SEFs) in chemical processing, consulting and accounting firms in information technologies, and logistic firms providing Global Positioning System (GPS)
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40 SECURING AMERICA'S INDUSTRIAL STRENGTH · suppliers, customers, and marketing departments; · trade associations such as the Food Marketing Institute that developed and promoted the Efficient Consumer Response system in retailing; and · customers and/or suppliers demonstrating or developing new products or services of higher quality or with improved capability.
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SECURING AMERICA'S INDUSTRIAL STRENGTH 41 The Board's case studies, especially of the service industries trucking, food retailing, and banking but also apparel, powder metal parts, and other manufacturers, underscore that efficient absorption and deployment of technology from external sources such as software, systems, consulting, and accounting firms, as well as suppliers, customers, and competitors, are themselves risky endeavors that, in addition to capital, require knowledge, skill experimentation, and analysis that for the most part are not classified as R&D.
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the adequacy of measures and statistical data on research and innovation broadly defined; (2) the employment, income, and labor market effects of industrial resurgence and the adequacy of human capital to sustain it; (3)
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Industrial Research and Innovation Data Revealing as the Board believes the industry case studies are, the findings are anecdotal. Carefully selected statistical data, collected nationally on a recurring but not necessarily very frequent basis, also are needed to help discern and track changes in innovation processes as well as to help design and evaluate public policy measures affecting innovation.
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Federal statistical agencies should explore whether public-private partnerships could produce information useful to both corporate managers and public policy makers at less cost and effort and with less burden on respondents. Labor Implications The employment and income implications of technological and industrial change have been among the most contentious economic issues in the 1990s.
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manufacturing firms in industries other than pharmaceuticals and chemicals rely more heavily on trade secrecy and lead time to recoup their R&D investments than they do on legal mechanisms such as patents and that, if anything, the effectiveness of patents as a means of appropriating R&D returns has declined since the early 1980s (Cohen et al., 1998~. In short, apart from pharmaceuticals and biotechnology, the effects of IPR changes on innovation and technical advance are highly uncertain with respect to either the incentive provided to the innovator to capture the benefits of his invention, investment, and effort and therefore invest more resources and effort in innovation or the encouragement to the inventor to provide the information to others who might improve upon it.
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Should there be different approaches to intellectual property protection depending on the subject matter? Long-Range Research The improved competitive performance of many of the industries examined by the STEP Board has come about in the face of reductions in industry-funded longer-range research in some sectors.
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The fastest-growing firms in information technology Intel, Sun Microsystems, and Microsoft for the most part eschewed traditional large-scale research organizations. But this pattern has not extended to pharmaceutical companies, the new biotechnology enterprises that have become profitable, or the chemical firms that have shifted emphasis to life science products.
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with a lag time, overall private R&D spending tends to follow the pattern of public spending, suggesting that a downward trend is difficult to reverse; · the majority of federal investment in most research fields is, appropriately, a function of particular government missions and their political support; but the productivity of a field and its long-range prospects for contributing to successful applications may be neglected in the process of allocating resources to different programs; and · although there is no reason that currently constituted research fields should continue to be supported at the same or increasing levels, there is apparently no mechanism for assessing support of fields of research related to industrial activity across agencies and for making adjustments in one agency's budget to compensate for another agency's spending reductions dictated by changes in the latter's mission. The trends in several engineering and physical science disciplines are of sufficient concern to justify a selective effort to assess whether they are adverse and, if so, what steps should be taken to change them.
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CONCLUSION The STEP Board's inquiry about U.S. industrial performance was prompted by the contrast between the diagnosis in the 1980s of secular economic decline and permanent loss of competitiveness and the experience in the late 1990s of growth, profitability, and stock market acceleration.
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. Borderline Case: International Tax Policy, Corporate Research and Development, and Investment.
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In Borderline Case: International Tax Policy, Corporate Research and Development, and Investment, J Poterba, ed.
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