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New Strategies for New Challenges: Corporate Innovation in the United States and Japan (1999)

Chapter: EXTERNAL SOURCING OF TECHNOLOGY AND INNOVATION

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Suggested Citation:"EXTERNAL SOURCING OF TECHNOLOGY AND INNOVATION." National Research Council. 1999. New Strategies for New Challenges: Corporate Innovation in the United States and Japan. Washington, DC: The National Academies Press. doi: 10.17226/5823.
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Page 29

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EXTERNAL RELATIONSHIPS IN CORPORATE TECHNOLOGY POLICY AND INNOVATION STRATEGY 29 4 External Relationships in Corporate Technology Policy and Innovation Strategy The trend toward increasing reliance on external relationships in corporate technology policy and innovation strategy in both the United States and Japan is widespread, and has both domestic and international aspects. It is driven by the globalization of markets, the high cost of keeping abreast of new technologies, and the complexity of high technology products and systems which force companies to focus their resources on the most important corporate assets. Companies must therefore rely more and more on capabilities outside the firm. Some hope this will result in mutual sourcing and symbiotic competition worldwide. The trend toward greater reliance on external relationships takes at least two forms: (1) external sourcing of technology and innovation accompanied by deemphasis on vertical integration, and (2) voluntary associations or consortia of firms for the purpose of agreeing on de facto standards through which architectures and interfaces are agreed on to foster market growth through the stimulation of interoperability. The latter relationships are prominent in software and other areas of information technology. EXTERNAL SOURCING OF TECHNOLOGY AND INNOVATION Greater reliance on external sourcing, the search for and acquisition of technology and innovation from sources outside one's own firm, is, in the judgment of t he task force, the most important trend in global technology management. The practice of acquiring technology and innovation from outside the firm, a long-standing operational practice in Japan, is growing. A survey of companies around the world illustrates that firms anticipate a growing reliance on external sources of technology (Figure 4-1). Several recent reports and indicators confirm the existence of this trend in the United States. According to a 1996 report by the Council on Competitiveness, the aircraft, automotive, chemical, electronics, information technologies and pharmaceuticals industries are increasing their focus on alliances, R&D partnerships, and other mechanisms aimed at tapping or leveraging external capabilities.1 Table 4-1 shows the extent of R&D outsourcing by U.S.-based companies in 1993 and 1996. The figures show outsourcing rising significantly over that period. The trends should be interpreted with some caution, because they may reflect better coverage of nonmanufacturing industries in recent R&D surveys. Table 4-2 shows R&D funding paid to outside organizations by Japanese companies for 1993 and 1996. The U.S. and Japanese data may not be directly comparable due to differences in the surveys and accounting methods. Still, the figures show that Japanese firms do fund R&D outside the firm at a significant level. The Japanese government also keeps track of payments to foreign organizations. In recent years, R&D payments to foreign organizations by Japanese companies has been slightly under ten percent of total outside payments.2 Some experts suggest that outsourcing is the key to corporate innovation strategy in both countries.3 At the same time, the nature of external relationships is changing as the level of dependence on outside affiliations for critical technology increases. In general, the level of supplier control increases in proportion to the sophistication of the technology provided to the

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Innovation, "the process by which firms master and get into practice product designs and manufacturing processes that are new to them," is vital for companies wishing to remain competitive in today's rapidly changing high technology industries. American and Japanese firms are among the world's most technologically innovative and competitive. However, the changing dynamics of global competition are forcing them to rethink their technological innovation strategies. The choices they make will have great impact on their futures as companies as well as on the livelihoods of their employees and the communities in which they operate.

In order to understand the ways in which Japanese and American companies are changing their technological innovation strategies and practices, the Committee on Japan of the National Research Council and the Committee on Advanced Technology and the International Environment (Committee 149) of the Japan Society for the Promotion of Science (JSPS) organized a bilateral task force composed of leading representatives from industry and academia to assess developments in corporate innovation strategies and report on their findings. Through a workshop discussion of the issues and subsequent interaction, the task force explored the institutional division of innovation in both countries: the structure and performance of technology-based industries, the role of the government in the support of science and technology, and the role of universities in the science and technology system. The task force was particularly interested in exploring the points on which the two systems are converging,-i.e., becoming more similar in strategy and practice-and where they continue to be distinct and different.

Although a comprehensive study of these trends in U.S. and Japanese innovation was not easily feasible, the task force was able to develop several conclusions based on its workshop discussion and follow-up interactions that were substantial in time and content. This report identifies a set of issues whose further elucidation should be helpful in guiding public policy in both nations. These issues include the role of external sourcing of innovation, transnational activity and globalization, the organization and performance of R&D, and the role of consortia, joint ventures and other joint activities. A call for greater international efforts to collect and analyze data on these important trends is the central recommendation of the task force.

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