National Academies Press: OpenBook

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

Chapter: Vertical and Diagonal Relationships in Outsourcing

Suggested Citation:"Vertical and Diagonal Relationships in Outsourcing." 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.
Page 30
Suggested Citation:"Vertical and Diagonal Relationships in Outsourcing." 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.
Page 31

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EXTERNAL RELATIONSHIPS IN CORPORATE TECHNOLOGY POLICY AND INNOVATION STRATEGY 30 original equipment manufacturer (OEM), and consequently the level of OEM control decreases. Another way of looking at it is that as the level of technology controlled by suppliers increases, OEMs must enter into more equal relationships with them. Therefore partnering between OEMs and suppliers is becoming more frequent. Figure 4-1 Percentage of companies with high reliance on external sources for technology. Source: Edward B. Roberts, "Benchmarking the Strategic Management of Technology," Research- Technology Management, January-February 1995, p. 55. External sourcing of technology and innovation generally occurs within two types of institutional relationships. One is the relationship between OEMs and suppliers.4 Outsourcing is the term usually applied to this type of relationship. The other is the formation of strategic technology partnerships between corporations, usually for a limited time and purpose. The terms alliance and consortium are commonly used to describe this form of relationship. External sourcing as used in this report includes both types of relationships. It also encompasses a broad range of activities from a growing reliance on suppliers for increasingly independent and sophisticated engineering and design work to encouraging suppliers and universities to conduct research and development which can be integrated into the corporate innovation process. Vertical and Diagonal Relationships in Outsourcing The relationships of trust between suppliers and OEMs and the benefits to technological innovation that such relationships can bring are characteristic of many of the Japanese vertical alliant business groups (vertical keiretsu). U.S. firms have been adopting aspects of the Japanese vertical keiretsu model by reducing the number of suppliers, giving those suppliers more scope to innovate (sometimes by providing functional specifications), and increasing the level of

EXTERNAL RELATIONSHIPS IN CORPORATE TECHNOLOGY POLICY AND INNOVATION STRATEGY 31 technological cooperation between original equipment manufacturer and supplier. This trend is facilitated by the use of computer-aided design and manufacturing systems linked through computer networks, allowing co- development in the OEM supply chains. TABLE 4-1 Company-financed R&D Contracted to Outside Organizations by R&D-performing Companies, 1993 and 1996, million dollars 1993 1996 Total Manufacturing 3,462 5,833 Nonmanufacturing 2,339 4,293 Total as a percentage of company-financed R&D 3.6 4.9 SOURCE: National Science Foundation, Division of Science Resources Studies, Survey of Industrial Research and Development: 1996. TABLE 4-2 Japanese Industry R&D Funding Paid to Outside Organizations, 1993 and 1996, million dollars 1993 1996 Total 4,722 5,113 Manufacturing 3,576 3,824 Nonmanufacturing 1,146 1,289 Total as a percentage of company-financed R&D 8.6 9.1 NOTE: Purchasing power parity values used for currency conversion. SOURCE: Government of Japan, Management and Coordination Agency, Report on the Survey of Research and Development, various surveys 1993-1997 Japanese OEMs have enjoyed more or less exclusive vertical relationships with their suppliers, and conducted research and development jointly with commitment by the OEM to buy and by the supplier to produce. Although the evidence is mainly anecdotal at this point, members of the Japanese working group point to a trend in which more Japanese suppliers are expanding to diagonal relationships, diversifying their research, and expanding markets, leading to higher levels of outsourcing in the Japanese economy. Japan's vertical keiretsu are an interesting model for U.S. firms. Some may wonder whether U.S. firms may make the mistake of mimicking old keiretsu, after Japan has moved to "diagonal" relationships across vertical alliance boundaries. However, it is unlikely that arrangements similar to Japan's traditional keiretsu would be allowed under U.S. law. Still, U.S. manufacturers such as Chrysler and Eaton have adapted aspects of Japanese supplier

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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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