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

Chapter: Diversification vs. New Firm Creation in Relation to Outsourcing of Innovation

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Suggested Citation:"Diversification vs. New Firm Creation in Relation to Outsourcing of 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 32

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EXTERNAL RELATIONSHIPS IN CORPORATE TECHNOLOGY POLICY AND INNOVATION STRATEGY 32 relationships to their own circumstances.5 Driving this trend is increasing global competition across industries which pushes companies to develop and produce higher quality, competitively priced products quickly for demanding end users. At the same time, it should also be noted that although some U.S. companies have emulated aspects of Japan's vertical keiretsu, few or none have emulated the horizontal alliant business groups composed of major manufacturers, large banks, and trading companies, which are also referred to by the term keiretsu . Horizontal keiretsu remain a dominant and distinguishing feature of Japanese business which is not mirrored in the U.S. system, although German business is also known to have a main bank structure. Rising foreign direct investment by manufacturing firms has also encouraged sourcing beyond the immediate group as companies search for high quality, low cost suppliers to support their production operations around the world. Also contributing is the fact that suppliers are required to have significant capacity to conduct R&D and to innovate alongside end-users. For example, Johnson Controls, a large U.S. automotive components supplier, has become the lead supplier of seat subassemblies to Toyota's global assembly operations, providing seats to Toyota assembly plants in Georgetown (Kentucky), Fremont (California), Ontario (Canada), and Cardiff (Wales). Diversification vs. New Firm Creation in Relation to Outsourcing of Innovation As outsourcing becomes more prevalent, the capabilities of external sources of technology becomes an important issue. Large Japanese firms are often said to be adept at internal diversification using both foreign and domestic assets.6 Yet the effectiveness of this strategy has been brought into question. In the United States, diversification takes place primarily through the creation of new firms and secondarily through mergers and acquisitions. The creation of new firms is important for new emerging technologies (biotech, computer hardware, software) but not for later stage growth or stable fields. The advantages of diversification through acquisition are that it is faster and requires less R&D resources. However, only acquisitions in closely related businesses have a good track record, and they are the basis for only modest degrees of diversification. Unrelated acquisitions have high failure rates. Internal diversification through R&D has less initial risk, is more flexible, and provides broader business scope.7 In addition, it is typical for large Japanese electronics firms to sell to the OEM component market while also consuming their component output in their vertically integrated businesses, which can facilitate diversification in electronic components and end products. The advantages and disadvantages of various routes to business growth through innovation can be seen in recent U.S. and Japanese examples. Several of the leading Japanese integrated electronics companies have successfully launched liquid crystal display (LCD) manufacturing in recent years on the foundation of their existing business and technological bases (diversification through internal R&D). Other attempts by large Japanese manufacturers during the late 1980s and early 1990s to diversify into high technology fields far removed from their original businesses have yielded fewer examples of success. Some believe that internal diversification's dependence on existing organizations can constrain the search for new technologies and thus may be less suited than new firm creation and even mergers and acquisitions for creating entirely new business opportunities. In the United States, the investment community and business pressures have an important influence on strategic decisions to enter new businesses, as opposed to Japan, where company management has been more free to formulate and pursue long-term strategies without external pressures. The U.S. investment climate is currently not favorable to firms that stray far from their

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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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