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EXECUTIVE SUMMARY 2 The picture which emerged is mixed. The Joint Task Force agrees that there is strong evidence that U.S.- Japan problem convergence, or increasing commonality in the problems addressed by corporate innovation in the two countries, is occurring.2 However, there are a variety of views among committee members over whether there is growing similarity in the institutions underlying innovation in the two countries, as well as in the strategies and approaches to innovation of U.S.- and Japan-based companies. Some practices appear to be growing more similar, such as the use of external sources of innovation and the relationships of original equipment manufacturers with suppliers and customers. Other practices, such as those of human resources utilization and development, are still different to the extent that ongoing change appears insufficient to alter the mismatch that in the past has created friction between the United States and Japan. Following are specific points of convergence and continued differentiation: Growing Similarities and Evidence for Convergence Original Equipment Manufacturer (OEM)-Supplier Relations In the past, U.S. firms have been seen as choosing suppliers based on short-term price criteria, and promoting price competition among a number of suppliers. Japanese supplier relations have been seen as more stable. Some U.S. firms have been moving toward reliance on a smaller number of trusted suppliers while Japanese suppliers are beginning to expand business with firms outside their traditional business groups.3 Drivers of this phenomenon include increasing global competition and the search for cost reduction and quality through innovation. In the case of Japanese OEMs, the successful experience of transplant companies (which in many respects have been forced to use non-group suppliers), and exchange rate shifts have fueled a search for non-Japanese based suppliers to keep costs competitive. Inventiveness Companies in each country are focused on attaining innovation-related capabilities associated with firms in the other nation. For example, Japanese firms are putting greater emphasis on inventiveness, while U.S. firms are focusing more on being responsive to market needs, improving existing products, shortening product cycles, and improving manufacturing processes and quality. Focus on Core Business Activities Firms in both countries are focusing their resources on core business activities in the quest for greater efficiency and lower cost. Many lower priority activities are being outsourced. However, there is no consensus among Japanese and U.S. practitioners on the extent to which it is an effective general strategy. Role of Government The role of government with respect to innovation and competition is in flux in both the United States and Japan. In the United States, debates continue over the appropriate federal role in supporting the development and diffusion of precompetitive commercial technology.4 While support for basic research has been largely maintained across relevant agencies, the outlook for