AN ASSESSMENT OF U.S. COMPETITIVENESS IN HIGH-TECHNOLOGY INDUSTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R002200250001-4
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 51
• Document Creation Date: December 19, 2016
• Document Release Date: September 28, 2006
• Sequence Number: 1
• Publication Date: May 19, 1982
• Content Type: REPORT

Approved For Release 2006/09/28: CIA-RDP83M00914R002200250001-4
Final Draft
AN ASSESSMENT OF U.S.
COMPETITIVENESS
IN HIGH-TECHNOLOGY
INDUSTRIES
A Study Prepared for the
Working Group on High-Technology
Industries
of the
CABINET COUNCIL ON COMMERCE
AND TRADE
MAY 19, 1982
Annrrnred For Release 2006/09128 : CIA-RDP83M00914R002200250001-4
 Approved For Release 2006/09/28 CIA-RDP83M00914R002200250001-4
D R A F T
AN ASSESSMENT OF U.S. COMPETITIVENESS
IN HIGH-TECHNOLOGY INDUSTRIES
A Study Prepared for the
Cabinet Council on Commerce and Trade's
Working Group on High-Technology Industries
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Contents
I. INTRODUCTION ............... ..........................1
II. THE IMPORTANCE OF HIGH-TECHNOLOGY
INDUSTRIES TO THE UNITED STATES ..........................3
III. EVIDENCE OF A DECLINING U.S. COMPETITIVENESS
IN HIGH TECHNOLOGY INDUSTRIES ............................ 8
Broad Indicators Show a Changing U.S Position ........ ....8
Relative Changes in Export Market Share .............. 8
Relative Changes in the Balance of Trade ............ 10
Industry-Specific Cases Also Indicate a Declining
U.S. Position ...........................................12
Pharmaceuticals ....................... ............12
Robotics ............................................ 12
Aircraft ............................................ 13
Biotechnology ....................................... 14
Space .............................................14
Fiber Optics ............. ..........................15
Computer Hardware and Software ........... .......... 1
Semiconductors ......................................16
Machine Tools ................................... ..17
IV. FACTORS CONTRIBUTING TO THE EROSION OF U.S.
COMPETITIVENESS IN HIGH-TECHNOLOGY-INDUSTRIES ........... 18
The Overall Economic Climate Affects Competitiveness
in High-Technology Industries ........................... 19
Foreign Financial Markets and Government Policies Make
Capital Cheaper and More Available to U.S. Competitors..20
United States ....................................... 22
Japan .............. .................. .....24
France ... ............ ............................25
West Germany ................. ...................... 26
Other Countries Are Committed to Increasing Research
and Development Efforts Relative to the U.S. Effort ..... 27
Overall R&D Funding ........... 27
Business R&D Funding .................... ...........29
Government R&D Funding....... ..... ........30
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The U.S. Advantage in Scientific and Technical
Personnel Is Shifting ................................. .....32
Shortages of Well-Trained Scientists and Engineers ..... 32
Upgrading the Quality of Science and
Engineering Education.......... ........................
Foreign Government Industrial Policies Affect
Competitiveness in High-Technology Sectors ..................35
Japanese Industrial Policy .............................37
French Industrial Policy .................. ...........38
West German Industrial Policy .......................... 40
The Transfer of Technology Has Accelerated
the Technological Advance of U.S. Competitors ............... 41
The Transfer of U.S. Civilian Technology ...............41
Department of Defense Weapons Programs as
Avenues of Technology Transfers .......... ...........42
Japan's Restrictive Technology Transfer Policies
Compared with We-st German and U.S. Policies .......... 43
V. IMPLICATIONS FOR THE U.S. ECONOMY AND NATIONAL SECURITY
OF AN EROSION OF STRENGTH IN HIGH-TECHNOLOGY INDUSTRIES ..... 45
The.Economic Health and Vitality of the American
Economy Depends on High Technology ........ .................45
The Weakened Position in High Technology Affects
the U.S. National Security.......... ......................46
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1. Introduction
For many years after World War II, the United States was the
world leader in industrial technology. As other countries
recovered from the war and as international trade intensified,
the world economy expanded and became more integrated. By the
1960s, the economies of the advanced developed countries had
reached the point where they displaced many types of American
products in world markets. They still, however, needed American
high-technology goods and expertise. Thus, the composition of
American exports shifted toward capital goods and services
embodying significant investments in research and development.
Recently, however, the research and development capabilities and
activities of other advanced economies have increased and
broadened. The United States has lost and may continue to lose
competitiveness in high-technology industries. Broad trade
patterns and industry-specific data support this view. The
technological sophistication of foreign firms now rivals or
surpasses that of the United States in segments of critical
technologies, such as fiber optics, computer componentry,
antibiotics, biotechnology, and semiconductors.
In the past, the United States has principally competed in the
high-technology arena on the strength of the uniqueness of its
technological expertise. As other countries have risen to the
U.S. level of performance, other factors, such as price and
quality, have become more critical.
These changes largely reflect the closing of the technological
gap between the United States and other major industrialized
societies. This narrowing was inevitable because of their
relatively modest base. It is less costly to catch up than it is
to innovate and develop new markets. But overlaying these broad
evolutionary trends are factors that have accelerated the U.S.
decline in competitiveness. Other countries have been willing to
make sacrifices to increase their competitiveness in high-
technology industries.
This report presents the results of an objective analysis of how
the research-intensive industries of the United States have
performed relative to those of Japan, France, and West Germany.
The comparison is limited to these countries to simplify the
presentation and because they are the principal U.S. competitors
in high technology. In certain industries, other countries may
be as important.
The report discusses the importance of high-technology industries
to the United States, presents the evidence of the eroding U.S.
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position, and assesses some of the causes of this erosion. These
causes include more favorable general economic conditions abroad,
greater relative growth in total research and development effort,
ready access to low-cost investment capital, a relative increase
in highly trained scientific and technical personnel, and
industrial policies that seek to promote the growth of
high-technology industries. The transfer of U.S. technology to
other countries has also contributed to the decline in U.S.
competitiveness, but. it has not been a principal contributor.
A declining U.S. relative position in high technology has
implications for the U.S. standard of living and the ability of
U.S. firms to continue to conduct R&D at the current rate. The
underlying premise is that the industrial composition of the U.S.
economy matters. These research-intensive sectors provide the
United States with a dynamic industrial core and, in the past, a
strong international competitive position. Because these
industries are essential to both U.S. productivity and national
security, their continued health and vitality has a significance
far greater than their seemingly small scale may indicate.
The high-technology segment of the U.S. economy is a collection
of nine industries with an important common characteristic: an
exceptionally high degree of continuing investment in research
and development. In the second and third sections, to identify
the relative performance of these industries and to compare
overall U.S. trade performance against Japan, Germany, and
France, these nine industries are combined into a single
"high-technology sector." Appendices A and B discuss the methods
used to identify high-technology sectors and present data that
are based on the alternative definitions.
Further, to illustrate the changing relative U.S. position in
these high-technology industries, this report presents examples
of where major shifts are likely to occur. More detailed
discussions on each example are presented in Appendix C. These
illustrations, drawn from a cross-section of high-technology
industries, form the basis for the conclusion that the relative
U.S. position in high technology may continue to weaken unless
its decline can be quickly reversed.
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II. The Importance of High-Technology
Industries to the United States
High-technology industries are important both because of their
direct contributions to the growth of the American economy and to
national security and because of their indirect contributions to
the competitiveness of other sectors.
o Nine of the ten fastest growing U.S. industries
in the 1980s are high-technology industries.
o Over two-thirds of all defense hardware
purchases originate in the high-technology sector.
o Over three-quarters of all industrial research
and development effort goes into creating new
products that in turn benefit the growth of produc-
tivity of the sectors that consume them.
The industries comprising the high-technology sector of the U.S.
economy have been identified as:
o communications equipment;
o electronic components;
o aerospace;
o computers and office equipment;
o drugs and medicines;
o industrial chemicals;
o professional and scientific instruments;
o engines, turbines, and parts; and
o plastic materials and synthetic resins.
These industries are grouped together into a single entity for
the comparisons in this chapter.
The importance of high-technology industries to the U.S. economy
is reflected by their disproportionate contribution to research,
their high rate of productivity and growth, and their overall
favorable balance of trade. These benefits have a ripple effect
throughout the economy as other industries absorb the new
technologies and create new jobs.
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Although they represented only 13 percent of the value of product
shipments in 1980 and only 5 percent of total employment, their
research expenditures accounted for more than 60 percentof total
U.S. private industrial R&D, and they employed more than 25
percent of total scientific and technical manpower.
Figure 2.1
High
Technology
Total U.S.
Business
Figure 2.2
GROWTH OF REAL OUTPUT
(1970-1980)
RATE OF INFLATION
(Average annual Increase)
High
Technology
Figure 2.3
High
Technology
TRADE BALANCE IN 1980
(Billions of Dollars)
Total
Merchandise
Total U.S.
Business
Other
Than
High-
Technology
During the past decade,
their rate of growth of
real output was more than
twice that of the growth
rate of total U.S.
industrial real output.
Their 1970-80 average
rate of increase in
prices was one-third that
of the country's overall
average inflation rate.
In 1980, high-technology
products had a favorable
trade balance of $31
billion, in contrast to
all other manufactured
goods, which had a trade
deficit exceeding $50
billion.
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The United States is unique in the important component that
high-technology goods represent in its exports. Between 1967 and
1980, the proportion represented by high technology has grown
from less than 40 percent of total manufactures to about 44
percent. It is also important to note that the high-technology
component of U.S. manufactures imports has steadily climbed--from
about 16 percent to 25 percent. Thus, overall U.S. manufactures
trade is increasingly concentrated in high technology.
Figure 2.4
High-Technology Goods Comprise a Large and Growing
Share o U.S. Manufactures Imports and Exports
(PERCENT)
50 r-
(PERCENT)
. 150
Source: OOC/ITA
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The service sector receives half of the benefits resulting,from
the R&D performed within the manufacturing sector, especially the
high-technology component.
Figure 2.5
For Every Dollar of R&D Performed, the Service
Sector Receives Hal the Benefit
For Own Products
and Processes
Source: F. M. Scherer "Research and Development. Patenting, and
the Micro-Structure of Productivity Growth;" Report to NSF, June 1981.
Figure 2.6
PRODUCTIYrTY IN U.S. HIGH-TECHNOLOGY
INDUSTRIES GREW SUBSTANTIALLY PASTER
DURING THE 1970's THAN IN THE TOTAL
BUSINESS SECTOR
Average Annual
t3rowen 1670.80
During the 1970s the
productivity of
high-technology industries
has grown, on average, six
times faster than average
business productivity.
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Because of this high productivity rate, however, the U.S.
high-technology sector lags behind the overall performance of the
business sector in creating new jobs. But in the industries
supporting high technology, employment expanded over 50 percent
faster than the overall growth rate of employment between 1970
and 1980.
Figure 2.7
OUTPUT GROWTH IN HIGH-TECHNOLOGY
INDUSTRIES CAUSED RAPID EMPLOYMENT
GROWTH IN SUPPORT INDUSTRIES
For every job created
within the U.S.
high-technology sector,
eight jobs are created in
sectors that supply it.
This job multiplier does
not include the jobs.
created in downstream
industries whose enhanced
competitiveness and
productivity results from
the application of
high-technology products
and related services.
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III. Evidence of Declining U.S. Competitiveness.
in High-Technology Industries
A range of indicators can be used to gauge the relative
competitiveness of U.S. high-technology industries. Regardless
of whether the indicators used are broadly defined, such as
balance of trade figures, or narrowly defined, such as*
industry-specific
assessments of relative technological capabilities, other
developed countries have made significant strides in narrowing
the overall U.S. lead in industrial technology. These changes
mark a new international competitive environment for U.S.
high-technology industries.
BROAD TRADE INDICATORS SHOW A CHANGING U.S. POSITION*
Technology-intensive products have traditionally been a source of
strength in the U.S. trade balance. For decades, the United
States was unique among developed countries in the importance of
high-
technology exports to its overall trade pattern. Yet indicators
of competitiveness show a broadly deteriorating U.S. position
through the early 1970s and a more complex changing picture since
1973.
Japan, on the other hand, is shown to be rapidly gaining in
competitiveness in these products by almost any measure used.
The change in the German and French competitive positions is
ambiguous, with gains shown by some indicators, and no change or
losses shown by others.
Relative Changes in Export Market Share
The most commonly used indicator of international competitiveness
is the export market share a country's products maintain over
time.
*See Appendix A for a definition of high technology. For the
purposes of this report, the definition used excludes the
automobile and consumer electronics industries. The decline in
U.S. competitiveness would be more pronounced if these sectors
were included. The definition used in this section is designated
as DOC2, excluding radios and television receivers.
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Figure 3.1
Percent of Industrial Country
High-Technology Imports
Japan .'.t?,~
.....N.N?H..UN.Yat.*fl.....p..it???..YN
Source: DOCJITA from UN Series 0 Trade Data.
The Industrial countries are: Austria. Belgium. Canada. Denmark. France.
Italy. Japan. t.uxemcourg. Netherlands. Norway. Sweden. SwitbOrtand.
United Kingdom. United States, and West Germany.
Figure 3.2
Share of Third-Country
High-Technology Markets
From 1962 to 1980,
Japan's share of world
exports of
high-technology products
increased from 4 percent
to 14 percent, while the
German and French shares
increased only
marginally. The U.S.
share declined
from
32
percent in 1962
to
27
percent by 1974
and
has
not exhibited any
decisive trend since then.
In third-country markets
during the same period,
West I""+4
Germany i--
France
Japan
L I I I 1 1 1 1 1 1 1 1 L_ I I I i
Source: DOCITA tram UN Series 0 Trade Oats.
the
U.S.
share declined
from
38
percent to 33
percent;
Japan's share
increased only slightly,
from 5 percent to 6
percent; and Germany's
and France's shares
increased markedly, going
from 9 percent to 16
percent and from 7
percent to 12 percent,
respectively.
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Relative. Changes in the Balance of Trade
The U.S. trade balance in high-technology products increased from
1962 through 1980. ,However, comparing this growth with that of
the Japanese and German trade balances reveals evidence of a
decline in competitiveness. The U.S. balance grew 12 percent
annually, while Japan's balance increased by 35 percent, and West
Germany's by 13 percent. France's 4 percent annual growth rate
was the slowest.
Figure 3.3
Japanese and German Trade.Balances Increased
Faster than U.S. Balance from 1962 to 1980
(Billions o U.S. Dollars)
'Note: The defitnhon of high technology used her, is the OOC2 definition esctuding radio and TV receivers.
Source: ITA/DOC from U.N. Series 0 Trade Data.
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The bilateral trade balances of the United States in
high-technology products with its three principal competitors
illustrate a loss of competitiveness with Japan, with a deficit
beginning in 1968 and continuing through 1980. The U.S. balances
with France and Germany remained in surplus throughout the same
period.
Figure 3.4
Since 1968, the U.S. Bilateral Trade Balance in
High Technology wrth Japan as Sown a De ici:
(Billions o U.S. Dollars)
0, f. r ~T "t"r 1 1 1 1 1
1962 1965 1970 1975 1980
'Note: The definition of nigh technology products used is the OOC2
demotion excluding rada and TV receivers.
Source: DOC/ITA from UN Sense 0 Trade Oats.
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INDUSTRY-SPECIFIC' CASES ALSO INDICATE A DECLINING U.S. POSITION
The following brief assessments show the changing U.S.
competitive position in several important high-technology
sectors. In all cases the U.S..lead has declined or become
vulnerable. More detailed studies and additional sources appear
in Appendix.C.
Pharmaceuticals
.Over the past twenty years, the American domination of world
pharmaceutical markets has steadily declined. Competitive
advantage depends on the manufacturer's ability to produce a
steady stream of commercially successful new products through
industrial innovation.
o In the antibiotics sector, Japanese manufacturers
are the world leaders in new compounds. For example,
seven of the eleven new antibiotics developed in 1979
originated in Japanese laboratories.
o While expenditures of U.S.-owned companies for
research at home and abroad are large and growing,
they have not matched the expansion of foreign-owned
firms' research efforts.
o The U.S.-located share of world pharmaceutical
research has fallen from about two-thirds in the
early 1960's to just above one-third today--higher
growth rates for West Germany, Japan, and the U..K.
have persisted.
o Manufacturers have been hampered by the lengthy
testing required before bringing new products to
market--new FDA proposals should help produce
quicker and less expensive review..
Robotics
While the United States.continues to lead in research and design,
Japan has far surpassed it in robot production and use.
International comparisions of robot usage vary significantly
because of differing definitions of what constitutes a robot.
.But, even according to the more narrow U.S. definition, which
excludes simple mechanical transfer devices, Japan currently has
about three and a half times as many robots in use as the United
States.
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o Starting with technology licensed from the United
States, Japanese manufacturers have developed robots
for a broad spectrum of applications. Over 70 percent
of all robots used in Japan perform machine-tool
loading and assembly operations, compared with 21
percent in the United States. Japan's experience in
this area, which is expected to be a major growth
market, will give it an advantage in the U.S. market
as it moves to increase exports.
o Several U.S. firms have entered into licensing
arrangements with foreign companies to accelerate
their own entry into the robot field. The belated
but rapidly growing interest in the United States is
due in part to the increasing economic justification
for purchasing robots resulting from declining robot
prices and rising wage levels.
Aircraft
The U.S. civil aircraft industry has traditionally dominated
world markets. As late as the mid-1970s, U.S. manufacturers held
95 percent of the world's orders for airliners. Since 1975,
however, foreign competition has intensified.
o The principal source of competition is from the
government-funded European consortium Airbus
Industrie, which captured 26 percent of the jet
aircraft orders by 1981.
o During 1981, commercial airlines ordered a total
of 235 U.S. aircraft. This contrasts sharply with
the 360 ordered in 1980. On the other hand, Airbus
Industrie's orders increased from 33 in 1980
to 45 in 1981.
o The relative level of U.S. aerospace R&D funding has
steadily declined because of decreased federal
funding. Foreign R&D capabilities, most of which are
government funded, have expanded, allowing them to
challenge U.S. technological leadership.
o While not yet capable of producing complete jet trans-
ports, various Japanese firms have entered into
licensing arrangements to produce parts for U.S. and
other foreign companies. This has allowed them to
make significant inroads into component production
while acquiring the technology to further their own
aircraft development.
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Biotechnology
Commercial success in biotechnology will depend heavily on the
ability to identify potential applications of the technology and
develop the necessary processes for large-scale production. Thus
large amounts of venture capital have been supplied to many small
biotechnology firms in the United States to support research and
product development and testing, even though most of those firms
have yet to realize any sales revenue.
Although the United States has the lead in recombinant DNA and
cell culture technologies, there are gaps in its process
technology and in the manpower available to meet future needs.
o Other nations are making substantial investments in
the commercialization of processes, in which the
United States has no clear lead.
o Japan has an undisputed lead in fermentation
processes, a critical segment for commercializa-
tion, and is aggressively seeking to build on its
strengths in this area.
Space
By the mid-1980s, estimated requirements for U.S. commercial
space launch services will exceed the capacity of available
shuttles. However, the United States will not have modern
expendable launch vehicles available to augment the shuttle
capacity. The French, with their Ariane launch vehicle, have
initiated a marketing campaign to secure this traffic overflow.
o Space activity in the United States is controlled
by the National Aeronautics and Space Administration
(NASA). Payloads and launch dates are manipulated
by NASA, with first priority going to military,
rather than commercial, needs.
o Pricing of U.S. launches is artificially set by NASA,
rather than through private negotiations between
launch customer and launch-vehicle supplier. The
French are able. to offer the customer more favorable
financing terms than NASA can.
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o Budget restraints have limited the speed of commer-
cialization of space. The evolution of expendable
launch vehicles has slowed, as NASA turned all its
attention and funding to the development and deploy-
ment of the Space Shuttle.
o The French Ariane has undergone considerable and rapid
evolution to meet the needs of the commercial satel-
lite industry.
o The Japanese are putting up satellites and in time
could assume the launch support role for commercial
satellites for Pacific rim countries.
Fiber Optics
Fiber optic technology has advanced rapidly since the late
1960s. It offers an ever-increasing range of applications,
especially in the communications field. There are three
components in a fiber optics system: light source, transmission
medium, and detectors.
o Japan has a clear, lead in light source technology
and application and is competitive with the
United States in the other component technologies.
o Japan's Ministry of International Trade. and Industry
has targeted optoelectronics for rapid development.
The Engineering Research Association of
Optoelectronics Applied Systems was established in
1980 to be the coordinator of government-subsidized
projects in fibers optics and other optoelectronic
R&D projects.
Computer Hardware and Software
The United States retains broad leadership in computer hardware
and software production and technology. The Japanese have
demonstrated strengths in the high-performance segment of
computer mainframes.
o Japanese producers now have products that match the
capabilities of major U.S. producers. Their equipment
is also compatable--that is, it can run on U.S.
software.
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o Two U.S. companies have produced computers that are
two and one-half times as fast as conventional main-
frames. The Japanese are working on their own high-
speed model and are expected to introduce a comparable
computer later this year.
o Software productivity has not kept up with the
expanded use of computers, especially microprocessor
systems. One reason is the shortage of workers with
key skills; another is the lack of standardization of
programming languages and operating systems.
o Software costs in relation to total system costs
are increasing. They now account for three-quarters
of the cost of a typical computer.
The United States no longer has the lead in several important
areas of semiconductor technology. The U.S. position may be
further weakened as many nations perceive that a viable
electronics industry is essential to economic well-being and
military security.
o Japan has an emerging leadership role in high-
density computer memories. It now has well
over 50 percent of the world market for the
current state-of-the-art device.
o The Japanese also have strong capabilities in
complementary metal-oxide semiconductor technology,
favored for its low-power, radiation-resistant
characteristics.
o Japan has an emerging semiconductor production
equipment technology that will rival U.S. capa-
bilities. Emphasis is on increasing the degree
of automation of production facilities as well
as improving its ability to produce devices with
the smallest possible geometries.
o The West German and French governments have subsidized
a number of programs to assist their microelectronics
industries.
o The United States retains a solid lead in important
microprocessor technology.
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Machine Tools
While technically not falling within the definition of high
technology, the competitiveness of the machine tool industry will
increasingly depend on the use of microelectronics and
computer-based technologies. A healthy machine tool industry is
considered an important element of the U.S. industrial base.
o The U.S. share of worldwide production of machine
tools has dropped from 37 percent to 17 percent.
Japan's share, on the other hand, has grown from
5 percent to 13 percent. Western Europe has main-
tained a steady share of 15-20 percent.
o U.S. machine tool companies have not aggressively
pursued foreign markets to offset slow periods in
their highly cyclical market. Other countries,
particularly West Germany and Japan, have actively
penetrated the U.S. market. Imports now account for
24 percent of U.S. consumption.
o Computer numerically controlled (CNC) machines and
flexible manufacturing systems (FMS) will play a
major role in the machine tool industry in the coming
decade. Japan has already made inroads in the U.S.
CNC market and has targeted FMS as a specialty to mass
market. Its early experience in this area will give
it an advantage as demand increases.
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IV. Factors Contributing' to the Erosion of U.S.
Competitiveness in High-Technology Industries
The dynamic interactions between economic, societal, and
political forces have accelerated the development of foreign
high-technology industries. The incentives and disincentives
created by government policies can affect the willingness of
firms to conduct research and attempt to exploit new processes
and products in the marketplace.
General economic policies, particularly as they influence the
rate of inflation, deserve attention because the United States
has experienced a relative decline across much of the
high-technology sector. The breadth of the decline suggests that
overall economic conditions have had an important influence on
competitiveness.
Structural differences in financial markets, relative changes in
the level of research and development effort, and shifts in the
availability of well-trained scientific and technical personnel
have also affected U.S. competitiveness.
Overlaying these general economic and structural considerations
has been the role of foreign governments in seeking to channel
support to specific high-technology sectors. The success of
these sector-specific industrial policies has depended to an
important degree on the overall framework established by
government policies which may be focused toward broader national
objectives.
Although the transfer of U.S. technology has accelerated the
technological growth of the rest of the world, it has not been a
principal factor in the decline of U.S. competitiveness. The
influence of technology transfer varies considerably in
importance, depending on the recipient and the type of technology
transferred. With respect to Japan, where aggressive policies of
acquisition and absorption were pursued, it did lead to a change
in relative competitiveness. In addition, in recent years, U.S.
government policies that cover the transfer of military know-how
to allies may have implications for competitiveness in a number
of high-technology sectors, such as aerospace and electronics.
While this study examines several factors affecting
competitiveness in high technology, these factors are only part
of the problem. The ones highlighted are considered to be
especially important. But a broader list would include relative
prices, exchange rates,,labor costs, relative productivity
growth, relative quality of products, relative marketing effort,
and relative cost and availability of export financing. (See
Appendix D, which summarizes the factors affecting innovation.)
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Lastly, though not discussed in detail, it should be recognized
that international differences in management objectives can
influence the nature of competition in high-technology sectors.
If foreign firms are supported by a favorable economic climate,
have access to adequate labor and capital resources, and have the
technical know-how, their focus on objectives other than
achieving sufficient return on their research investment can
significantly enhance their competitiveness in high technology.
U.S. firms require an adequate return on their prior investments
in research to fund their present and future research
investments.
THE OVERALL ECONOMIC CLIMATE AFFECTS COMPETITIVENESS
IN HIGH-TECHNOLOGY INDUSTRIES
Innovative activity and the willingness to apply technological
advances are directly and substantially affected by the general
economic environment and government macroeconomic policies. To
increase investor willingness to undertake high-risk investments
with long-term paybacks, it is important to reduce uncertainty
through:
o strong and steady economic growth;
o low and predictable inflation, to maintain
cash flow for investment by preventing
the erosion of the real values; and
o consistent government macroeconomic policies.
Before the 1973-74 oil price increase and the world.recession
that followed, the general economic environment was favorable to
research and development, innovation, and capital formation in
the United States, Japan, West Germany, and France. These events
unfavorably altered the economic environment in all four
countries, though less seriously in Japan.
o the rate of expansion of real economic activity
slowed sharply in all four countries,
o the rate of inflation increased in all but
Japan, and
o government economic policies became more volatile
and lacked consistency as they switched between
fighting inflation and maintaining high employment.
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The pace of investment and innovation in Japan was adversely
affected by the sudden 5-6 percent drop in its real growth rate
in 1975. Nevertheless, the steadiness of the rate in the late
1970s--the real GNP growth range was 5-7 percent a year during
1976-80--restored the confidence of Japanese businessmen in the
fundamental soundness of their economy. Even in 1981 and 1982,
relatively dismal years for other countries, Japan will average
more than 4 percent real growth. Each of the other. countries had
greater variations in real GNP growth in 1976-80, and each slid
into recession last year.
Post-1975 inflation rates have been more favorable in Japan and
West Germany. Despite the international tendency toward
inflation, both countries price increases in the last half of the
decade below those between 1960 and 1973. The lower rates of
inflation indirectly promoted investment by helping to hold down
interest rates.
In part, the relative shifts in macroeconomic performances in the
late 1970s were conditioned by government economic policies.
Tokyo and Bonn clearly chose to combat actual and latent
inflationary pressures more strongly than recessionary problems.
Monetary authorities of both countries held the growth in money
supply to rates well below previous norms. On the other hand,
French money stock growth was considerably more rapid than before
1973, and U.S. money growth was as rapid.
The effects of fiscal policy shifts on investment and innovation
are not as clear. The United States and France have achieved the
greatest success in limiting increases in budgetary deficits, but
they did so by having government revenues as a share of GNP rise
more quickly. In Japan and West Germany, higher private saving
negated part of the adverse consequences of large deficits.
The recent emphasis on lowering the rate of inflation and
eliminating the use of "stop-and-go" economic policies by the
U.S. government is expected to provide a more conducive climate
for innovation in the United States. Though the current
recession has a negative effect, the decline in the underlying
U.S. inflation rate suggests a movement toward a more favorable
economic environment.
FOREIGN FINANCIAL MARKETS AND GOVERNMENT POLICIES MAKE
CAPITAL CHEAPER AND MORE AVAILABLE TO U.S.. COMPETITORS
High-technology firms generally compete in rapidly expanding
markets that can change quickly with the introduction of new
products or processes. The ability to quickly respond to new
opportunities is essential.
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International differences in the availability of capital may be
crucial where substantial benefits accrue to firms able to
rapidly expand. In many high-technology industries, costs
decline with cumulative production volume. Therefore, rapid
expansion allows a firm to realize lower costs and higher profits
sooner than its competitors. Once a lead is established in an
industry, the effects can become reinforcing: the leading firm
generates more funds for investment and thus can afford to expand
at a faster rate and further increase its lead over its
competitors.
Differences in the cost of capital between the major developed
countries are also important to competitiveness. Financial
capital is like any other resource consumed by a firm: its cost
must.be reflected in the. price of the goods and services the firm
provides. As competition in high technology becomes more
oriented toward price and quality, lower-cost capital can
influence competitiveness.
Tax policies are one of the factors that can influence the cost
of capital. Through a variety of provisions, governments can
seek to reduce the cost of capital. Special reserve accounts
have been one important mechanism. While legal constraints may
limit the uses of these funds, reserve accounts effectively
constitute an interest-free loan from the central government and
provide additional maneuverability by lowering corporate demand
for external funds.
o Japanese, French, and West German firms benefit
from tax deductions for special reserve accounts.
In Japan special reserve allowances have also been
legislated to encourage specific corporate
undertakings, such as the application of
computer-aided design and robotics.
o By the end of 1978, "reserves and provisions"
uniformly comprised almost two-thirds of French and
,Japanese and one-third of West German equity
holdings. Moreover, foreign firms have uniformly
experienced a continued growth in allowable
reserves and thus benefited from a constant stream
of tax-free income.
The financial markets in Japan, France, and West Germany are
organized to make low-cost finanical capital available to favored
industrial sectors. The French and Japanese governments
especially emphasize the use of their banking systems to
influence the pattern of industrial growth. Such government
intervention can significantly distort the operation of financial
markets. While these policies may not necessarily result in the
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most profitable or the most productive use of financial
resources, they are attempting to fulfill a variety of foreign
political and social objectives.
United States
High capital costs can be striking in their effect, particularly
when international differences exist. For example, last year,
when U.S. corporations typically faced a weighted cost of capital
of 16.6 percent, the total cost of a $100 million investment
financed over 15 years exceeded $900 million. In Japan, where
the weighted cost of capital was only half as high, this same
investment cost $374 million or 60 percent less. Even allowing
for differences in relative depreciation schedules, the stream of
returns necessary to cover capital costs is much higher in the
United States than in Japan. (See Appendix E for a more detailed
discussion on the determinants and differences in the
international cost of capital.)
Figure 4.1
U.S. FIRMS FACE HIGHER COSTS OF CAPITAL
(Average Weighted Cost of Capital)
Annual Percentage Cost
20
? Japan
Throughout the 1970s
American companies, on
average, paid a higher
price for financial
capital than their
competitors in West
Germany, Japan, and
France. This difference
has widened significantly
during the last five
years. By 1981, U.S.
industry's capital costs
were more than twice those
of its competitors in West
Germany and Japan.
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Relatively higher U.S. inflation rates, which tend to increase a
firm's estimate of future nominal returns, may have mitigated the
effects of these higher capital costs in the past. Currently,
however, they do not sufficiently offset them or compensate for
the more volatile U.S. sources of funding. External funding has
increased significantly relative to internal funding. These.
factors have reduced the willingness and ability of U.S.
corporations to engage in anticipatory or rapid capacity
expansion or in other forms of high-risk investment.
Figure 4.2
$Billions
U.S. Corporations Are Increasingly Relying
On External Sources Funds
)eternally
Gated
Extemany
GGe" ated
1970 1975 1976 1977 1978
'M1arnY .aaar Mirieu UnWaataaeaa praflb. Adpgw rto. and Cap" oanauapatef aaoaatoa Eataf W roar are aafa.ei
nit a+pi4S n Gorputata 41.6"W& Swat:.3% 0909 ADM AO of its 0Yfaa StatM& left Yams Ne. eai.
Internal cash flow is normally the preferred source of funds for
innovative activity. Industry structure, corporate tax policies,
sales volume, profit margins, and investor demands for a return
on investment strongly influence the generation of internal cash
flow. External funds are raised through stock issues, bond
sales, and borrowing. Host financial markets and a corporation's
relationship with its lenders greatly.affect both how these funds
are raised and corporate reliance on them. Normally, firms are
hesitant to externally fund high-risk projects, especially if the
payoff may not be realized for a number of years.
In the United States, the household sector is a net provider of
funds to the, business and government sectors. In previous years,
the U.S. saings rate has been substantially below that of its
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competitors. A comparison of average household savings rates for
the 1976-80 period reveals a great disparity: Japan, 20, percent;
France, 16 percent; West Germany, 14 percent; and the United
States, 6 percent. While part of the difference may be
attributed to cultural and institutional differences, one factor
historically has been the insufficiency of incentives for
increased. savings. The incentives to savings in the
administration's Economic Recovery Plan, however, should increase
U.S. capital availability.
The U.S. system is further characterized by substantial direct
acquisition of capital through equity financing and borrowing,
principally from the household sector. U.S. corporations have
relied relatively less on debt as a source of funds than have
their foreign competitors. As a result, they have tended to put
more emphasis on short-term profitability in assessing investment
programs.
Figure 4.3
Composition of Corporate Liabilities in 1979
(Value of Equity Holdings = 100)
ISM
OR MM_
United Staten Japan woo Germany franc.
C0110011JU n of Cdrponte' Uaofftlea In 1919. Vat m of Egawlr Ho1dktps - 100.
Wwartoo-V .amr to Japed a woo G.t nw. P: ndl ta~ K M nq.FnY W kwupawns N eta Uwow -tat.
'A-0 a b#er 197$.
Japan
Japan's success in high-technology industries has been partly due
to the ability of its large,. integrated corporations to divert
cash flow from the mature business segments, as well as their
ready access to external sources of low-cost capital. Rather
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than relying heavily on equity, as the United States does,
Japanese firms use bank financing extensively. Japan has 13
major city banks backed by nationwide branches. This limited
number has centralized the supply of investment capital, allowing
major corporations to efficiently raise funds.
More importantly, central bank rate supervision has often kept
interest rates below market clearing levels. As a result, the
major city banks periodically need Bank of Japan refinancing and
thus become subject to government guidance on allocating loans
among industries. This guidance bolsters bankers' confidence in
the ability of targeted borrowers--those firms integral to the
accomplishment of the Ministry of International Trade and
Industry's vision of industrial development--to sustain high debt
levels. Although most commercial bank lending is short-term,
explicit or implicit rollover agreements allow Japanese
corporations to view short-term loans as long-term liabilities.
In recent years, overall reliance on borrowing has declined
because of higher profitability and more liberal provisions in
the tax code for reserves. These favorable factors have also
created new opportunities for direct financing via stock and bond
issues. But a low dependency on the sale of equity shares and
bonds as a source of funds continues.
In general, Japanese companies have traditionally benefited from
higher levels of gross cash flow than their competitors.
Moreover, stable prices have kept down the cost of replacing
capital, freeing a greater share of internal funds for new
programs. Specifically, Japanese firms benefit from:
o higher leveraging, which allows substantial tax
. deductions for interest payments; and .
o reserve accounts, which yield a sizable and sustained
tax shelter for corporate income.
Japan has widely used tax incentives to stimulate selected
high-technology sectors, including the microelectronics and
computer industries. For example, in addition to ordinary
depreciation allowances, there are special types of depreciation,
including one-time initial write-offs and accelerated
depreciation. Revenue losses attributable to promotion of
science and technology have been rising and constitute
approximately one-quarter of Japanese tax preferences.
France
The French capital market reflects the pervasive influence of the
central government in controlling economic activity and its
desire to ensure the availability of long-term capital for
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corporate investment. It is characterized by an extremely
complex set of financial intermediaries, most under government
control, which together channel household savings into corporate
investment.
French firms depend heavily upon bank lending to supplement
internal funds. In 1970-79, financial institutions supplied over
75 percent of the funds French corporations raised in France.
The market for stocks has traditionally been limited, while the
bond market has been dominated by the nationalized industries and
special credit institutions.
The Banque de France closely controls the amount and cost of
capital available to firms. As in Japan, commercial banks rely
on central bank refinancing of medium- and long-term industrial
loans and are thus subject to administrative guidance.
Citing French commercial bank caution in lending, the relatively
high interest rate to corporate borrowers, and the excessive
weight accorded short-term profits in deciding among potential
borrowers, the Mitterrand government has introduced legislation
that will result in a nationalized banking sector directly or
indirectly controlling 97 percent of all resident deposits and 93
percent of all loans. The government expects that this
additional control will enable it to ensure that lending criteria
are adjusted in favor of long-term investments judged to be in
the national interest.
West Germany
The West German financial system is characterized by a high level
of personal savings and the banking system's crucial role in
attracting long-term deposits and reloaning them to industry.
1970-79, roughly 80 percent of corporate financing was in the
form of fixed-interest loans for ten years or more.
While West German banks often play a major role in corporate
decision making by virtue of their major equity holdings, the
central government has not taken advantage of the financial
system to guide lending activities. Financial policies are
generally macroeconomic, with specific lending institutions
providing sectoral assistance.
The interlocking relationship between the financial and
industrial sectors is perhaps greatest in West Germany. .In 1980,
banks voted an average of 63 percent of the corporate shares
voted of the 74 largest West German corporations. The three
largest banks alone accounted for 35 percent of the shares voted.
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As financial advisers and large holders of voting rights, banks
can have considerable influence over a firm's behavior. At a
minimum, banks are interested in ensuring that decision. making is
consistent with long-term return to capital and, thus, the
ability to repay the extensive long-term bank exposure. The
firms benefit from the information bankers are able to bring to
their board rooms and from the greater degree of certainty that
financial support exists for corporate decisions.
To emphasize investment as a means of stimulating the economy,
the West German government has sponsored a number of programs to
compensate for perceived capital deficiencies. In particular, it
has attempted to compensate for the virtual absence of venture
capital and the growing reluctance of commercial banks to finance
small- and medium-sized firms. For example, the government
sponsored an independent organization formed by a consortium of
banks with the goal of providing venture capital for high-risk
projects.
OTHER COUNTRIES ARE COMMITTED TO INCREASING THEIR RESEARCH
AND DEVELOPMENT EFFORTS RELATIVE TO THE U.S. EFFORT
Both government and private industry support high technology by
sponsoring research and development programs. An examination of
trends in R&D in the United States, Japan, West Germany, and
France reveals significant changes in overall relative growth in
real R&D expenditures and in how those expenditures are allocated
among the different types of research. It also shows a dramatic
increase in U.S. industry's share of R&D spending, along with the
U.S. government's strong shift from defense-related to civilian.
projects.
Overall R&D Funding
In absolute terms, the United States supports the largest amount
of R&D. In 1977, for example, U.S. private funding of industrial
R&D. was about 40 percent greater than the sum of the
corresponding figures for Japan, West Germany, and France. But
since 1964, R&D funding from all sources has increased more
rapidly in these three countries than in the United States.
These differences in growth reflect in part, a growing
willingness by these other countries to invest a constant or
increasing proportion of their gross domestic output in R&D.
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Figure 4.4
Selected Indicators of R&D Funding for the
United States, Japan, West Germany, and France
150
Real Growth of R&D Expenditures
.(Percentage Change)
R&D Expenditures Share of GOP
(In Percent)
There have also been significant changes in allocation of R&D
spending among basic research, applied research, and development
across the four countries.
Figure 4.5
Share of R&D Spending
for Basco Research
(In Percent)
t.EGEND:
United states
Japan
Between 1967 and 1977, in
real terms, Japan
increased its proportion
of R&D funds for basic
research by over 60
percent, West Germany by
over 50 percent, and
France by over 16
percent. The proportion
of U.S. spending
adjustment for inflation
allocated to basic
research, however,.
remained constant
throughout the period.
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Business R&D Funding
With regard to business funding of R&D, U.S. performance compares
favorably for the 1970s.
Figure 4.6
100
Real Growth in Business
R&D Funding
(Percentage Change)
Figure 4.7
Business R&D Funding as
a Percentage of Manufacturing
GOP
During 1964-70, firms in
West Germany and France
expanded their R&D funding
at substantially higher
rates than U.S. firms.
During the 1970s, however,
growth in U.S. business
funding of R&D surpassed
that of West Germany and
almost matched the French
growth rate. Meanwhile,
R&D spending by Japanese
.firms grew over 50.
percent faster than that
of U.S. firms.
A look at business R&D
funding relative to the
share of the business
gross domestic output
apportioned to R&D for
manufacturing activities
also shows U.S. business
favorably.
IEGENO:
United States West Germany
RM Japan France
Sourcr. OECD. Science and Technology indleatora Unn.
Because the United States is increasingly relying on private
business to fund research, a greater share of U.S. research will
be influenced by the vagaries of the market. For example, a
recent trend has been for U.S. businesses to favor research
projects with short-term benefits relative to those with
long-term benefits. This tilt toward shorter-term projects is
partly the result of the volatile U.S. rates of inflation. Thus
projects with long-term economic and social benefits tend to be
underfunded.
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Government R&D Funding
The four countries show major changes in goverment R&D funding
patterns during 1964-78. These differences may well have
influenced these countries' rate of development of commercial
technologies during the past ten to fifteen years.
Governments in all industrial nations fund R&D for at least three
purposes:
o to meet government needs (e.g., defense);
o to enhance the science and technology
infrastructure (scientific knowledge, training
of scientists and engineers); and
o to stimulate development of commercial
technologies (in the United States, the major
beneficiaries of this type of research support
have been agriculture and energy).
Figure 4.8
U.S. GOVERNMENT R&D EXPENDITURES
HAVE DECLINED IN REAL TERMS
Percent
Change
-251
1964- 1970 1970 - 1978
LEGEND:
United States
Japan
West Germany
France
From 1964 through 1978,
real government R&D
expenditures in the United
States declined slightly.
During 1964-70, the
governments of Japan, West
Germany, and France .
greatly. increased their
R&D spending., while from
1970 through 1978, only
Japan and West Germany
continued. this rapid
expansion.
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Figure 4.9
U.S. GOVERNMENT OBLIGATIONS
FOR R&D BY MAJOR BUDGET FUNCTION
The major proximate factor
in the decline of U.S.
government spending for
R&D was the sharp cutback
in defense and space R&D
during the late 1960s and
early 1970s. At the same
time, other major
components of U.S.
government R&D did not
increase. enough to
completely offset this
reduction. Current budget
projections, however, show
R&D. relative expenditures
shifting back to defense.
1960 62 64 66 68 70 72 74 76 78 8081
Note: Estimates are shown for 1980 and 1981.
Source: NSF. Science Indicators-1980.
In contrast, the governments of Japan, West Germany, and France
accelerated their R&D efforts in several areas to narrow the U.S.
technological leadership. For example,
o all three countries increased their R&D outlays for
nuclear energy programs;
o European nations, led by France and West Germany l
undertook a space satellite program and development
of the Airbus;
o in France and Japan, the governments allocated
substantial funds for electronics R&D.
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THE U.S. ADVANTAGE IN SCIENTIFIC AND
TECHNICAL PERSONNEL IS DECLINING
The availability of large numbers of well-trained scientific and
technical personnel has long been recognized as a significant.
contributor to the competitive strength of American
high-technology firms. Recent trends, however, reveal that not
only is this relative advantage diminishing, but the relative
quality of the U.S. technical pool may also be declining.
Shortages of Well-Trained Scientists and Engineers
The following trends during. the 1970s illuminate the problem;
o Employment of scientists and engineers in R&D
rose considerably more rapidly in Japan, West
Germany, and France than in the United States.
Figure 4.10
GROWTH IN SCIENTIFIC AND ENGINEERING
PERSONNEL, 1970 - 1979
(Percent Change)
(Percent change)
70 r--""`
United Japan
States
West
Germany
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o The percentage each country contributes to the
total number of scientists and engineers
employed in R&D across all four countries
illustrates the significant changes in relative
positions. Japan moved up to almost 25 percent
from 20 percent of this total, while the U.S.
proportion declined from 63 percent to 57 percent.
o When examined against labor force trends, these
relative changes become even more significant: the
labor force in the United States grew by 24 percent;
in Japan, by about 6 percent; and in France, by
roughly 5 percent. In West Germany, it.actually
declined by 6 percent.
o There has been a noticeable "graying" of America's
engineering work force as the percentage of younger
engineers in the pool has fallen. Since the obso-
lescence of knowledge occurs rapidly, especially in
areas where R&D is extensive, an aging engineering
work force is likely to be less creative.
As a result of these trends, during the 1970s, the U.S. labor
market was characterized by shortages of personnel in several
high-technology specialties. Most prominent among the shortages
or tight labor market conditions reported during this period were
those for all types of computer specialists. This reflected the
burgeoning applications of computers thr-ughout the economy and
their related servicing industries. Similar situations were
reported for electronic specialists and chemical, electrical, and
industrial engineers.
The increases in salary levels in the private sector, which
resulted from a tight labor market, seriously affected
recruitment of instructors for U.S. engineering school faculties
(currently, there are 1,600 faculty vacancies) and for the U.S.
armed forces (where pay scales did not keep up with the private
sector). These increases also caused a sharp drop in the number
of. engineering Ph.D. candidates.
Upgrading the Quality of Science and Engineering Education
The quality of secondary and postsecondary educational programs
will be important to the competitive positions of advanced
economies. Not only with respect to enhancing the education of
future engineers but also to upgrade skills of the existing work
force. In the past, U.S. industry has made less use of the
option of upgrading the skills of older personnel than its
foreign competitors, whose governments encourage systematic
upgrading.
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Although the United States retained a substantial, if reduced,
overall lead in the employment of scientific and technical
personnel, the relative upgrading of the quality of the overall
labor force was greater in the other countries, particularly in
Japan.
United States
The lack of universally high standards in mathematics and the
sciences in U.S. secondary schools, along with a lack of emphasis
on these disciplines, seriously handicaps attempts to broaden the
U.S. base for training scientists and engineers. This has been
cited as a major factor in the relative decline of the
"technological literacy" of the U.S. labor force.
At the university level, however, the United States remains
strong. Education in science and engineering at U.S. univer-
sities compares very favorably with postsecondary education in
competing nations. The relative adaptability of the U.S. engi-
neering schools, as compared with their foreign counterparts, has
been a strength. For these reasons, U.S. universities enjoy a
strong international reputation and attract large numbers of
foreign students.
Japan
The Japanese have a policy of emphasizing scientific and
technological training. The strong background average Japanese
factory workers have in science and mathematics is one
explanation of their superior understanding of the technological
aspects of production.
Scientists and engineers enjoy a very high status in Japan. This
has been reflected by the 65 percent of the baccalaureates who
opt for scientific fields at the university level (as contrasted
with 30 percent in the United States).
The relationships among universities, the government, and
industry are very close in Japan and mostly maintained by
informal channels.
West Germany
West German secondary education for those heading for
universities also has much more required training in mathematics
and sciences than U.S. schools. About 75 percent.of those who
graduate from the upper secondary school go on to universities,
and roughly one-third of this group seek degrees in science,
engineering, or mathematics.
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France
The highly centralized French educational system has. rigid
secondary school requirements in mathematics and science studies
for those planning to enter higher education. Those entering
higher education either go to the very select Grandes Ecoles, for
which the competition is very great, or to ordinary
universities. Despite the rapid expansion in requirements for
engineers in France, the Grandes Ecoles have not been allowed to
expand significantly.
Graduates from the select French. engineering schools are destined
for careers as technical administrators in the government and
industry, while those with degrees in the sciences or engineering
from ordinary universities do not carry such a cachet to success.
FOREIGN GOVERNMENT INDUSTRIAL POLICIES AFFECT
COMPETITIVENESS IN HIGH-TECHNOLOGY SECTORS
The growing government use of active policy instruments has
resulted from the pressures of a number of economic and political
changes in the post-World War II period. Nations have continued
their efforts to develop industrial structures that satisfy their
political, social, and economic objectives. Yet they have also
pursued policies that reduce barriers to trade, including
reducing tariff and nontariff barriers in the Multilateral Trade
Negotiations.
The industrial policies of the advanced economies of Japan,
France, and West Germany were developed in response to.
international and domestic political and economic pressures. An.
additional dimension creating concern in high-technology
industries is the perceived acceleration of technological
change. This combination of forces is now pressing the advanced
countries to adapt to changes both between their respective
economies and with respect to developing countries.
These changes are not simply cyclical expansions or contractions
in business activity. Rather, they are changes in the
fundamental nature of world economies requiring a substantial
emphasis on service sectors and modifications within industrial
sectors. Because the problems stem. essentially from the supply
side, appropriate adjustments will require substantial time.
So competitive pressures have been increasing across the board.
These pressures have been buttressed by the escalating
significance of economies of scale in achieving competitiveness
in high-technology sectors, the increasing costs of R&D and
innovation in key sectors, and the lengthening lead times for
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developing new products. These three factors have raised the
barriers to entry in a number of industrial sectors andemphasized
the significance of a correct strategy.
Carried out with the necessary infrastructure of low-cost,
readily available capital, a strong commitment to research and
development, and abundant, highly trained personnel, foreign
government industrial policies promoting indigenous development
of selected high-technology sectors can influence competitiveness.
o Foreign governments have developed a number of
instruments which have strengthened their
research infrastructure concurrent with their efforts
to target sectors for accelerated development.
o The emergence of foreign high-technology firms
supported by favorable government programs
affects the ability of U.S. firms to conduct
R&D.
In adopting industrial policies for higher-technology sectors,
governments usually state as their principal objective the
identification and acceleration of activity in potentially strong
sectors to gain larger shares of international markets. In some
countries, these policies lead to the government's selecting
"national champions" or strengthening state-owned enterprises to
be used as the competitive leaders.
At present, industrial policies are based wholly on national
considerations. Only within a given country are the processes
and procedures perceived to be available to make the required
nonmarket decisions. The response to the pressures from
international competition is to beef up national capabilities,
rather than to seek an intergovernmental solution. All the
criteria of location and distribution of benefits come from the
national interests, and the objective is to protect national
power and wealth through maintaining as high a growth rate as
possible by restructuring industry.
Foreign industrial policies in the high-technology sectors can
weaken the ability of U.S. firms to realize adequate returns by
driving down the returns for research, investing in the ownership
of U.S. firms active in promising technologies, signaling
intentions in the marketplace not to permit U.S. firms to achieve
adequate returns, ignoring or bypassing patent or copyright
protection, and sometimes requiring know-how to be transferred as
a condition of access to foreign markets. Thus, for U.S. firms
engaged in research, the already high risk is amplified once a
determined foreign competitor enters the field with government
support.
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The governments of France and Japan have similar objectives and
techniques for industrial policies. They are more directly
involved in sectoral guidance than are Germany and United States,
with the United States being at the extreme by providing
virtually no such guidance.
Japanese Industrial Policy
During the past two and a half decades, the Japanese government
has employed a wide range of programs. These include funds for
modernization and development, rationalization cartels,
establishment of standards, preferential tax rates, consolidation
of enterprises, and the establishment of joint ventures.
Japan's national industrial plan identifies sectors the
government considers to have the best prospects for technological
advance and international competitiveness and then adopts
supporting techniques. The process started in the late 1950s
when Japan shifted the emphasis of its industrial policy from
improving individual company efficiency to concentrating its
activities on priority sectors. For these sectors the government
restricted imports, prohibited foreign investment (except as
minority partners), and encouraged imports of foreign technology.
In the late 1960s and during the 1970s, Japan encouraged greater
specialization and economies of scale. In the early 1970s,
emphasis shifted toward R&D assistance and sales of entire plants
abroad. A number of Japanese institutions work together to
promote such sales.
The Japanese government's current plan is laid out in a document
entitled "Industrial Policy Vision of the 1980's," published-by
the Ministry of International Trade and Industry (MITI) in April
1980. It sets priorities, and industry sectors are expected 'Co
respond appropriately.
The objective of Japanese industrial policy in the
high-technology sectors is to anticipate and accelerate signals
from the market. Consequently the Japanese government supports
R&D activities, capital expenditures, and export efforts.
o Through the Japan Development Bank and the Industrial
Bank of Japan, MITI and the Ministry of Finance
provide financial assistance.
o In addition, MITI will support a selected group of
R&D projects and technologies proposed by key
companies in these sectors. Participating companies
share in the development work, in the know-how
generated by the project, and in the rights to.
patents.
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The industrial sectors to be emphasized in the 1980s are twelve
so-called knowledge-intensive industries. Adding these to those
already selected for the 1970s results in about twenty-four
specific sectors to be given governmental support.
Information electronics is supported through substantial R&D
subsidization--such as the $400 million research joint
government-industry effort in microelectronics in the late 1970s
and the special assistance given to software development.
o On the marketing side, the government has supported
companies purchasing computers. It offers financial
asssitance and has established a joint venture with
private enterprise to lease computers. The govern-
ment also reserves about 90 percent of its purchases
for Japanese producers.
o In telecommunications, it has been difficult to
open up purchasing to foreign bids. Nippon Telephone
and Telegraph Corporation (NTT) not only has given a
preference to Japanese suppliers, but has directly
supported the R&D of the major telecommunications
equipment suppliers and has helped finance their
exports.
French Industrial Policy
French industrial policy has been highly selective, pragmatically
shifting. between market and nonmarket approaches to meet whatever
pressures seemed to need countering.
Before the mid-1970s, French industrial policy was aimed at
preventing the takeover of French industry by foreign firms and
at strengthening it through consolidation. It also strove to
enhance French industry's ability to compete effectively with
European firms, anticipating further European integration.
During the 1950s and early 1960s, the French government used a
wide variety of techniques to stimulate industry, encompassing
virtually all those used currently. For example:.
o it selected certain sectors for encouragement,
providing government education about R&D assistance;
o it encouraged mergers and consolidation;
o it created investment-banking facilities to provide
risk capital;
o it protected industry from international competition;
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national and domestic competition to force efficiency
and competitiveness;
it allowed cartel-like groupings of industry to try to
achieve competitiveness; and
o it encouraged specific sectors to cut their losses
short when competitive forces were overwhelming.
The government directed its promotion efforts at high-technology
sectors, including nuclear energy, aircraft and space, energy
conservation, electronic data processing, and
telecommunications. It used a variety of techniques, including
government purchasing, tax incentives and direct financial
assistance, and special funds for distressed regions. In
addition, it concentrated on stimulating consultation of
companies with labor, strengthening the capital markets, and
supporting R&D in key industries.
The planning structure for guiding a sector may be fairly simple
or complex. In the case of the computer-related electronics
industry, France has four separate plans;, the Plan Calcul, for
the mainframe computer; the Plan Composa:nts, for microelectronic
components; the Plan Peripherique, for EDP peripheral equipment;
the Plan Software; and the Plan Electronique Civile and the Plan
Mechanique for the entire electronics and mechanics industries.
In formulating these plans, the government works closely with
industry.
A major feature of France's pre-1976 policy was that the
criterion of success was achieving international
competitiveness--preferably without, but if necessary with,
technological assistance from abroad. It sought to promote
high-technology industries through government investment in
"national champions" in various key projects and through the
selective admittance of foreign firms that could accelerate
technological innovation in cooperation with French companies.
Once they have become concentrated, however, these "champions
have responded poorly to consolidation. and the competition.
The techniques have shifted somewhat from direct government
guidance of specific sectors and firms, to greater reliance on
market signals and enterprise strategy with stimulants to growing,
enterprises, so as to hasten market processes. These moves have
brought French policy closer to both German and Japanese practice.
Only France and Japan have publicly announced the selection of
target industries for future government support, and the lists
are virtually identical.
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Examples of France's commitment to enhancing the competitive edge
of targeted industries include the following policy actions:
o Tax deductions have been offered to people who
purchase shares on the stock exchange, and mergers
are being restricted.
o A five-year, five-billion-franc support program for
electronic data processing and telecommunications
equipment is in place.
o The Ministry of Research and Technology has increased
spending by 33 percent., aiming to raise total spending
from 1.8 percent of the GNP to 2.5 percent by 1985.
West German Industrial Policy
During the 1960s and early 1970s, the West German economy was
considered a "free-market miracle." Substantial government
assistance, however, was instrumental in making this miracle
possible.
During the early 1970s, the government recognized that if German
industry were to remain competitive internationally, it had to
shift out of the low-skill, low value-added products that were
being undertaken by the developing countries.
o Through grants, low-cost loans, and tax concessions,
the government increased its support to the high-
technology sectors. For example, West Germany
participated in Europeanwide projects in nuclear
energy and aerospace. By the late 1970s, the West
German programs and techniques employed were not
significantly different from those of France.
o A new science and technology ministry was created
to provide federal R&D funding.
Since the late 1970s the government has been increasing its
funding for R&D, especially in aerospace ventures in cooperation
with other European countries and in the West German
microelectronics industry. It helped finance firms buying data
processing equipment and provided additional funds for R&D in
energy-related projects. However, it has no priority list of
sectors to be supported. The government responds and guides, but
it does not lead.
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The system of consensus, developed in West Germany since World
War II, lets the individual companies lead. They respond
essentially to market signals, but with guidance from the banks
with which they are associated. In addition, labor has
significant input through the system of "codetermination."
Consequently, there is a degree of concerted action called
"concertation," involving three-way dialogues among business,
government, and labor. Through this system, information is
fairly widespread, and adjustments to perceived changes are more
rapidly made. These adjustments are not made under a system of
planning, where goals are projected, but simply through collegial
decisions to adjust to market changes.
THE TRANSFER OF TECHNOLOGY HAS ACCELERATED THE
TECHNOLOGICAL ADVANCE OF U.S. COMPETITORS
The transfer of U.S. technology by the private sector has.helped
foreign industry approach or equal the technological
sophistication of the United States. This has been particularly
true in the case of Japan. But compared with all other factors,
.the transfer of U.S. technology cannot be considered the.
principal cause.of the decline of U.S. competitiveness, because
the ability to apply technological developments must. exist before
knowledge of technological advances can be of any use. Avenues
for the transfer of technology also exist through the
weapons-related international cooperative programs of the
Department of Defense.
The Transfer of U.S. Civilian-Technology
Although a case-by-case analysis may reveal instances where the
transfer of U.S. civilian technology has adversely affected U.S.
competitiveness, from a broad perspective, the available data do
not identify it as being a major factor. To directly undermine
U.S. international competitiveness, the technology must be
transferred to a foreign firm unrelated to the U.S. firm, with
insufficient compensation,'or must fall into the control of
foreigners faster than leakage would occur.without a transfer.
Although the evidence is that U.S. firms have been more willing
in recent years to transfer technology overseas, this tendency
applies, for the most part, to transfers between related parties,
primarily foreign subsidiaries of U.S. firms.
o There is a very stable relationship between U.S.
receipts from foreign affiliates and outgoing U.S.
direct foreign investment. The ratio of the former
to the latter stayed between 5 percent and 6
percent during'1967-78, suggesting that the
transfer of U.S. technology to foreign subsidiaries
increased at about the same rate as outgoing direct
foreign investment.
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o The two manufacturing sectors--machinery.and
chemicals--that have accounted for the major shares
of U.S. receipts of royalties and licensing fees as
well as U.S. direct foreign investment activities
abroad have also accounted for the major share of
U.S. manufactured exports.
Transfers of technology are increasingly taking
place on a barter basis, so the estimates of returns
technology transfers bring U.S. firms will be
conservative.
Department of Defense Weapons Programs
As Avenueg.of Technology Transfers
Transfers of technology take place through various Department of
Defense programs operating within the framework of NATO and U.S.
relations with Japan. These programs were originally designed to
enhance U.S. interests by strengthening the military power and
defense-related industrial capacity of U.S. allies. Now, with
the increased ability of European and Japanese industry to apply
technological advances, these programs affect U:S. technological
competitiveness.
Coproduction and Codevelopment
Technology transfers take place largely through the avenues of
coproduction and codevelopment. These programs seek to reduce
the production cost of weapons systems by avoiding duplication of
resources and to promote the technically advanced, industrially
productive, and economically viable defense industries of U.S.
allies.
Technology transfer under these programs is a. major
defense-related issue. Coproduction and codevelopment have been
important in integrating and strengthening the defense-related
industrial base of U.S. allies, and the United States has
benefited from technology transferred from its allies. But, on
balance, U.S. allies have been the greater beneficiaries from
these transfers because of the. more advanced level of U.S.
military technology. In recent months, the Department of Defense
has been reassessing the interest of U.S. national security as
related to technology transfer to U.S. allies under military
programs.
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Offsets
Another important defense-related instrument of technology
transfer from the United States to its allies has been the policy
of "offsets." Initially, offsets were related to the balance of
payments in connection with arms sales. They committed the
seller to "offset" the imbalance in arms trade by applying a
certain percentage of the purchase price to purchases from the
buyer nation. In recent years, however, offsets have in many
cases lost their relationship to the consideration of the balance
of payments and have simply become a certain favorable condition,
other than the price, that the buyer extracts in connection with
a purchase. In some cases, the size of the offset exceeds the
price of the arms purchase..
The practice of offsets has become intricately intertwined with
the various activities conducted under the coproduction and
codevelopment programs. Technology transfer, in various forms,
plays a part in offsets. For example, a coproduction agreement
by a manufacturer may become an offset in a major arms sale.
Japanese Technology Transfer Policies
Compared with West German and U.S. Policies
In contrast to other U.S. competitors, Japan has implemented
specific technology transfer policies aimed at improving its
international competitiveness. It was not, moreover, an isolated
instance of government intervention targeted specifically at
Japan's international technology transactions. It formed an
integral part of Japan's national industrial policy.
After World War II, Japan instituted a national control system
over technology transfers, based on the Foreign Exchange and
Foreign Trade Control Law of 1949 and the Law Concerning Foreign
Investment of 1950. All technology transfer contracts and direct
foreign investment projects had to be screened and approved by
the Japanese government. The government believed that without
its direct controls, Japanese industry might fall under the
domination of foreign interests. This concern dated back to the
initial industrialization effort of the post-Meiji Restoration
(1868).
The government sought to exert a countervailing power on behalf
of the Japanese firms vis-a-vis their foreign competitors, who
had superior technologies. It also discouraged competition among
rival Japanese firms in their efforts to gain access to foreign
technology. This, too, was intended to strengthen the bargaining
position of Japanese technology purchasers. The government
encouraged "staggered, orderly entry" by individual firms into
specific industries, allowing the initial entrants to establish
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temporary monopolies based on imported technologies. In another
effort to improve their access to technology, Japanese companies
expanded foreign investment in research-intensive countries, such
as the United States and West Germany.
Imported technology has contributed to Japan's exceptional
economic growth, but it was only part of an overall strategy.
o In recent years, imported technologies have become
a complement to rather than a substitute for domestic
R&D and innovations.
o In the 1970s, Japan put greater emphasis on importing
technologies that had not yet been commercially
exploited in the transferring countries themselves.
o In the past, Japan's domestic R&D efforts were geared
primarily toward modifying, adapting, and improving
imported technologies. Now, however, it is targeted
at the high-risk stage or areas with the potential for
major technological advances.
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V. Implications for the U.S. Economy and National Security
of an Erosion of U.S. Strength in High-Technology Industries
The United States occupies a unique leadership position in the
world political and economic structure--a leadership role
underwritten by,its preeminence in advanced technology. The
erosion of this preeminence has far-reaching economic, political,
and national security consequences for the United States.
THE ECONOMIC HEALTH AND VITALITY OF THE AMERICAN ECONOMY
DEPENDS ON HIGH TECHNOLOGY
The special combination. of contributions to the U.S. economy of
high-technology industries--including high productivity growth
and low inflation--indicate the importance of this segment to the
overall strength of the U.S. industrial base. Further, there is
a direct linkage between the research activities conducted by the
high-technology industries and the U.S. standard of living.
Research nutures innovation, which feeds technological progress,
which leads to productivity gains. Productivity over the long,
run is the predominate element which determines the overall
ability of the U.S. economy to grow and in turn to produce a
higher standard of living and new jobs.
Likewise, the composition of both the U.S. economy and U.S.
trade--how much is services versus manufacturing--affects the
ability of the economy to provide new jobs and an ever-improving
relative standard of living. From some perspectives, the United
States can afford to be indifferent about the commodity
composition of its economy and exports. For example, the United
States has limited control over its current account balance.
Nevertheless, the crucial linkage between research and
productivity necessitates that attention be paid to the structure
of the U.S. industrial base. To reverse the trend of a relative
deterioration of the U.S. standard of living, structural changes
must occur in the U.S. economy.
As the high-technology industries of other countries have emerged
as strong international competitors, U.S. high-technology
industries are facing in a significantly altered competitive
environment. Technological preeminence, already lost in some
high-technology segments, will be increasingly difficult for
American society to successfully maintain. The combined effect
of the general maturing of the world economies and increased
foreign government support of these sectors ensure that for the
indefinite future America's, leadership position will be
challenged.
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Reversing the current trend of a continuing erosion of U.S.
technological preeminence will also require a sustained
investment in research. However, the policies of foreign
governments in high technology will tend to undermine the
willingness and capability of U.S. firms to conduct research and
development programs in areas where foreign target-industry
programs are active. Thus concurrently with the increased need
for the United States to invest in research and development,
international pressures may aggravate the ability of U.S. firms
to respond.
THE WEAKENED POSITION IN HIGH TECHNOLOGY
AFFECTS U.S. NATIONAL SECURITY
A strong economic system is vital to the security of the free
world. The United States has a dual role both as the principal
guarantor of Western security and the leading defender of the
economic system of the free world. In this context U.S.
technological preeminence and high-technology industries that
generate advanced know-how take on strategic importance.
The special role high-technology industries play in the nation's
defense is evidenced by the-fact that almost two-thirds of all
hardware sales to the Department of Defense are produced by the
high-technology sector. B4cause advanced technology products and
the industries that supply and develop them form such a critical
underpinning of our defense capability, there is a trade-off
between additional benefits from expanded international
specialization and the potential adverse consequences for U.S.
national security.
o A realignment in the relative balance of power
may take place with a weakened U.S. technological
base.
o The pace and direction of technological advance is
difficult to predict, but such advance must be
recognized as vital to providing for U.S. defense
strength.
o Increased reliance on foreign sources for military
technology heightens U.S. vulnerability.. In the area
of defense-related know-how, the United States was
previously relatively immune to leverage resulting
from technology sharing.
o With the loss of leadership in key sectors of
high technology, the United-States will lose direct
control over the transfer of sensitive advanced
technology to the Soviet Union.
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In an increasingly economically interdependent world, any effort
to preserve self-sufficiency may entail economic costs. To.
maintain an adequate capability across a broad spectrum of
advanced technologies, the United States may need to be willing
to subordinate cost considerations to security considerations.
Without a strong high-technology industrial base in place,
defense will have to bear higher costs, in any case, to maintain.
U.S. independence in military-related technology. Furthermore,
as demonstrated in previous conflicts, technological capabilities
can decisively influence the course of events.*
Thus, the maintenance of a broad U.S. technological base that
enhances the defense capabilities of the United States and its
allies is a prudent element of the U.S. national security
strategy.
* See Appendix F for two illustrations.