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

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001700240013-9
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 65
• Document Creation Date: December 20, 2016
• Document Release Date: April 4, 2007
• Sequence Number: 13
• Publication Date: October 1, 1982
• Content Type: REPORT

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REVISED DRAFT
AN ASSESSMENT OF U.S.
COMPETITIVENESS
IN HIGH TECHNOLOGY
INDUSTRIES
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Executive Summary
Tn December of 1981, the Cabinet Council on Commerce and Trade '
(CCCT) directed that a study be performed on the current competitive
Posture of the United States in high technology. This study is
submitted in fulfillment of that request.
The concerns of the CCCT with U.S. performance in high technology
sprang from the recognition that the gains to the United States from
advanced technology are quite significant.
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 possible erosion of
this preeminence could have far-reaching economic, political, and
national security conse-1,ences for the e TuTnited States
The special combination of cont. ibutions to the U.S. economy of
high-technology industries--including high productivity growth and
low price growth--indicate the importance of this segment to the
overall strength of the U.S. industrial base. There is a direct
linkage between the research activities conducted by high -techln.ology
industries and. the U.S. standard of living. Research nutuIres
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.
As the high-technology induS`_+^ies of other countries L ae emerged as
strong international competitors, U.S. high-tech
^nology industries
are facing a significantly altered competitive environment. in the
new environment, the United States faces a major challenge to
maintain its broad technological preeminence.
This report summarizes an interagency examination of U.S. high
technology industries -- their importance, their trade performance,
and the factors influencing their competitiveness vis-a-vis foreign
competitors. Key findings include the following:
o High technology industries are vital to the U.S. economy.
Their growth rate has been twice that of total industrial
output, and they contribute the bulk of technological
advances to all sectors of the economy.
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o National security depends upon the technology-intensive
industries both for sophisticated items essential to modern
weapons superiority, and for a strong and flexible
industrial capability for future contingencies.
o The United States will have to depend heavily on its areas
of greatest strength --- principally advanced technology and
agriculture -- to meet increased competition in world
markets. The technological challenge confronting the
United States can benefit all competitors and nations
through increased efficiency and growth.
overseas.
o An array of factors influence U.S. versus foreign advances
its technology. The most important of these across
all
industries are:
- the overall state of the domestic economy,
-
cost and supply of capital,
-
relative R&D efforts,
-
the transfer of technology,
-
availability of scientists and technicians,
and
-
explicit industrial policies toward technology-
o Over the last twelve years, there has been'a decline in the
international market position Of U.S. high technology
industries from a position of dominance to one of being
strongly challenged. Market share for the high technology
group .-- and for nearly all individual industries -- has
fallen. Foreign competition in high technology has
increased dramatically, with developments in selected new
areas indicating that technological advantages have shifted
intensive sectors.
o If present trends continue, some or all of these factors
could contribute to a further decline in the competitive
position of U.S. high technology industries. y
o A free market system encourages technological advances, but
significant impediments to free and open markets exist
world-wide. For example, foreign governments use closed
markets, direct fiscal support, and guidance to capital
markets to create an artificial advantage for favored high
technology sectors. Recognition of these impediments and
reasoned efforts to counter them are essential to prevent
serious disadvantages for U.S. firms. -
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o Foreign government industrial programs to promote high
technology industries have adversely affected U.S. high
technology industries and will, if trends continue, place -
U.S. business at a disadvantage, even with an ..deal
environment for high technology withi ;_he United Stater .
Industry targeting by foreign governments against specific
high technology areas could preclude valuable long term
U.S. technological developments.
o The major technological challenge to the United States is
from Japan. Now limit=d to a few high technology sectors,
this challenge is expected to broaden in the f 't-?e.
We believe that the evidence justifies c ncer^ fo.r our coat' ued
preeminence in high technology. W ,I ie it was ine',7 i table that the
abnormal postwar gap in technology betrween the United States and
other advanced countries would narrow, we must appreciate that that
era has past. We must begin a process to identify the appropriate
policy responses. The Cabinet Council on Commerce and Trade is
undertaking to assess both industry specific and broader factors
which have influenced United States competitiveness in high
technology. J
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Contents
Page
I. INTRODUCTION ..............................................2
II. THE IMPORTANCE OF HIGH TECHNOLOGY
INDUSTRIES ..............................................3
III. U.S. PERFORMANCE IN WORLD TRADE ...........................6
Background ............................................. 7
High Technology Trade ................................9
Industry-Specific Cases ............................... 13
IV. THE ENVIRONMENT FOR TECHNOLOGICAL DEVELOPMENT:
F~~L~U/~TOR ~~.s _ ............... 18
CONTRIBUTING TO COMPETITIVENESS
The Overall Economic Climate and
High Technology industries ........................
Financial Capital Cost/ Supply ....................... 21
Relative Research and Development Efforts ........... 26
Scientific and Technical Personnel .................. 29
Government Industrial Policies in High
Technology Sectors .............................. 31
Transfers of Technology .............................38
V. IMPLICATIONS ............................................. 41
Appendix
Page
A.
Defining Technology-Intensive Trade ........................A-1
B.
Statistical Tables .................... ..................... A-il
C.
Summary of the Changing Competitive
Situation in Selected High Technology
Sectors ....................................... ............A-53
D.
The Innovative Process ...:......... ........................ A-74
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2
I. INTRODUCTION
The gains to the United States from advanced technology are quite
significant. The standard of living, national security, and the
variety of free choices available in this country in large measure
are a result of the advanced skills and knowledge we have developed
and applied. The recognition of technology's importance to the
United States -- and the recognition that leadership in technology
is a perishable asset which can be lost if not vigorously maintained
-- have led to this assessment of the current U.S. position.
Purpose
This report summarizes an interagency examination of the importance
of advanced technology to the United States, the performance of this
country's technology-intensive industries, and the factors
influencing relative technological advantage between the United
States and its major foreign competitors. The purpose of this
effort is to provide the foundation for a subsequent study where
policies related to U.S. technological strength will be considered.
The interagency effort, and this report, have prescribed limitations
in scope. The intent has been to perform a synthesis of existing
understanding and research pertinent to the study's objectives. A
significant original research program has not been attempted.
Oraanization_ of the Report
This report is presented in four major sections. Section II
describes the nature of the most technology-intensive industries and
the reasons for our examination of this specific group in detail.
In Section III the role of high technology industries in U.S.
international trade is discussed. The relative performance of these
industries is assessed in relation to overall U.S. trade performance.
The factors which we have judged to be the major elements affecting
technology are presented in Section IV. Included in this section
are descriptions of foreign actions which directly affect U.S. high
technology industries.
Section V outlines implications for further work.
Supporting appendices are located at Tabs A through D.
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II. THE IMPORTANCE OF HIGH TECHNOLOGY INDUSTRIES
High technology industries* are identified by he simultaneous
presence of two characteristics : 1 ) an a.'iove average level of
scientific and engineering skills and capabilities, compared to
other industries ( alternatively R&D effort relative to sales can be
used); and (2) a rapid rate of technological development.
High technology is differented from "high science" or pure science
in that it is technology? developed for rcial application. Pure
science is concerned with the staa te of Knowledge independent from
any relationship it may bear to commercial applications. The
continued dominance of the U.S. in high science as illustrated by
its "monopoly" on Nobel prizes and numbers of scientific articles in
'Leading journals is not at issue. In fact, some would confuse the
strength in high science with strength in high technology. There
are linkages but they are complex. Countries can be highly
competitive in a high technology industry yet make few, if any,
contributions to the underlying scientific base.
*This report examines the performance of industries that are
technology intensive. In order to examine world trade peformance, a
specific set of industries must be identified as "high technology
industries". Available trade data categories define industries at a
fairly aggregated level. Consequently, some specific sub-categories
that have relatively low technology intensity are included in the
definition. Also, some specific high technology industries are
excluded for the same reason. Detailed industry examinations --
such as those discussed at the end of this section -- should,
though, consider specific high technology industries (for instance,
robotics and computer-related machine tools) which are excluded from
the aggregate definition made for trade data purposes.
It should be recognized that by its very definition high technology
industries are a dynamic collection. Any definition of a high
technology industry must involve an industry analysis at a -
particular-point in time. Thus the collection of industries
identified as high technology can change over time. However as
detailed in Appendix A, the conclusions developed from the broad
data are not sensitive to the definition selected for high
technology.
.For further discussion of high technology industry definitions, see
Appendix
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4
The industries comprising the high technology sector of the economy
for examination of trade data have been identified based on their
R&D expenditures to include:
o Aircraft and parts;
o Computers and office equipmment;
o Electrical equipment and components;
o Optical and medical instruments;
o Drugs and medicines;
o Plastic and synthetic materials;
o Engines and turbines;
o Agricultural chemicals;
o Professional and scientific instruments; and
o Industrial chemicals.
Economic Importance
The most technology-intensive U.S, industries provide a significant
contribution to overall output growth, productivity increases, and
trade performance. Key aspects of the role played by high
technology industries in our economy include the following:
o During the past decade high technology industries as a group
had a rate of growth of real output which was more than twice
that of total U.S. industrial real output. (See Figure 2.1)
Nine out of the ten fastest growing U.S. industries in recent
years have been high technology industries.
o The rate of increase in prices of high technology industry
products during the 1970-1980 period was only one-third that
of the country's overall inflation rate. (See Figure 2.2)
o High technology product trade has contributed large surpluses
to our balance of trade. (See Figure 2.3)
o During the 1970's, average labor productivity of the -
industries in the high technology group grew six times faster
than that of total U.S. business. (See Figure 2.4)
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The high technology industries accounted for more than 60 percent of
total private industrial R&D, although they represented only 13
percent of the value of manufacturing product shipments. The
products and processes or iginating in the high technology industries
are dispersed across other industries, acting to enhance duct
quality, reduce costs and increase productivity. Notably, the
non-manufacturing sectors of the economy receive significant
benefits. It has been estimated that half of the benefits from R&D
measured in terms of specific products and specific processes are gained by the agricultural, mining, services, etc. sectors.
(See Figure 2.5) The presence of significant external, or
spillover, benefits from private research and development are not
no~
surprising. It is quite difficult for the private investor in
research and development to cartuYe, or rater line, all the
benefits from his investment. -
The technology-intensive industries, moreover, have an important
contribution to job creation -- despite the limited amount of
employment within the group itself. Estimates have been made that
job creation via indirect support of the high technology industries
has been significantly higher than that for the economy as a whole.
This is reflected in the growth figures for employment in high
technology support industries over the 1970-1980 period. (See Figure
2.6)
Further, high technology products are a key element of U.S. foreign
trade. The United States is unique in the relative importance that
high technology goads represent in its expo r.ts. Tjiah tecnnoiocry
products constitute a significantly greater share of the U S
manufactured exports than of any other major economy. This has been
the case consistently and has increased moderately over time.
Between 1967 and 1980, the proportion represented by high technology
goods has grown from under 40 percent of totaU.S. factUres tol
about 44 percent. For West German, France and Japan, the proportion
is between 25 and 30 percent.
Of importance, also, is the fact that U.S. imports of higher
technology products are becoming significant. (See Figure 2.7)
Overall, U.S. two-way manufactures trade is becoming more
concentrated in high technology goods.
National Security Considerations
The importance of a strong economic system to the security of the
free world is self evident. The nited States has a dual role, both
as the principal guarantor of Western security and as the leading
defender of the economic system of the free world. In this context,
U.S. technological oreeminance and high technology industries take
on strategic importance and the maintenance and protection of a
broad U..S. technological b,as,e is a vi ta.l element of national
security policy. Failure or. our part to maintain Q,ur technological
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leadership could lead to adverse consequences for the United States
and for the balance of power between the Soviet Bloc and the
fcn-communist community of nations. How we maintain technological
preeminance must be carefully considered. Economic measures
designed to promote an industry or sector because they can distort
the operation of the market can weaken the overall economy, damaging
our national security.
Advanced technology products and the industries that supply and
develop them form a critical foundation for our defense capability.
Consequently specific cases of trade-off between additional benefits
from expanded foreign production capabilities versus the potential
adverse consequences for U.S. national security may arise. Key
considerations include possibilities that:
o Increased reliance, to the point of dependence, on foreign
industries for significant military-related technology would
heighten U.S. vulnerability. While the economic and military
capabilities of Western countries might be enhanced in the
short run, our long term security might be eroded.
o With the loss of leadership in key sectors of high technology,
the United States will lose further control over the transfer
of sensitive state-of-the-art technology to the Soviet Union.
o Ultimately, a weakened U.S. technological base might force a
realignment in the relative balance of po,7er.
These considerations must be balanced against risk that excessive
and unwarranted government involvement in high technology could run
the risk of weakening our position in high technology and thereby
damaging our national security.
III. U.S. PERFORMANCE IN WORLD TRADE
The international competitiveness of the United States in
technologically intensive industries must be assessed in relation to
the overall trade position of this country, particularly with regard
to the significance of changes over time and the causes of these
changes. This section provides an overview of all merchandise trade
as background to a more detailed examination of high technology
industry trade. Selected points on specific industries are cited as
illustrations of the problems facing these industries from foreign
competition.
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Following World War II the productive capacity of the United States-
relati.ve to the rest of the industrial world gave this country the
il~.
ability to compete successfully in almost any world market and in
almost any commodity group. As supply capability increased in the
major economies this picture changed. Overseas competitors steadily
increased their proportion of markets versus the U.S. in virtually
every category and location. in addition, the industrial sector in
many less developed countries (LDCs) has grown dramatically over the
past three decades, and has become of major importance in world
trade.
Growth in foreign capacity has acted to b:.in a secular decline
y in
the U.S. share of world trade. Given the disrupted and
underdeveloped state of foreign economies 30 years ago, such an
erosion in the U.S. share has been inevitable, to be expected, and
beneficial to the United States. In.1950 U.S. GNP amounted to about
one-third of total world output. By 1970 the strong growth abroad
had reduced this share to some 22 percent of world GNITP, -- a 35
percent decline. During the same period the U.S. share of world
exports declined from 21 to 18 percent, a proportionate drop of only
1.4 percent.
The United States thus maintained its status in world trade more
strongly than would be indicated by the relative size of the economy
alone Further, a..n absoiu.te terms, the United Stares as remained
11
the world' y, s largest single trader. In 1970, U.S. exports exceeded
those of the second largest exporter, Germany, by 25 percent.
Over most of the post-World War II period, moreover, a comparatively
consistent relationship existed between the price of U.S. goods and
foreign goods. The volume of goods exhorted from this country
consistently obtained about the same volume of imported goods from
abroad. Until the 1970's, a stable dollar versus other major
currencies -- and effectively similar rates of inflation here and
abroad -- resulted in similar movement of the U.S. share of trade in
both current value and as calculated in terms of real quantities of
goods. (See Figure 3.1)
Conditions clearly changed in the 1970's, and changed in ways
directly pertinent to our consideration of high technology
industries. Divergence between the U.S. export share in nominal and
volume terms, as shown in Figure 3.1, reflects part of these changes.
Simply put, over the last decade the United States exported-.an
increasingly greater vol-1!me of goods, but these goods were valued
less on world markets. In effect, U.S. products in total could not
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command as high a price in world markets as they once did.* The
decline in the value of the dollar during much of the 1970: is both
a cause and a reflection of this.
What we would like to obtain is a higher price for our exports
versus that of other countries. In terms of export shares, this
means that we would like the nominal share (in current dollars) to
be increasing over time in comparison to the volume share. Put
another way, as time goes on we want the same volume of exports to
exchange for an equal or greater quantity of imports.
In < JieV11ny g ? 17g,30re 2.1, it is dramatically clear that from 1970 on
11 1 J 1L 1
what we would have liked to have seen has not occurred. Not only
have we had difficulty holding on to our volume share, but also we
have only held on by reducing the value obtained for our exports (a
reduction affected by the decline in the value of the dollar). We
feel this is a significant change from the "to-be-expected" decline
in our share of world trade due to growth of supply capacity
overseas. It has direct significance to our assessment of the
performance of U.S. high technology industry.
(See NOTES 1 and 2, pages 42 and 43 for detailed explanations of
exchange rate effects and comparisons of trade shares.)
* The dramatic rise in the price of oil has been a major factor in
the change in relative U.S. export shares. The same pattern in
real versus nominal shares is obtained, though, even if the
extreme oil price changes are excluded from the calculations. In
any case, higher petroleum costs are a continuing fact of life
and the assessment of the current U.S. position versus 1970
cannot ignore their effect.
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The growth in strong competition overseas has made it increasingly
apparent that U.S. success in foreign markets will be hard won. If
success is achieved and maintained it will have to be in those areas
in which the United States has the greatest comparative advantage in
relation to the rest of the world. This is desirable, of course, as
the benefits of trade are the greatest if all countries can move
toward specialization in what they do best.
The United States' strengths today vs.-a-vis t~:e world as a whole
lie in three areas:
-- Natural resources. Included here are ndoW:_.Ients mineral
deposits, agriculture and forest acreage. The strong past and
potential contributions of these resources to U.S. trade is
clear.
Wealth in existing capital. Both the U.S. productive plant
and equipment, and the existing economic infrastructure
transportation networks, communications, utilities -?-- are
comparatively the most valuable in the world.
- Technical and scientific knowledge. This advantage 'Lies
principally in "human capital" the skills and knowledge of
the work force -- and in a variety of institutional research
facilities and traditions.
This third factor, as we have discussed, is character zed by
4 industries with vigorous growth and influence which reaches into all
areas of the economy. To varying degrees, technological advances
can sometimes act to substitute for inputs of natural resources and
physical capital stocks. Further, of the areas of U.S. comparative
advantage, it is one that can most readily be eroded (both by
developments overseas and decline in the U.S.). Technology is
transferable (mobile) when sufficient skills and knowledge exists in
the recipient country's populations; where skills and knowledge are
deficient, the mobility of technology is impeded.
Technical and scientific knowledge is translated into technological
advances. These advances significantly effect our future success in
world trade. What then can be said about the performance of our
technology-intensive industries in recent years, and about their
prospects for the future?
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Assessing High Tecrolo Performance
A. variety of trade statistics have been examined to assess high
technology industry performance, many of which are presented in the
following discussion or in Appendix B. We recognize, though, that
there is no single method to test the competitiveness of a group of
industries as complex and diverse as the high technology sector.
Further, there are questions concerning the performance of these or
any other industries which are essentially unanswerable -- such as:
What level of competitiveness is enough?; and, chat share of a
market is too little?
The United States will face ,-n~ st ' the
an ~rL~e~e rugg c for r:ar:icts in hfuture. Even if industries have performed relatively well, they
should not be hampered by either old or new barriers that prevent an
even better performance.
In this light, the appropriate questions to be addressed are the
following:
- Does the decline in the market share of U.S. high technology
industries represent a natural evolution from a position of
dominance that is of no concern, or is there reason for
concern?
- Are there significant indications that the trend will continue?
The answer to both of these questions, we believe, is yes.
Competitive Trends
Aggregate Market Share -- Aggregate measures of trade performance in
technology-intensive products include export market share. This
indicator -- a country's exports divided by the sum of other
countries' exports -- shows a growing importance of other countries'
products versus those of the United States.
From 1962 through 1980 the U.S. share of industrial country high
technology exports as a group declined. (See Figure 3.2) The share
of each of our major competitors increased. For japan, dramatic
gains took place, with a 4.2 percent share rising to 12 percent by
1980. (Japanese export success reflects in part the lower inflation
adjusted value of the yen since 1974. The real value of the yen
fell nearly 20 percent between the beginning of 1975 and the end of
1981.)
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The greatest gains by Japan took place in the form of increased high-
technology exports to the major economies themselves. German and
French gains were strong in third country markets, that is, other
than the U.S., German, French and Japanese markets. The United
States has traditionally been strong in the third country area, but
experienced a significant share reduction in these markets as well.
(See Figure 3.3)
Disaggr aced Market Share -- Examining market share performance by
more disaggregated high technology industries indicates a similar
pattern for the United States. For the ten technology-intensive
industries examined, only two -- representing some 15 percent of
U.S. high technology exports -- showed an increase in exports
relative to ,
.. similar industrial country exports for 1965 versus
1980. (See Figure 3.4) Of these two, only one -- agricultural
chemicals, (some 4 percent of U.S. high technology exports) --
showed an increase in share between 1970 and 1980.
Moreover, as can be seen in Figure 3.4 (where the width of the bars
represent relative industry size in total industrial country high
technology exports), the industries which have the larger shares in
world trade are not those where the U.S. share has increased. The
opposite has been the case.
Technology-intensive Trade Balances
The U.S. overall trade balance in high technology products increased
from 1962 through 1980. Japanese, German, and French balances also
grew. (See Figure 3.5) The U.S. surplus remained the largest,
although the relative growth in the Japanese surplus was the most
rapid.
Dramatic change in the Japanese competitive position in high
technology surplus is also indicated in their expanding bilateral
balance with the United States in high technology trade. (See
Figure 3.6) From a deficit in these products in 1968, Japan has
moved to a surplus position vis-a-vis this country of nearly $3.0
billion in 1980. This surplus -- about one seventh of Japan's
global high technology trade surplus -- is about equal to the U.S
combined surplus in these products with France and Germany.
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The trade surplus generated in high technology products is
significant for the United States. Nonetheless it should be noted
that a substantial portion of this surplus has been due to only two
nadu s t r , t, In s. In 1.980 more than 5,0 percent of the U.S. surplus in
high technology products was from aircraft and computer-related
trade alone (these two sectors rank among the highest technology
intensity in terms of the industries identified as high
technology). This proportion, moreover, has increased since 1965,
indicating that the other high technology industries have been
relatively less successful in the combined domestic and
international market. (Two of the ten industries, in fact, posted
trade deficits in 1930.)
Changes in Relative Trade Advantage
Changes in relative trade performance between industries within the
same country provide additional information on the status of high
technology industries. A specific indicator useful for this
examination is a country's "revealed comparative advantage" -- the
ranking -1 industries accords g to their market share versus the
average market share for the country. This measure, which is
presented for industries of the four major countries-in Figure 3.7,
is simply the export market share of an industry divided by the
country's total export market snare. (in Figure 3 . 7 the radius of
the circles represents the average market share. Industries falling
inside the Circle thus have less than the country' S average share of
world markets, those outside have greater than average. )
E,{c~..
....,^minatiC% of changes in these measures over tifi~e indicates
practical differences in country specialization in trade.
Three points are emphasized by charges in industry versus average
export shares for these countries. First, there are considerably
greater differences in country market shares for the United States
and Japan, than in the other two countries. Germany and France's
industry market shares are generally near to the country average
(and thus fall near the circle in Figure 3.7), with little major
alteration in this pattern between 1965 and 1980.
Secondly, in the U.S. and Japan the differences existing in market
shares for different industries have increased further -- sometimes
dramatically -- between 196 and 1980. Most notable have been
increases in aircraft, computer, and agricultural chemical
industries in the United States, and the electrical equipment,
optical/medical instruments, engines/turbines, and automotive
industries in Japan.
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The third point of major interest is the degree to which increases
in relative advantage within the Japanese ranking are matched by
reductions, or little change, for those industries' relative
advantage in the United States. This is particularly apparent with
regard to the electrical components and instruments industries
within the higher technology sector.
The suggestion made by this third point is the possibility of the
past Japanese predominance in radio, TV and automobile exports being
duplicated in other sectors. In this case, the measures of
increased relative advantage in Japan -- those for electronic
components, instruments, engines and turbines, and computers ---
which are shown in Figure 3.7 suggest much tougher future
competition in these areas.
An examination of individual industries and products provides
further information on the performance and prospects for U.S. high
technology trade. Key points for a variety of selected cases --
examined at a level of greater detail than is possible for the total
high technology industry list discussed so far are outlined
below. (Further information is presented in the Appendices.) In
all of these sectors the United States has had at one time or
another, technological leadership. These cases illustrate how this
Past situation of U.S. dominance has changed. They also illustrate
the increasing presense of foreign government programs in the areas
of commercial research and development. How substantial and
effective these programs are varies across the different sectors.
Some government supported programs such as those in aircraft and
semiconductors have clearly influenced the competitive status of
foreign firms.
Aircraft
The U.S. civil aircraft industry has traditionally dominated world
markets. As late as the mid-1970's, U.S. manufacturers held 95
percent of the world's orders for large transport aircraft. Since
1975, however, foreign competition has intensified.
The principal source of competition is from the government
funded European consortium Airbus Industrie, which captured
roughly a quarter of the jet aircraft market in 1981. Over
half.of the announced new orders for wide-body aircraft have
been captured by Airbus.
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14
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 hic are gorverrIZient funded, have
expanded.
Space - Aircraft and Parts
By the mid-1980's, estimated requirements for U.S. commercial space
launch service will exceed the capacity of the approved shuttle
fleet. Present policy (being reexamined) calls for a .base out of
expendable launch vehicles that could augment the shuttle capacity.
The French, with their Ariane launch vehicle, have initiated an
aggressive marketing campaign to secure a major segment of this
traffic.
o Civil space activity in the United States is the
responsibility of the National Aeronautics and Space
Administration (NASA). Comrnercal payload launch dates are
established by NASA through agreements with customers.
National security payloads, now launched on expendable
vehicles, will depend on the Space Shuttle in the lace 1980's.
o Fixed prices of U.S. launches are set by NASA, rather than
through commercial negotiations between launch customer and
launch vehicle suppliers. Current policy recruires full cost
~_~ ve
recovery for expendable launch, in the post-1985
period, Space Scuttle launches will recover all
out-of-pocket" costs to NASA, The French Arianesoace
organization is able to offer the customer more favorable
financing terms than NASA, both because of subsidy by the
French Government and because incorporation as a commercial
venture permits flexibility not presently available to NASA.
o The evolution of expendable launch vehicles has slowed as
NASA's major attention and funding has been toward the
development and deployment of the Space Shuttle. Though
there is a fledgling initiative by U.S. private interests to
develop a competitive expendable launch vehicle.
o The French Ariane, although now using technology similar to
that developed for U.S. vehicles two decades ago, will
undergo considerable and rapid evolution to meet the needs of
the commercial satellite industry.
o The Japanese are putting up satellites, are developing their
own. launch vehicles, and in time could assume the launch
support role for commercial satellites.
o The Soviet Jnion has launched a foreign system commercially
for the first time and could also become a competitor.
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Computer Hardware and Software
The United States retains broad leadership in computer hardware and-
software production and tech-no-logy. But, the Japanese -,
.~
se have begun to
close the gap in a variety of sectors.
o Japanese producers now have products that match or exceed the
capabilities of major U.S. producers in such sectors as
large-scale processors, magnetic disk storage and printers.
Joint government--industry research efforts are focusing on
software, in which the Japanese lags U.S. firms in most areas.
o The Japanese government and industry have targeted the
scientific comp tang 'o per com.7u +e r e,ct" and t _
Japanese producer recently V
r p- announced a computer which i%
c1 a i.. ~ aims surpasses current U,,r :a. models in this ode._ tti 115 >eC1.i.
o In concert with industry, the Japanese government has begun a
10-year R&D program to produce the so-called "5th generation"
computer system, by which they hope to leapfrog the U.S.
industry.
Semiconductors - Computers and office machines, Electrical equipment
and Components
The United States no longer has the lead in several im-portant areas
oT semiconductor technology.
o Japan has an emerging leadership role in metal-ox_de
semiconductor (MOS) 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 (CMOS) technology, favored for its
low power, radiation resistant characteristics,
o Japan has an emerging semiconductor production equipment
technology which will rival U.S. capabilities. Emphasis is
on increasing the degree of automation of production
facilities as well as improving its ability to produce high
density devices.
o The Japanese, West German and French governments have
subsidized a number of Programs to assist their
microelectronics industries.
o The United States retains a firm lead in microprocessor
. technology.
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Fiber Optics - Electrical equipment and components
Fiber optic technology has advanced rapidly since the late 1960s, a s gin significant potent t i al r ar~g o.f.~ aP.'r p3 cat i oi n es ecry i1
-e p a :Y in
with
the cormniunicarions field.
o Of the three components in a fiber optics system -- light
source, transmission medium, and detectors -- Japan has been
credited with 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
to rgete~.+ 'Lptoe ecy'_ nics for riapi ".~evelopmert . The
Engineering .'--search Association of Optoelec tronics Applied
S
Systems s was stabl is 1 i 1930 `o ' i t of
S st esv is e4 1'a L be the t..~ordJ~nLor UL
government-subsidized projects in fiber optics and other
optoelectronic R&D projects.
Biotechnolo- Drugs and Medicines, Chemicals (hiogenetics)
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 makin,; substantial investments in the
coranerr_ialization processes, in which the United States has
no clear lead.
o Japan has an undisputed lead in fermentation processes, a
critical segment for commercialization, and is aggressively
seeking to build on its strengths in this area.
Pharmaceuticals
American domination of world pharmaceutical markets has been
steadily reduced over the past twenty years.
o In the antibiotics sector, Japanese manufacturers are the
world leaders in new compounds. Seven of eleven new
antibiotics developed in 1979 originated in Japanese
laboratories.
o Expenditures of U.S.-owned companies for research at-home and
abroad have not matched the expansion of foreign-owned firms'
research efforts.
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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.
Robotics - Computers and office machines, Electrical equipment
and components
While the United States continues to lead in research and design,
Japan has far surpassed it in robot production and use. According
to a narrow U.S. definition of robots, which excludes simple
mechanical transfer devices, Japan currently has about three and a
half ti: ies as many robots in use as the sited States .
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 Stages.
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.
o Several U.S. firms have entered into licensing arrangements
with foreign comranies to attempt to accelerate 11--heir own
entry into the robot field.
Machine Tools* - Computers and office machines,. electrical equipment
and components,
o The competitiveness of the machine tool industry Will
increasingly depend on the use of microelectronics and
computer-based technologies, areas of increasing activity
overseas.
o Other countries, particularly West Germany and Japan have
actively penetrated the U.S. machine tool market. Imports
now account for 24 percent of U.S. consumption.
o Japan has developed a major capability in computer
numerically controlled (CNC) machines and flexible
manufacturing systems (FMS). Japan has already made inroads
in the U.S. CNC market and has targeted FMS for mass
marketing.
*While the aggregate machine tool sector technically falls outside
the definition of high technology, a nur.er of segments of the
industry are intensive ccns..ume'r.s of nea techno~ogies .
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The United States maintains an absolute ]Lead in overall technology.
Nonetheless, there has been a decline relative to our major
competitors _n a significant number of U.S. high technology
`industries. This change must be considered in conjunction with the
following:
o The importance of technology as a key factor of U.S.
comparative advantage in trade -- particularly considering
the secular decline in the aggregate U.S. trade position;
o The value of technology-4-ntens4 e industries --? in terms of
growth potential, and their high wage, low pollution
^'^a_"3C~ erist i. _ ~:s .~ , A
., _
`_... _- as a %:.i.ici:ii.., activity;
and
o The signs of concentrated foreign efforts to become major
competitors in technology-intensive products.
The degree to which specific factors have affected the
comb etitiveness of the country' s industries --- and may continue i.o
do so -- is discussed in the following Section.
IV. THE ENVIRONN NT FOR TECHNOLOGICAL DEVELOPMrte CTORS
CONTRIBUTING TO COMP TITIVENESS
Among a large variety of economi' social 'a .,. no.'_ it.: _!cal io.~rces-
several key factors have a s a n I cant influence o._ techno logical
development and the competitiveness of virtually all U.S.
technologically-intensive industries. This section examines these
principal elements, contrasting their significance to the United
States and major foreign competitors.
We believe that among the most important factors which influence
competitiveness in high-technology industries are*:
*Exchange rate movements can have and have had an influence on the
competitiveness of high technology industries. But there are
several reasons for not identifying them as an element affecting
competitiveness across a broad range of high technology industries.
A number of high technology segments are only emerging industries,
robotics and biotechnology, for example. Trade is not significant.
given for some of the more established high technology sectors
international flows may take the form of technology rather than
products and, therefore, are relatively insulated from the effects
of movements in exchange rates. Another factor dimishing the
influence of exchange rates is the widespread phenomenon of rapid
price declines for high technology products, in_ some instances, of
sufficient magnitude to dominate any movements in exchange rates.
For these reasons we do not identify exchange rate..movements as a
principal element affecting the U.S. Competitive position
across-the-ward in ',-',-;h technology.
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General economic policies including competition policies and
their effects on growth and the investment decision;
Financial capital cost/supply;
Explicit R&D programs and incentives;
Supplies of skilled personnel;
The transfer of technology to other economies; and
Explicit industry policies, including targeting strategies
and trade restrictions.
In the following, these major elements are discussed in some detail.
The relative importance of each of these considerations may vary
significantly among industries. We do not intend that this
assessment should downplay the importance of other individual,
detailed considerations which are highly industry-specific.
The high technology industries are characterized by relatively rapid
technological deveiionment and changing market attributes. No
precise analytic method exists for determining the effect of a each
one of these factors in isolation or, innovative performance for a
group of industries as a whole. In large cart, they act in
concert, Stable nonin: lat_ J any gro,,,rch rt lITit:_c?tes the demand e dtm1
and nor
new innovation, but it could :not be attained without adequate
skills embodled in scientists and engineers , and adequate R&D
expenditures. New innovation could not be applied without access to
financial capital at competitive rates. Conversely, technology
transfers would be more likely to take place if skills, capital and
demand were limited in the domestic environment. Interactions
between a number of these factors must also be recognized, further
complicating the analysis.
THE OVERALL ECONOMIC CLIMATE AND 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.* During
recession, among the first areas to be cut back by firms have
historically been investments in research and development and other
long-term innovative activities. Thus, to increase investor
willingness to undertake high-risk investments with long-term
paybacks, it is important to reduce uncertainty through:
*Additionai discussion of the influence of these factors can be
found .in Appendix D.
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o strong and steady economic growth;
n low and predictable -inflation; and
o cons?stent 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. Strong and steady economic
growth maintained investor confidence in the potential return to
innovative actin .ties inflation averaved 6 ercent
iI e str,.^ent s in ,_a
r
-cyned tL'e
or less an_n _ u!al ly and remained _'~ fai.-1j!^a :ire-, t., ~. the
and _ y stable, .:a.,c ~. . _:. ~
erosion of real-value historic-based depreciation allowances and
...v. _s ..nd
pr o v i -j nA a more s a
tble p in. 1,.c zo ; rdi ~? ... l.fN
.~ ~.-. ._ ... 1 L u.... n 1 .... .. r L. J .y ._ .., 1. J t..1.~
prices.
Government macroeconomic policies indirectly supported private
investments in innovative activities. Government revenues and
expenditures grew more slowly than incomes, leaving increasingly
larger shares of incomes at the disposal of the private sector.
om encn
Only in the United States did + -his nhen~ fall to to cccur, aand ; n
the two decades starting in 1960 expenditures slightly out-oaeed
overall income gains. Budget deficits of the four countries, in
general, did not crowd out private capital expenditures or push
interest -rates upward.
The oil price increase and the world-wide recession unfavorably
altered the economic environment __ll four countries, t ough ass
seriously in Japan. For the last half of the 1970s:
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.
Confidence in the strength of Japan's economy 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 4-6 percent a year during 1976-80 --
restored the confidence of Japanese businessmen in the fundamental
soundness of their economy. Even in 1981, a relatively dismal year
for most industrial economies, Japan had 3.0 percent real growth.
Each of the other countries had greater variations in real GNP
growth in 1976-80, and only the United States and Japan had
substantial real growth in 1981.
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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 were below
those between 1960 and 1973. These 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. Some
governments clearly chose to combat actual and latent inflationary
pressures more strongly than problems arising from slower economic
growth or recession. And the monetary authorities in some instances
held growth of the money supply to rates well below previous levels
combat inflationary' tendencies.
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. The decline in the underlying U.S.
inflation rate combined with dramatic decline in interest rates and
the recovery of the stock market suggest a movement toward a more
favorable economic environment.
FINANCIAL CAPITAL COST/SUPPLY
The Role of Financial Cabitai
High technology firms genera llY r ompete in r~
apidly expand ing ma _rket s
that can change quickly with the introduction of new products or
processes. The ability to quickly respond to new opportunities is
essential. International differences in the availability of
financial capital may be crucial in determining relative
competitiveness in specific areas.
All technology-intensive industries are not necessarily among the
most capital-intensive industries within an economy, particularly in
terms of physical capital per worker. There is, though, a
significant requirement for financial capital -- that is funding for
research, development and operations occurring before sales take
place -- in most of the high technology industries.
The requirement for financial capital is directly tied to the nature
of many high technology concerns. New opportunities in terms of
oroduct or process are often created for the first time by costly
fa1^damental research carried out with no guarantee of return to the
investment. The aopilcarion or new tec nnolog-v in a oroduction
system often requires substantial capital. Finally, the growth in
sales may be initially slow and require financial support because
the product may have been created before the explicit demand for the
item existed ;i,e., we wanted it but didn't know It").
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In this context, the cost of financial capital can have a particular
effect in comparison with other costs of production for
technology-intensive firms. High capital costs can preclude
endeavors which have high risks but potentially great returns for
the entire society. Further, we feel that the policies of our major
competitors can have notable influences on the relative cost and
availability of capital in a number of technologically-intensive
areas. Many of these are reared to industrial policies which are
described in other sections of this report. Principal
characteristics of foreign financial systems in which such policies
operate are outlined below.
r
Financial Systems
.'a-pan -- Japan S success in high technology competition has been
partly loe to the ncenl.-ves and oenefits of its government's
guidance through its Linancial system, including now it has
administered its tax policies. Government control of Japan's
financial system remains tight despite the steps taken in recent
years to liberalize. Even though Japan's direct contribution to the
development of its high technology industries has been more limited
in the last few years, its high technology etforts continue to have
a significant impact on the development of those industries through
financial policy instruments such as interest rates, tax incentives
and loan programs. (For more on the latter, see the sect ion on
industrial policy.)
Af e ~1orld i^lar IT, Japanese __._..t wit sfi _ :.he lac e de d
J
bank _ -urn, banks f"nea
_u ,4 ds tl -roug}bboTro:tin .r.s. In
em= cc.r r`ae
demands through heavy borrowing from the Bank of Japan. This set of
relations gave the monetary authorities tremendous leverage over the
financial system. Reinforcing this leverage, an extensive array of
capital controls insulated the Japanese financial s-
t' :~':. _@;it and
interest rate structure from foreign money market developments, and
the government rationed credit on a preferential basis to promote
development of targeted economic sectors. A corollary of this
pattern of financial development was that Japanese bond and stock
markets were underdeveloped.
The authorities' leverage over the financial system began to erode
after the first oil crisis, due to declining demand for bank credit
in view of slower economic growth and increasing corporate reliance
on overseas fundings and retained earnings. Concurrently, the
authorities recognized the need to move toward a market-oriented
environment to finance current account and budgetary imbalances and
to implement monetary policy via open market operations. Although
the large growth in government bond issues .to finance budgetary
"efi c its i_as resulted in the emergence of a sizeable Japanese bond
market, this market trades mainly government bonds and not private
corporate issues. The Japanese stock market is still characterized
as volatile.
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Thus, in recent years Japan has replaced administered interest rates
for most key money market instruments with market oriented rates and
revoked most prohibitions on external capital flows. However, some
external controls remain; and certain domestic deposit and lending
rates, and as well as primary market issues of government bonds are
still under administrative control . These controls and allocation
of loan funds to corporations through "window guidance" are used by
the government to extend preferential credit to certain sectors and
industries to fulfill social and economic objectives.
Japanese central bank rate supervision has 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
encourages the banks to make loans to targeted borrowers -- those
firms integral to the accomplishment of the Ministry of
International Trade and Industry's vision of industrial development
enabling those firms to sustain unusually high debt levels.
Furthermore, most commercial bank lending is short-term, but
explicit or implicit rollover agreements allow Japanese corporations
to view short-term loans as long-term liabilities.
Japan's tax policies have been particularly helpful to the
development of their high-technology industries in general and for
specifically designated industries such as microelectronics and
computers. Most importantly, their high technology. industries have
been aided by both general tax provisions that _provide exemptions
for capital gains and personal income tax exemptions - 1i^ e
encouraged high levels of savings and ,_.nvest.men They have levels ~- also
been aided by special tax provisions that encourage high technology
development through accelerated depreciation, as well as one-time
write-offs for purchasing designated Japanese produced equipment
such as computers, tax reserve funds that allow tax deferral, and
tax credits on specified types of investments. The combined effects
of these subsidies has been very important. This is demonstrated
for example in the magnitude of the national tax revenues lost just
under the category of promoting technology. In 1981 alone this loss
amounted to over $600 million, or over one-fourth of all Japanese
national tax benefits granted.
France -- The. inefficient and poorly developed 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 selected, favored corporate
investment despite a chronic shortage of long term capital. 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 domestically. The market
for stocks has traditionally been limited, while tiye bond market has
beer'; dominated by the nationalized industries and special credit
n s t_ ..: 1. _ o n s .
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24
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 add l..1"Vnal control will
enable it to ensure that lending criteria are adjusted in favor of
1 ~./l1i^y_ "t,G1 t. ti.G in SC v4.. n.._ _ ._V11 i:1 S , itLGLe"_ y .
41: iiiV v'J iiLam. ~`t.J L.,J, jl l~,.l l.V :v tl-.
West Germany -- The West German financial system is characterized by
a high level of personal savings, and a high degree of industry
financing by retained earnings. The ratio of internal resources to
gross investments has ranged from 70 to 90 percent over the past 20
years. The banking system's crucial role is to attract long-term
deposits and relcan them to industry. In 1970-79, roughly 30
percent of external corporate financing was in the form of
fixed-interest loans for ten years or more.
The interlocking relationship between the financial and industrial
sectors in West Germany is the strongest among the major economies.
In 1980, banks voted an average or 63 percent of the corporate
shares voted of the 74- largest West German corgi?rati ,r:S . The t tee
largest banks alone accounted for 35 percent of the shares voted.
As financial advisers and holders of voting rights of such
significance, German banks can have considerable influence over a
firm's behavior. This influence contributes to decision making
consistent with long-term return to capital and, thus, the ability
to reduce 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.
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 employed the financial system to guide
lending activities. Financial policies are generally macroeconomic,
with specific lending institutions providing sect-oral assistance,
primarily to housing.
Nonetheless, to emphasize investment as a means of stimulating the
economy, _^c 'P?ies t German government has sponsored a number of
programs to compensace for perceived capital market deficiencies.
.or e:cam'`le it has attempted to ccmpensare for he virtual- absence
of venture caoital and the reluctance of commercial banks to finance
small- and medium-sized firms by the use of a government sponsored.
independent organization formed by a consortium of banks with the
goal of providing venture capital for .gh-risk projects.
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Sources of Funds
Internal cash flow has significant advantages as a source of funds
for innovative activity. industry structure, corporate tax
policies, sales volume, profit margins, and investor demand 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 acid 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.
.n important development influencing innovative activity, therefore,
has been that external financing in the United States has increased
significantly compared with internal funding. The relative
importance of these two sources has been reversed. within the past
decade. (See Figure 4.1)
The U.S. household sector is a net provider of funds to the business
and government sectors. In previous years the U.S. saving rate has
been substantially below that of its competitors. A comparison of
average personal saving 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 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. (See Figure 4.2) As a result, they may have
tended to put more emphasis on short-term profitability in assessing
investment programs. l
Assessment of the Relative U.S. Position
Examinations of the practical effect of our major competitors'
economic policies indicate that industry preferences in capital cost
and availability have existed. Tax policy, to special reserve
accounts, has been one mechanism employed in this regard. For
example, in some cases, special reserve accounts have been used
effectively as an interest-free loan from the central government
providing additional maneuverability by lowering corporate demand
for external funds:
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o 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 1973, "reserves and provisions" uniformly
comprised almost two-thirds of French and Japanese and
one-third of West German eauit1' 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 and France are organized to make
low-cost 1financial capital available to favored industrial sectors.
T he ;!Trench and Japanese o=v ern antes especially emphasize t he use: of
their banking Systems to influence the pattern of industrial
growth. While these policies may not necessarily result in the most
profitable or the most productive use of financial resources within
these economies, such actions can significantly affect the cost and
supply of capital for specific foreign firms relative to U.S.
counterparts.
Relative Cost -- We believe that some specific high technology
industries may have faced effectively greater capital costs here
than abroad. This has been due to the combined effects of
preferential treat afforded specific foreign firms in obtaining
capital at favorable rates and foreign government ::olicies which in
effect act to reduce ..he risk of an industry project -- and thereby
the Orel t . .^7hic h mus be paid. =n=. c p,,itaI on tills account 0n the
other hand, non-favored firms abroad may have faced higher costs, or
found capital less available.
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
reveal 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
over most of the 1960s and 1970s with a projected reversal of this
pattern in the future. THe U.S. defense establishment absorbs a
significant proportion of U.S. research and development spending.
Among OECD ccntries, J.S. defense related R&D spending is over three
times _=e'COmD_ ed 'evel of all Other governments. Most of the
,ore] cTi ;overnmer _ sponsc_ =_d R&D focuses on areas of potential
commercial signi=_cance.
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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 precent 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. (See Figure 4.3) 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. Further, these expenditures
are focused on areas where these investments become significant
relative to U.S. efforts.
There have also been significant charges in allocation of R&D
spending among basic research, applied research, and development
across the four countries. Starting from a relatively low base,
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. (See Figure 4.4)
The proportion of U.S. spending, adjusted for inflation, allocated
to basic research, however, remained constant throughout the
period. The U.S. government funds approximately 70 percent of all
basic research performed in the U.S.
Business R&D Fundin
With regard to business funding of R&D, U.S. performance compares
favorably for the 1970s. Between 1964 and 1970, 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, starting from a
lower base R&D spending by Japanese firms grew over 50 percent
faster than that of U.S. firms. (See Figure 4.5)
A look at the share of business gross domestic output apportioned to
R&D for manufacturing activities also shows a comparatively strong
U.S. business performance. (See Figure 4.6)
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 pressures 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
change in favor of shorter-term projects is partly the result of the
volatile U.S. rates of inflation and, some observers believe,
managerial incentives and technicuues. Thus, projects with long-term
economic and social benefits tend to be underfunded. It is widely
recognized that the social returns to research far exceed the
.pr.iv,at.e returns, thus the changing structure of s.p.onsors yip of R&D
in turn influences the composition of the projects..undertaken.
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A recent study by the McGraw-Hill Company shows that, unlike during
previous recessions, R&D expenditures by U.S. Firms are expected to
increase substantially in 1982 over 1981 (up i7 percent). The new
tax v; n
~ pro.., provisions and competition from. Japan are believed to be
particularly responsible for the unusual increase. However, the
survey provides no evidence concerning the time horizon of these
investments.
Government R&D Funding
Governments in all industrial nations fund R&D for at least three
purposes:
o to meet government needs (y `r 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 tvue of
research support have been agriculture and energy).
The four countries show major changes in government 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.
From 1964 through 1978, real government R&D expenditures in the
United States declined by approximately 9 percent. (See Figure 4.7)
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, with
real growth of 66 and 30 percent, respectively. Recently France has
announced a goal of greatly increasing the resources devoted to R&D.
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. (See Figure 4.8) 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 a relative R&D expenditure shift back to
defense. Combined with the private sector increases, this will
signify a relative change away from civilian R&D support.
In contrast, the governments of Japan, West Germany, and France
accelerated their R&D efforts in several areas during the 1970s
seeking to achieve maximum impact on commercial technologies in
order to narrow the U.S. technological leadership in key sectors.
=or example,
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o all three countries increased their R&D outlays for nuclear
energy programs;
o Europeans nations, led by France and West Germany, undertook
a space satellit.r program and development of the Airbus;
o in France and Japan, the governments allocated substantial
funds for electronics R&D.
However, in 1981 the U.S. government sponsored almost half of all
R&D conducted in the United States, about $32.9 billion, and real
growth of approximately 4 percent is estimated for 1982. Of this
amount 52 percent went for national defense, 14 percent for space,
11 percent for health and 10 per cent for _ ener- ,1r. . The scale an
~~ ..;.
relative support for military R&D is unique. Outlays for R&D by our
major trading partners tend to focus on projects with significant
payoffs in the commercial sphere.
In 1980, the last year for which international data are available,
the U.S. government expenditures for R&D, $29.6 billion, were a
third greater than those of Japan, West Germany and France combined
($22.2 billion). The Japanese government sponsored 25 percent of
all R&D conducted in Japan in 1980, about $5.7 billion; the West
German government sponsored 48 percent, about $9.1 billion; and the
French goverment sponsored 62 percent, about $7.4 billion.
SC 1 ENT 1_... is TECH I CAL ?ERS0.}.\ 1\ EL
Although representing only 5 percent of total employment, the high
technology industries accounted for more than 25 percent of total
U.S. scientific and technical manpower in 1980.
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.
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. (See Figure 4.9)
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.
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30
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
a and in ~ --~ >rail ~.. >.ce ou 1 - I11 ' s
Percent; / by ~ roughly J percent. . i?'O t=aJ t
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 obsolescence of knowledge
occurs rapidly, espcially 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
? }yam t r a }.?> per ? in Ve t,
gas c r-raC e i e x shortages of pe Soso,^1?.~l Sc rul hiy1-
technology specialties. Most prominent among the shortages or eight
labor market conditions reported during this period were those for
all types of computer specialists. This reflected the burgeoning
applications of computers and their related servicing industries
throughout the economy. 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 vacancies) and for the U.S. armed forces (where pav scales
did not keep up with the private sector). These increases also
contributed toga sharo drop in the number of engineering Ph.D,
candidates.
Upgrading the Quality of Science and Engineering Education
The quality of secondary and postsecondary education programs will
be important to the competitive positions of the advanced
economies. Not only with respect to enhancing the education of
future engineers but also to upgrade the 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.
Although the United States retained a substantial, if reduced,
overall lead in the employment of scientific and technical
personnel, the relative upgrading of the dality of the overall
labor force was greater in the other countries, particularly in
Japan.
United Stazes--Tihe- lack of universally h_ah standards in mathematics
and the sciences in U.S. secondary schools, along with a _ac_{ o=
emphasis on these disciplines, seriously handicaps a..temuts to
broaden the U.S. base For =raining scientists and engineers. This
has also been cited as a major factor in the relative decline of the
"technological literacy"'of the U.S. labor force in general.
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At the university level, however, the United States remains strong.
Education in science and engineering at 'U.S. universities compares
very favorably with postsecondary education in competing nations.
The relative adaptability of the U. S. engineering 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. Still,
the previously mentioned faculty vacancies do raise questions about
the ability of U.S. universities to provide quality engineering
education in the future.
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
n.roduct ion .
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. sc~lools. .~b"ou ~75 percent of those who graduate
from the upper_ secondary school. go on to universities, and. rounhly
one-third of this group seek degrees in science, engineering, or
mathematics.
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 administrators in the government and industry, while
those with degrees in the sciences or engineering from ordinary
universities do not carry such a guarantee to success.
GOVERNMENT INDUSTRIAL POLICIES IN HIGH TECHNOLOGY SECTORS
In adopting industrial policies for high 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.
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Foreign industrial -policies in the high technology sectors can
weaken the ability of TJ. S , firms to realize adequate returns in
variety of ways, e.q., signaling intentions in the marketplace not
to perm t U.S. f_rms to achieve adequate retur.ns, ignoring or
bypassirg patent or copyright protection, rotection, and some, d comet lime, requiring
-1 3 , ime
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.
Industrial development can be strongly influenced by a governments
tax and expenditure policies. :any have :.n.dustr_al ;DO.LicieS aimed
at specific industries. The choice of policies is dependent on
political, social and economic obje t_"/es.
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.
Industry Tarqetinq
industry targeting -- the selective use of instruments by a
government In order to enhance the competitiveness of a particular
industrial sector -- is a concentrated form of industrial oolicv.
The nstrum.ents can be col bi-ratio-=s of --f-:>>t..1 "-'i protective t=are
measures applied in varying degrees _I.1tensity in a number o=
t format on Ci
instances governsments also create or per _4 11
industry groupings which intensify their industry's concentration in
order to achieve larger scale economies, reduce duplicative
activities, or influence the direction of industry development.
These groupings can simply be research cooperatives made up of major
industry members and permitted by exceptions in antitrust laws, or
they can be nationalization of the entire industry.
Industry targeting by the advanced developed countries has come to
concentrate increasingly on the high technology sectors. A
compilation of public statements about industries targeted by the
governments of Japan, France and West Germany (Table 4.2) is
essentially a list of high technology sectors. It should be noted
that there are indications that other countries are beginning to
adopt similar development strategies. For example, Mexico and
Brazil have targeted the computer sector.
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Table 4.2
`..rGeLed Industries.
We St
Japan France Germany
COMPUTERS X X X
MICROELECTRONICS X X X
ELECTRONIC INSTRUMENTS X
LASERS X
OPTICAL COM1MRMICATION X
ELECTRONIC OFFICE EQUIPMENT
X r
BIOTECHNOLOGY X X
ROBOTS X X
r.i= GY "SET~V1TION EQTTI PMEN
..~...7 `...v_I i~.... 'J::11\:'i'33 :yyl T i9
UNDERWATER E`IPLOR3TION lE~?J x.111?- L ~~ r'
tiLV ~., i:.L_Il
li
1r acw occurs
HIGHEST
TECHNOLOGY
O
13
LOWEST
TECHNOLOGY
14 ~~ 16 1T
72 .1
HIGHER L' WER ~
TECHNOLOGY
W?-TZ; T see :71a^rfarns :nCicate the 400ar1 Cr!fta~'Manf, as r I IM
3W:M3 :el atrve :o seder mw.Vnrt * 0 5 rr.i Lams
CO MTry.The c rcls reoa3.nt3 tfq average warto as COR anaI,
^r tt o :C4.?t:y fi,0. rota; enyOr13 O s oer OY wonC ei0C't31.
ivnouar .no43t(rfs-snCwn as rays frog, !nC tt. f.r-,-Cf
datene beyond the Circle have an extort m.ar}el shard greeter
man average to the Country. Thoea inside the Cirote have ai-
Cort 30ans Itss than the Country average. T h." an 0-to0?.Ofnrive advantage Measures, an the IO69031 my in each
Country irtaCahng tlla icOustn wO;Ch naa Oernonfltat.d the
greatest re!atrn advantage for tsar country. 'nose rani an
PoaihonIO in order at r.0000logy-:nt.ssrty. Mounting
11OCinrla4 t0 the -,revolt ir.lenslty at IOa moans. O. c10Cx yos'.
tip.
Soutcc fTAlVOC !ran U.N. Sena 0 Trade :era
LEGFN0
oa,r.d Lane. . lvas
Saq Linea . ism
11'
HIGHEST
TECHNOLOGY
FRANCE
HIGHEST LOWEST
de
/~ 13
X12
HIGHER LOWER
TECHNOLOGY
V..aa HIGHER LOWER `4
TECHNOLOGY
LOWEST
TECH itOLOCY
- R D P84 B00049 RO01700240013-9
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p 2b
O
N
1112-41-0
wj
a E
o
E
U ?
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760'
I
toot
F
Figure 4.3
SELECTED INDICATORS CF ,R&D FUNDING
FOR This UNITED STATES, JAPAN, WEST GERMANY,
AND FRANCE
Real Growth of R&D Expenditures
(P,reantaa r Change)
Figure 4.4
share of R&D Spending
for Basic Research
(in Percent)
Figure 4.6
Business R&D Funding as
a percentage of Manufacturing
GOP
R&D Expenditures Share of GOP
(in Percent)
Figure 4.5
Real Growth in Business
R&D Funding
IPer antagu.Ch:ange)
Q United States
Gay France
'Oats not avaaaafe for :aoan.
Source: 0EC0. Science and Tecrrnaiogy Indicators unit.
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Figure 4.7
REAL EXPENDITURES BY
GOVERNMENT ON R&D
IX
LEGEND:
United States
~\ \ Japan
West Germany
France
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Figure 4.8
U.B. GOVERNMENT OBLIGATIONS
FOR R&D BY MAJOR BUDGET FUNCTION
(Percent)
1007-
1 1 1 1 1 1 1 1 I 1 1 l
011 1 111 I 11
1960 62 64 66 68 70 72 74 76 .78 80 81
Annrnx/prl Fnr RAIAasP 2007104/04 - CIA-RDP84B00049R001700 4001 -
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Figure 4.9
GROWTH IN SCIENTIFIC AND ENGINEERING
PERSONNEL, 1979-1979
(Percent Change)
(Percent change)
70
United
States
Japan
West France
Germany
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