Washington verses Tokyo: the technorivalry. Paul E. Tsongas; Mitchell G. Tyson.
We have entered a new era characterized by rapid technological advances, the evolution of domestic markets into global ones, and sharp international challenges to the U.S. technological and
economic positions. That weare entering
a new high tech era is widely recognized. The implications of this new era, however, are only now beginning to be understood. As a nation we are not yet fully prepared for it. Our success in this new era is not assured.
The pace of technological change is escalating. The synergistic effects of complementary technological advances are beginning to revolutionijze our lives. We are seeing the extraordinary effects of the combination of semiconductor breakthroughs, new computer architectures, and telecommunication networks. We are seeing how robotics is changing manufacturing, fiber optics is changing communications, genetic engineering is changing chemical processes.
Imports and exports are an increasingly important component of the U.S. economy. A rapidly growing number of domestic industries must compete internationally to survive. The impact of international competition has been painful as domestic industries such as ship-building, steel, textiles, consumer electronics, and autos have been won by our competitors. The phenomenon of globalization is even starting to hurt Japan, our most potent challenger. Its steel, textile, and consumer electronics industries are, in turn, being challenged by the so-called mini-Japans: South Korea, Taiwan, Singapore, and Hong Kong.
The reasons for the erosion of the U.S. international competitive position are complex, but largely identifiable. Our economic conditions and business management practices have discouraged high risk, long-term investment in new technology. We have been devoting a declining percentage of our GNP to R&D and have witnessed deterioration in our educational system.
While we have drifted, our competitors hav been exhibiting great determination in building their technology bases and capturing U.S. markets. The Japanese have been particularly successful incombining a supportive government and an aggressive private sector to challenge an area of traditional U.S. leadership--high technology.
The importance of our rapidly growing and advancing high technology industry is clear. Potential markets for high technology products are huge. High technology advances are crucial to revitalizing basic industries and increasing productivity in the service industry. And high technology provides the competitive advantage our weapons have over the Soviets--thus it is critical to national security.
High technology is an area of traditional U.S. leadership. The quality of our scientific establishmnt and the vitality of our small business sector are two of our strengths. But our international competitive challenge has been stiff. Through a combination of taking advantage of our science and our willingness to share it, unfair trade practices and protectionism, careful engineering and hard work, smart long-term investments, and targeted government policies, we have been brought down from a position of dominance. In some market segments we have been beaten. The challenge is broadening into other areas, and if trends continue we coul be in serious trouble.
The litany of Japanese strengths is a familiar one and includes comparisons of R&D spending as a percentage of GNP, educational standards and numbers of engineers, percentage of GNP spent on defense, management practices and labor attitudes.
Perhaps the most interesting comparison, and one that represents a fundamental difference between the U.S. and Japan, is that of the government-industry relationship.
For a long time it was thought that the U.S. was competing against Japan Inc.--a national economy that functioned like a single corporation. This view has been discredited. However, Japan often performs as if it were acting under centralized guidance. The organizational heart of this process seems to be the Ministry of International Trade and Industry (MITI)--the Darth Vader of the Japanese economy. But how MITI operates is still largely a myster to most of us in this country. There is no analog in American experiences.
Does MITI sit down with its 3000 engineers, divine the future, and issue "guidance" to corporations, who for cultural reasons, generally acquiesce? Or does MITI listen to its industries and merely reflect industrial consensus, providing governmental assistance where appropriate? It is hard to tell.
What we do know is tha Japan, in several areas, has demonstrated the ability to anticipate long-term technological and market opportunities and develop a national consensus among institutions to invest accordingly.
Consensus building is an integral part of Japanese culture. Goal setting is approached cooperatively, and implementation is a joint effort. In the U.S., groups vie for influence. Decisions are rarely final and a consensus is not enduring. Individual rights are pursued in the courts and in Congress, like sporting contests to determine winners and lossers, while the national interest hangs in the balance. The only winners are the lawyers and lobbyists.
There is also a sense of strategy in Japan. Protectionist policies were adopted in the 60's and 70's to foster the development of growing high tech industries, which can now compete on thier own. In the U.S., protectionism is bestowed on old industries, which decline further because of reduced competition.
Japanese management worries about being technologically competitive, tempering concern about rates of return with regard for long-term survival. Japanese managers are willing to sacrifice short-term profits for long-term market share. The Japanese also concentrate on quality control to improve reliability, worker participation to keep motivation high product improvements to keep costs down and expand markets.
Japanese firms also benefit from an economy in which savings rates are high, debt represents a larger share of corporate finance, and the yen is undervalued. A recent study entitled "The High Cost of Capital: Handicap of American Industry" by Dr. George Hatsopoulos, sponsored by the American Business Conference, found that the effective cost of capital in the U.S. is twice what it is in Japan! This means that the Japanese can justify investing in more long-term and high risk/high pay-off research and development projects than we can. In the long run, our underinvestment will make us less competitive.
The Japanese efforts have been extra-ordinarily successful in developing steel industries, shipbuilding, consumer electronics, autos, manufacturing technology, and now high tech, as well. The most startling success has been the capture of 70 percent of the market for the most advanced commercial memory chip, the 64K RAM. The Japanese success here was a direct result of the joint government/industry program set up by the Ministry of International Trade and Industry in the mid-1970's.
Admitedly, U.S. industry must compete with Japan not only for markets, but also with the U.S. military for resources. Japan devotes 1 percent of its GNP to defense. We spend 4.7 percent. These large defense expenditures compete with the commercial sector for capital and engineering manpower. High technology weapons procurement typically involves high cost/low volume items designed with special military characteristics in mind. To be competitive, commercial production must stress high volume and low cost. The increasing shift of basic R&D into the Defense Department is likely to further limit scientific communications for reasons of national security.
Ironically, the Japanese owe many of their economic gains to their ingenuity in applying U.S. R&D. Now Japan is embarking on an technologies indigenously. Join government/industry programs in biotechnology and materials science have begun. Twenty years ago, the Japanese computer industry started from scratch, but now it is number two in the world. The Fifth Generation Computer Project, whose goal is to develop and commercialize a seeing/hearing/speaking computer with a powerful problem-solving capability, should be of special concern to us. Even if the project to have significant impact on technological and commercial development.
Japan's formula of looking a decade ahead, developing a consensus with industry and putting a program together to achieve goals is a powerful force in stimulating innovation and keeping Japan in the vanguard of technology.
It is interesting to see how the American view of Japan has evolved since the end of World War II, when Japan was viewed as defeated enemy deserving U.S. help in rebuilding her economy. In the late 70's "Made in Japan" was synonymous with cheap and shoddy goods. In the late 70's unwilling to admit that the Japanese had caught up to us, American blamed our growing trade imbalance on unfair trade practices.
But when we looked beyond some of Japan's non-tariff barriers that clearly inhibited agricultural imports, we found very sophisticatd technology and highly competitive products. Japan was viewed as an invincible technological juggernaut. A Japanese capture of 70 percent of the 64K RAM semiconductor chips was compared to Sputnik. American business and political leaders issued a call to arms.
While characterizations of the Japanese as supermen were overstated, these statements were successful in getting people's attention. The result is that today there is a more balanced view of Japan and an increased awareness of how much our economic growth depends on capital formation, technological innovation, and the competitiveness of American industry in world markets. The most promising outcome is our new appreciation for the strengths and weaknesses of the U.S. economy, government policy, and industrial management.
It is in the vanguard of technology that the economic battle between the U.S. and Japan will be fought. The nation that develops new technologies can build new industries around them and incorporate them into existing industries. The nation that develops and commercializes faster will have the competitive edge. Increases in productivity and improvements in global market positions depend on successful innovation.
It is increasingly evident that we do not translate new inventions into commercial products and processes as fast as our competitors do. The key to U.S. industrial competitiveness is an acceleration of our rate of innovation.
To accomplish this we need to increase the level of R&D expenditures; increase the supply of workers with critical skills; upgrade the technical capabilities of all workers; and, increase the level of investment in new technologies and new ventures.
There are compelling reasons why the private sector underinvests in R&D. Research and development are often espensive, and results are highly uncertain. Given the sophisticated copying of our products by competitors, it is often difficult for an individual firm to realize the benefits of its own R&D. Basic research is unlikely to provide short-term returns on investment, and industry tends to focus on incremental product improvements that can return quick profits.
Basic industries frequently spend little on R&D, and innovations are rare. Improvements in the technology base of a given industry (such as automation, machining, and chemical processing), while important to an industry as a whole are often too costly and risky for a single firm to pursue. The social rate of return on R&D is often twice the private rate of return.
Compounding this situation is the fact that federally supported R&D is out of balance. While military R&D is up dramatically, civilian R&D is stagnant. while basic research is up, applied research is down. Yet applied research is the critical step whereby basic research is developed to the point it can be applied commercially. This is the area of greatest Japanese strength.
Federally supported R&D reports slightly less than half of all R&D in this country. But industrial R&D is concentrated on technological development, which is based on the basic or applied research supported by the government. It is critical that the government maintain steady support of basic research and support applied R&D in areas in which industrial support is lagging or which our competitors have targeted, such as the Fifth Generation Computer. The govenment also should encourage increased levels of industrial R&D through R&D tax credits. The government should take steps to widely or effectively disseminate the results of federal R&D perhaps through technology extension centers. Lastly, the government should provide incentives for industrial development of patents that arise from federal R&D.
Investment in human capital is as important as plants and technology to economic growth. The U.S. work force, if well trained, motivated, and managed, represents a tremendous source of productivity adn innovation. Yet assessment after assessment shows that we are failing to develop the human resources needed to meet the technological challenge.
We are failing to porvide basic math and science shills to our elementary and secondary school students. Public schools have qualified math and science teachers in only half of all classrooms.
We are producing too few engineers in critical fields and too many of our engineering graduates lack first-rate training. Colleges and universities are hobbled by faculty shortages, obsolete equipment and curricula. There is a serious shortage of graduate students, threatening the future supply of PhDs and faculty. Universities have inadequate resources to match growing engineering enrollments.
We are also failing to keep our work force current with technological advances. Firms are finding it easier to dimiss senior personnel with obsolescent skills and hire recent graduates. This wastes the talents of our most esperienced engineers, scientists, and managers.
We must embark on a major program to provide the human resources necessary for us to compete technologically. Modeled after the Morrill Act of 1862, which established the land grant college system that revolutionized U.S. agriculture, a High Technology Morrill Act ought to support partnerships among industry, education, and government to mount a lont-term investment in our capacity to provide math, science, and engineering skills at all levels. This is a critical investment we cannot afford to put off.
While technology itself is rapidly changing, the risks of investment in a high-cost-of-capital environment are high. Traditional sources of capital do not support such activities when safer investments with shorter paybacks are available. Even venture capital, which is one of our country's basic strengths, is increasingly shifting to lower risks investments with medium-sized firms. As a result, small U.S. firms often end up licensing Japanese competitors because no one else is interested.
The key to increasing the level of corporate investment in R&D, human resources, technology development and new ventures is bringing down the cost of capital. There are no simple ways to do this, however. We need to review all the factors that contribute to the cost of capital, including savings rates, monetary policy, government deficits, tax rates, financial markets, banking regulations, barriers to the international flow of funds, and debt/equity ratios before we can design a comprehensive economic program. The first step is to develop a broader understanding of the importance of the cost of capital in our ability to invest in innovation and productivity.
It may surprise many people to learn that therer exists a coherent government policy that is determining United States international competitiveness. The policy covers such matters as technological innovation and capital investment. Unfortunately, the policy originates not in Washington, but in Tokyo; it is the policy of the Japanese government.
Public investments in R&*d and education, and steps to improve our economy and lower the cost of capital, are essential to restoring our competitive position. But to do what is necessary we must come to grips with the fundamental question of what is the power role of government.
We should not, and need not, adopt the Japanese model. The culturally embedded characteristics of Japan cannot be transplanted. There are also tradeoffs in Japan's approach. The Japanese educational system produces a highly competent and productive work force, but relies on an educational system that stresses rote learning, imitation and memorization, and discourages questioning. Copying this here could stifle the creative and innovation spirit which is our strength.
We must build on our strengths and develop an approach in the American context. Our free enterprise system, which relies on individual firms managing investments and competing, is basically sound. we do not require
centralization or new sprawlin g bureaucracies. It should not entail picking winners and losers. It should
spur the private sector to produce more winners, maintain an economic environment in which winners stay winners, and help loser become winners if possible. Private firms can best combine technology, manpower, and capital to create economic goods. But government in which these resources are available and economic incentives exist to encourage the most effective use of these resources.
In this country there is an edndless ideological debate about whether the government has a role to play in strengthening our industrial competitive position. The issue is cast starkly: laissez-faire versus government planning. Such a debate is irrelevant and pointless.
The United States has an industrial policy whether it is acknowledge or not. Such a policy is inherent in numerous specific policies concerning such things as taxes, patent and antitrust laws, export regulations, research and development budgets, and educational priorities. This bundle of policies creates an environment in which American firms must conduct business and compete.
The reasl issue is whether or not the United State ought to develop a coherent policy to enhance its economic competitiveness. The answer is obviously that we must--our economic survival depends on it.
American firms are no longer merely competing among themselves. They must compete in an international marketplace. Many high tech companies must compete against Japanese enterprises that have teh support of the Japanese government, Japanese banks, and Japanese labor all acting in concert. The odds are thus stacked against American business. This changing reality ought to prompt a revision of American industrial policy.
Devising a coherent industrial policy will inevitably lead to a balancing of competing interests. There ae few easy choices. But the imperative of strengthening our country's competitiveness has a Darwinian logic of its own that will force us to face the issues one way or another. The sooner we face them, the better. The issues arise in several areas:
Military security versus economic growth. Concern over Soviet advances has caused the Administration to seek broadened authority to control the export of goods, technology, and even academic exchanges. Extending export controls to new commercial technologies can slow technological development and weaken the competitiveness of firms in the United States. While there is a need for restrictions on transfer of sensitive technologies that have military applications, the Administration's tilt toward broader controls threatens to damage our economic security without stopping the hemorrhage of technology.
The focus instead should be on narrowing and improving our export licensing procedures. For example, high-power laser technologies have significant commercial and military applications. Restricting shipments of commercial products that are being actively marketed by competitive firms in other countries will not improve our military security. The result will be lost sales that can only damage our continued strength and the development of this important technology.
Antitrust enforcement versus economic cooperation. In another epoch when the United States economy was relatively insulated from outside competition, our antitrust policies made some sense. But changing circumstances of international competition have out-paced the law. In some cases, antitrust laws are now an unacceptable burden on firms that must cooperate in important, albeit limited, ways to meet the international competition.
Research and development projects may be beyond the financial of technological capacity of any single firm acting alone. This is the case with some advanced computer and semiconductor technologies, as well as in steel and textiles. The Microelectronics and Coputer Technology Corporation, a research consortium of 12 United States firms, is just now beginning its high risk initiative in advanced computer design to match the Japanese. But MCC faces uncertain status under current antitrust laws. This country must relax its antitrust laws to encourage such joint research ventures.
Fair trade versus free trade. when Japan targets the Fifth Generation Computer and begins to allocate resources towards its development, that is not unfair. It is smart. We are wasting our time in asking Japan to refrain from such initiatives.
But when the Japanese restrict their markets to United States exports or zero in on our markets with predatroy pricing, that is unfair. We must not tolerate these practices. Negotiation is the best means of settling disputes of this kind. Protectionist tit-fot-tat tends to escalate to everyone's disadvantage. But if threatening the Japanese with protectionist reprisals is the only way to get them to the negotiating table, them theaten we must.
Sunrise industries versus sunset industries. Industrial policy has been criticezed as an ill-fated to pick winners and losers. This casts the issue incorrectly. The government has no business favoring petrochemicals over lasers or bioengineering over turbines. The market is the best arbiter of these choices. The government ought to fashion policies that will recognize the needs of different industries.
For example, semiconductor manufacturers face competitive pressures that are different from those in the textile industry. Antitrust reform might help the former but not the latter, while government-sponsored research on synthetic materials might help the latter but not the former. There is no reason we cannot do both. Tailoring government policy to the differences can create more winners and offer losers the best opportunity to turn themselves around.
Though none of these issues is novel, their importance for American economic well-being is the new, overriding reality. It is high time for a United States strategy attuned to this reality.
While partisan political battles rage over whether we need a national development bank or whether we should let the market respond without government help, progress is being made on a range of fronts.
Congress is taking steps to extend the R&D tax credit that is so important in correcting market imperfections that inhibit corporate R&D.
There is growing Congressional support and legislative progress to enact the High Technology Morrill Act to provide matching federal funds to joint industry/ university projects to improve technology education.
Congress is taking actions to modify government export policy to strike a more reasonable balance between export promoting and national security.
Legislation to change our antitrust laws to encourage cooperative R&D ventures is also progressing, as is a bill to extend copyright protection to semiconductor designs.
These are welcome changes in policy that are more than matched by changes in the private sector, such as the incrasing attention being paid to U.S. management techiniques and companies that exhibit the American brand of excellence. There is increasing support for worker participation, export marketing, and increased R&D. Nowhere are these signs stronger than in our high tech industries.
But the response of the U.S. government falls significantly short of the national strategy, and mobilization of scientific, human, and capital resources necessary to create a climate that encourages strengthened U.S. industrial competitiveness. While there is a growing consensus among business leaders and Congressional leaders, there still is no Presidential leadership.
In our political system there is no substitute for Presidential leadership. While the Congressional legislative agenda developed cooperatively with industry is a good one, Administration support is unevevn. Competing priorities in the areas of national security and the budget deficit, as well as an ideological bent for leaving education to the states and applied R&D to industry, have prevented the Administration from developing a coherent program or even leading consistent support for Congressional initiatives. The most encouraging sign has been the establishment of a National Commission on Industril Competitiveness, which is expected to make its report this fall. Hopefully, this will be the catalyst for Presdential leadership.
In conclusion, while we are making some significant progress in improving our competitive position, we do not have the national strategy and consensus necessary to accelerate that progress. The challenge is to meld the entrepreneurial strength of the private sector and the broader perpective of the public sector into a system that assures action and efficiency. The federal government must place high on the national agenda the need to strengthen our international competitive position.
Our nation' greatest achievements have always been the product of leadership. In building a transcontinental rail-road to the Pacifi, in constructing the Interstate Highway System, and in putting a man on the moon, the federal government looked to the future. Today it can set national goals to focus both public and private resources on assuring the success of American competition in a new era of technological challenge.