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Executive Summary In May 1989, top executives from the U.S. computer sector, joined by uni- versity and industry researchers, met with governmental policymakers for a one-day colloquium in Washington, D.C., to define an agenda for keeping the U.S. computer industry competitive. Conducted under the auspices of the Computer Science and Technology Board of the National Research Council, the colloquium encompassed the full range of computer industries-hardware, soft- ware, and services and systems integration that collectively constitute the computer sector. From this broad representation emerged a strong consensus on one central theme: Ensuring that the United States remains preeminent in computing at the beginning of the next century requires strategic comrrutment, leadership, and collective will that cannot be attained with a "business as usual" approach by industry or government. This conclusion was based on discussion in five major areas. MAINTAINING U.S. COMPETITIVENESS Strategic Intent What is good for one firm even the leaders computer-related industries may not be good for the industry in question or for the computer sector as a whole. The exodus of U.S. merchant semiconductor manufacturers from dynamic random access memory (DRAM) markets is a prime example of this problem, but others exist. Advances by foreign firms that have licensed new

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2 KEEPING THE U.S. COMPUTER INDUSTRY COMPETITIVE microprocessor technology developed by innovative, cash-strapped U.S. com- panies raise the question, How can the nation secure a greater share of the returns from technologies that originate within its borders? Colloquium pariici- pants frequently made appeals for strategic commitment on the part of individu- al firms. Some suggested, however, that lower costs for borrowing capital and other incentives will be needed to counter the financial resources of foreign investors shopping for U.S. technology and to encourage firms to evaluate the long-term impacts of short-term business decisions. Indecision can be costly; cooperative projects under way in other nations and the successes of foreign firms that have not been deterred by occasional setbacks clearly illustrate the value of strategic commitment. Cooperation Competing in global technology markets requires cooperation within and among f rms and between industry, universities, and government. Joint research efforts (such as SEMATECH and the Microelectronics and Computer Technology Corporation) are only a part of what is needed, although they repre- sent a good start. The magnitude of the investment and risk associated with emerging technologies, the need for worldwide technology and business devel- opment, and the importance of timely actions are among the factors behind the growing push for cooperation. Cooperation has already contributed to U.S. successes in the computerfield, and the nation should build on those successes. Government-university-industry collaboration underlies U.S. leadership in technologies ranging from networked computing to artificial intelligence and parallel computing, and its potential underscores the value of a continuing dialogue. Within the computer sector, the success of the systems integration industry with interfirm alliances may be a harbinger of the future for other computer-related industries. Manufacturing More and more computers and components will resemble consumer electron- ics goods, taking on a commodity-like character with both quality and price determining market success; firms that are successful in these large-volume markets will be those with superior product design, manufacturing efficiency, and product quality. If weaknesses in manufacturing and in the integration of research, development, and manufacturing are not corrected, computer hard- ware manufacturers could find themselves serving only specialty markets. Manufacturing strengths are essential for competing in the high-volume markets that fuel revenue and technology growth. Moreover, product quality is increas- ingly key to customer differentiation among Apes and varieties of hardware and software.

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EXECUTIVE SUMMARY 3 Erosion of the semiconductor-manufacturing segment of the computer hard- ware industry jeopardizes the health of the entire sector. The flagging fortunes of U.S. semiconductor producers will not be confined to the electronic compo- nents segment of the hardware industry, if present trends persist. Manufacturing capabilities and capacity must be developed to assure a major domestic supply of DRAM chips and to preserve adequate supplies of other key components. U.S. leadership in computers, software, and related services depends on timely and economical access to such key components. However, the dominance of a few integrated Asian firms in important semiconductor technologies vests these companies with the potential for cartel-like control over inputs essential to U.S. computer manufacturing. To maintain adequate access over the long term, even extreme measures, such as government subsidies, may have to be considered. Technology Development and Transfer Some standardization is essential, but the optimal level is not clear-cut the issue is one of balance. Most colloquium participants called for standards to facilitate computer-to-computer communication and exchange of data. But standardizing operating systems and other elements was more controversial. According to several participants, standardizing operating systems could stifle creativity, lock technology at a primitive stage, and open the industry to imitator firms that compete on the basis of low manufacturing costs rather than innova- tion. According to the opposing view, it could instead ensure a base level of conformance onto which innovative firms could add their own specialized hard- ware and applications, and it could make sophisticated systems cheaper and eas- ier to use and thereby increase the productivity of the nation as a whole. Computer and other technologies are converging. Consumer electronics, business computer systems, communications systems, and other business equip- ment (e.g., copiers) increasingly rely on a common set of technologies and com- ponents. This convergence can convey advantages to manufacturers with rela- tively broad product lines or correspondingly broad partnerships. Systems technology is a domestic strength. Software and systems integration businesses are strong, thanks to U.S. strengths in designing and implementing complex systems. Concentrating further effort in these areas would build on existing strengths. Technology transfer was the key to many of today's commercial successes, but U.S. computer firms have frequently failed to realize the corrunercial bene- fits of research conducted in the United States. Successful technology transfer is difficult even chaotic. Organizational impediments within firms often result in the most fruitful transfers occurring to and from the outside. Further opportu- nities for transfers from universities and federal laboratories are too often missed. In an environment characterized by rapid change, delay and missed opportunity can be crippling, if not fatal.

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4 KEEPING THE U.S. COMPUTER INDUSTRY COMPETITIVE Small entrepreneurial f rms may dominate the popular view of innovation in the computer sector, but many important innovations originally emerged from research at large firms. While large firms may not always run with their inven- tions, small firms too often fail to acquire the manufacturing, marketing, and other business capabilities necessary to sustain market leadership. The cult of the entrepreneur seems to be an American phenomenon, and its appropriateness for the future was called into question by colloquium participants. Japan's large integrated firms are establishing an increasingly impressive record of innovation to go along with their manufacturing prowess, and large firms dominate tech- nology and market advances in Europe. How to maximize the strengths of large and small Arms and harness those strengths together will be key to achieving a more cooperative, strategic posture in the computer sector. Infrastructure and Education Enhancing information infrastructure will benefit producers and users of computer technology. Computer networks with limited interconnection and cumbersome or costly access contribute to what many colloquium participants saw as a failure of the country to achieve much of the promise of computers. Several participants proposed building a national advanced-technology comput- ing and communications network that would enable a variety of computer-based activities and resources, while fostering advances in hardware and software technologies that would benefit the computer sector. Acknowledging that this concept raises a number of implementation and policy questions, participants suggested that federal proposals for a national research and education network were a good place to start. Ultimately, the growth of the U.S. computer sector depends on high-quality education and training programs. Colloquium participants returned frequently to the need for education to make computing a more integral part of many activ- ities, to make the U.S. population more comfortable with and interested in com- puting, and to ensure that we in the United States have the talent to advance computer-related technology and its commercialization. SETTING THE AGENDA Each issue highlighted by this colloquium is complex, and each poses a host of implementation questions. The task of communicating what the problems are and why they are problems is itself difficult, as illustrated by the discussions that took place at the colloquium. The Computer Science and Technology Board intends to examine several of these issues in more detail, and it urges decisionmakers in the computer industry and in government and academia to continue the dialogue needed to resolve key problems of mutual concern.