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The following HTML text is provided to enhance online readability. Many aspects of typography translate only awkwardly to HTML. Please use the page image as the authoritative form to ensure accuracy. particularly hard to find. They lie in the advantages of large-scale production—economies of scale, learning, and scope—which lead to an essentially random division of labor in which first-movers in a particular product gain cost advantages over new entrants. They lie in differences in national patterns of demand and subtle product differentiation to meet the desires of different national markets. And they lie in national differences in technological capabilities. But what determines the kinds of technological capabilities a country fosters, the kinds of demand patterns it develops, or whether its firms are first-movers in scale-intensive industries? Such country-based sources of competitive advantage have something important in common—they are created, not inherited. They can be attributed, at least in part, to salient differences in how national economies are organized and in the economic objectives they pursue.2 As intraindustry trade and competition among the developed countries have intensified, the role of such differences in shaping competitive outcomes has drawn increasing attention. Competition among American, European, and Japanese companies has spilled over into competition among the American, European, and Japanese models of capitalism.3 And trade conflicts, once narrowly focused on allowable national border policies, have spilled over into conflicts about allowable national differences in areas that have traditionally been the domain of domestic policy choice. Nowhere are systemic competition and friction among the developed countries more heated than in high-technology industries.4 Such industries are disproportionately concentrated in the developed countries. In 1987, 82 percent of the world's R&D expenditures and 69 percent of the world's R&D personnel were located in five industrial countries—the United States, Japan, France, the United Kingdom, and West Germany. With the addition of five smaller European countries, the shares rise to 91 percent and 84 percent, respectively (Dunning, 1990). In the 20 years between 1966 and 1986, technology-intensive goods (as measured by the Organization for Economic Cooperation and Development [OECD]) climbed from 14 percent to 22 percent of world manufactured exports (Ostry, 1990a). In 1987, about 42 percent of America's manufactured exports, more than one-third of Japan's manufactured exports, and about one-fifth of Europe's manufactured exports were high-technology products (National Science Board, 1989, Table 7-11, p. 377). As a result of growing trade and investment, the share of domestic suppliers in the home markets for high-technology products has declined in the United States and even more dramatically throughout Europe. In the United States, products from Japan have accounted for the biggest increase in import penetration. Only in Japan has the import penetration share remained unchanged over the past two decades, with domestic suppliers still account-
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