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OCR for page 96
96
CONFLICT AND COOPERATION
Different National Ir~vesiment Regimes
and Their Consequences
NATIONAL INVESTMENT REGIMES DIFFER
Inward foreign direct investment, especially in high-technolo=,y indus-
tries, can bring substantial benefits to the host country. For example, in the
United States the rapid expansion of foreign direct investment has helped
compensate for the low rate of domestic U.S. savings through both large
numbers of acquisitions and the construction of Oreenfield distribution and
manufacturing facilities. Investment by technologically advanced compa-
n~es can also bring new technologies, processes, products, managerial skills,
and organizational techniques to joint venture partners, suppliers, and ulti-
mately competitors. New companies also create substantial employment,
often in sectors with higher-than-average wages and value added. The
skills and training imparted by such employment have further positive spin-
off effects throughout the national economy. In addition, improved prod-
ucts and services can mean greater benefits for host-country consumers.
Reflecting these views, countries such as the United States and the United
Kingdom have maintained open investment regimes. With some excep-
tions, albeit in major areas such as telecommunications, civil aviation, and
broadcasting, the U.S. investment regime is among the most open on the
planet, with the principle of national treatment generally applied.26i For
many policymakers in the United States, the benefits of foreign direct in-
vestment are an article of faith and, as noted above, there is considerable
justification for this view.262 It is significant, especially with respect to
high-technoloOy competition, that so few of the advanced industrial coun-
tn~.c Inch the r~nirilv industrializing countries seem to have the same confi
-^,~ r~~~'
dence in this policy approach.
In fact, many influential participants in the world trading system have
quite different investment regimes, particularly with respect to the most
26i Multinationals and the National Interest, p. 48. In 1991, the Bush administration af-
firmed that "the United States has lone, recognized that unhindered international investment is
beneficial to all nations, that it is a positive-sum game." Economic Report of the President,
U.S. Government Printing Office, Washington, D.C., February 1991, p. 262.
262 Ibid. For a comprehensive review of the issues associated with foreign direct invest
ment, see Edward Graham and Paul Krugman, Foreign Direct Investmerrt in the United States,
Institute for International Economics, Washington, D.C., 1996. See also David Bailey, George
Harte, and Roger Sudden, "U.S. Policy Debate Towards Inward Investment," Journal of World
Trade, vol. 26; Allgust 1992, pp. 65-93.
OCR for page 97
DIFFERENT NA TIONA ~ INVESTMENT REGIMES AND THEIR CONSEQ UENCE:S 9 7
technologically advanced industries.263 While national investment regimes
vary considerably by country and sector, none is as receptive to foreign
direct investment in high-technology sectors as the United Kingdom and the
fruited States. Despite attempts by the OECD to win acceptance for the
principle of national treatment, countries as diverse as France, Italy, and
Germany, and to a greater extent Japan, either formally regulate foreign
direct investment or permit informal barriers which impede it.264
Among the advanced industrialized countries, Japan is by far the most
restrictive. For many years, structural and cultural obstacles joined Japa-
nese government policy in making foreign investment, especially acquisi-
tions, exceedingly difficult.265 Unfortunately, the situation remains largely
263 Many countries, such as Japan, France, Taiwan, Canada, Korea, and Australia, require
government notification and/or the screening of high-value investments. While formal prohi-
bitions on the acquisition of domestic firms by foreigners have declined, many governments
retain the power to review-and effectively block foreign acquisitions, a capability but-
tressed by exclusionary private business practices. See Defense Science Board, Industrial
Base Committee, Report of the Defense Science Board Task Force: Foreign Ownership and
Control of U.S. Industry, Washington, D.C., June 1990, pp. 29-30. The United States also
limits foreign investment in sectors such as telecommunications and nuclear energy. See
James K. Jackson, Foreign Direct Investment in the United States, U.S. Library of Congress,
Congressional Research Service, CRS Report IB9301 1, Washington, D.C., 1993.
264The European countries are more open to greenfield investments; acquisitions are more
difficult. Reich emphasizes the competitive consequences of these differences in investment
opportunities, noting that "Anglo-American firms have often encountered a different pattern of
regulation when investing abroad. They have often been forced by host governments to invest
in fully-integrated production facilities, exchange market access for patents, or have often been
denied any investment access at all. Recent evidence suggests, for example, that a series of
'structural barners' continue to deny U.S. firms the kind of reciprocal access to some foreign
markets that their rivals enjoy in the United States." See Simon Reich, "Asymmetries in
National Patterns of Forei;,n Direct Investment: Consequences for Trade and Technology Oe-
velopment," p. 31, in C. Wessner (ed.), Sources of International Friction and Cooperation in
High-Technology Development, Competition, and Trade.
265 This is not to say that foreign investment in Japan is impossible. However, successful
foreign investments remain the exception. These constraints are outlined in detail in the
second annual working report of the U.S.-Japan Working Group on the Structural Impediments
Initiative. Companies such as IBM, Texas Instruments, and Motorola have penetrated the
Japanese market often only after exhaustive efforts, and sometimes in exchange for proprietary
technology. Multinationals and the National Interest, p. 71. See also Robert Z. Lawrence,
``Japan's Low Levels of Inward Investment: The Role of Inhibitions on Acquisitions," Transnational
Corporations, vol. l, no. 3, December 1992, p. 47, who notes that, in contrast to most coun-
tries, new foreign investment in Japan occurs primarily through greenfield establishments and/
or joint ventures. For an elaboration of this point, see Simon Reich, "Asymmetries in National
Patterns of Foreign Direct Investment," p. 12. Citing an internal U.S. Treasury assessment,
Reich concludes that '`hostile takeovers are rare, and foreign takeovers usually occur only after
all domestic possibilities have been exhausted," p. 13. See also Dennis Encarnation, Rivals
Beyond Trade: America versus Japan in Global Trade, Cornell University Press, Ithaca, N.Y.,
1992, and Mark Mason, American Multinationals and Japan: The Political Economy of Japa-
nese Capital Controls, Harvard University Press, Cambridge, Mass., 1992.
OCR for page 98
98
CONFLICT AND COOPERATION
unchanged, notwithstanding efforts by the Japanese government to address
the problem.266 In a 1995 White Paper, the Japan External Trade Organiza-
tion (JETRO) noted that "whereas Japan has 15.4 times as much cumulative
direct investment abroad as foreign investment at home, U.S. external in-
vestment is just 1.2 times the foreign investment within the (U.S.~...and the
"comparable] figure for Britain is 1.3.-267 A recent U.S. government report
supports this assessment, noting that "Japan's stock of inward foreign direct
investment (FDI), relative to the overall Japanese economy, remains minus-
cule compared with that of other industrialized countries."268
The report also notes that Japan's outward investment flows dwarf in-
vestment into Japan, with a ratio of around ten to one throughout the 1990s.
This contrasts with the investment flows of other OECD countries, which
are much more balanced, with the ratio of outward to inward investment
below two in every case substantially below in most cases. These asym-
metries continue. `'In 1994, Japanese overseas FDI was $41 billion," while
Japan's inward FDI was $4.2 billion.269 This lack of receptivity to foreign
investment on the part of Japan is considered a major trade barrier.270
If Japan stands out among the industrialized countries for its barriers to
foreign direct investment, it is by no means alone in having barriers. As
266 USTR, 1996 U.S. National Trade Estimate Report on Foreign Trade Barriers, pp. 195-
196. The report states that Japan has acknowledged that its inward investment lags far behind
that of other industrialized economies and notes that the government of Japan has established a
high level council charged with promoting measures to improve the investment climate. In
1995, the United States and Japan signed an agreement which commits Japan to take additional
actions to promote foreign direct investment.
267 Ibid.
268 Ibid. In 1991 the OECD estimated Japan's share in global inward foreign direct
investment to be under 1.5 percent, as compared with the 36 percent of FDI hosted by the
United States. The Office of Technology Assessment also found that foreign investment in
Japan is by far the most restricted, with foreign affiliates controlling 0.9 percent of total assets
in Japan compared with 20.4 percent in the United States. See Multinationals and the National
Interest, Office of Technology Assessment, p. 79. See also Robert Z. Lawrence, "Japan's Low
Levels of Inward Investment."
269 In part, this imbalance in flows reflects Japan's large trade surpluses, although others
would argue, also in part, that the trade surpluses are to some extent the result of investment
barriers. See the presentation of L. Chimerine to the conference Sources of International
Friction and Cooperation in High-Technology Development and Trade. Chimerine suggests
that while macroeconomic factors, such as the low U.S. savings rate, unquestionably play a role
in the U.S. trade deficit, the causality can run both ways. He notes, for example, that Japan has
trade imbalances with countries with both high and low savings rates as well as high and low
budget deficits. See also Robert A. Blecker, Beyond Twin Deficits, p. 1. This view contrasts
with that of many economists who maintain that the excess of domestic investment over domestic
savings, plus some accounting identities, fully explains the trade deficit. Blecker argues that
"poor trade performance or low foreign demand can cause both a widening trade deficit and a
low national savings rate (including a high fiscal deficit), as well as the reverse." Ibid.
270 USTR, 1996 U.S. National Trade Estimate Report on Foreign Trade Barriers, p. 195.
OCR for page 99
DIFFERENT NATIONAL INVESTMENT REGIMES AND THEIR CONSEQUENCES 99
noted, in a limited number of sectors, the United States restricts investment
to some degree. In France, heavy state participation in the economy, in-
cludin=, direct equity investments by the central government in leading com-
panies as well as indirect investment through state controlled banks, coupled
with formal and informal investment screening ire strategic sectors, com-
bines to create substantial barriers to freedom of entry in high-technology
sectors. In Germany, extensive cross-holdings among banks and major
corporate groups, with representatives of national banks serving on the boards
of companies to which they provide loans, make acquisition of existing
companies problematic.27~ China welcomes foreign investment critical to
China's economic development plans, though often with strict conditions
concerning technology transfer (see below), and prohibits a wide range of
other foreign investment, especially in the service sector. And In newly
industrializing Korea, there are fewer foreign multinational investments than
in almost any other late-industrializing country.272
The explanations for this policy divergence among We industrialized countries,
as well as those rapidly industrializing, are many and varied. In some cases
the divergence reflects different traditions of corporate governance, espe-
cially in Japan and, to a lesser extent, Germany.273 In the case of Japan,
there are "considerably more regulations on business than tin] most other
countries, and this undoubtedly obstructs the entry of new firms, both do-
mestic and foreign, into the market. Many foreign firms, which are able to
enter other markets, face greater difficulties in entering the Japanese market
due to "government] regulations and administrative guidance."274 In other
271 Multinationals arid the National Interest, p. 59.
272 For a discussion of current Chinese policy, see 1996 Foreign Trade Barriers, USTR,
p. 56. For Korea, see Alice Amsden, Asians Next Giant, p. 147. See also Robert Lawrence,
"Japan's Low Levels of Inward Investment," p. 53. With only 18 percent of its FDI invest-
ment foreign majority-owned, Korea joins India (14 percent) and Japan (34 percent), "as
conspicuous outliers," cited in Simon Reich, "Asymmetries in National Patterns of Foreign
Direct Investment."
273 Sylvia Ostry, "Technology Issues in the International Trading System." p. 15. The
author observes that bank-centered governance arrangements are more resistant to mergers and
acquisitions than are equity-oriented arrangements. Since equity markets are much more
accessible through mergers or acquisitions, the result is significant asymmetry in the ability of
companies to acquire new technologies and obtain market access.
274 The Report of the Ad-Hoc Committee on Foreign Direct Investment in Japan, Keidanren
Committee on International Industrial Cooperation, Committee on Foreign Affiliated Corpora-
tions, entitled Improvement of the Investment Climate and Promotion of Foreign Direct Invest-
ment into Japan, p. 5, cited in Multinationals and the U.S. National Interest, p. 76. See also
Simon Reich, `'Asymmetries in National Patterns of Foreign Direct Investment," p. 11 and
passim. In recent years, analysts and managers of U.S.-based multinationals have argued that
official government restrictions have been supplanted by private sector impediments. The
USTR's 1996 Foreign Trade Barriers report notes that the current low level of FDI in Japan
OCR for page 100
00
CONFLICT AND COOPERATION
cases, it reflects a tradition of a broader, more direct role for the state,
particularly with respect to multinational companies.275
The effect of these "structural impediments" is to make foreign direct
investment difficult, even exceptional, especially for the acquisition of ex-
isting firms in leading, high-technology sectors. The administrative diffi-
culty can provide, at a minimum, the opportunity to oppose unofficial per-
formance requirements of the type pursued by European governments.276
These obstacles also permit the exclusion of direct foreign investment in
strategic sectors.277 Indeed, in the case of Japan, the time and cost associ-
ated with overcoming the reluctance of the national administration and the
constraints on mergers and acquisitions mean that many high-technology
companies are either excluded or obliged to settle for licensing agreements.278 979
INVESTMENT BARRIERS, LICENSING AGREEMENTS,
AND TECHNOLOGY TRANSFER
Licensing agreements, however, limit market access for firms with com-
petitive products, particularly in Japan. Licensing is designed to ensure that
the host-country firms gain access to the advanced technology of their for-
eign competitors. This is one explanation for the large, nonreciprocal flows
reflects years of exclusionary business practices, high market-entry costs, discriminatory bu-
reaucratic practices, and the cumulative effect of years of formal restrictions on inward invest-
ment. P. 195.
275 Carnoy et al., The New Global Economy, p. 91. For example, in 1985, forty-one of the
world's largest 200 industrial enterprises were state owned (of these, eighteen were multina-
tionals, of which seven were French). These included French flagship companies such as Elf-
Aquitaine, Renault, CGE, St. Gobain, and Thompson.
O7A ~
_,- bee uslry, -~lecnnology Issues In the 1nlernarlonal 1raalng System,- p. in, Laura
Tyson, Who's Bashing Whom? and Multinationals and the U.S. Technology Base.
277 Martin Carnoy notes that "government policies are crucial in determining how locally
based MNEs are protected from foreign competition," with policies ranging from direct protec-
tion (i.e., reserving telecommunications or energy markets for domestic companies) to oovern-
ment procurement and ideological protection through antiforeign competition propaganda. Carnoy
et al., The New Global Economy.
278 Some acquisitions do take place in Japan, but they have been generally confined to
domestic firms. See Multinationals and the National Interest, pp. 7075. Citing Japanese Fair
Trade Commission sources, the report notes that "in contrast to the limited number of merger
and acquisition activity by foreign investors in Japan, such activity among domestic Japanese
Finns is vibrant and unhindered." Ibid., p. 74.
279 Reich points out that determined foreign investors essentially have two options: greenheld
site construction or licensing. Simon Reich, "Asymmetries in National Patterns of Foreign
Direct Investment," p. 14. However, the high cost of land, unfavorable exchange rates, and
regulatory roadblocks make the greenf~eld option available to only a few companies. The
result is licensing and/or joint ventures which frequently involve the transfer of technology,
leading to what Reich describes as "widescale, non-reciprocated technology transfers from the
United States to Japan." Ibid., p. 15.
OCR for page 101
DIFFERENT NA TIONAL INVESTMENT REGIMES AND THEIR CONSEQ UENCES 101
of technology from American to Japanese firms.280 This outflow of tech-
nology from U.S. and European firms to Japan is compounded by the tech-
nology transfer requirements of many rapidly industrializer, countries.28i
Meeting these performance requirements can be a sine qua non for invest-
ment and even sales of advanced products. As noted above, in strategic
sectors such as aerospace, telecommunications, and automobiles, the impo-
sition of compulsory technology transfer continues to grow.
In the United States, the relative openness of the investment environment
became a source of growing, concern in the latter half of the 1980s, a period
of very rapid growth in direct foreign investment.282 For example, the rapid
acquisition of U.S.-based suppliers of semiconductor equipment and materi-
als led the U.S. semiconductor consortium SEMATECH to oppose unsuc-
cessfully the transfer of these suppliers of strategic inputs to foreign own-
ership.283 The acquisition of companies and technologies of direct relevance
to U.S. national security led to the Exon-Florio provision in the Omnibus
Trade and Competitiveness Act of 1988. This provision empowers an inter-
a:,ency group, the Committee on Foreign Investment in the United States
(the CFIUS) to veto the takeover of U.S. companies on national security
grounds.284 However, this authority has been narrowly interpreted by the
Treasury, and the CFIUS process has been criticized for its reactive, case
280 Ibid.
281 See the section Compulsory Technology Transfers above. While many countries seek
to upgrade their technological capability, some analysts argue that China, "because it enjoys
tight governmental control of a huge potential market, has taken the practice to a new level."
See the article by Blustein and Mufson, The Washington Post, 19 May 1996, citing Greg
Mastel.
282 In 1989, for the first time, foreign multinationals invested more in the United States
than U.S. corporations invested abroad. Much of this inward investment flow was concen-
trated on the acquisition of U.S. high-technology companies. For example, from October 1988
to March 1993, 722 such companies were acquired, with Japanese investors accounting for
437, the United Kingdom 82, France 49, and Germany 29. The acquisitions of Japanese
investors included 108 computer firms, 52 in semiconductors, 42 in materials, 36 in electron-
ics, and 34 in semiconductor equipment. See Proctor P. Reid and Alan Schriesheim (eds.),
Foreign Participation in U.S. Research and Development: Asset or Liability? National Acad-
emy Press, Washington, D.C., 1996, p. 80. See also Robin Caster and Clyde V. Prestowitz, Jr.,
Shrinking the Atlantic: Europe and the American E;cor~omy. North Atlantic Research, Inc. and
Economic Strategy Institute, Washington, D.C., June 1994.
283 Howell et al., Creating Advantage, p. xiii. See also Andrew A. Procassini, Competitors
rn Alliance: Industry Associations, Global Rivalries and Business-Government Relations, Quo-
rum Books, Westport, Conn.' 1995.
284 First created in 1975 by President Ford and formalized in the 1988 Omnibus Trade and
Competitiveness Act, the CFIUS is composed of officials from the Departments of State,
Commerce, Defense, Justice. and Treasury; the Office of the United States Trade Representa-
tive; the Office of Management and Budget; and the Council of Economic Advisers. In the
1988 Act, the president was granted the authority to investigate and block foreign investments
that threaten national security.
OCR for page 102
02
CONFLICT AND COOPERATION
specific approach.285 Moreover, the CFIUS currently lacks the authority or
resources to assess broad concerns about foreign investment in technologi-
cally strategic industries of great relevance to the defense base.286
FOREIGN DIRECT INVESTMENT IN
HIGH-TECHNOLOGY INDUSTRY
U.S. policy has long held that foreign direct investment brines benefits
in the form of jobs, capital, technology, tacit knowledge, and choice and
price advantages for consumers. This view reflects the technological and
commercial preeminence of the U.S. economy in the postwar world which
sought to insure overseas investment opportunities for U.S. companies as
well as the traditional American policy goal of maximizing consumer wel-
fare. In the case of high-technology industry, there may be occasions when
more nuanced views are required.
Given the dynamic, learning-by-doing characteristics of leading high-
technology industries, some informed critics argue that broad generaliza-
tions are inadequate, especially as a guide for national policy. They point
out that in certain specific circumstances, foreign investment can also have
significant disadvantages for the host country.287 For example, existing
companies, and the benefits they furnish to the local economy, can be dis-
placed by the arrival of foreign companies with significant competitive
28s In 1990, the report by the Defense Science Board, Foreign Ownership and Control of
U.S. Industry, recommended improvement of the CFIUS review process. In her 1992 analysis
of high-technology trade, Laura Tyson raised the same concern, describing the CFlUS as
"remarkably passive" in the exercise of its responsibilities. Laura Tyson, Who's Bashing
Whom? p. 147. She notes that in some 700 notifications of investment, 600 involved acquisi-
tions of foreign high-technology fields. Fourteen of these were investigated and one, the
Chinese acquisition of an aerospace components manufacturer, was blocked. Ibid. The CFIUS
does not have the authority to require foreign investors to notify the Committee of proposed
investments, nor does the law require review of foreign investments in nonpublicly traded
companies. U.S. General Accounting Office, Foreign Investment: Analyzing National Security
Concerns, GAO/NSIAD-90-94, Washington' D.C., 1990.
286 For a useful discussion of the CFIUS, see Reid and Schriesheim (eds.), Foreign Partici-
pation in U.S. Research and Development. This recent study also notes the limitations of U.S.
government data concerning foreign acquisition of U.S. high-technology firms, and calls for
the development of "more sophisticated capabilities for assessing and addressing the risks and
capitalizing on the opportunities presented by the growth of foreign involvement in the nation's
dual-use technology base." Ibid., pp. 78-79.
287 Laura Tyson, Who's Bashing Whom? pp. 42~5. See also Alan Tonelson, who attacks
what he calls "a techno-globalist assumption," i.e., that inward foreign direct investment is
always good for the recipient; therefore any attempts to restrict or channel it are necessarily
foolish. Tonelson points out that while foreign investment can add to the recipient country's
wealth and to its wealth-creating capabilities, for a phenomenon as large and complex as
foreign direct investment, broad generalizations about its effects offer little policy-relevant
OCR for page 103
DIFFERENT NATIONALINVESTMENT REGIMES AND THEM CONSEQUENCES 103
advantages conferred by the national policies of the investing company's
home government, e.g., subsidies or protected home markets.288 The pres-
ence of well-financed, technologically advanced foreign companies can also
deter the expansion of domestic companies or the entry of domestically
based competitors through aggressive pricing made possible by more inte-
grated corporate structures, more patient stockholders, and a willingness to
tolerate losses in pursuit of a long-term strategy. In these conditions, for-
eian investment may actually reduce market competition, through either the
elimination or purchase of domestic firms. This can result in more concen-
trated market power at both the national and global level.289 In some cases,
the outright purchase of relatively small companies providing key technol-
ogy components for industries, such as semiconductors, can increase na-
tional dependency on foreign-owned suppliers while also augmenting the
possibility of anticompetitive behavior.290
guidance, especially for high-technology competition. Alan Tonelson, "The Perils of Techno-
Globalism," Issues in Science and Technology, Summer 1995. The OTA analysis cited above
observes that ~reenfield investments in facilities for manufacturing, design, and R&D add
more to an economy than does an investment in distribution networks, whose main effect is to
make imports available, often to the detriment of local producers of such products (although to
the benefit of consumers). The OTA analysis suggests that because "FDI can be concentrated
in different sectors and deployed to very different effects...different forms of FDI can and do
have different implications for the U.S. technology base." Multinationals and the U.S. Tech-
nology Base, p. 150 and chap. 6. The need for nuanced assessment does not imply that FDI is
not generally benefit cial to the recipient economy. See, for example, P. Reid and A. Schriesheim
(eds.), Foreign Participation in U.S. Research and Development, pp. 6~80. For an analysis
highlighting the benefits of foreign direct investment to the U.S. economy, in particular tech-
nology inflows and industrial "best practice," see Richard Florida, International Investment:
Neglected Engorge of the Global Economy, American Enterprise Institute, Washington, D.C.,
1994. For a provocative discussion of U.S. policy on foreign direct investment, see Robin
Gaster, "Guiding Foreign Investment," Foreign Policy, Fall 1992.
288 This is especially true when the investing companies benefit from the direct support of
their home government through equity investment, debt forgiveness or favorable loans by state
controlled banks. See Laura Tyson, Who's Bashing Whom? p. 43. These conditions also
suggest that market considerations are not dominant. "When a foreign government is the
investor, however, foreign national interests are at play, and these may conflict with American
national interests." Ibid.
289 Ibid., p. 146. Much of the concern over foreign direct investment focused on the
possible adverse effects of acquisitions in the U.S. semiconductor industry on market competi-
tion and national security. "Because semiconductors are an indispensable input throughout the
electronics complex, strategic control over their supply by concentrated Japanese oligopoly
poses a threat to downstream producers throughout the world." Ibid. See also Linda H.
Spencer, Foreign Investment in the United States: Unencumbered Access, Economic Strategy
Institute, Washington, D.C., 1991, and U.S. Department of Commerce, Foreign Direct Invest-
ment in the United States, Washington, D.C., 1993.
290 Laura Tyson, Who's Bashing Whom? p. 146. For example, industry observers note that
a sudden shortage of epoxy resin for semiconductor packaging (due in this case to an accident
OCR for page 104
104
CONFLICT AND COOPERATION
CONSEQUENCES FOR COMPETITION POLICY
AND FOREIGN POLICY
This dependency can have significant consequences in terms of both
national competitiveness and national security.29i For example, a number
of studies indicate that American companies relying on foreign suppliers for
crucial components, such as DRAMs and displays, have been put at a com-
petitive disadvantage because they cannot obtain the latest technology in
the narrow timeframes that characterize competition in high-technology prod-
ucts.292 Failure to obtain critical components in a timely manner can seri-
ously disadvantage producers dependent on foreign supply. Indeed, geo-
graphically concentrated supply of key components, along with the relevant
tacit knowledge, assigns suppliers of these vital inputs considerable strate-
gic leverage. When supply is concentrated among a small number of pro-
ducers. or a single country, to a significant extent suppliers can determine
access to relevant technologies, the rate at which they can be incorporated
into new products, and the price their customers must pay.293
Technological dependency heightens the risk of slower product evolution
and of lower revenues to fund marketing and R&D for the next generation
of products. More fundamentally, producers who depend on innovations in
a distant foreign economy may have reduced opportunities to profit from
destroying a key plant) caused considerable concern among U.S. semiconductor producers who
are dependent on foreign suppliers. In addition to epoxy for plastic packages, the U.S. indus-
try relies on a limited number of Japanese suppliers for high-purity silicon, ceramic packages,
and, to a lesser extent, the steppers which imprint circuits on semiconductors. See John P.
Stern, "Japan: the Philosophy of Government Support for Information Technology," p. 3 and
passim.
291 A recent National Academy of Engineering report notes that the United States, much
more than any other industrialized country, has relied on technology niche companies for a
disproportionate share of major product and process innovation, adding that from the mid-
1980s to early 1990s foreign acquisitions of these firms increased significantly. See P. Reid
and A. Schriesheim (eds.), Foreign Participation in U.S. Research and Development, p. 70.
292 Michael Borrus and Jeffrey A. Hart, "Display's the Thing," p. 24. Delays in access can
have significant consequences. For a new electronics product, a six months' delay to market
can cost up to one-third of its potential revenue stream. See George Stalk and Thomas M.
Hoot, Competing Against Time, Free Press, New York, 1990. Studies documenting the delay
in the delivery of key components, such as semiconductor manufacturing equipment to Ameri-
can producers by Japanese suppliers, include the Defense Science Board Task Force's Foreign
Ownership and Control of U.S. Industry, June 1990; the National Advisory Committee on
Semiconductors' report Preserving the Vital Base: America's Semiconductor Equipment and
Materials Industry, 1990; and the General Accounting Office's U.S. Business Access to Cer-
tain Foreign State of the Art Technology, GAS/NSIAD-91-278, September 1991. European
users encountered similar problems. See also Howell et al., Creating Advantage, pp. 116-
132, especially pp. 129-130.
293 Borrus and Hart, "Display's the Thing," p. 24.
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DIFFERENT NATIONAL INVESTMENT REGIMES AND THEIR CONSEQUENCES 105
spillovers and localized tacit knowledge.294
In some cases this can be
overcome, a prospect aided by the rapid advance in electronic communica-
t~on. However, the sustained efforts to acquire and apply new foreign
technologies are more easily undertaken by large multinationals in the most
advanced countries. Such efforts are more difficult for small and medium-
size firms.295 On the other hand, the success of newly industrializing coun-
tries such as Korea and Taiwan particularly in electronics-suggests that
industrial groups with effective government support can overcome locational
disadvantage. The presence of multiple, competing suppliers of equipment
embodying the most recent technology is a crucial dete~inant of their
success.296
In addition to the competitive risks of technological dependency on con-
centrated foreign suppliers, the transfer of control over strategic military
technologies through foreign purchase of U.S.-based suppliers of key com-
ponents raises important national security issues.297 When foreign govern-
ments are the investors or when an acquisition threatens to concentrate
market power among few suppliers, some analysts believe careful review by
the CFIUS is warranted to determine if the acquisition should be blocked or
subject to conditions.298 As noted above in the section on dual-use technol-
ogy, a key feature of America's defense strategy is superiority in high-
technology weapons systems. Concentrated market power in the hands of
294 For example, Jonathan Eaton and Samuel Kortum find that distance appears to inhibit
the flow of ideas between countries, although trade relationships enhance such flows. Also,
increased levels of education significantly facilitate a country's ability to adopt technology.
See J. Eaton and S. Kortum "Trade in Ideas: Patenting and Productivity in the OECO,~' Journal
of International Economics, 1996 forthcoming.
295 Borrus and Hart, "Display's the Thing," p. 24, note 5.
296 SEMATECH's development of advanced equipment technologies for semiconductor
manufacture contributed importantly to the development of the Korean semiconductor industry
by generating alternative sources of supply equipment for manufacturing, which led to a more
competitive market for DRAMs. In addition, some U.S. firms reportedly transferred DRAM
designs to Korean firms, presumably to ensure alternative sources of supply.
297 See the report of the Defense Science Board Task Force Foreign Ownership and Con-
trol of U.S. Industry. The report cites a number of instances where assured access to military
technologies has been threatened by foreign acquisition of U.S. firms and the subsequent
transfer of the government-supported research offshore. Pp. 15-19. The report also under-
scores the relationship between national security and the long-term economic competitiveness
of U.S. industry. P. 14. The "dual-use" strategy described by the Under Secretary of Defense
for Acquisitions, Paul Kaminski, explicitly relies on commercial technology as the leading
agent of change in technology areas critical to U.S. defense capabilities. See the presentation
by Paul Kaminski in C. Wessner (ed.), Sources of International Friction and Cooperation in
High-TecJ:nology Development and Trade.
298 Laura Tyson, Who's Bashing Whom? p. 44. The conditions imposed on Huts' acquisi-
tion of MEMC is an example. See the contribution of Charles Cook, MEMC vice president for
strategy and acquisitions to the NRC symposium, in International Access to National Technol-
ogy Promotion Programs, 19 January 1995 Symposium Proceedings.
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106
CONFLICT AND COOPERATION
foreign producers, even close allies, can significantly reduce national au-
tonomy in the implementation of foreign policy goals.999
The lack of consensus which characterizes post-Cold War foreign policy
initiatives creates uncertainty about assured supply of components for mili-
tary systems. For example, foreign producers may not be willing to supply
the components to be utilized in military actions, either as a result of home
government "guidance" or through the reluctance of foreign firms to disrupt
supply schedules to meet military surge requirements.300 National compa-
nies, no matter how multinational in operation, are responsive to the policy
preferences of their home governments.30~ And foreign policy goals deemed
central in one polity may have considerably less resonance in another, espe-
cially if compliance involves financial loss or market disruption.
Because technological dependence poses substantial risks to national au-
tonomy, whether the national goal is competitive markets or the ability to
project military force in support of national interests, the state of the national
technology "supply base" is a 1egibmate concern of government. In the case
of the United States, policymakers should recognize that national technologi-
cal competency is a central concern of U.S. competitors. Consequently, na-
tional policies designed to maintain national technological capabilities may
become as normal a part of U.S. policymaking as they are for most other
governments, with specific attention directed to foreign direct investments.302
299 Jeffrey A. Garten, A Cold Peace: America, Japan, Germany, and the Struggle for
Supremacy, Times Books, New York, 1992, p. 227. The author points out that U.S. trading
partners could exercise real leverage over the United States as creditors, as suppliers of vital
technology, or as hard-to-please partners in endeavors that Washington finds important.
300 For example, a recent NAE report cites a 1983 case where the Japanese government
reportedly pressured the leading Japanese producer of ceramic materials, Kyocera, to stop
supplying ceramic nose cones to the U.S. Tomahawk Missile program through its U.S. subsid-
iary. See P. Reid and A. Schriesheim (eds.), Foreign Participation in U.S. Research and
Development, p. 77.
301 Carnoy et al., The New Global Economy in the information Age, p. 84. Citing Stephen
Cohen, the author points out the unwillingness of U.S. corporations to cooperate in the develop-
ment of the French independent nuclear deterrent, or to construct the Soviet-European pipeline.
Formal export controls on technologies, such as U.S. restrictions on the Soviet purchase of
modern telecommunications equipment (e.g., fiber-optic cable), or the stated reluctance of major
Japanese producers to supply flat panel displays to the U.S. military, or the difficulty in acquiring
key components during the Gulf War, illustrate both the risks of dependency on foreign supply
and the responsiveness of corporations to the policies of their home government.
302 Multinationals and the U.S. Technology Base, pp. 150-153. The report identifies five
basic types of Foreign Direct Investment in ascending order of their contribution to the U.S.
technology base: distribution facilities for imported products; final assembly facilities for
imported components; manufacturing facilities that use a mix of imported and locally manu-
factured components; integrated design, engineering, and manufacturing facilities that provide
customized products for the local market; and fully integrated research and production facili-
ties that are a strong strategic component of a firm's global R&D, sourcing, and manufacturin,,
operations. P.; 150.
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10
CONFLICT AND COOPERATION
ers. The fundamental virtue of the agreement is that it provided a mecha-
nism to open the Japanese market rather than closing the American market.
It also provided a measurable target for access and a monitoring mechanism
to promptly address dumping in the United States or third-country markets.
The Agreement also set the stage for much-improved relations between the
U.S. and Japanese semiconductor industries.3~3 Initially as a result of MITI
encouragement, the industry also witnessed a proliferation of design-in projects
between foreign suppliers and Japanese users. Subsequently, these relations
expanded exponentially in response to market demands with an explosion
of joint ventures and other long-term alliances between Japanese and for-
eign companies.3~4 After a difficult start, the Agreement also largely re-
moved, or at least contained, a major source of tension within the overall
U.S.-Japan bilateral relationship.
The successful conclusion of the August 1996 negotiations on the re-
newal of a modified Semiconductor Agreement between Japan and the United
States underscores the desire of both countries to avoid renewed trade con-
flict in this strategic sector. While the Japanese government was initially
reluctant to renew the government-to-government agreement, a compromise
was reached which included two separate but interdependent agreements: an
agreement between the U.S. and Japanese industry associations on interna-
tional cooperation in the semiconductor sector and a related agreement be-
tween the U.S. and Japanese governments. (See Box I for a summary of the
agreements). The inter-industry agreement encourages continued industry-
to-industry cooperation and includes the monitoring of shares in key mar
313 For example, Japanese government sources point out that design-ins, in which foreign
semiconductor devices are specifically designed for inclusion in commercial products (such as
camcorders or VCRs), increased nearly ninefold in Japan since the first agreement was con-
cluded in 1986. See Ministry of Foreign Affairs, Japan, Salient Points and Data Related to the
Japan-U.S. Semiconductor Arrangement, p. 4. Reflecting the title, the Ministry's report states
that, "the Arrangement's historical role has been fully achieved." Despite this accomplish-
ment, the report does not recommend continuing the agreement, a view which corresponds
closely with a January 1996 Electronics Industry Association of Japan (EIAJ) report, Mission
Accomplished: Why There Is No Need for a Semiconductor Agreement with Japan. Somewhat
to the surprise of the American government, in early 1996 the Japanese government rebuffed
the initial U.S. effort to renew a modified agreement, i.e., one which would not have a specific
target figure. See Susumu Maejima, "Ending Chip Pact Is Shortsighted...," Asahi Evening
News, 5 February 1996.
314 As examples, the EIAJ cites the case of Toshiba and Motorola, which have a long-
standing joint venture, established in 1987, in Sendai in northern Japan. More recently, Hitachi
and Texas Instruments agreed on a new joint venture in 1995, located in Richardson, Texas,
although their collaboration dates back to 1988. EIAJ, Salient Points. For a valuable industry
perspective on the considerations relevant to joint ventures, see the presentation by Motorola's
Charles White in C. Wessner (ed.), Sources of International Friction and Cooperation irz High-
Technology Development and Trade.
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DIFFERENT NATIONAL INVESTMENT REGIMES AND THEIR CONSEQUENCES 1 1 1
BOX I. THE U.S.-]APAN SEMICONDUCTOR
AGREEMENTS OF 1996.
The United States and Japan faced the~possibility of renewed conflict in the semicon--
ductor sector as they approached they scheduled expiration of the 1991 U.S.-Japan
Semiconductor Agreement on 31 July 1:996. The t;J.S. semiconductor industry and
government, while acknowledging that tremendous progress had been made in in.creas-
~ng U.S.-J?pan industry cooperation and foreign market access in:Japan~ under the 1991
Agr~em:em and.its 1986 predecessor, were seeking a renews of :the Agreement to
ensure: continuation of the government-to-government and industry-to-industry mecha-
nisms that had led to the progress of the previous decade. Lee Japanese industry land
government argued that, inasmuch as the foreign : share in the: Japanese market hat
reached more than 30 percent by the first quarter of 1996, the objectives of the earlier
agreements: had: been fulfilled and no new:'greement was necessary. . ~ ~ I:
: in particular, while *'e U;:;S. governmene.and ~ndusuy wamed a-continued~govern-
mental role: in :monitoring:~progress~ in .~market: access And industry :-cooperation, the
Japari;ese :govern:ment resisted any cont0id :government: role.: The 1991 Agreement
praY'd.ed~: that the two ~ernm~ joined ~Q~dI=e: foreign rnaricet share in Japan on a
quarterly Isis and used :~a: 20: perter foreign share .ta~get against Rich to measure
progress in :increasing foreign market: shared ~.:~ . ~ .: ~ : ~ :: : - ~ ::
. fluter mot-is of :negotiations between Ash Me two :induseries:.and the two govern-
mends, a compromise was reaccede ton 2 A-avoiding renewed conflict in this: sector
and permitiing.:condnued ~nclussry-to~n.dusiry coope~'on :w~h :a continued but ret
. . .. ... . . , , ,~ ~ . ?
~ Aces . eve ~or.government~monl:tor~ng.~: ~e~rto.t 3iS :compmmme ~ =.~eement~t tat
the. To industries, rather than the To governmenis,..would calculate -~reign. shares in
key: mark ts around *e~worl:d, and :~en~rep~:inf rmation to :0 ~.govern-
m:ents. :In Addition, no new market~iLr..e target was set Miese~provisions, wok met
Moths: sides, ob~ea~es, were Inch: fit: thivo separate IBM i~erdependent.agreements:
an agreement between the US. and Japanese industry associations on international
cooperation in the semiconductor sector and an agreement between the U..S. and
Japanese governments concerning semiconductors.
Inter-ladustry :Agreement
The inter-industry. agreement provides for a continuation of the cooperative activi-
ties between semiconductor: users and suppliers begun under the t986 and 1991
Agreements. A joim industry steering committee is to continue :as under the previous
agreements to review developments in joint industry cooperative actuates to promote
the designing of :fore~gn semiconductors in new products in specific sectors and in
emerging applications. .. in Addison, the agreement provides for. new-cooperation
between semiconductor suppliers in areas such as standardization; environment, worker
health.and safer; intellectual property rights; trade and investment liberalization; and
market development. The new agreement also creates a Semiconductor Council made up
of senior execuiives-of the U.S. and Japanese industries, which is to meet once a years
The agreement also provides that industry experts are to prepare quarterly markets
trade How reports, which are to include data on market shares of foreign semiconduc-
tor products in major semiconductor markets. The reports are to be based on a
number of data points, largely from industry surveys and government data, allowing the
two industries joindy~r, if necessary, each acting-independently to measure the
foreign share of the Japanese and other markets. These quarterly reports are to be
continued
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2
CONFLICT AND COOPERATION
provided to the governments for their review, thereby ensuring a government role in
monitoring developments In foreign market access in Japan.
While the initial inter-industry agreement is bilateral, ~ provision is included that is
to permit the European and other semiconductor industries to join the Semiconductor
Council once their respective governments have eliminated or agreed to eliminate
expeditiously all tariffs on semiconductors. No term is set on the inter-industry
agreement, although the two industry associations agreed to review the agreement in
three years.
Government-to-GoYernment Agreement
The government-to-governn~ent agreement welcomes the inter-industry agreement
and affirms the intention of both the U.S. and Japanese governments to support
industry-to-industry cooperative efforts. It further provides that the two governments
are to hold consultations at least once a year to receive and review the reports on data
collected by the industries; to review and discuss the cooperative activities conducted
trader the inter-industry agreement and market trends and developments, incluciing
those relating to competitiveness and foreign parUcipa~on in major marked; and to
discuss government policies and activities affecting the semiconductor industry.
The U.S. and Japanese governments also agree to establish a Global Government:al
Forum made up of governments of major semiconductor-producing countries and other
interested economies. This Forum is to meet annually to discuss issues that may affect
the global semiconductor industry. The organization is to be ope n to governments
without any precondition, and its first meetmg it to be held no later than I January
1997.
The two governments also reaffirm in the agreement the need to avoid the problem
of injurious dumping through effective arid expeditious an~dumping measures, consis-
tent with the GATE and the WTO Ant~dumping Agreement The term of the govern-
ment-to-government agreement is three years, expiring on 31 July 1999.
Lets, but without a new foreign market share target for the Japanese market.
Interestingly, while the inter-industry agreement is bilateral, it provides for
the possibility of participation by other semiconductor industries on the
condition that their national tariffs on semiconductors are eliminated. The
government-to-government agreement affirms the support of both govern-
ments for cooperation by their respective industries and provides for regular
consultations on the evolution of the semiconductor industry and policies
affecting it.
The success of the Semiconductor Agreements to date and the continued
difficulty in obtaining market access for other high-technology products has
led some analysts to conclude that similar agreements offer a pragmatic and
effective means of resolvin;, long-standing trade conflicts.3~5 In this view,
3~5 For one of the most complete statements of the rationale for this approach, see Michael
Bonus et al., The Highest Stakes, pp. 197-205. See also Stephen Cohen and Pei-Hsinng Chin,
"Tipping the Balance." For an industry view, see Council on Competitiveness, Roadmap for
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DIFFERENT NAHONA f INVESTMENT REGIMES AND THEIR CONSEQUENCES 113
arguing that U.S. trade partners should change their domestic policies or
their enforcement is less likely to produce desirable results, for either
party, than is a focus on reciprocal access to markets, investment opportuni-
ties and technologies.3~6 Whatever the merits of this view, in the absence
of significant advance in a multilateral context, pressure for bilateral solu-
tions focused on specific outcomes is likely to grow.
Whatever solutions are proposed multilateral talks, bilateral in~tia-
tives to reduce structural impediments, or regional cooperation-the
sharp differences in national investment regimes are an important source
of friction and a destabilizing element in the global system. As dis-
cussed above in the section on cooperation, unequal access for trade
and investment undermines the basis for sustainable international co-
operation in the development of new technologies. These differences in
access, or asymmetries, are also a major source of trade imbalances,
and generate pressures for restrictions on foreign investment in coun-
tries which do have relatively open investment regimes. Finding a means
to address these asymmetries is therefore an important instrument for
both improved cooperation and reduced trade friction. Progress in
reducing these asymmetries in national practices requires a two-track
approach: (1) a determined and sustained effort to improve access on a
bilateral basis and (2) the conclusion of a workable multilateral accord
on investment.
Reflecting the importance of investment issues for the continued health
of the international trading system, a multilateral effort to reach an interna-
tional investment accord is now under way. In May 1995, members of the
OECD decided to launch negotiations among the twenty-five OECD mem-
ber countries, with the aim of reaching a Multilateral Agreement on lnvest-
ment (MAI) by mid-1997.37 The objective of the negotiations is to "pro-
vide a broad multilateral framework for international investment." This
involves both a broad definition of investment and a broad coverage of
Results, p. 55. For a discussion of the advantage of a results-oriented approach in terms of
Japanese perceptions and practices, see James Fallows, Looking at the Sun, pp. 448-450 and
497~98, and Laura Tyson, Who's Bashing Whom? pp. 133-136 and chap. 7. For a succinct
review of the strategic trade theory underlying this approach, see Luc Soete, `'Technolo:,y
Policy and the International Trading System: Where Do We Stand?" pp. 3-7. For an informa-
tive discussion of views of past and current "strategic trade" theorists, see Jeffrey Hart and
Aseem Prakash, "Implications of Strategic Trade for the World Economic Order."
316 In some cases, bilateral solutions may be the only recourse possible, not least because
barriers to market entry can include collusive private arrangements, informal government guid-
ance, focal regulations obstructing access to investment, discriminatory standards, and issues
of competition policy and its enforcement, none of which are under the purview of the WTO or
any other multilateral mechanism.
317 See the June 1995 OECD Ministerial Communique. SO/PRESS (95) 41. Paris, 24 May
1995.
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114
CONFLICT AND COOPERATION
sectors, levels of government, and types of laws and regulations. The goal
of the OECD negotiations is to achieve "high standards for the liberaliza-
tion of investment regimes and investment protection," including effective
dispute settlement procedures, with limited general exceptions, such as na-
tional security.3ig This is the major reason for the decision to first negotiate
amoral, OECD members rather than among, the members of the more broadly
based WTO, though it is not clear that this strategy will prove successful.319
The ultimate goal of the negotiations is a "free standing international treaty"
that, though negotiated at the OECD, will not be confined to OECD mem-
ber countries.
If an effective multilateral accord on investment, such as that envisaged
in the OECD negotiations, can be obtained, it would represent a major step
forward on investment issues. For the United States, it is essential to con-
tinue to actively pursue this multilateral approach, while seeking to extend
to nonmembers acceptance of the principles and standards to be agreed at
the OECD. At the same time, systematic review of the impact of foreign
acquisitions on the U.S. defense base and related consequences for the U.S.
competitive position should be conducted.320 This is especially important
in oli~opolistic industries where foreign competitors have a history of
anticompetitive behavior or where the foreign investor is, in effect, a for-
eign government.32i Indeed, in neither case can the interests of the partici-
pants in the transaction be considered paramount.322 It is therefore appropriate
that sustained attention be given to the nature and sectoral concentration of
inward foreign investment, a practice already adopted by many governments.
318 See the presentation "Progress toward a Multilateral Agreement on Investment" by
William WitherelI in Peter S. Rashish, (ed.), Building Blocksfor Transatlantic Economic Area.
European Institute, Washington, D.C., 1996. Witherell describes a wide range of mechanisms
available to the OECD for consultations. Ibid., p. 32.
319 Some analysts believe this decision to have been an error, because non-OECD members
are skeptical of negotiations to which they are not party, though as noted the OECD is to
undertake consultations with interested nonmembers. For a critical assessment of the OECD
initiative, see E. M. Graham, presentation to the Institute for International Economics confer-
ence on the World Trading System: Challenges Ahead, 24-25 June 1996.
320 See Laura Tyson, Who's Bashing Whom? pp. 145-149. The author was quite critical of
the operation of the CFIUS. In her 1992 analysis, she argues that "a prudent policy toward
foreign direct investment when it involves a product or industry deemed critical to national
security should follow two basic principles. First, it should use requirements for national
ownership or local production by foreign suppliers to enhance national control over suppliers
regardless of their nationality. Second, it should seek a diversity of suppliers to maintain a
competitive global supply base." Ibid., p. 147. At that time, the author faulted the CFIUS for
having ignored both the potential national security threat and the strategic economic threat
posed by foreign oligopolistic control over critical industries such as semiconductor producers
and its major equipment and materials suppliers. Ibid., p. 148.
321 See the section Foreign Direct Investment in High-Technology Industry above.
322 Laura Tyson, Who's Bashing Whom? p. 43
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DIFFERENT NA TIONA ~ INVESTMENT REGIMES AND THEIR CONSEQ FENCES 1 15
For example, many countries have implemented investment policies designed
to maintain advanced manufacturing and the associated high-wage employ-
ment.323 Given the importance of high-technology industry for the U.S. de-
fense base and future economic growth, an enhanced awareness of other coun-
tries' policies toward foreign investment could prove valuable to U.S.
policymakers.324 Moreover, in light of the role of the United States in the
world economy, a better understanding, of inward foreign investment in host
countnes abroad as well as in the United States, and policy decisions taken on
the basis of that infonnation might well contribute to the success of ongoing,
ne ,otiations on a multilateral investment agreement. Better informed decision-
making offers the prospect of strengthening the U.S. technology base and
improving opportunities for high-wage employment.
COMPETITION POLICY- CONVERGENCE?
Market concentration in high-technology industries poses special chal-
lenges to national policymakers. The dangers of oligopolistic control in
high-technology industries are not well-understood. As noted above, na-
tional policies and instruments to defend domestic industries from predatory
pricing or concentrated market power can encounter substantial opposition
both on grounds of principle and as a result of their impact on other com-
mercial interests. Ant~dumping duties are often seen as an imperfect and
incomplete response to the conditions effective closure of the national
markets of major exporters, despite commitments to liberalize that give
rise to injurious dumping,. However, existing international rules do not
adequately address the market barriers and competition policy failures that
make antidumpin~, remedies necessary.
Ultimately, what is needed is a network of enforceable commitments by
trading nations to have and to enforce laws against private restraints of trade.
The actual convergence of those national laws, beyond the core anticompetitive
practices which they all must prohibit, may take considerable time. To the
323 See R. Gaster, "Guiding Foreign Investment,~' pp. 97-100. As a result of these policies,
"foreign firms in Europe have been forced to raise the local content of their finished products."
Caster also notes that European politicians have pressured foreign firms to produce sophisti-
cated goods, train local workers, introduce advanced management practices and "explicitly
called on foreign firms to conduct more R&D in Europe and encourage them to set up design
facilities and use local suppliers, training the suppliers to meet international standards." Ibid.,
p. 98. Robert Scott notes the European concern with maintaining employment in manufactur-
ing and the policies adopted to encourage high-wage employment in high-value manufacturing.
See Scott,"Trade: A Strategy for the 21st Century" in Todd Schafer and Jeff Faux (eds.),
Reclaiming Prosperity: A Blueprint for Progressive Economic Reform. M.E. Sharpe, New
York, 1996, pp. 249-250. For a proactive policy approach, see the Commission Green Paper
on innovation, p. 23.
324 A recent National Academy of Engineering study recommends the U.S. government
improve its capability to assess and track foreign investment. See P. Reid and A. Schriesheim
(eds.), Foreign Participation in U.S. Research and Development, p. 78.
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16
CONFLICT AND COOPE:RATION
extent convergence is eschewed or delayed, however, there will be potential
for friction, and pressure for other policy remedies will ~row.
In addition, there is increasing recognition that concern over oligopolistic
behavior in high-technology industries should be extended "to include con-
trol over strategic assets and capabilities."325 As electronics pervade the
modern economy, industrial innovation depends on the components, materi-
als~ automated machinery, and control technologies (i.e., software) that are
combined to create new products and processes. A domestic economy's
effective access to those technological inputs depends crucially on the na-
tional supply base.
CUMULATIVE CONSEQUENCES
The supply base affects producers in several ways. A robust supply base
provides access to relevant technologies at affordable costs and in a timely
fashion while offering opportunities for essential interaction between sup-
pliers and producers. The quality of the supply base can therefore be a
crucial determinant of domestic firms' ability to compete in rapidly evolv-
in~ hi~h-technolo~y products.326
However, the flows of technical know-how across national borders are
determined by the distinct national characters of local markets. For ex-
ample, markets in the United States tend to be relatively open, employee
mobility is high, forei an firms can acquire technologically advanced Ameri-
can firms, and the capital constraints of U.S. firms often encourage the
licensing of core technologies.327 This contrasts with East Asian countries
such as Japan or Korea where markets are less open, the mobility of skilled
labor is low, direct acquisition of firms is virtually impossible, integrated
ind~lctnn1 ct~l~tilre.~ (in Skirt or chaebol) Drovide firms with patient capital,
and national institutions are less open to foreign access.328 The result of these
structural differences is that accrued technological know-how tends to be re-
tained locally and tends not to diffuse rapidly across national boundaries.329
_ _ _ . ~ ~7 _. .
An, _ _~ ,^ ~^ _ ~ A ~ ~ - ~-~ ~ r
325 Laura Tyson, Who's Bashing Whom? p. 275.
396 Dependence on distant producers of key components poses unique competitive chal-
len~e,es. Perhaps the most important concerns the nature of the dependency. Some companies
outsource to expand capacity and thereby leverage their own knowledge. Other firms rely on
outsourcina for knowledge, that is, the company needs a component but lacks the in-house
skill to produce it. The second form of dependency leaves the firm open to competitive
challenge. Charles Fine and Daniel Whitney, `'Is the Make-Buy Decision a Core Compe-
tence?" pp. 17-18. It is assumed that companies cannot avoid some degree of dependence; the
point here is that the form this dependency takes has quite different competitive consequences.
Ibid., p. 21.
327 Borrus et al, The Highest Stakes, p. 22.
328 Ibid.
329 Ibid.
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DIFFERENT NATIONAL INVESTMENT REGIMES AND THEIR CONSEQUENCES 11 7
GLOBAL COMPETITION
AMONG NATIONAL COMPANIES
There is a paradox in that as economic activity expands across the ~lobe,
the role of national policies and practices continues to play a major role,
sometimes even determining, competitive outcomes. The globalization of
economic activity is, however, very real.330 At the risk of underscoring the
obvious, many hi~,h-technolo=,y enterprises are multinational in operation,
performing research, manufacturing, assembly, and sales at many sites in
many countries. And, as noted above, the number and variety of interfirm
relationships continues to expand. For technology, they range from licens-
ing agreements to joint development and acquisition. For manufacturing,,
they range from original equipment manufacturing, to second sourcing, to
assembling and testing with similar diversity in marketing and service agreements
as well as formal joint ventures to develop and manufacture new products.
(See Box E.) These transnational relationships have become so numerous
and pervasive that some observers have concluded that they portend the end
of national commercial rivalry, to be supplanted by a system of global
cooperation leading, to enhanced global welfare.33~332
Without disputing the growth in the scope of economic competition, and
330 As one analyst notes, "Texas Instruments' hi,h-speed telecommunications chip is a
model of the efforts of technology enterprises to marshal! global resources in the desi;,n,
manufacture, and delivery of a product. TI's TCM9055 chip was designed with Ericsson
engineers in Nice, France, using software developed in Houston, Texas. The chip is produced
in Japan and the U.S., tested in Taiwan, and included in Ericsson products that monitor sys-
tems in Australia, Mexico, Sweden, and the U.S. Chip-testin~ [for] assembly plants in the
Philippines is done by engineers at terminals in Dallas. Marketing is organized into world-
wide product teams rather than by country; technology glitches are solved by engineers from
multiple countries communicating with each other from work stations around the globe." Daniel
M. Price, Investment Rules and High-Technology: Toward a Multilateral Agreement on Invest-
ment. OECD, Paris, France, 2~27 October 1995, p. 4. The author concludes from this global
activity that "while geographic location is important to customer service and product support,
national borders appear increasingly irrelevant."
331 Howell et al., Creating Advantage, p. xiv. This view is in fact often encouraged, for
good reason, by foreign investors wishing to blend into local economies as good corporate
citizens subject to the same treatment as domestic firms.
332 While the reality of global economic activity is incontestable, its meaning is subject to
different interpretations, with substantial relevance for national policy. For example, a recent
Japanese industry publication states that. "given the borderless nature of many fundamental
operations in this [the semiconductor] industry, the era in which it made sense to distinguish
the nationality of a semiconductor chip has long since passed." Electronic Industry Associa-
tion of Japan, Mission Accomplished, Tokyo, January 1996, p. 1. The recent Japanese Ministry
of Foreign Affairs report makes a similar point, arguing that in light of the many alliances in
the industry "the [semiconductor] Arrangement, which attempts to identify the nationality of
semiconductors, is now obsolete and meaningless." February 1996, p. 1. The same report.
however, then describes the market in terms of national shares.
OCR for page 118
llg
CONFLICT AND COOPERATIOlV
therefore the scope of operations of global corporations, others argue that
economic globalization "simply expands the dimensions and complexity of the
competition being waned between national systems."333 In this view, most
multinational corporations, though not all, remain profoundly national in char-
acter even while operating on a global scale.334 This national character is the
result of a complex yet powerful combination of factors. First and foremost
the corporations are subject to the norms and policies of the home nation.
More pervasively, to the extent that board members, senior executives, and
key employees are nationals of the same country, they tend to reflect its
values, beliefs, culture, and historical experience. This gives meaning and
effect to the norms and accentuates the importance of national policy, for
example, on antitrust, bribery, or export controls. Corporations also depend
on the national educational and technological infrastructure, as well as on the
trade and investment policies of a given country and in some cases on specific
government support.335 From this perspective, far from being rendered irrel-
evant by the globalization of competitive functions, government policies can
play an instrumental role in determining competitive outcomes in the rivalry
between national enterprises competing on a global scale.336
NATIONAL STRATEGIES
FOR MULTILATERAL SOLUTIONS
Systematic differences in access to national markets for trade and invest-
ment pose serious risks for the international system. Mutual reductions of
tariff barriers, while valuable in opening markets to trade, afford only part
of the resolution of international trade and investment issues for high-tech
'~ Howell et al., Creating Advantage, p. xiv.
334 There are, of course, cultural variations-which underscores the basic point. U.S. and
British multinationals, more than any other country's, are philosophically antistate and there-
fore tend to be more "footloose." Although distinctly "American" or "British" in modes of
operation (e. ,.' employment patterns or local sourcing, and especially when in need of govern-
ment help in securing economic interests) "they are first and foremost profit-making private
enterprises, obligated to their...stockholders' not to any nation-state." Carnoy et al., The New
Global Economy in the Information Age, p. 86.
335 Martin Carnoy argues that Japanese and certain European multinationals may not be
state-owned but they tend to be '~state-tied," that is, their operations may be shaped by state
policies that allow them to gain advantage over competin;, firms. More generally, he argues
that large international companies "are rooted in national economies and national systems of
production.' as they operate through affiliates in other countries. Carnoy et al., The New
Global Economy, p. 87.
336 Howell et al., Creating Advantage, p. xiv. Michael Porter also supports this view. He
suggests that `'differences in national economic structures and institutions contribute profoundly
to competitive success." Furthermore. he stresses that as a result of the globalization of
competition, the role of the home nation is more rather than less important. The Competitive
Advantage ojCNations, p. 19.
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DIFFERENT NaTIONA~INVESTMENT REGIMES AND THEIR CONSEQUENCES 1 19
nology industries. Intervention by government in hi~h-technology industry
is on the increase, as is the number of countries employing these practices,
with each country seeking to alter the composition of its national economy
to achieve a competitive edge.337 In addition, the United States, which
continues to be the leader and the initiator of proposals to improve the
international economic system, must do so in the face of a decline in its
relative weight in the world economy, the special concerns of European
policymakers for their hi=,h-technolo=,y sectors, and the markedly different
investment and trade practices of some East Asian economies. All these
factors suggest that if further progress is to be achieved, a coherent,
long-term strategy will be required.
At the outset, this report recognized the inevitability of friction as coun-
tries seek to acquire and maintain the advantages of hi:,h-technology indus-
try in an increasingly global economy. This "competitive friction" can, as
noted above, have its virtues insofar as it stimulates human endeavor and
productive national investment. Yet, friction also has its risks. It can easily
degenerate into conflict. Multilateral agreements and mechanisms to elimi-
nate practices which generate friction, and contain or mitigate it when it
occurs, are essential. However, they may not be sufficient; indeed, they are
not likely to be reached if current trends in the targeting of hiah-technolo:,y
industry continue. And these practices are likely to continue to the extent
that they are seen as successful and relatively costless. Sustained attention
at the national level, supported by institutions and policies designed to
address these issues, will prove necessary to contain friction and help give
positive direction to the competition among nations.
In fact, international friction over these practices need not be inevitable.
Where either a country has avoided the competitive challenge by exiting the
industry (e.g., the United States In color televisions) or where the industries
involved do not recognize or do not accept the challenge (e.:,., automobiles
in the United States in the 1970s and perhaps today in Europe), friction can
be avoided or at least delayed. However, the absence of friction and con-
flict does not indicate the absence of harm to national interests. In econo-
mies open to trade, the industrial base can be eroded and future develop-
ment compromised, through both the loss of productive capability in high-growth
industries and the loss of related research and development activity, thereby
narrowing future technological and political choices.
Some level of friction may therefore be positive. For example, the pro-
cess of granting access to national technology programs in Europe and the
United States must be informed by the realities of access to forei;,n technol-
ogy and markets through both trade and investment. To gain reciprocal
access to technologies, export markets, direct investment opportunities, and
337 See OECD. Indlustrial Subsidies and Box B above.
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20
CONFLICT AND COOPERATION
the balanced trade they engender, a pragmatic approach, adjusted to the
special conditions of hi:,h-technolo:,y competition, is required. In the case
of the United States, a pragmatic approach might also contribute to moder-
atin~ the moralistic tone that sometimes characterizes U.S. commentary on
countries whose positions or practices differ from those of the United States,
while helping to assure that the United States has the economic strength to
negotiate effectively and provide essential global leadership. In the case of
Europe, structural reform to facilitate the creation and ease the operation of
small innovative firms could contribute substantially to economic growth
and employment.338 Indeed, the continued growth of the advanced econo-
mies, and the corresponding ability of the governments in Europe and the
United States to maintain their unparalleled research infrastructure and lib-
eral trading policies, are key conditions for sustained, global economic growth
and the progress this implies for mankind.
To meet this challenge, the consistent application of result-oriented poli-
cies offers the prospect of opening markets for investment and trade for all
participants in the global economy, and of curbing abuse in areas essential
to industrial Innovation, such as intellectual property protection. Sustained
attention on the part of major participants in the international system to the
special characteristics of high-technology trade could contribute to strengthening
the multilateral system.
The major participants in the international trading system already have
policies designed to improve the attractiveness of their national economies
to high-technology industry In sectors such as microelectronics and aero-
space. In some cases, further efforts to improve the regulatory environment
in sectors such as telecommunications and biotechnology could offer sub-
stantial benefits to national economies. Investment in infrastructure, espe-
cially in universities and other research institutions, is a form of competi-
tion which is likely to enhance both national and global welfare In contrast?
national policies which, over a sustained period, emulate the corporate strategy
of always being a "fast second," presume that countries with well-devel-
oped research infrastructures both will have the economic means to sustain
investment in these systems and will continue to have the necessarily public
support to maintain open access. Similarly, roughly reciprocal access to
markets, investment opportunities, and enabling technologies appears fun-
damental to the continued health of the multilateral system, as does some
international understanding on the appropriate rules-of-the-game for the support
of targeted industries. To achieve these goals, countries are likely to pursue
both bilateral and multilateral agreements, an approach that holds out the
prospect of the incremental success necessary to the maintenance of the
system as a whole.
338 See European Community, Green Paper on innovation, pp. 5-7
Representative terms from entire chapter:
direct investment
