11 Some recent studies suggest that the problem in U.S. technological performance has not been as much the slowdown in the creation of new knowledge as the failure of industries to take advantage of available new technology." There are several possible explanations for the failure of U.S. firms to exploit technological opportunities as rapidly as their competitors. On the public policy side, there has been too little support, either in the form of public funding or tax policy, for "middle-ground" or generic R&D projects.10 Such projects consist of applied research with commercial applications, but where the results are too general to make them attractive to private companies operating on their own. On the private side, R&D consortia among private actors to support such projects have been discouraged by antitrust considerations. The Justice Department under President Reagan significantly eased its antitrust restrictions on jointventure R&D arrangements. The new regulations, however, still allow competitors excluded from a joint R&D venture to file damage suits and still limit the kinds of joint research activities exempted from usual antitrust conditions. Perhaps as a result, the U.S. has remarkably few private joint R&D ventures compared with the other advanced industrial countries at a time when the risk and capital requirements of new technologies preclude a go-it-alone R&D strategy by even the largest companies.11 See Baily and Chakrabarti, op. cit., and Henry Ergas, "Does Technology Policy Matter?" in Bruce R. Guile and Harvey Brooks, eds., Technology and Global Industry (Washington, D.C.: National Academy Press, 1987). 10 For a broader discussion of the lack of support for generic and middle-ground research, see Baily and Chakrabarti, op. cit. 11 See Tom Jorde and David Teece, "Innovation, Strategic Alliances and Antitrust," paper prepared for Brookings Institution panel on microeconomics and growth, November 1988. 12 A major reason behind the failure of American firms to exploit technological opportunities is their relatively low investment rate in plant and equipment. New plant and equipment expenditures in manufacturing declined as a percentage of GNP in the 1980s (see Figure 1). As a result, the age of the nation's capital stock in manufacturing equipment has increased to relatively high levels by historical standards. Capital investment also increases labor productivity. There is a strikingly close relationship between the rate of growth of the quantity of physical capital per worker and the rate of growth of labor productivity among the advanced industrial countries (see Figure 2).12 During the 1970-86 period, the U.S. consistently had the lowest investment rate in plant and equipment, the lowest growth in physical capital per worker, and the lowest growth in labor productivity (see Table 7). Furthermore, the already low U.S. investment rate has been on a downward trend-the net national investment rate in the 1980s was lower than during the 1950s, 1960s and 1970s (see Figure 3). As the preceding discussion indicates, public or private actions that reduce the trade imbalance; increase productivity growth; generate high-wage, high-productivity jobs; stimulate more R&D spending; hasten the diffusion of technological knowledge; and increase the rate of capital formation, can improve the nation's competitiveness. The next section considers policy actions required to realize these objectives. Before considering these actions, it is important to emphasize that foreign-owned firms operating in the U.S. can contribute to national competitiveness in all of the ways identified here. Foreign-owned firms can in 12 George Hatsopoulos, Paul Krugman, and Lawrence Summers, "Beyond the Trade Deficit," unpublished paper, April 1988. 13 vest in physical and human capital and R&D; create high-wage, high-productivity jobs; introduce new production technologies and organization skills; and increase U.S. exports and reduce U.S. imports, thereby improving the trade balance. The basic challenge for government is to formulate policies that will encourage both domestic and foreign firms to take the private actions required to strengthen national competitiveness. IV. GENERAL POLICIES TO IMPROVE This section suggests policy initiatives to strengthen national competitiveness over the long run. The policy recommendations include: a gradual deficit reduction plan; changes in government spending priorities and tax policy to increase national saving and national investment in physical plant, human and knowledge capital; the further relaxation of antitrust laws and the use of government funds to stimulate R&D consortia for generic or middle-ground technologies; and the use of international negotiations and national trade laws, including the new Omnibus Trade Bill of 1988, to maintain open and fair conditions in global trade. The following discussion describes the rationales for each of these recommendations. The first step in addressing the nation's competitiveness is increasing its investment commitment. This is where the nation's macroeconomic challenge and its competitiveness challenge come together. During the next several years, the gap between national saving and national investment must be reduced in ways that encourage more investment. This will require an increase in national saving. The U.S. saved less than two percent of its income in 1986 and 1987. This is less than one-third of the savings rate realized in the 1970s, less than one-fifth of the aver 14 age saving rate of the major industrialized countries, and only one-eighth of the saving rate in Japan.13 Low national saving discourages national investment by raising the cost of capital. Recent studies suggest that the cost of capital is significantly higher in the United States than in Japan. For example, one study indicates that in 1985, American firms had a real cost of funds of six percent while Japanese firms had a real cost of funds of only 1.5 percent.14 Although there is disagreement about the exact size of the cost of capital disadvantage to American firms, there is general agreement that such a disadvantage exists and that the real cost of capital in the U.S. remains high by historical standards. The high cost of capital is an important factor behind the myopia that is thought to affect American companies.15 The cost of funds plays a critical role in determining how much a firm values future as opposed to current earnings.16 It influences how 13 Rudiger Dornbusch, James Potreba, and Lawrence Summers, "Business, Economics and the Oval Office: Advice to the New President and Other CEOs," Harvard Business Review (November 1988). 14 George N. Hatsopoulos and S.H. Brooks, "The Cost of Capital in the United States and Japan," paper presented at the International Conference on the Cost of Capital, Kennedy School of Government, Harvard University, 1987. 15 See Dornbusch, Potreba, and Summers; Martin Feldstein, "Business, Economics and Oval Office: Advice to the New President and Other CEOs," Harvard Business Review (November 1988). 16 For example, an investment decision that lowers a firm's earnings by one dollar today while increasing earnings by two dollars. ten years from now is a profitable decision if the firm's cost of funds is five percent, but it is an unprofitable decision if the firm's cost of funds is ten percent. It follows that a firm's investments will be rationally lower, the higher the cost of funds it faces. See Hatsopoulos, Krugman and Summers, op. cit. 15 much patience is actually rational. Because American companies have operated in an environment of high capital costs, they have rationally developed a short-term focus.17 The low national saving rate also makes the nation dependent on foreign capital inflows to finance its productive investment. Perhaps as much as two-thirds of gross private investment in plant and equipment is currently financed by foreign funds. There can be no significant reduction in the nation's current account imbalance without a reduction in its reliance on foreign capital. Although private saving has also fallen in the 1980s below its post-war average, record federal budget deficits in the 1980s have been the major cause of low national saving. The deficit has absorbed more than two-thirds of the nation's private savings during the past five years, drawing funds away from private investment and making the nation increasingly dependent on foreign investment to make up the difference. As a result, the deficit has been a major burden on the nation's competitiveness. There is widespread concern that the deficit will not go away as a result of continued economic growth. Indeed, recent estimates by the Congressional Budget Office show the deficit beginning to rise even though the 17 The myopia of American business has also been encouraged by the cyclical variability and relatively low growth rate of the American economy relative to that of Japan. Japan has had only one serious recessionary downturn during the postwar period. Japan's producers have come to expect rapidly growing national markets with little perceived risk of a slowdown which could reduce returns on investment. In contrast, American producers operate in a national market which has grown slowly and which has suffered from recurrent and sometimes prolonged recessionary slowdowns. This has increased the riskiness of investment for American companies and has encouraged a short-term focus. |