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4.2. The technological performances of the US, Europe and Japan

The ability to develop and apply technological innovations is a crucial factor in the economic performance of the more advanced countries. Expenditures for research and development (R&D), number of scientists, patents and licences, high technology trade, are some indicators that can help to investigate the innovative capacity and the success of its application in the US, Europe and Japan.

R&D expenditures

A first indicator of the activities to foster innovation is the expenditure for research and development. In the previous section the limits of this variable in describing the whole of innovative activities have already been pointed out, as the effort in production engineering and in part-time R&D activities in medium and small firms is largely left out of the official data (Patel and Pavitt 1985: 13). R&D spending, however is a widely used indicator that also allows comparisons over time and space.

In 1986 the US spent almost $120 billion on R&D, about 2.7 per cent of GNP. Half was financed by industry and $55 billion came from the federal government, but 70 per cent of public funds went to military research, while in 1981 the share of defence was 50 per cent (Fortune, 13 October 1986, p.39). Japan and West Germany spent a slightly lower share of GNP than the US, but their effort in civilian R&D is better than the US (ibid.). This has been true since the 1980s; National Science Foundation data in Table 4.1 show that in 1981 the US spent 2.39 per cent of GNP on R&D, more than any other country. Only 1.65 per cent, however, went to civilian R&D, less than the 1.9 per cent spent by Japan in 1978 and the 2.15 per cent spent by West Germany in 1980.

Table 4.1: Expenditure on research and development as a percentage of GNP

Notes: NA - Not available.
Figures for US exclude capital expenditure

Source: For 1961-66 NSF Science indicators 1980, Appendix tables 1-3, 1-4; for 1967-81, NSF National Patterns of Science and Technology Resources 1982, Tables 17 and 19. Table, in this form, taken from Flamm 1984: 31.

Since 1960 the share of US R&D expenditures financed by the federal government has fallen from about 60 per cent to 47 per cent in 1986 (ibid; Flamm 1984: 29). At 1972 prices the amount of US R&D expenditure has increased from less than $20 billion in 1960 to $37 billion in 1982. These data are obtained using the GNP deflator; if a price index for the inputs of R&D is used, the net increase is likely to appear much lower, because the costs of innovative activities tend to increase faster than the average, as a study by Mansfield et al. (1982: 231) has shown.

Using OECD data and defining Western Europe to include Belgium, Denmark, West Germany, France, Ireland, Italy, the Netherlands, Sweden, Switzerland and the United Kingdom, Patel and Pavitt have offered a detailed comparative analysis of the positions of Europe, the US and Japan. Table 4.2 shows the distribution in 1982 of the R&D expenditures (at 1975 constant prices and US dollar purchasing-power parities) among these three areas. The US accounts for almost half (48.9 per cent) the total R&D carried out by the most advanced countries, but falls to 43 per cent when we consider only civilian R&D, with 34.6 per cent in Europe and 22.4 per cent in Japan. The US share is higher, with 52.7 per cent of the total, in R&D expenditure by industry.

Table 4.2: Distribution of R&D expenditure among Japan, Western Europe and the US in 1982

Note: R and D expenditures (at constant 1975 prices) converted to US dollars using 1975 purchasing power parties.

Source: OECD

Table taken from Patel and Pavitt 1985: 15.

Comparing the dynamics of R&D expenditure in the past two decades, Japan has shown the most rapid growth, nearly 10 per cent a year in real terms since the late 1960s, against the 4 per cent for Europe and the 2.4 per cent for the US before 1975, later increased to 6.3 per cent. The result is that the share of Europe in the total R&D expenditures of the most advanced countries has fallen from 35.5 per cent in 1975 to 31.5 per cent in 1982 (Patel and Pavitt 1985: 17).

R&D expenditure in per capita terms, at 1975 prices, shows a similar pattern. In civilian R&D, in 1982 Japan had almost reached the US level ($147 per capita in Japan, $155 in the US); since 1967 Japan has tripled its R&D per capita, while the US has increased it only by 20 per cent. Europe, in the late 1960s was ahead of Japan, but has increased its per capita R&D spending only by 40 per cent, reching $105 in 1982 (ibid.: 22).

Considering the share of R&D expenditure in the GDP at 1975 prices, from 1967 to 1982 Japan increased its rate from 1.58 per cent to 2.47 per cent, an increase almost entirely due to civilian R&D expenditure. Europe increased its share from 1.78 per cent to 2.04 per cent, with a constant share of military R&D. In the US the share has fallen from 3.07 per cent to 2.69 per cent, while civilian R&D has remained at 1.97 per cent, after a fall in the 1970s (ibid.: 18).

After 1981 the US has accelerated the share of R&D in GDP at a pace near to 8 per cent from 1981 to 1983. This was the highest rate among the most advanced countries (almost twice as much as France and Germany), with the only exception of Italy, whose 20 per cent increase is explained by the much lower levels of the previous R&D effort (The Financial Times, 3 December 1985).

Patel and Pavitt tried to show how the increased value of R&D expenditure by industry results from a combination of growth of output and the increase in the share devoted to R&D by firms. Between 1967 and 1981, the corporations' decisions to increase the share of R&D activities explained one-third of the real growth of R&D in the US and half that in Europe. The recent fall in European R&D expenditure by firms is then mainly due to a stagnating output, while the share devoted to R&D is already high (Patel and Pavitt 1985: 19).

Table 4.3 shows the position of different European countries. France, Germany and Italy had the highest rates of growth of industry-financed R&D, while in Britain the expenditure did not increase. Britain and France devote to defence one-quarter of industry R&D. The orders of magnitude need also to be remembered: the whole R&D expenditure by firms in Italy is about the same as the R&D budget of Siemens, the large German firm (Brainard and Madden 1985: 63).

Table 4.3: Industry-financed expenditure for R&D in Europe in 1982

Notes: R and D expenditures and industrial value added (at constant 1975 prices) converted to US dollars using 1975 purchasing-power parities.

(*) In Belgium, Denmark and Ireland Defence R&D accounted for less than 1 per cent of GERD.

Source: OECD. Table taken from Patel and Pavitt 1985: 23.

The resulting picture is not so different from that outlined in the previous chapter for the economic performances. After a relative decline in comparison to Europe and Japan, the US has retaken the lead in the growth of R&D expenditure, but, as in the economy, most of the growth is the result of increased military spending.

Table 4.4 shows the size of military R&D using the data of the Stockholm International Peace Research Institute (SIPRI) for the 1977-85 period, at 1980 prices and exchange rates. In 1985 the US spent $27.8 billion for military R&D, more than three times the combined amount spent by France, Britain and West Germany. The dynamics of

the civilian and military expenditures has been summarized by a report to the US Congress that noted that the civilian R&D budgets of Japan, Britain, France and Germany had risen in the 1964-1979 period from 10% of US R&D civilian spending to 121 % of the US commitment. Between 1980 and 1984, federal support for research and development had declined by 15%, while military R&D increased 110%. A large part of the Department of Defense programs, moreover, have little potential for civilian spillovers.

(Quoted in Tirman 1984: 21)

Table 4.4: Military R&D in Western countries

Notes: Military R&D, constant prices, calendar years 1977-85, US $ M., 1980 prices and exchange-rates

*Provisional figure
() SIPRI estimate

Source: World Armament and Disarmament: Sipri Yearbook 1987: 156

It must be stressed that even before the increase in military R&D spending of the Reagan administration, in 1981 71 per cent of the $3.5 billion spent by the US federal government on R&D were distributed to the Defense Department, NASA and the military activities of the Department of Energy (Melman 1983: 89). Besides the greater funding available for military research, a number of other factors - modern laboratories, 'challenging' projects, higher salaries - have attracted scientists and engineers to the military sector, diverting important resources away from the rest of the economy.

Scientists, patents and licenses

The number of scientists and engineers at work in a country offers another indicator of the dynamics of innovative activities. In the US their number has increased rapidly between 1950 and 1963, slowing down before 1970 and moving only slightly in the 1970s (Mansfield 1980: 594). This has contributed to increase the average age of US scientists and technicians.

The importance of military research can be found here again, as more than a quarter of all US scientists and technicians work on military projects, with the highest concentration in aeronautic and astronautic engineering (80 per cent), and more than 40 per cent in electronics (DeGrasse 1984: 125).

The slow increase of the US pool of scientists and engineers is also documented by the graduation of PhD students. In 1986 the number of foreign students obtaining PhDs in engineering in US universities was greater than the number of American students (Reich 1987: 63). The share of foreign PhD students in all US universities has also increased from 12 per cent in 1960 to 20 per cent in 1986 (Business Week, 20 April 1987, p.59).

The main indicator of the 'output' of innovative activities is the number of patents. Usually the distribution of patents filed and granted in the US is used as a key indicator, but these data need to be considered with particular caution. The patenting by non-US firms, in fact, is limited to products and processes relevant for the US market, reflecting commercial as well as technological performances. Nevertheless, in 1986 42,000 patents were granted to US inventors and 35,000 to foreigners, while in 1960 less than 8,000, out of a total of 47,000 patents, were granted to foreign inventors (ibid.)

As the share of US patents granted to American firms fell from more than 80 per cent in 1963 to about 60 per cent in 1983, European firms have slowly increased their share to about 25 per cent, while Japan has jumped from virtually nothing to 18 per cent of all US patents granted in 1983 (Patel and Pavitt 1985: 29).

A different analysis of patents, classified by year of application, rather than by year of registration, has been carried out by Mansfield, who found that the applications of US residents have declined since 1969, and 'there is also some evidence that the percentage of United States innovations that are radical breakthroughs tended to decrease during the 1960s and 1970s' (Mansfield 1980: 595).

The US National Science Foundation pointed out such a trend back in 1975, when it wrote in its report that apparently 'the number of patentable ideas of international merit has been growing at a greater rate in other countries than in the United States' (quoted in Dumas 1984: 143). This pattern is confirmed by the parallel decline of the patents registered abroad by US firms: 'from 1966 to 1976 US patenting activity abroad declined almost 30% in ten industrialized countries' (ibid.: 144).

However, the technological superiority of the US in the past decades has resulted in a continuous and substantial inflow of payments for the licensing agreements with foreign firms for the use of US technology. The largest part is by far that of the payments from foreign affiliates to US firms. According to US National Science Foundation data, in 1975 the US received $3.5 billion for patents and rights from foreign affiliates, a figure that, however, can be distorted by the effects of different fiscal systems and by account practices of US multinational corporations. In the same year, the payments from unaffiliated foreign residents have been little more than a fifth, $759 million, while the payments abroad by US companies have been $241 million to their foreign affiliates and $192 million to foreign firms (Mansfield 1980: 587-8). Although many current analyses consider past licensing to foreigners as a 'giveaway' of US technology (see Business Week, 20 April 1987, p.62), this flow of funds has represented a key contribution to the US balance of payments and to the profits of US corporations.

The trade of high-technology products

The relative performances of the most advanced countries are also described by the dynamics of international trade in high technology products, usually defined as those with a high share of R&D activities in the total sales of an industry. Here the US experience may have appeared as a major success. Stephen Merrill, in a report of the Center for Strategic and International Studies of the Georgetown University, noted that

the output of high technology industries grew at twice the rate of US industrial output as a whole. The average annual, rate of price increases in the high technology sector was one third that of the country's overall average inflation. The average annual growth in employment in high technology and its supporting industries exceeded the growth rate of total business employment by more than 50%. The average annual productivity growth rate in high technology was six times the average growth rate of US business as a whole.

(Merrill 1985: 51)

However, looking at the performances on international markets, the picture becomes less rosy. Shortly after the 1980 peak in the US high technology trade balance, the second half of 1984 turned the US balance into a deficit. This is the result of the surge of imports favoured by the overvalued dollar, but Merrill himself pointed out that 'by any of several measures of technological intensity, the United States was losing market share in a range of high-technology industries well before the 1981-1983 dollar appreciation and the 1983 economic recovery' (ibid.: 52).

According to a study for the US Congress Joint Economic Committee, 1986 has been the first full year when the US trade balance in high-technology products registered a deficit, estimated around $2.5 billion (Finan et al. 1986). It must be stressed that this is both the effect of declining US competitiveness and the result of the strategies of US corporations to produce offshore and make greater use of foreign subcontractors, especially in the countries of South-East Asia (ibid.: 4). In the first half of 1986, South Korea had a trade surplus with the US in electronics-related goods of $448 million, the surplus of Singapore was $543 million and that of Taiwan $740 million (ibid.: 32).

Looking at the composition of US foreign trade, the share of high-technology products in US exports was close to 30 per cent in 1983, twice as much as that in US imports. However, the technological intensity of US exports has increased only a little from the 24 per cent of 1970, while the share of high-technology products in US imports has increased from 10 per cent in 1970 to 15 per cent in 1983 (Merrill 1985: 46).

The position of Europe is equally difficult. In 1983 the ten EEC countries imported from the US high-technology products worth $17.2 billion and exported to the US $7.3 billion (ibid.: 47). In 1985 the EEC had a $12 billion trade deficit in 'information technology' products (mainly computers and software) and half of the local production is carried out by US and Japanese subsidiaries. In five years, these foreign affiliates are expected to increase their share to two-thirds of the European output. This is the result of the poor performance of European industries dating back to the 1970s. According to EEC estimates, over the last decade the output of high-technology products has increased by less than 5 per cent a year in Europe, while in the US it increased by 7 per cent and in Japan by 14 per cent a year (International Herald Tribune, 28 November 1985).

The new technological landscape

The technological performances of the US, Europe and Japan in different industrial sectors have been summarized by Patel and Pavitt in a comprehensive picture of the relative advantages and disadvantages, using a set of indicators, in particular the index of revealed technological advantage. Their results are shown in Table 4.5. The sectors of relative strength of the US are those related to natural resources, aerospace and military industries, that are financed by the US government. Electronics and telecommunications are also areas of relative, although declining, US advantage. For Europe, the areas of strength are chemicals, machinery, nuclear energy and aeronautics. Japan has the greatest advantage in engines, motor vehicles, machinery and electric industry (Patel and Pavitt 1985: 39).

This picture of the competitive positions and specializations over the whole range of industrial sectors by the US, Europe and Japan, provide an adequate account of the complexity of the current technological situation, with three large economies that are at the frontier of technological development in different areas. The phase of 'catching up' by Europe and Japan of the overall US technological advantage has ended and is replaced by a growing specialization and a more articulate set of relative advantages and disadvantages in different sectors.

Table 4.5: Technological performances of the US. Europe and Japan in industrial sectors

The attempt by the US to regain a leadership position in the 1980s did not succeed in reversing the decline of its technological superiority. Japan has kept improving its positions, even if it remains weak in a few sectors and markets. The European performance has combined successes and failures, with prospects that have become more uncertain. In Europe there are low levels of innovative activities, lower than in the US and Japan on all the indicators, and their dynamics have stagnated due to the slow growth of European economies (ibid.: 68). However, in spite of this slow-down of the European technological accumulation 'there is no systematic evidence that Western Europe is any less effective than Japan or the USA in translating its technological knowledge and skills into superior products and processes' (ibid.: iii).

The result is that 'there are now three regions of the world that are competing along the world technological frontier. Given the differentiated nature of technology, the picture of technological leads and lags across countries is bound to be a complicated one, with considerable variations across sectors, types of activity and time' (ibid.: 4). The model of an overall 'technology gap' therefore has to be abandoned, but the power relations associated with positions of technological advantage remain an important aspect in the international arena.

Together with the 'technology gap' model, other conventional wisdom has to be abandoned. A 1986 report of the US National Security Council found a Japanese superiority in research and development for semiconductors, industrial automation, computer architecture, telecommunications components. The report concluded that the Japanese progress in research is such that 'the conventional model of US technological leadership in basic research followed by more successful Japanese commercial exploitation is no longer accurate in many of the critical technologies targeted by the Japanese' (quoted in Reich 1987: 65).

In order to understand the mechanisms of the American decline and the forces that are shaping the new geography of high technology, it is important to examine the different technological 'styles' that have inspired the innovative strategies of both corporations and governments. Although the result so far documented is a convergence of the comparative performances of the most advanced countries, the approaches to innovation have developed along rather different paths. According to Vernon, over the post-war period,

in consumer goods, US businessmen had traditionally concentrated on satisfying.., new high-income wants. The Europeans and the Japanese, on the other hand, paid much more attention to the adaptation of products for lower-income needs, including the trimming of costs and prices, as well as the improvement of durability. In producer goods, US businessmen had concentrated on finding substitutes for their high-cost labor, whereas the others had displayed a greater relative interest in material-saving innovations. As a result of these disparities, most US innovative effort found eventual expression in new products, while the Europeans and the Japanese appeared to be devoting a larger proportion of their innovative effort to improving their productive processes.

(Vernon 1982: 157)

Such a description by Vernon is a very good account of the 'Fordist' regime of accumulation, both of the consumption model of mass-produced standardized goods, and of the innovative patterns, related to the different market conditions, social structures and income distributions of the US, Europe and Japan. This had important effects on the innovative process within firms and on the technological accumulation of the economy, changing the relative positions of the most advanced economies. To return to Vernon, the European and Japanese producers showed a greater capacity to react rapidly to external pressure and 'these changes have meant that US businessmen have lost a critical lead that they for so long had enjoyed' (ibid.: 158).

However, the size of US firms, their presence in foreign markets and the importance of military R&D, are all factors that suggest caution 'in the assumption that US firms will lose much technological ground to their European and Japanese competitors; the ground will certainly shift, but the US firms may still be left with a visible competitive edge' (ibid.: 160). A major reason for such 'optimism' is that US firms are now also in the position to use technologies that have been originated in other countries, where the large presence of affiliates of US multinational corporations offers the US a particular access and degree of control.

On the basis of such processes, what is the outlook for the future? An interesting technological scenario has been suggested by Pavitt:

1. The US maintains its lead in technologies closely related to military activities. This poses some problems in international technology transfer West-West or West-East in such areas as aircraft, space, nuclear materials and electronics, but these are similar to problems that have existed over the past 25 years.

2. No new countries join the select club at the world technological frontier...

3. Japan, West Germany and few of its neighbors maintain their technological dynamism and increase their innovative capacity in general and in particular sectors of comparative advantage.
(Pavitt 1985: 17).

The growth of international technology flows by itself does not guarantee a greater access of new countries at the technological frontier because the conditions that have made possible the 'catching up' on US technology by Europe and Japan are neither present, nor transferable elsewhere. The levels of technological accumulation and the possibility to move know-how are not adequate for greatly expanding, in the near future, the number of countries with a presence on the technological frontier.

Rosenberg, however, has stressed the importance of the change that is taking place: 'by contrast with the postwar years of American hegemony, we are likely to see several technological competitors functioning within increasingly similar economic environments and therefore responding to increasingly similar stimuli and problems' (Rosenberg 1982: 289).

In a similar way, Merrill also noted that 'the evidence is overwhelming of a widening technological parity and a quickness on the part of certain competitors to capitalize on newly acquired capabilities and seize important market niches at the high technology end of various high technology industries' (Merrill 1985: 56).

In spite of the different emphasis and perspective, these analyses agree on the convergence of Europe and Japan on the world technological frontier, resulting in a more fragmented pattern of technological leads and lags in different sectors among the advanced capitalist countries. An overall 'technology gap' over all the range of high technologies is perhaps reproduced further down in the international hierarchy, with the developing countries.

In this framework, the objective of a technological strategy in the more advanced countries becomes not reaching (or restoring) an overall leadership, nor, for the weakest countries, an indiscriminate effort to imitate and reproduce a consolidated technological model, embodied by the leading country. Therefore it would be wrong to expect the new Japanese leadership in many new technologies to result in Japan 'replacing' the US with an overall technological superiority. This is prevented not only by the lack of political, economic and military conditions comparable to those that made possible the rise of US leadership, but also by concrete technological reasons. The range of new technologies is simply too wide for any country to maintain an undisputed 'lead.' Rather, the new objective of technological strategies becomes targeting the best position for the national economy in the international division of labour at the technological frontier. Nevertheless, the control of high technology continues to be a source of power, particularly in the case of military technology, whose role and effects are discussed in the next section.

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