presentation by João Castro and Susana BeiraLisbon . 5th March 2005

Explaining Industrial Leadership

David C. Mowery and Richard R. Nelson

pages 359 - 382

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I

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III

IV

V

VI lessons and implications for public policy

the locus of industrial leadership: firms, sectors, of the nation-state?

the evolution of industry structure

the role of domestic market demand in industrial leadership

factor endowments, institutions, and industrial leadership

explanations for industrial leadership in these seven industries

SUMMARY

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Iexplanations for industrial leadership in these seven industries

GERMANY JAPAN USA

MACHENIRY TOOL . market specificities(design low cost). CNC machine tools

. large domestic demand. mass production methods

CHEMICAL . strong links between universty research and industry. ability to sell abroad. pioneered in in-house R&D

. cheap domestic petroleum. petrochemical specialization (product development). strong links with the university

PHARMACEUTICAL . strong links with the university. abundant supply of skilled scientists and engineers

. massive postwar governement investments. price insensitive consumers. strong university research

BIOTECHNOLOGY . greater extent on close links with university. high independent and specialized venture capital

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Iexplanations for industrial leadership in these seven industries

GERMANY JAPAN USA

medical equipment

. specificty of the domestic market. strong cameras and lenghts industry… specializiation in endoscopy, imaging

SEMICONDUTORS . specilization in memory chip

. R&D programs of the Defense Department. domestic poll of of skilled scientist and engineers. large domestic market. sophisticated venture capital

COMPUTERS

SOFTWARE . anti-trust policy. innovative users

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IIfactor endowments, institutions, and industrial leadership

BUT!

. not always natural resources played an important role

. domestic universty system important, but not with the same intensity in the different sectors

. domestic avaibility of capital

. venture capital (leadership Vs enduring leaders)

. universty links important if they are proactive, close to firms needs

SO! leadership vs maintain the leadership

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IIIthe role of domestic market demand in industrial leadership

Domestic markets tend to dominate the sales of firms in the early development of most of these industries

U.S. Department of Defense supported the early growth of American firms in computers,

semiconductors, and softwareMedical products industries→ high profitability→ few explicit government controls on health care costs (vs highly regulated markets in most Western European

nations)Exploiting their domestic market required that firms innovate →major effects on the growth and structure

of demandEven in a world where markets are global, large

domestic markets provide an invaluable “springboard” for firms seeking to enter new

industries or seize new technological opportunities

IVthe locus of industrial leadership: firms, sectors, of the nation-state?

firm factorsCHEMICAL & PHARMACEUTICAL

firm factors national factors

. to be first mover

. own investments and learning

. national institutional environments

. national policy environments

. high quality university system

COMPUTER, SOFTWARE, SEMICONDUTORS

firm factors national factors

. domestic factor supply

. demand conditions

. university system

. industrial finance

MACHENIRY TOOLS

firm factors national factors

. recent years neither the firm-level nor the national locus of industrial leadership has endured

. differences in national markets and changes in these markets over time

leading firms were establishedmany years ago

high rates of turnoveramong “dominant firms”

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IVthe locus of industrial leadership: firms, sectors, of the nation-state?

IMPORTANT IS!

1. the environment, and what firms do to environment matter

2. firms often exert significant influence on industrial-level supporting institutions and policies

3. “sectoral support systems” – the sources of industrial leadership resides in structures intermediate beteween nations and firms

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Germany chemical industry, also invented the industrial research and pioneered in providing technical consulting services

the American Defence Department is crucial to the R&D development in semiconductors, computer and software American firms

interaction

industrial influences on supporting institutions

sectorial innovation systems

as an industry develops, the firms themselves may play a powerful role in molding their institutional environment

examples – Kaiser Wilhelm Gesellschaft US policies on intellectual property rights

US pharmaceuticals industry supports growth in the NIH budget, the Dod supports semiconductors and computers firms

regional concentrationbiotechnology - Seattle, San Francisco, San Diego and Boston; Rhinelandmachine tools firms – Milwaukee; south-western Germanycomputer, software, semi conductors – “Silicon Valley”

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the locus of industrial leadership: firms, sectors, of the nation-state?

IV

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Vthe evolution of industry structure

“dominant design” theories

. industrial evolution has involved the progressive opening of new segments on market demand, for which existing “dominant designs were poorly suited

“dynamic capabilities”

. these long-term leaders have maintained their technological and capabilities in the face of significant change in underlying basic technologies

“punctuated equilibria”

. numerical control for the machine tools industry

. development of petroleum for the chemical industry

. the antibiotics for the pharmaceutical industries

. integrated circuit, microprocessor for the semiconductor industry

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Vthe evolution of industry structure

COMPETENCE-DESTROYING

technological change

. Standard Oil of New Jersey – petroleum to chemicals

. pharmaceuticals to biotechnology

nature of market change

. pharmaceutical and marketing questions

. but, in electronics complex marketing, manufacturing were insufficient to maintain dominance

vertical specialization

. computer/electronic firms (ex. Siemens, Philips, Nec, Hitachi...)

. pharmaceutical – formed “alliances” or contractual relationships with smaller biotechnology specialists

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VIlessons and implications for public policy

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policies . much R&D infra-structure is sector-specific

. a number of regularatory policies are sector specific

. anti trust policies are neither framed by nor targeted on specific sectors

. the policies associated with the development of a strong industry vary significantly from sector to sector (in scope, kind and impact)

. governement regulations have significant influences in phamaceutical and medical firms development...

....more recently with environmental regulations

. defense-related procurement in France and Great Britain proved to be a much less efective catalyst for industrial leadership

lessons for sectoral policies

VIlessons and implications for public policy

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generic policy principles

government R&D support

. structure seams to be as important as the budget

. the structure of university systems appears to be as important as the government support to industrial development

competition policy

. competition among firms in applying and commercializing technological advances

. ex. the stringent postwar competition policy of United States, and the anti trust policy

intellectual property rights

. ex. chemical products and pharmaceutical (ability of firms to capture the return of their R&D)

. “renaissance” of the USA industry... incentives for aggressive private enforcement