International trade and R&D offer significant opportunities for knowledge transfer through exports, but simultaneously increase potential competition through imports. In this paper, the author examines industry-level heterogeneity in the relationship between domestic innovation and international trade. Using a model of innovation in the global economy and a novel measure of relative industry strength, the paper examines differential effects of exports and imports in high-technology industries. These relationships are tested empirically using panel data from four high-technology industries in the US over the period 1973–2001. In industries that are relative global leaders, the empirical evidence points to gains from both exporting and importing. On the other hand, in industries that are relative global laggards, the results are more fluid. The author finds that exporting contributes favorably to domestic innovation in both leading and lagging industries when foreign R&D is at its maximum; at lower levels of knowledge abroad, however, the net effect of exporting on lagging industries is negative. Results for importing are likewise nuanced. In industries that are relative leaders, increasingly sophisticated imports lead to greater domestic innovation when industry structure is more concentrated, providing a competitive kick-start. In industries that are relative laggards, this effect is not present.
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Within any given industry there will be a distribution of firms of leading and lagging firms. Individual firm-level heterogeneity means that lagging firms exist in leading industries, and leading firms exist in lagging industries. On balance, we can think of industry-level analysis as the average of all of the firms in that industry. Econometrically, the logic behind this has been formalized in Melitz (2003) and subsequent papers.
A classic example of a good that is both rival and excludable is a chocolate bar: it cannot be shared without one party having less than if one consumes it alone, and it is easy to prevent someone else from consuming it. Likewise, a class example of a good that is both non-rival and non-excludable is a public park, where multiple parties can enjoy it simultaneously, and no one can be excluded.
Empirically, at the level of national economies of industrialized nations, various empirical studies have shown that there are spillovers from foreign R&D to domestic TFP (Bernstein & Mohnen, 1998; Coe & Helpman, 1995; Keller, 2002; Keller & Yeaple, 2009; Nadiri & Kim, 1996). However, in these studies there is great variation among countries, with the US the greatest source of spillovers to other nations and the smallest receiver of productivity benefits that can be attributed to foreign R&D. In some studies carried out at the country level, the effect of foreign R&D on US domestic TFP is negative (Engelbrecht, 1997; Park, 1995). Empirical studies at the broader sectoral level have also shown mixed results. In several studies, Keller (2000) finds evidence of import-weighted foreign R&D contributing to domestic TFP in 13 pooled manufacturing sectors among major OECD economies, including the US. Keller (2002) also finds that the effect of foreign R&D on domestic R&D is inversely related to geographic distance. Evenson (1997) finds weak evidence of import-weighted foreign R&D contributing positively to domestic TFP growth in 11 pooled manufacturing sectors among major OECD economies.
To be clear, industry-level analysis captures the average of capabilities, knowledge stock, and absorptive capacity within the industry as a whole, relative to other national and global industry peers, but cannot capture distinctions among individual firms, such as laggard firms in leading industries or leading firms in relatively laggard industries. In other words, we capture the average, but not the variance, of the distribution of firms in the industry.
To be clear, the argumentation above goes beyond the seminal studies by Salomon. This study highlights the contingent effect of leading or lagging industry status on the relationship between exporting and intensifying foreign R&D. The argumentation in this paper addresses firms in industries that are both leading and laggard industries relative to the global frontier (and, indeed, can be leaders in one time period yet laggards in another). In contrast, in Salomon and Jin (2010) individual firms may be leaders or laggards relative to firms in the industry, but the Spanish industries lag the global frontier (p 1097). In Salomon and Jin (2008), the focus is on industry relative distance from the global frontier, where industries may lag or be at parity with the global frontier (but are not the global leaders). More broadly, the argumentation in this study posits the influences that industry-leading or -lagging status may have that go beyond the learning-by-exporting relationship. These include competitive pressures to innovate deriving from the industrial organization perspective for firms in leading industries, and the potential for firms in lagging industries to learn from leaders abroad and thereby substitute foreign R&D spillovers in place of diminished potential for domestic R&D spillovers. (While this study cannot empirically differentiate these channels, the mechanisms outlined above could potentially be tested with other data.)
Majumdar (1980: 104) notes: “It must be pointed out that the Japanese imitation of the electronic calculator technology in 1964 occurred without any assistance from the original producers in the US. There were no licensing or joint venture agreements. The Japanese producers rather copied the product through a process of so-called ‘reverse engineering’.”
The industries were selected for this study based on the following criteria. While all four industries are considered high technology relative to all of manufacturing, they differ along key dimensions that we wish to exploit. First, these four industries provide a range in technological maturity. The computer equipment industry (SIC 357) has been characterized by rapid technological advance. Communications equipment (SIC 366) is also a technology-driven industry. In contrast, the household audio and video equipment (SIC 365) industry involves lower-margin mass production. Finally, scientific instruments (SIC 381+382) generally involves incremental technological advance, with input from varied scientific disciplines. Second, these four industries have had markedly different experiences in the global trading arena. For example, during the period from 1973 to 1996, the average share in world exports for all US manufacturing industries was 11.5%. However, the average was as low as 2.1% in the household audio and video industry (SIC 365) and as high as 24.4% in computer and office equipment (SIC 357) and 24.7% in scientific instruments (SIC 381+382) over that period.
For example, Scherer (1984: Chapter 9) identifies differences in technological opportunity among industries as being responsible for nearly half of firm-level differences in innovative output.
Aggregation to the three-digit level is accomplished through adding the four-digit totals for real inputs (capital, labor, energy, and non-energy materials) and summing to the three-digit totals. Inputs are first deflated at the four-digit level, using the input-specific, four-digit price deflator. The resulting real four-digit inputs are then aggregated to the three-digit level. Factor shares are calculated using the three-digit inputs and three-digit output – that is, aggregated first.
Capital stock data were provided by Norman Morin at the Federal Reserve.
Many patents are neither licensed nor produce revenue, and thus have little direct connection to innovation at the macroeconomic level. Moreover, while some industries are very dependent on patent protection, such as biotechnology, others – such as computer equipment – rely heavily on trade secrets.
These data include all R&D performed in industry, regardless of source of funding. Thus government-funded R&D is included. However, this should not pose a problem, as it is reasonable to assume that the overall stock of R&D abroad, including government-funded, constitutes the available pool of scientific and technological knowledge upon which both domestic and foreign firms will draw.
The specific countries in the sample are: the United Kingdom, Germany, France, Denmark, Finland, Ireland, Italy, the Netherlands, Spain, Sweden, and Japan. These countries are included on the basis of continuous data availability over the period, and they represent a substantial portion of R&D activity in the industries included in the panel.
Estimates of the rate of depreciation of R&D stock range from 0.05 to 0.15: see Griliches (1998). Coe and Helpman (1995), for example, assume δ=0.05, Keller (2002) assumes δ=0.10, and Griffith et al. (2004) assumes δ=0.15. Sensitivity tests in these studies, and in my regressions, do not find that the results are changed significantly with varying values of δ. I present results based on δ=0.11, based on the value used in a comprehensive US Department of Labor study (US Department of Labor, 1989).
For example, Bureau of Labor Statistics estimate a contribution of domestic R&D to TFP growth of 0.49% for the years 1973–1987 for all manufacturing. Griliches (1994) estimates 0.36% for the years 1973–1989.
The net effect is determined by evaluating at a particular point. In this case, the calculation is at the means of exports to sales and imports to sales.
Evaluated at the maximum instead of the mean value of foreign R&D stock, a 1 percentage point increase in exports to sales is associated with a 1.77% increase in domestic TFP in relatively strong industries and a 1.87% increase in TFP in relatively weak industries.
I am thankful to an anonymous referee for highlighting this distinction.
AT&T held the patents for the technology of sending voice signals through copper wire. After the patents expired in the 1890s, AT&T was still able to retain control over the connections among exchanges (Crandall, 1991: Chapter 2). The manufacture of equipment was controlled largely through Western Electric, which was the “manufacturing and supply unit of the Bell System” from 1881 until the breakup of AT&T in 1984, when the breakup of AT&T in 1984 separated Western Electric from the Bell companies.
RCA, GE, and AT&T were key players in developing the early technology. In the UK, Electric and Musical Industries Ltd (EMI) formed a partnership with Marconi to develop early television (Inglis, 1990). In the US, RCA and GE were the main producers of transmitters and antennas.
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The author is grateful for comments received from three anonymous reviewers and editors Paul Almeida and John Cantwell. Earlier versions received valuable comments from Lewis Branscomb, Robert Lawrence, Josh Lerner, Suzanne Cooper, F. M. Scherer, Paul Vaaler, Robert Kudrle, Masaaki Kotabe, and Ram Mudambi. She also thanks seminar participants at Harvard University, the University of Minnesota, Temple University, the Academy of Management Annual Meeting, and the Midwest International Trade Meeting for their comments.
Accepted by John Cantwell, Editor-in-Chief, and Paul Almeida, Area Editor, 22 July 2013. This paper has been with the author for two revisions.
Selection of Industries and Industry Background
Computer equipment (SIC 357)
The US computer equipment industry is innovation-driven, with strong ties to science and engineering. Innovation in the computer equipment industry has been characterized by rapid technological advance, with complex, distinct technologies, and numerous breakthrough advances. The industry has gone through several periods of discontinuity, characterized by more frequent entry and exit of smaller startup firms (and the growth of some of these startups into formidable companies), followed by consolidation around several large companies conducting R&D in centralized research facilities (Yoffie, 1997). From the beginnings of the computer industry, changes in market structure evolved concomitantly with technological advance (Bresnahan, 1999; Bresnahan & Malerba, 1999). While technological advance propelled the growth of the US computer industry, market demand that sustained the price elasticity of demand was critical. The existence of a substantial base of scientists and engineers, the importance of small business, and perhaps to a lesser extent the vast potential market of home users played an important role in the rapid expansion of the computer industry in the US. As early as 1977 more than 70 manufacturers were making personal computers, primarily for scientists and hobbyists, with small businesses beginning to use these as well; by 1978, 15,000 personal computers were in households (US Department of Commerce, 1978).
From the origins in the tabulating machines of Hollerith (an antecedent of IBM) and of Powers (ultimately Remington Rand and its successor companies), international distribution was an essential component, establishing the broad global channels that remained important as the computer industry evolved. Prior to the First World War, these US inventors took their tabulating machines to England and to Germany, and then through the rest of Europe, developing the initial market for what would eventually be computer equipment. These initial partnerships also became the precursors for eventual British and European competitors. Likewise, even before the establishment of research facilities abroad, these international channels also formed the basis for global sources of incremental improvements to the products (Connolly, 1967; Flamm, 1988). At the same time as there was a concerted effort in the US to develop powerful computing machines, no comparable industry was developing in Europe, at least not on the scale of that in the US (Connolly, 1967; Flamm, 1988). In Japan, the government protected the domestic infant industry from foreign competition while encouraging access to foreign technology through licensing agreements; the combination of protection and access to state-of-the-art technology proved successful in the development of a globally competitive Japanese computer industry by the 1980s (e.g., Toshiba, Sharp, and others) (Bresnahan, 1999; Chandler, 1997; Flamm, 1988).
Household audio and video equipment (SIC 365)
Commercial success in the household audio and video equipment industry has been heavily dependent on the introduction of new products at increasingly rapid intervals (McKinsey Global Institute, 1993; MIT Commission on Industrial Productivity, 1989; Rosenbloom & Abernathy, 1982). One of the major technological transitions in the home audio and video equipment industry, as in other industries, was the transition to solid-state circuitry in the early 1970s (US Department of Commerce, 1973). The use of integrated circuits and single-board designs was another important transition in the industry, which allowed decreases in size and cost along with improved technology (MIT Commission on Industrial Productivity, 1989). Japanese companies were early innovators in applying solid-state technology to consumer electronics, starting with portable radios in the 1960s and continuing with television, including an all-solid-state color TV introduced by Hitachi in 1969 (Rosenbloom & Abernathy, 1982). Likewise, Japanese companies were similarly quick to use integrated circuits in consumer electronics.
International trade in the US household audio and video equipment industry has been consistently dominated by imports since the 1960s (Marcus, Pettingill, & Stearns, 1975; US Department of Commerce, 1998). US exports in this industry were relatively small throughout the period, while imports continued to rise. While foreign manufacturers were actively pursuing segments of the US industry, US radio and TV manufacturers did not actively seek overseas markets in the 1960s and 1970s, concentrating on meeting domestic demand (Rosenbloom & Abernathy, 1982). US manufacturers responded to lower-priced imports in part by seeking out lower-cost offshore manufacturing opportunities (MIT Commission on Industrial Productivity, 1989; US Department of Commerce, 1972). While this strategy lowered costs in the short term, it might have contributed to longer-term problems such as the failure to invest in automation. Further, US consumer electronics manufacturers responded to increased import pressure by seeking trade restrictions and protection. In 1971 Japanese firms were found guilty of dumping with little penalty in a US Customs case initiated in 1968. The antidumping duty law of 1979 provided some more stringent penalties. Several lawsuits against Japanese firms in the 1970s were initiated by Zenith and other companies (US Congress, 1990).
Communications equipment (SIC 366)
Engineers, entrepreneurs, and inventors developed telegraph, telephone, radio, and TV technologies in the late nineteenth and twentieth centuries using common roots in physics, much of which was understood by the early nineteenth century (Brinkman & Lang, 1999). The early history of technology in the telephone industry in the US was dominated by AT&T (Crandall, 1991: Chapters 2 and 4).Footnote 21 In radio, a mix of foreign and domestic companies influenced the early development of the industry. After developing the wireless telegraph in Italy, with the first transatlantic communication in 1901, Marconi remained the dominant international telegraph company until the end of the First World War. In the US, RCA was formed after the First World War from Marconi’s US assets, including wireless patents. The technology for television broadcasting equipment evolved from roots in radio, and was developed in the US and abroad (Inglis, 1990).Footnote 22 Mobile telephony also developed internationally from early roots in radio technology. AT&T demonstrated the first mobile telephone service in 1946. In 1950, the first cellphone prototype, developed by Ericsson and Swedish Telecom, was demonstrated in Sweden. The Nordic Mobile Telephone Group was established in 1969 as a joint project to put in place a mobile telephone network in Sweden, Finland, Norway, and Denmark. The first commercial mobile phone network started in Tokyo in 1979, based on the analog Advanced Mobile Phone System (AMPS), soon followed by the Nordic group in 1981. Cable television first started in the 1940s in the US as community antenna television systems in which a single large or well-placed antenna captured weak television broadcast signals and redistributed them via cable to a group of homes. Cable further evolved in the 1950s into distant station importation using microwave signals to transmit signals from distant stations to a central cable network. In the 1970s satellite distribution of programming became a third mode for cable systems to receive programming. The early history of satellite communication started in the Second World War, when UK engineer Arthur C. Clarke, a British RAF officer working with engineers at MIT, developed the concept of satellite communication. The development of such a system was accelerated in the1960s by the space program in the US (Inglis, 1990). Satellites remained a strong US domestic industry through the 1990s (Knott, Bryce, & Posen, 2003).
New technologies continued to provide competition as the industry evolved. Major technological developments include the switch from analog transmission to digital, the introduction of fiber optics, and the development of cellular radio (Yoffie, 1994). A consistent theme in the telecommunications segment is that new technologies, frequently coupled to changes in the regulatory framework, have displaced older technologies and the companies that hold onto them. Another significant technological evolution has been the feasibility of and demand for integration of data transmission capabilities with existing audio and video transmission technologies. This has been accelerated by the transfer from analog to digital transmission. Early analog advances in 1970s included the introduction of coaxial cable with increasing capacity to carry simultaneous phone and data calls, and the development of a domestic satellite system capable of high-speed data transmission, as well as delivering phone, fax, and TV services (Marcus et al., 1975, US Department of Commerce, 1974). The US HDTV standards also take into account the possibility of including other types of data in the television transmission (Farrell & Shapiro, 1992).
The communications equipment industry was shaped extensively by the regulatory framework that governed the separate sectors. In 1978, the Federal Communications Commission extended the interconnect market to include telephone sets (US Department of Commerce, 1979). The 1982 consent decree and subsequent divestiture of AT&T in 1984 into seven regional Bell companies had important consequences for further opening up communications equipment to a variety of manufacturers, domestic and foreign. The Telecommunications Act of 1996 had important consequences for communications equipment, including telephone, TV, and cable. Most of the telephone companies operating in Europe and Japan historically were state-owned monopolies. State monopoly of services generally engendered preferential relationships with equipment manufacturers as well.
Scientific instruments (SIC 381+382)
Innovation in the scientific and industrial instrument industry depends on close ties to science and engineering, with feedback from users an important aspect (Klevorick, Levin, Nelson, & Winter, 1995; von Hippel, 1976). Innovation in this industry has tended to involve incremental improvements of existing product designs. Sometimes, technological advances allowed the transformation of existing technology, often requiring the development of all-new products. This, for example, was often the case with the transformation from analog to digital technology during this period (US Department of Commerce, 1973, 1979). Similarly, the incorporation of microprocessors generated greater demand for precision testing equipment in other industries dependent upon microelectronics, including semiconductor manufacturing, communications equipment, and the computer hardware industry (US Department of Commerce, 1973, 1976).
The scientific and industrial instruments industry differs notably from the other industries under consideration, in that few of the products of this industry have consumer markets. This industry is very R&D intensive, and the users typically demand a technically advanced product without being very price sensitive. The industry is closely tied to broader trends in the national and international economic and policy sphere. For example, the growth of environmental rules in the 1970s, and the subsequent need for compliance with environmental and health regulations, spurred demand for monitoring and controlling instruments (US Department of Commerce, 1973, 1979). Energy conservation measures, a focus on improving labor productivity, and the need for quality control also increased demand for more sophisticated instruments in the 1970s (US Department of Commerce, 1976).
US manufacturers actively sought to sell to markets overseas. In the early 1970s US manufacturers of scientific and industrial instruments established overseas subsidiaries and joint ventures. They also participated in international industrial expositions (US Department of Commerce, 1973). Frequently, US affiliates abroad worked with the corporate engineers within the parent company to design new products (US Department of Commerce, 1976). Growing investment in R&D in Europe and Japan led directly to demand for the scientific instruments and laboratory equipment, as the US industry was a leader in many sectors (US Department of Commerce, 1979, 1986). Also, as R&D-intensive industries abroad expanded, such as communications equipment, computer equipment, and other industries, demand for scientific and testing equipment increased concomitantly (US Department of Commerce, 1986). On the other hand, a countervailing relationship between growing foreign R&D abroad and domestic innovation was the increasing technological competitiveness of the scientific and industrial instruments industry abroad. Thus in the 1970s and 1980s the US industry faced increasing competition from more sophisticated imports (US Department of Commerce, 1979, 1986).
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Smith, S. Follow me to the innovation frontier? Leaders, laggards, and the differential effects of imports and exports on technological innovation. J Int Bus Stud 45, 248–274 (2014). https://doi.org/10.1057/jibs.2013.57
- innovation and R&D
- international trade theory
- global competition
- industry dynamics
- learning from exporting
- import competition