Is research and development the basis of long-term national competitive advantage

In order for a nation to be economically successful it must plan for the long term. This is how economic powers such the Western Europe, US and Japan have become so successful. The major reason behind national competitive advantage is Research and development. National competitive advantage is undeniably one of the most important goals, any government aims to achieve, and it is generally believed that it is through industrial leadership and competitive advantage that a nation is able to develop and succeed. As companies innovate, they increase their profits. In turn this helps the nation overall, when thousands of companies are doing the same. There is a need for ‘recognition of the importance of innovation in an economy’, (Mowery & Rosenberg, 1992). This essay will look at the reasons behind R&D and its implications for competitive advantage, on global economies.

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The way that innovative systems at both corporate and national levels have contributed to the development of major industries shall be discussed. The essay will also look into a number of industries where R&D takes place. The main focus will be on the U.S, U.K and Japanese economies.

“Techno nationalism” is the concept where certain industries have managed to gain competitive advantage in world markets. This is usually done via technological sophistication and innovation. The global economy saw some tremendous changes after The Second World War. The biggest and most dramatic change was that of Japan. The war had left the Japans economy in a state of devastation. Since then Japan has grown to become the world’s second largest economy. Today, Japan commits a total of 3% of GNP to R;D, whilst the US commits 2.63%, respectively. This was done due to Japan’s adaptability to American and European technologies. It also had an advantage over industrialised nations. Japan improvised instead of creating from scratch, already tried-and-tested Western technologies. However the U.S being a first mover enjoyed other advantages and did not have to go through the trouble of catching up, as it gave head starts to certain industries. According to Krugman, (Mowery, D., 1993), high-income countries are generally pioneers in new technology since they tend to be rich in scientists and engineers- hence having greater R&D investments, and also because high-income domestic markets have higher expectations, especially when it comes to drugs, motivating the companies to strive for excellence in innovation. On the other hand, due to outflows of technology through foreign investment, it is better to be the late industrializer rather than the first mover.

As information technology and large-scale operations grew so too did the number of global companies competing directly. With the growth of multinationals, R&D also increased substantially. The maturity of the US and Japanese pharmaceutical industries came about due to the cultivation of communication, transport and standardization in conjunction with other external factors. The pharmaceutical industry has many advantages to other corporate companies. Mowery (1983) stated, “Firms without in-house R&D facilities were handicapped in their ability to pursue R&D and innovation” and hence, economic growth. Companies can afford to invest huge sums of money in R&D because medication is of inelastic demand and will be paid for no matter what its cost (within reason) or state of economy. A firm’s corporate structure, as well as its corporate strategy is heavily dependent on its R;D model. Hence, it would be beneficial for firms to create internal venture groups to work on up-and-coming technologies. This would help promote greater creativity and innovation in research activities, which would in turn help the company.

Governments fund for research and development in the form of subsidies depending on how important they feel the research is. By the early 1990’s a huge gulf was created in the amount spent by the US and Japanese governments, in terms of expenditure by industry, spending on R&D. In the US this expenditure was 28.5% whilst Japan spent 1.4% respectively. Until the end of World War II, the US had a mixture of government support with hidden help provided to some industries. It was said by many industry theorists such as Porter that governments should not set ‘targeted’ policies of support towards certain industries. Instead it was argued the so-called ‘invisible hand’ should do this.

Economies of scale, differentiation, capital requirements, and government policies are just some of the competitive forces which make the pharmaceutical industry to have large barriers to entry and exit, Porter (2000). It is particularly difficult for new entrants into the market to become successful if the products they are competing against have come from firms whose producers are highly sophisticated, and who invest a lot of time and money in R&D.

Universities and companies have inherent interest in forging links with each other.

The US, UK and Japanese governments recognized the importance of this process. They insured that universities and firms could work along side the institutional framework to innovate for the future. ‘The education system, which had been expanded by this time to include several universities and other higher education institutions, started to supply many trained engineers’, (Nelson, 1993), which refers to Japanese growth. These links between firms and institutions also created ‘clusters’. As Porter states ‘a nations successful industries are usually linked through vertical or horizontal relationships’, (Porter, 1990).

Education is the cornerstone of any successful nation to produce innovative goods. The ready supply of talented graduates ensured the success of Japans pharmaceutical industry and the US automobile and semi conductor industry. Close links between business and universities ensure that R&D facilities have the best staff with established contacts in both areas. Support for the pharmaceutical industry by funding university research by governments, is one of the key reasons of success behind the success of the industry in both the US and Japan. ‘The rise of the American chemicals industry was associated with the growing strength of American Universities’, (Mowery & Nelson).

Serran Screiber (Nelson, R., Rosenberg, M, 1989) in the late 1960’s argued that American firms were superior to their competitors. This was due to the fact that US firms spent more on R;D and their university- business links were then larger than all other OECD nations combined. It is usually US firms that are first to come up with technological innovations. The problem they have is that they lose the competitive edge soon after as other technologically advanced nations such as Japan soon produce products to compete directly. The Japanese government during the late 1960’s was attempting to become indigenous in all R&D. This was done by implementing rigid policies aimed at encouraging R&D.

The Silicon Valley is an excellent illustration of how links between the academic institutions and the business can produce innovative products which are a strong competitive advantage. Stanford University is very closely linked to Silicon Valley in North California, which became the hub for the semi conductor industry which is the best in the world. This was done with the help of suitable climatic conditions and government assistance and its unique cooperative risk-sharing structure.

R&D can have a direct impact on more then one industry. A prime example of this is the defence industry. Inventions such as the Jet engine for fighter planes were initially designed for the combat. However, an offshoot of this was that it led to the creation of the commercial flight aircraft industry. R&D spending by the Department of Defence in the US was opening the market for commercial aircraft industry after the Second World War, which has made the commercial aircraft a massive industry in its own right (Mowery & Nelson).

The US Department of Defence has also been responsible for the R&D in the semiconductor field. Just as the commercial aircraft industry was an offshoot, so too was the computer industry. Both of these industries have become clear leaders in the world as a result of the R&D for the US Department of Defence.

Companies invest huge sums of money in R&D. In order to make sure that no one else simply copies what often is the result of years of hard work, international patents are employed. These are particularly important to the pharmaceutical industry. It is in the interest of all countries to uphold patents, as this aids the local industry and also encourage innovation. As huge sum of money are invested by firms, patents act as a guarantee that no other firm can copy its product. Without such a guarantee it is unlikely firms would be willing to invest large sums into R&D.

The US and UK had a head-start on Japan in terms of the technology it produced locally. The way in which Japan was able to compete was to use this to its advantage. Japan imported technology readily available in the West, and using its own R&D facilities produced more innovated products than those currently available. Japan had to ‘encourage the importation of advanced technology and promote a domestic base’, (Nelson, 1993), this allowed them to compete with the other industrialized nations. Gershenkron emphasizes Japan would have to imitate the modern efficient organizations to succeed, and also would require large institutional assistance.

Technology is the main driving force behind all R&D activity. R&D is carried out for a number of reasons, political in the case of the defence industry or commercial in the case of the pharmaceutical industry.

Today the world’s business environment poses a whole new scenario. Strong university-business links, in-house R;D facilities, government assistance in the shape of subsidies, taxes, regulations and the ability to detect, import and use to your own advantage, foreign innovations are all necessities more than sources of advantage. In the light of the information discussed, it is suffice to say that investment in R;D, innovation and technology does indeed pay off by giving, Japan and the US in this case, competitive edge in the pharmaceutical and electronics industry to say the least.

The only way in which nations can compete on an increased global scale is to keep innovating in order to gain national competitive advantage. If the leading economies do not invest the same amount into R;D then they could lose out to other nations. The success of R;D is not solely dependent on the amount of capital spent. As has been illustrated other factors such as cultural differences and management practices do also come in to account. Overall, R;D is essential for growth of a country, without innovation, competitive advantage would decline.