The New Competitive Advantage The Renewal of American Industry Michael H. Best GreatClarendonStreet,OxfordOX26DP OxfordUniversityPressisadepartmentoftheUniversityofOxford ItfurtherstheUniversity'sobjectiveofexcellenceinresearch,scholarship, andeducationbypublishingworldwidein OxfordNewYork AucklandBangkokBuenosAiresCapeTownChennai Dar esSalaamDelhiHongKongIstanbulKarachiKolkata KualaLumpurMadridMelbourneMexicoCityMumbaiNairobi SãoPauloShanghaiTaipeiTokyoToronto Oxfordisaregisteredtrademark ofOxfordUniversityPress intheUK andincertainothercountries PublishedintheUnitedStatesby OxfordUniversityPressInc., NewYork ©MichaelBest,2001 Themoralrightsoftheauthorshavebeenasserted DatabaserightOxfordUniversityPress(maker) Firstpublished2001 Allrightsreserved.Nopartofthispublicationmaybereproduced, storedinaretrievalsystem,or transmitted,inanyform orbyanymeans, withoutthepriorpermissioninwriting ofOxfordUniversityPress, oras expresslypermittedbylaw, or under termsagreedwiththeappropriate reprographcsrightsorganization.Enquiriesconcerningreproduction outsidethescopeoftheaboveshouldbesenttotheRightsDepartment, OxfordUniversityPress,attheaddressabove Youmustnotcirculatethisbookinanyotherbindingorcover andyoumustimposethissameconditiononanyacquirer BritishLibraryCataloguinginPublicationData Dataavailable LibraryofCongressCataloguinginPublicationData Best,MichaelH. Thenewcompetitiveadvantage:therenewalof Americanindustry/MichaelH.Best. p.cm. Includesbibliographicalreferencesandindex. 1. Competition—UnitedStates.2. Industrialmanagement—United States. 3.Comparativeorganization.I.Title. [HD41.B382 2001]338.6′048′0973–dc212001021559 ISBN0–19–829744–0 ISBN0–19–829745–9 (pbk.) Acknowledgements Conversationsabouttechnologicalchangeare‘intheair’attheUniversityofMassachusettsLowell.ChancellorWilliam HoganandVice-ChancellorFrederickSperounishaveledthewayinadvancingamodelofhowatechnology-oriented universitycan playa leadership role inregional development. I am fortunate.Feweconomistshavesuch opportunities for ongoing discussions with engineers, scientists, and entrepreneurs on links between innovation, technology, production, and the creation and diffusion of knowledge. These discussions form the background for the concern with regional economic growth at the heart of this book. But even in this congenial institutional environment, the influence of one individual stands out. I have gained enormously over the years from conversations and shared endeavors with Professor Sukant Tripathy. Sukant was a gifted advanced materials scientist. I worked with Sukant on a wide range of issues. These included diversification of the jute industry of East Bengal; the search for ‘clean energy’ solutions that address simultaneously thechallenges of thetechnologicaldivide betweenrich and poor regions and global warming;the pursuit of analogies between self-assembly processes amongst molecules in laser impacted nanostructures and networked business enterprises; and the role of ‘systems integration’ as a source of competitive advantage in Silicon Valley and Boston's Route 128. Tragically, Sukant died in a swimming accident just after this manuscript was completed. The void is permanent in the lives of the many that he touched. TheUnitedNationsIndustrialDevelopmentOrganizationinViennaistheother institutionwithwhichIhaveworked closely over many years. Frederic Richard, Cristian Gillen, and Giovanna Ceglie, in particular, have been allies in searching for new understandings of local iv ACKNOWLEDGEMENTS capability development, technology management, and approaches to technology assistance. Involvementinindustrialcompetitivenessprojectsovernearlytwodecadeshasresultedinintellectualpartnershipsthat have shaped the emerging methodology and content of the ‘capabilities and innovation’ perspective developedin this book. These include Robin Murray in North London and Cyprus; Tea Petrin and Ales Vahčič in Slovenia; Cristian Gillenand RobertForrantinJamaicaand Honduras; Vlado Kreačič and David Ellerman inMoldova; Rajah Rasiahin Malaysia; Aidan Gough in Northern Ireland; and Robert Forrant and William Lazonick in Massachusetts. The methodology involves a constant back and forth between guiding concepts and primary research as change strategies and programs are designed, debated, and implemented. This has involved, as well, the study of hundreds of business enterprises, and numerous educationalinstitutions, researchcenters, and industrialpolicyagencies indifferentparts of the world. The debts to individuals who have shared their time, experiences, and expertise in interviews can only be acknowledged collectively. Manyhaveparticipateddirectlyinthepreparationofthismanuscript.JaneHumphrieshascommentedonandlistened to many of the ideas. Aidan Gough, too, of the Northern Ireland Economic Council has left a major imprint on the conceptual contours. Christos Pitelis suggested the title.John Bradley, Steve Landau, Eric Martin,Sir George Quigley, Arthur Francis, Alan McGarvey, Merritt Roe Smith, Gianni Lorenzoni, Ben Fine, Steven Sass, and Stan Engerman have offered helpful suggestions. David Musson gave wise advice on the introduction and first chapter. Urska Cvek and Marjan Trutschl provided technical assistance. Urska and Richard Sherburne helped with the graphics and Gregory DeLaurier, Ann Newton, Sarah Dobson, and Lynn Childress with editing. Fred Sperounis provided intellectual and institutional support. ElizabethGarnseyandBrianLoasbyhelpedshapemyideasonEdithPenroseandtheideaoftheentrepreneurialfirm. IbenefitedfromdiscussionswithMark HarveyonPolanyi'sconceptofinstitutedprocesses. Ihavedrawnfrom Bruce Tull's unpublished work on the ‘precision corridor’ of the Connecticut River Valley. I have gained from projects with colleagues in the University of Massachusetts Lowell community including Robert Forrant, Krishna Vedula, Steve McCarthy, Robert Wagner, Ken Gieser, Larry Gross, Chris Tilly, Phil Moss, Aldo Crugnola, Nick Schott, Sammy Shina, Fran Eagle, William Mass, and Michael Fiddy. William Lazonick and Mary O'Sullivan's dining room has ACKNOWLEDGEMENTS v been the site of countless conversations with friends from all corners of the globe in the ‘Chandlerian school’ of organizational capabilities. The Judge Institute of Management Studies, Cambridge University proved to be a stimulating environment to try out many of the themes while I was the Arthur Andersen Visiting Fellow in 1999. I have learned from a group of students who have written dissertations under my direction on topics related to ‘industrial districts’ in different contexts. These include Rich Parkin, Bruce Tull, Marcela Miozza, Roman Habtu, José Tavara, Curtis Haynes, Maribel Aponte, Ron Caplan, and Alison Dean. Other former students who have influenced mythinkingincludeDavidLubin,TonyGuglielmi,FrankJohnson,AlRuthazer,FrankStathas,PeterUngaro,andJack Plaistek. Finally, my son Lawrence has generously consented to interruptions in my soccer-training program to work on my book. But perhaps my potential as a goalie has not suffered greatly. It goes without saying that responsibility for errors and omissions rests with the author alone. M.H.B. Cambridge, Massachusetts and Oxford January 2001 This page intentionally left blank Contents List of Figures ix List of Tables x List of Boxes x Preface xi 1. Introduction 1 Growth Anomalies 1 Competing Perspectives 2 Porter's Cluster 7 The Productivity Triad 9 Chapter Outline 15 2. Production Systems 20 The Idea of Technology Management 20 The American System and Interchangeability 25 Henry Ford and Single-Product Flow 28 Toyota and Multi-Product Flow 36 Canon and New Product Development 40 Intel and Systems Integration 46 Conclusion: Production Capabilities and Industrial Structure 54 Appendix 2.1.Throughput Efficiency and Waste 58 3. Cluster Dynamics 60 The Principle of Increasing Specialization 61 Open System Dynamics 69 Conclusion 85 4. Innovation Capabilities and Skill Formation 90 Business Models and Innovation Capabilities 91 viii CONTENTS Technology Manpower Development 105 Conclusion 114 5. The Resurgence of Route 128: The Triumph of Open Systems 117 The Argument in Brief 117 Industrial History 119 Regional Technology Capabilities 131 Skill Formation 149 Conclusion 158 6. Cluster Dynamics in Malaysian Electronics 163 Challenge: Growth with Low Value Added 163 Industrial Policy 164 The Singapore/Johor Region 166 Penang 171 Summary 187 7. The Case of Northern Ireland 191 Business Model 192 Production Capabilities 204 Skill Formation 209 Conclusion: The Lack of Growth Engines 214 8. Policy Implications 216 The Productivity Triad and Growth Anomalies 216 Capability Development Processes 219 Conclusion 241 9. The Sustainable Growth Challenge 243 Beyond the Growth or Environment Tradeoff 243 Design for Sustainability 244 Technology Design 245 Manufacturing Design for Energy Efficiency 250 Conclusion: Sustainability and the Red Queen Effect 254 Glossary 257 References 264 Index 279 List of Figures 1.1.Productivity Triad 10 2.1.Evolution of industrial structure 57 3.1.Model of cluster dynamics 70 4.1.Laboratory-push innovation: US big business 95 4.2.Incremental innovation: Japan PS 4 98 4.3.Systems integration innovation: US PS 5 100 4.4.Regional growth and skill formation dynamics 107 4.5.Plastics industrial food chain 112 5.1.Competing business models 124 5.2.The law of diminishing sizes 133 5.3.Genealogy of two regional production systems 135 5.4.Electrical engineering graduates in Massachusetts 155 6.1.Design capabilities and skills integration 177 6.2.International comparison of science and engineer graduates 188 7.1.Multi-disciplinary R&D group 197 9.1.Biodegradable Polymer Research Center 247