New technology, subsidies, and competitive advantage.

Summary

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US steel companies did not err in failing to adopt new technology to maintain their edge over Japanese firms in world steel production. US firms were producing 40% of world steel supply by means of the open-hearth process They would achieve little gain by adopting the oxygen-furnace process due to the large set-up costs required. In contrast, Japanese firms who were then starting from scratch, had everything to gain by adopting the latter technology despite the costs.

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New technology, subsidies, and competitive advantage.

I. Introduction

In the history of world economic development, it is not uncommon that from time to time the role of technological leadership shifted from one country to another; a lagging country seized the opportunity of a major technological innovation and overtook the leading country. The postwar experience of the U.S. and Japanese steel industries is an example of such "leapfrogging." In 1950s, the U.S. steel industry was the world leader in technology, plant scale and productivity [2, 71]. The Japanese steel industry, on the other hand, was in its infancy. At that time two basic technologies were available for steel producers: the established open-hearth furnace and the new and more efficient basic oxygen-furnace process. The U.S. steel producers invested heavily in the open-hearth technology immediately after the World War II. Hence in the late fifties and early sixties they resisted the shift from the open-hearth furnace to the basic oxygen-furnace. The Japanese steel producers, on the other hand, had little sunk investment in the old technology. They expanded their production capacity by building brand-new plants using the oxygen-furnace technology. As a result, the U.S. steel industry gradually lost its position of world dominance after 1960s. The American share of world steel production fell from 40 percent in 1955 to 18 percent in the early 1970s [2, 69].

It is also interesting to note the different policies pursued by the U.S. government and the Japanese government towards their steel industries during that period. The Japanese government actively promoted the growth of its steel industry by providing tax and depreciation incentives as well as low interest loans. The U.S. government, on the other hand, adopted a more or less laissez-faire approach and did not play an active role in encouraging the U.S. steel producers to switch to the new technology. The U.S. government started to intervene only after the U.S. industry had already lost its competitive advantage to Japan at the end of 1960s.

Why did the U.S. steel industry lose its competitive advantage to Japan? Some might argue that the U.S. steel producers and the U.S. government simply made a mistake. Resisting the new technology was a strategic error on the part of the U.S. steel producers. The U.S. government also erred in not intervening earlier. This explanation, however, is not satisfactory if one believes in the fundamental assumption of economics that agents are rational.

In this paper, instead of dismissing the decisions of the U.S. firms and government as mistakes, we attempt to understand their behavior as the outcome of interactions among rational agents. We argue that their decisions may be optimal given the economic environment they were in. The arguments go as follows. Consider the decision-making of two firms with regard to the adoption of a ...

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