Technology, Governance and Political Conflict in International Industries (Routledge Advances in International Political Economy)

Technology, Governance and Political Conflict in International Industries

In today’s globalizing world there is a great deal of interest in understanding how the international economy can be governed in the absence of world government. We need to know what works and why in the governance of international industries. Porter explores this issue using a comparative analysis of six leading international industries – cotton textiles, steel, electrical machinery, chemicals, automobiles and semiconductors – and draws lessons from both the present and the past. He explains how the distinctive technological profiles of particular industries have a profound impact on their organization, on their governance, and on the international political conflict associated with them. It has become clear that knowledge can play a key role in the construction of international institutions by, for example, alerting states to common problems and thereby transforming clashing interests into a willingness to cooperate. Surprisingly, however, the study of a very important type of knowledge – technology – has been neglected. Technologies differ from other types of knowledge because they are embedded materially in machines, technical manuals, and other aspects of production systems. In our contemporary high-tech economy many technologies are global. This book makes an important theoretical contribution to our understanding of international institutions by exploring conceptually and empirically the impact of technology on the governance of international economic activities. Technology, Governance and Political Conflict in International Industries addresses the current intense interest among scholars in the ways that knowledge can shape the development of international institutions by examining a particularly distinctive form of knowledge – technology. In doing so the book makes a unique contribution to the “constructivist” approaches that have become popular in the study of international relations. Moreover, Porter’s innovative approach treats the international economy not as a novel and constantly expanding highly competitive market composed of individual firms, but rather as a highly institutionalized set of industries, often dominated by leading firms, in which remarkable centurieslong patterns of continuity and repetition can be identified. Tony Porter is an Associate Professor of Political Science at McMaster University, Hamilton, Canada. He is the author of States, Markets and Regimes in Global Finance and co-editor with A. Claire Cutler and Virginia Haufler, of Private Authority in International Affairs.

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Technology, Governance and Political Conflict in International Industries Tony Porter

Technology, Governance and Political Conflict in International Industries

Tony Porter

London and New York

First published 2002 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group

This edition published in the Taylor & Francis e-Library, 2004. © 2002 Tony Porter All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by an electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Porter, Tony, 1953– Technology, governance and political conflict in international industries/Tony Porter. p. cm. Includes bibliographical references and index. 1. International business enterprises. 2. Technological innovations. I. Title. HD2755.5 P665 2002 658.5⬘14–dc21 2001048952

ISBN 0-203-16668-X Master e-book ISBN

ISBN 0-203-26140-2 (Adobe eReader Format) ISBN 0-415-27009-X (Print Edition)

Contents

List of figures List of tables Preface Abbreviations 1 2 3 4 5 6

Theorizing the role of technology in the governance of international industries

vii viii ix xi 1

The cotton textile industry: from the industrial revolution to the present

24

The steel industry: nationally-based cartels and market-sharing arrangements

49

The electrical industry: enduring complexity and the longevity of leading firms

69

The chemical industry: complex technologies and private governance

85

The automobile industry: assembly lines and international investments

96

7

Semiconductors: rapid maturation and cartel creation

112

8

Comparing across industries

124

9

Conclusion: industry structures, systemic factors and implications for the study of international relations

164

Notes Bibliography Index

174 179 193

Figures

8.1 8.2 8.3

8.4

8.5

8.6 8.7 8.8 8.9

8.10 8.11 8.12 8.13 8.14 8.15 8.16

Size (assets) distribution of US firms by industry Number of US patents by industry, 1977–98 Variation in growth rates: percentage difference between industry growth rates (US figures) and overall US economic growth rates by industry, moving five-year averages, high growth industries Variation in growth rates: percentage difference between industry growth rates (US figures) and overall US economic growth rates by industry, moving five-year averages, medium growth industries Variation in growth rates: percentage difference between industry growth rates (US figures) and overall US economic growth rates by industry, moving five-year averages, low growth industries Seven industries’ share of US exports US industry’s trade balance as a share of total UK trade turnover Share of seven industries of Japan’s exports Industry’s trade balance as a share of total national trade turnover, averaged for each industry, across the UK, France, and Germany Technical differentiation and maturation Top country’s share of world production Top five countries’ share of world production Market share of top exporting country by industry Market share of top five exporting countries by industry Share of world imports of top importing country by industry Share of world imports of top five importing countries by industry

127 131

135

136

136 137 137 138

138 140 154 154 155 156 157 158

Tables

1.1 8.1 8.2 8.3 8.4 8.5 8.6 8.7 9.1

Features of governance of international industries: variation across industry phases Indicators of differing technological profiles for US firms Indicators of differences in diffusion and maturation Firms appearing in the Fortune Global 500, by industry and rank, 1999 International organizations by industry, 1990s Number of US AD and CVD measures initiated by decade and industry AD and CVD measures initiated in non-US jurisdictions by industry Summary of relationship between industry complexity and state involvement Key systemic factors, nineteenth and twentieth centuries

19 126 134 135 141 151 151 153 165

Preface

In today’s globalizing world there is a great deal of interest in understanding how the international economy can be governed in the absence of world government. Scholars have made a lot of progress in studying international regimes, the formal and informal arrangements constructed by states to manage particular issue areas or industries. It has become clear that knowledge can play a key role in the construction of international institutions by, for example, alerting states to common problems and thereby transforming clashing interests into a willingness to cooperate. Surprisingly, however, the study of a particular but very important type of knowledge – technology – has been neglected. Technologies differ from other types of knowledge because they are embedded materially in machines, technical manuals, and other aspects of production systems. In our contemporary hightech economy many technologies are global. This gives technology, and those actors that can use it to their advantage, a powerful influence over the organization of human interactions at the international level, including those interactions involved in the governance of international industries. For instance, as this book will show, in some industries dominant firms can use their control of technology to organize markets, often in cartel-like arrangements, while in others technology disseminates and the ensuing competitive pressures and lack of private governance lead to the construction by states of international regimes. This book’s focus on the organizational effects of systems of technical knowledge is consistent with constructivist themes that have become popular in theorizing about international relations. Constructivist approaches start from the understanding that international affairs, as with other social and cultural fields, consist of more than strategic interactions among actors with fixed identities rationally seeking to maximize benefits and minimize costs. Social norms are important in shaping identities, in defining goals, and in creating standards to which actors adjust their behavior. Technologies, with their standards, codes, and production models, constitute a distinctive and significant subset of these norms. Often technologies develop relatively autonomously from states. In writing this book, therefore, I have had to go beyond much current constructivist international relations theorizing that has focused on inter-state norms. I have stressed the role of norms and shared understandings generated by the interactions that link firms with each other, with states, and with the materially-embedded production processes that they organize.

x

Preface

I would like to express my great appreciation to those people involved in the industries that I examined who, in consenting to be interviewed, were generous with their time and insights, especially those at the International Textiles Manufacturers Federation, the American Textile Manufacturers Institute, the Electronic Industries Alliance, the Organisation internationale des constructeurs d’automobiles, the European Chemical Industry Council (CEFIC), European Confederation of Iron and Steel Industries (Eurofer), and the Canadian Textiles Institute. The research could not have been completed without the excellent research assistance of Vince DeRose, Andrés Durán, Robert Johnston and Priscilla Parmar. This research overlapped with and was carried out at the same time as my involvement in the work that culminated in Private Authority in International Affairs (Albany: SUNY Press, 1999) that I co-edited with Claire Cutler and Virginia Haufler and the present project benefited from insights shared by the participants in that earlier project. I am also grateful for the support of the Social Sciences and Humanities Research Council of Canada, which funded this project.

Abbreviations

AAM AAMA ACEA AD AEG AISI AMA ATC ATMI CBTPA CEFIC CSPP CVD DEG DRAMs EC ECSC ECSI EEC EIA EIAJ EU Eurofer FDI FTC GATT IAF ICCA ICDC IEA IEC IFCATI IISI IRC IRF

Alliance of Automobile Manufacturers American Automobile Manufacturers Association Association des Constructeurs Européens d’Automobiles Anti-dumping Allgemeine Elektricitäts-Gesellschaft American Iron and Steel Institute Automobile Manufacturers’ Association Agreement on Textiles and Clothing American Textile Manufacturers’ Institute Caribbean Basin Trade Partnership Act European Chemical Industry Council (Le Conseil Européen des Fédérations de l’Industrie Chimique) Computer Systems Policy Project Countervailing duty Deutsche Edison Gesellschaft für angewandte Elektricität Dynamic Random Access Memory chips European Community European Coal and Steel Community European Electronic Chips and Systems Design Initiative European Economic Community Entente Internationale d’Acier Electronics Industry Association of Japan European Union European Confederation of Iron and Steel Industries Foreign direct investment Federal Trade Commission General Agreement on Tariffs and Trade International Apparel Federation International Council of Chemical Associations International Cable Development Corporation International Electrical Association International Electrotechnical Commission International Federation of Clothing and Allied Textile Industries International Iron and Steel Institute International Road Congress International Road Federation

xii

Abbreviations

ITMF JCSA JESSI LDC MAI MCC MEDEA MFA MITI MOU MSA MSSA NAFTA NICs NTM OICA Si2 SIA STA USTR VER VSIA VSt WSC WTO

International Textile Manufacturers Federation Japan Cotton Spinners’ Association Joint European Submicron Silicon Program Less Developed Country Multilateral Agreement on Investment Manchester Chamber of Commerce Microelectronics Development for European Application Multifibre Arrangement Ministry of International Trade and Industry ( Japan) Memorandum of Understanding Multilateral Steel Agreement Multilateral Specialty Steel Agreement North American Free Trade Agreement Newly Industrializing Countries Non-tariff measure Organisation International des Constructeurs d’Automobiles Silicon Integration Initiative Semiconductor Industry Association Semiconductor Trade Arrangement United States Trade Representative Voluntary Export Restraint Virtual Socket Interface Alliance Vereinigte Stahlwerke World Semiconductor Council World Trade Organization

1

Theorizing the role of technology in the governance of international industries

The contemporary international economy displays an astonishing capacity to move goods, capital, information and people across vast distances in ever shorter and more precise units of time. This time–space compression (Harvey, 1989), which for some theorists is the defining characteristic of globalization, involves remarkable daily feats of organization. At times, part of the system will break down spectacularly, perhaps from chemical spills, financial failure, war, or other crises. Yet, even these disruptions, by highlighting the difficulties and dangers involved, remind us how impressive the ongoing successes are that operate so smoothly that we might otherwise take for granted, scarcely noticing them. How are these vast sets of interactions organized and governed? This is a question that is not only intellectually intriguing, but also has important practical implications. We might be concerned with offsetting the negative effects of the global economy or enhancing the positive effects. We might be concerned about the welfare of an individual, a firm, a country, or humanity as a whole. There are many reasons why we need to understand better what works and what does not in the organization and governance of international industries. Any casual review of the governance of international industries will reveal sharp differences across industries. Some industries, like apparel or steel, have been governed for significant periods by systems of quotas administered by states. These have involved tense political conflicts as states seek to determine their firms’ market shares. In other industries, like the electrical machinery or chemical industries, states have not been very involved in this way, although they may have been active in other politically conflictual areas, such as the regulation of toxic chemicals. Explaining differences in the role of the state across industries is important not only because of the theoretical insights that can be gained by such a comparative method, but also because as the international economy becomes more complex we need to think about tailoring governance arrangements to the specific needs and potentials of each international industry. Commentary about the governance of the global economy as a whole, while useful, is insufficient for a world in which the character of industries varies sharply. Scholars in the field of international political economy have already made considerable progress in understanding how particular international industries are organized. A distinctive contribution has been to highlight the key role played by

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Technology in the governance of industries

states working through regimes – sets of formal and informal institutions organized in particular industries or issue areas.1 This work has stressed that markets are not self-regulating and that political conflict and rules provided by states are unavoidable features of the governance of international industries. Moreover, by focusing on industries or issue areas instead of the international system as a whole, this work has filled in essential historical details that more general analysis misses. Unfortunately, regime analysis has concentrated on the interactions among states in a way that has undermined its ability to understand interactions between, on the one hand, regimes initiated by states, and on the other hand, developments among and within the firms that organize production. Consistent with its roots in the discipline of international relations, which has traditionally emphasized the pre-eminence of states, regime analysis has built its explanations on features of relations among states such as their relative power or their ability to create shared norms. These state-centric approaches can provide useful insights, especially in issue areas in which states continue to enjoy unchallenged supremacy and autonomy. In the governance of international industries, however, they are inadequate. These industries involve a wide variety of complex private institutions, such as large multinational firms, trade associations, or more informal understandings between leading firms. These are often international and have a significant capacity to affect the development of the industry and thus cannot simply be treated as resources or domestic constituencies of individual nation-states. Moreover firms may be dependent on their interactions with a materially-embedded technology, such as an electrical grid, that imposes constraints upon their conduct that states can only alter at prohibitive costs. In seeking to understand the impact of inter-firm interactions and of technologies on the development of international industries we can turn to a vast amount of economic literature on industrial organization and technological innovation. Industrial organization scholars have provided a wealth of hypotheses and empirical findings in exploring the variation in the structures of industries and the organization, and conduct and performance of firms. Many economists have moved beyond the treatment of technologies as a pool of freely available ideas that are exploited by firms in response to changes in the relative prices of other factors of production. They have highlighted features of technology such as pathdependence, large-scale complex interdependence, and costliness that can contribute to its dynamic and autonomous capacity to shape the development of industries.2 These economic ideas provide an invaluable starting point for filling in industry-level processes that have been left out of regime analysis. The economic literature on industrial organization and on technologies suffers from certain deficiencies that complicate its integration with regime analysis. Most of it is focused implicitly on national industries with very little consideration of the complications added when firms routinely operate across borders. Exceptions, such as explanations for the development of multinational corporations (e.g. Dunning, 1988) or assessments of the impact of international competition on the ability of firms to engage in oligopolistic collusion, generally do not acknowledge the types of inter-state interactions and institutions which

Technology in the governance of industries 3 have been the focus of regime analysis. The lack of long-lasting consensus on some fundamental issues in the industrial organization literature is a further complication. Despite these challenges, it is crucial, if we are to adequately understand the governance of international industries, to begin to explore the relationship between, on the one hand, interactions among states, and on the other, relatively autonomous organizational and technological developments at the level of firms. The task of this book is to contribute to this exploration. It will demonstrate how variation in the governance of international industries and in the character of interactions among states is best explained not simply with reference to the norms created by states or to the relative power of states but rather to persistent longlasting features of the structure of industries which are rooted in the technologies upon which they are based. Technology, then, is a key focus of this study. While technologies draw upon other types of knowledge, such as pure science or economics, they are distinctive in the degree to which they are embodied in material objects such as machine systems, in highly codified texts, such as instruction manuals, and in routinized practices, such as those on a shop floor. Technologies, therefore, structure and constrain activity in a much more direct fashion than do other types of knowledge. In part, because of their embodiment in physical systems, technologies also display certain recurring patterns in their life cycles. Combined with their interdependence with other industries, the emergence of a new and successful technology in a particular industry can have profound and widespread economic, social, cultural, and political effects. The association of cotton technology with the British industrial revolution or of automobile technology with what has come to be labelled the Fordist era are examples. This book suggests that there may be recurring patterns associated with new technologies that have impacts on the governance of international industries. In this chapter, I present the theoretical framework needed for this task. After first drawing on and developing themes from regime analysis and from the economic literature on industrial organization and technology I will build a model of the relationship between technological change and the governance of international industries. The chapter concludes by explaining how this model will be applied to and assessed against the experience of six leading international industries: cotton textiles, steel, chemicals, electrical machinery, automobiles, and semiconductors.

Building on existing theories In this section I look at two bodies of theory, regime analysis and economic theories of technological change and industrial organization, which are starting points for the model that I will be developing in this book. Comprehensive reviews of these approaches are available elsewhere and are not needed here. The goal here is rather to highlight what is useful and what is missing with respect to the governance of international industries.

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Technology in the governance of industries

Regime analysis The international relations approach that is most useful for understanding the governance of industries is regime analysis. This section discusses the contribution of regime analysis in drawing our attention to the role of formal and informal institutions in particular international issue areas and industries – and thereby going beyond approaches that focus on the global system as a whole or on formal international organizations. However, the regime approach suffers from two related shortcomings that undermine its ability to address the types of relations that are the focus of this book. First, it assumes that the primary actors are states and this makes it difficult to analyze the contribution of industry-level factors to governance. Second, many theorists would reserve the regime label for issue areas in which a considerable degree of order, based on institutionalized multilateral collaboration of states, can be found. This makes it difficult to analyze the contribution of institutional factors to the significant variation in patterns of conflict among states in the many industries where inter-state collaboration is not sufficiently developed to merit the regime label. In this book, then, I build on the insights of regime analysis concerning the importance of industryspecific institutions but do not use the regime label in analyzing the six industry cases. What, then, are the relevant regime insights into the importance of institutions? Regime analysts have stressed the importance of both formal and informal principles and norms in providing order and regularity in international affairs. Often, informal principles and norms are linked to formal international organizations or treaties, but not always. Even where they are, the informal understandings shared by international actors are an important factor in the functioning of the more formal arrangements. Such informal understandings may reflect intangible but important elements of cooperative activity, such as trust, or they may reflect relations of domination and power that operate behind articles of agreement, voting procedures, and other more visible formal features of organizations. The concept of a social institution usefully captures both informal principles and norms, and formal organizations. Social institutions can be defined as “practices consisting of recognized roles linked together by clusters of rules or conventions governing relations among the occupants of these roles” (Young, 1989: 12–13). In international relations theorists have focused on the social institutions governing the practices of states. As noted, where these are specific to an issue area or industry the term regime has been used. As the most widely used definition notes, regimes are “sets of principles, norms, rules and decision-making procedures around which actor expectations converge in a given issue area” (Krasner, 1983: 1). The regime concept is especially useful in highlighting the way in which a complex and varied set of practices, organizations, agreements, and shared understandings can work together to provide predictability and regularity in a given issue area or industry. Focusing exclusively on either formal organizations or on the individual behavior of states would miss this effect. For instance, a series of bilateral investment treaties, along with changing attitudes of developing

Technology in the governance of industries 5 countries towards inward investment, provided an important normative foundation upon which the strong investment provisions of the North American Free Trade Agreement (NAFTA) were built. The subsequent mobilization of non-governmental organizations, concerned about the dangers of establishing similar rules at a global level in the Multilateral Agreement on Investment (MAI), led to a different set of understandings to those on which the NAFTA provisions were built. These in turn contributed to the foundering of the MAI. This important political process would be hard to understand by focusing solely on the actions of states or the formal wording of treaties. By contrast, the notion of an emerging regime for investment offers a useful starting point for analyzing the process. The complexity and informality of the things to which the regime concept refers has contributed to disagreements about how much institutionalization is needed before we can say that a regime exists. Even self-help systems, such as the market or the system of sovereign states, involve shared background understandings of the appropriateness of individualized behavior. More actively, “tacit bargaining” can also lead to shared understandings: “normative expectations can arise through the interactions of unilateral measures” (Kratochwil, 1995: 91). For some theorists, such understandings, even if they are not recognized by those they affect, or if they are seen as simply truth or reality rather than norms, might warrant the use of the term regime. Others have wanted a higher threshold of strong shared norms that demonstrably shape the conduct of actors. Kratochwil, for instance, has argued that “to the extent to which the definitions of regimes have to respect the political praxis of the actors, regimes cannot be introduced by the researcher ad libitum. For example, if the members of the international community decide that a particular issue is supposed to be governed by particular norms, a regime emerges, as was the case for fibers (the Multifibre Agreement)” (Kratochwil, 1995: 82). Thus, the actors must demonstrate recognition of the principles and norms of a regime and of its boundaries for it to exist. The present book could have taken the looser approach to regimes that Kratochwil criticized by claiming that even in industries where there is no successful institutionalized collaboration among states, we can still talk about regimes because there is institutionalized collaboration among firms, or because the fact that there are patterns of conflict implies that there must be institutional factors at work. However, this would involve entering into a defense of this use of the regime label – a task that is not necessary for the purposes of this book. Indeed, it is not unreasonable to adopt a more restrictive interpretation of the regime label for those projects that wish to highlight instances of successful inter-state collaboration. Consequently, in this book, I use the term international institution to refer to the broader category of formal and informal principles, norms, rules and decision-making procedures of which recognized international regimes are a subcategory. In addition to not restricting the range of relevant institutions to recognized regimes, it is also important for the purposes of this book not to restrict our research to institutions constituted by states. An example of the type of excessive

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Technology in the governance of industries

state-centrism that is typical in regime analysis is Aggarwal (1985: 18), which notes: At the most basic level, one can conceive of various transactions. These can be monetary, trade, information and other such flows. Transactions are then partially influenced at the next level by national actions consisting of unilateral controls and bilateral accords. International regimes in turn guide the imposition of national controls and accords. They are a multilateral system of rules and procedures to regulate national actions. In this model, all relationships between firms and other private actors, on the one hand, and regimes on the other, are mediated through states. Such initial assumptions preclude a research focus on more direct relationships between industrylevel institutions and regimes. One solution to the tendency of regime analysis to underestimate the significance of industry-level institutions has been the development of the concept of private authority (Cutler et al., 1999). As we noted in that book: Authority involves a surrendering of individual judgment, an acceptance of its dictates based not on the merits of any particular pronouncement but on a belief in the rightness of the authority itself. As such, authority lies between negotiation, where action is shaped by the payoffs produced by particular bargains, and coercion, where compliance results from fear rather than respect or faith. (Cutler et al., 1999: 334) Social institutions, which define the rights and obligations that constitute roles, are closely related to authority, since authority refers to the type of role that involves a right to prescribe the conduct of others and involves obligation on the part of others. The concept of authority, therefore, defines a particular type of institutional relationship that is important in governance. The concept of private authority facilitates analysis of the way in which private firms and business practices can generate authority that in many respects resembles the authority generated by states. In this book, one can find a great many instances of private authority, ranging from technical standards to well-developed cartels and industry associations. It will become evident from the case studies that atomized arm’s length markets are only one type of economic arrangement and in every case there are other institutional arrangements that link actors. The concept of private authority is consistent with the message of this book that industry-level structures play an important role in shaping governance and political conflict in international industries. However, in looking over long periods of time for patterns in industries’ governance, this book cannot focus as directly on the many questions concerning the nature and varieties of private authority as did the 1999 Cutler, Haufler and Porter volume. For this reason it adopts the more generic term, private institution, to

Technology in the governance of industries 7 refer to arrangements that shape actors’ conduct. This allows me to set aside the interesting but lengthy task of determining which of the very large number of institutions discussed in this book merits the “authority” label. In short, then, this book builds on the way in which analysis of regimes and of private authority allows us to identify the contribution of formal and informal institutions to governance and political conflict in international industries.3 Approaches that assume that individual state actors or atomized market actors, rather than institutions, are the only relevant units in the analysis of industries are incompatible with this book’s research project. In looking at international institutions – both inter-state and private, formal and informal – it is possible to draw on the insights from the analysis of regimes and of private authority without the definitional constraints that come with those particular labels. This section has focused on metatheoretical issues (theoretical questions about theories) and as such is preliminary to the more specific model and set of propositions that I develop below. Before doing that, however, I turn to another body of theory that will be useful for that model – theories of technological change and industrial organization.

Theories of technological change and industrial organization In this section, I first discuss the nature of technology and its relationship to knowledge and power before turning to theories of technology and industrial transformation. I will also briefly contrast these theories to the treatment of knowledge and technology in international relations theories. Finally, I will address the literature on industrial organization. Technology, knowledge and power Technology can be defined as codified or tacit knowledge that can be used to systematically manipulate the actions or structure of human or non-human physical entities or substances to achieve specified ends reliably and routinely.4 The parallels between technology and the types of institutions discussed in the previous section suggest the potential relevance of technology for the governance of international industries. In this section I explore theoretically this relevance. A growing literature on technological change has demonstrated the degree to which technical knowledge is independent of fortuitous scientific discoveries that are easily recognized and used by firms. Social institutions are far more important for and affected by technical knowledge than we often realize. This starts with the initial basic scientific research and runs through all stages of the development of new technologies, including the creation of new products, the processes by which they are produced, and the ways in which they are accepted by and distributed to their users. There are numerous ways in which scientific discovery relies upon social institutions. A great number of key scientific discoveries have been the product of

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Technology in the governance of industries

deliberate and highly organized initiatives on the part of states or firms. The central role of Bell Laboratories and the US Defense Department, in the scientific discoveries which made possible the microelectronic revolution, is an example from the mid-twentieth century. Even in earlier periods, where scientists played a more independent role, their discoveries were usually achieved in the context of an ongoing search by a community of scientists for solutions to practical problems. Such a community was made possible by a set of social institutions ranging from shared informal scientific protocols to formal international organizations devoted to the promotion of scientific research. These scientists often developed or relied upon a considerable amount of organizational capacity to mobilize people and resources in order to conduct their experiments. Thomas Edison’s late nineteenth-century scientific discoveries in electricity, for instance, were facilitated by sophisticated labs he had developed, by financial flows and interesting challenges generated by his commercialization of previous inventions, and by his ability to negotiate and build the complex political and commercial relationships which were needed to create electricity generating systems. Callon (1991) has nicely captured social features of the process of discovery which are often underestimated: a scientific text may be seen as an object which makes connections with other texts and literary inscriptions … . The list of authors tells of collaboration and of the relative importance of each contribution. Here, then, is the start of a network. But that network extends into the references and citations. These rework the cited texts, insert them into new relationships, and identify and link new actors together … . A text may speak of electrons, enzymes, government agencies, oxides, methods, experimental arrangements, multinational corporations and sectors of industry. But like the actors in some American novels who would otherwise never come together, their destinies are intertwined in the ‘socio-technical dramas’ described in scientific papers … the scientific article is a network whose description it creates. (Callon, 1991: 135–6) The importance of social institutions extends through the application of new scientific knowledge to create a marketable product. A firm needs substantial accumulated expertise just to understand a new discovery and even more to imagine and develop its commercial potential. To some degree this information is codified or embedded in machinery: codes, checklists, maintenance manuals and user handbooks, all of these escort objects on their travels … . Technical objects thus more or less explicitly define and distribute roles to humans and non-humans. Like texts they link entities together into networks in ways that may be decoded (Callon, 1991: 136–7)

Technology in the governance of industries 9 Much of this expertise is not formal codified knowledge, but rather tacit knowledge learned by doing. Institutions sustain the continuity over time of relationships between people and production processes that provide such knowledge: “innovation is basically a learning process. It is neither an exogenous Promethean gift nor a multipurpose knowledge base that can be oriented according to relative prices changes” (Cohendet, p. 68). To some degree these institutions can be internal to a particular firm. However, most complex production processes draw on relationships that extend beyond the firm. Additionally, the cost to any particular firm of developing and maintaining the needed expertise for itself is often prohibitive. For this reason, as many studies have demonstrated, innovative firms in a particular industry tend to cluster in particular localities in which a broader set of institutions and traditions specific to that industry have developed over time. These characteristics of technology mean that a technological development is path-dependent, shaped strongly by history, and may consolidate an ongoing competitive advantage of a firm or region: path-dependency reveals the extreme sensitivity of the motion and evolution of a technological system upon intervening events occurring early on the path … the first technical choices taken assume an extraordinary importance and are never forgotten in the course of the dynamics … . In the domain of increasing returns, it is history (and not science or technique) that decides that one technology becomes more efficient than another. (Foray, 1993: 4) Once a firm or region has developed experience in a technology it is possible to keep innovating by building on accumulated experience in a way that makes it difficult for competitors to catch up. The dependence of new innovations on past experience leads to the locking in of particular trajectories so that it becomes infeasible, ex post, to switch to another trajectory, even if that other trajectory might now, if comparable effort had been expended in developing it, be more efficient. A related feature of technology that depends on strong social institutions is the tendency of many new products to require transformation of infrastructures, other products, social relations, and cultural attitudes, all of which extend far beyond any individual firm, if the product is to be widely usable. This is readily apparent in the most influential modern technologies, such as the need for roads and a reconfiguration of urban space for the automobile, of the construction of extended networks for electrical and telephone systems, of the extensive training of users that was needed in the early twentieth-century chemical industry, and of the expropriation of land and the development of new communications technologies and practices, including the telegraph and standard time, for the railroads. The complex, integrated nature of many technological systems has led

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Technology in the governance of industries

Cantwell (1989) and others to refer to them as technological paradigms: a first element which accounts for the emergence of relatively ordered patterns of change stems from the very nature of the learning process underlying technological advances … technologies develop along relatively ordered paths shaped by the technical properties, the problem-solving heuristics and the cumulative expertise embodied in technological paradigms. Each ‘paradigm’ entails a definition of the relevant problems that must be tackled, the tasks to be fulfilled, a pattern of inquiry, the material technology to be used, and the types of basic artifacts to be developed and improved. A technological trajectory … is then the activity of technological progress along the economy and technological trade-offs defined by a paradigm. (Dosi and Orsenigo, 1988: 16) These and related features of technological paradigms have given rise to discontinuous, cyclical patterns of growth. A new paradigm may require a certain critical mass to be commercially viable and to overturn old ways of operating. Once that mass is reached, growth can be very rapid: costs drop, positive examples are set, and those not using the technology may find it increasingly difficult to interact with those who are. At a certain point, however, saturation sets in and growth rates fall – only a certain number of miles of railway track for instance, were needed in any particular country. For certain technologies these cyclical dynamics may have a powerful impact on economics and societies. Freeman (1983) and Perez (1986) have associated the rise of particular technologies with a sequence of distinctive socio-economic periods. Many theorists have correlated the emergence and decline of new leading sectors with fluctuations in growth rates for the economy as a whole: certain technologies, like microelectronics, can have led to dramatic productivity increases across a range of economic sectors as well as stimulating new economic activity as new products and systems that draw on other industries are developed. The rise and decline of new industries has been linked more generally, to the fortunes of hegemonic states and to recurrent patterns in the relations among great powers.5 Looked at as a whole, the above points suggest that technological change may, in general, be linked to regimes and to the governance of international industries. Technologies, because of their capacities to structure activities, bear a strong resemblance, and are heavily dependent on social institutions: “a technical object may be treated as a program of action coordinating a network of roles. These roles are played by non-humans (the machine itself and other objects such as accessories and power supplies) and ‘peripheral’ humans (such as salespersons, consumers, repair people)” (Callon, 1991: 136). Where technologies involve routines and protocols embedded in material objects they may impose more effective constraints on human conduct than shared norms that are not so embedded. Thus, technological systems, with their capacity to structure industries, especially if they display consistent evolutionary patterns, are likely to have a significant and interesting impact on regimes and on the governance of industries, in general.

Technology in the governance of industries 11 There have been a few initial efforts in the international relations literature to address the structuring effect of technologies on world politics but little on the governance of international industries specifically. For instance Basiuk’s Technology, World Politics and American Policy (1977) treats technology primarily as a national asset that needs to be assessed in an analysis of the competition between states. Such topics as the relative proficiency of the US and the USSR in military technologies are discussed but there is no discussion of specific industries. Similarly, Technology and International Relations (Hieronymi, 1987) and The Elusive Transformation: Science Technology and the Evolution of International Politics (Skolnikoff, 1993) mainly focus on technology’s impact on the system as a whole, either through its impact on the competition between states or on the relations between industrialized and developing countries. Tyson’s (1993) Who’s Bashing Whom: Trade Conflict in HighTechnology Industries argues that certain contemporary industries, such as semiconductors, have distinctive technological features, such as high costs and social benefits of research that have implications for policymakers and trade negotiators (in this example, the importance of government support for research and development). While useful, the book does not explore the dynamics and structuring effects of technologies that are obscured by thinking of a class of contemporary industries as uniquely “high tech”. As we shall see in Chapter 7, there are important similarities between the semiconductor and the early nineteenth-century cotton industries that, for their time, were high-tech and these are obscured by an approach such as Tyson’s. A more recent and important contribution to the literature on technology and international relations is Technology, Culture, and Competitiveness: Change and the World Political Economy (Talalay et al., 1997). This book goes beyond previous work in two key respects. First, technology is treated not just as a resource wielded by states, or as an exogenous force. Approvingly citing Cox, who notes that “it is more realistic to see technology as being shaped by social forces at least as much as it shapes these forces … technology itself is a product of society and society’s power relations” (1987: 21, 313), the editors stress that technology includes the intersubjective norms and other structuring effects to which I have referred above. Second, technology is treated not just as a feature of the system as a whole, but as having dynamics specific to particular industries: case studies from biotechnology, textiles in France, the financial industry, aviation, and automobiles are included. However, the insights provided by the various chapters, while useful, are not systematically integrated or compared. In short, the book makes a valuable contribution in orienting us to the study of the relationship between technology and international relations, in developing metatheoretical points, and in highlighting the effects of technology in particular cases, but only makes a very initial start in systematically developing a model of this relationship which can then be assessed with respect to case studies. Several factors have contributed to the underestimation of the importance of technological dynamics in the governance of international industries and in regimes. The pre-eminence of the state in leading models of international relations has led many theorists to overlook the structuring effect of technologies because

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Technology in the governance of industries

they are not conventional instruments of statecraft – indeed they are typically produced by firms. Second, as noted earlier, the institutional character of technological change is often underestimated. Third, neither actor-centered nor structural models, which comprise the conventional alternatives in much social science theorizing, are well equipped to address the structuring effects of technological change. A heightened contemporary understanding of the shortcomings of these two alternatives has led to an awareness of the way in which social practices, which are homologous with technologies, can have a constitutive role with respect to both structures and agents. Further insights from the study of industrial organization We are interested in this book in the way in which processes in an international industry involving firms and technologies influence and interact with the character of relations among states including state-led regimes that seek to regulate or govern the industry. It is important, therefore, to understand variations in the structure of firms and markets across industries. The discipline that has focused most directly on this topic is industrial organization. It would be very useful if we could draw on the findings of this discipline to identify persistent differences across industries in industry characteristics such as concentration levels, profitability, or technology-related characteristics such as capital or research and development intensity. We would then be able to develop typologies of industries and to explore the types of regimes and other inter-state interactions that are likely to be associated with each. For instance, consistently profitable industries may demand less assistance from states in managing market shares. For two decades the study of industrial organization was dominated by the “structure-conduct-performance” paradigm that held that the structure of an industry – whether it involved atomistic competition, oligopoly, or monopoly – could be tied to characteristics of conduct and performance such as economic efficiency and levels of profits. The underlying theme was that a concentrated structure would lead to collusive abuses such as excessive profits or the erection of barriers to new entrants. Based on this literature, anti-trust regulations were designed to counter such abuses. Since the 1970s this paradigm has come under attack from scholars who have argued that the higher profits of larger firms are due to superior performance and not collusion. Other complications have included contradictory empirical findings and the recognition that market structure could be the outcome of firm conduct rather than the cause of it. Despite these complications it is possible to identify useful “stylized facts” about industry structure that are supported by the empirical studies (Schmalensee, 1989). The following are especially relevant to our present study. Contrary to the structure-conduct-performance paradigm there is not good evidence that concentrated industries are more profitable for all firms in those industries. However, there is strong evidence that leading firms with large market shares can maintain above-normal and more stable profits for long periods than other firms and that their profitability is greater when the industry is more concentrated. There is also

Technology in the governance of industries 13 strong evidence that such firms are more capital- and research-intensive and engage in product differentiation strategies, such as advertising, as compared to firms in general. Mueller, in an extensive empirical investigation of long-run profits, notes that there has been significant continuity in the firms which are dominant: in 41 percent of 350 US industries the leading firm was the same in 1972 as it was in 1950. He reconciles the major paradigms by concluding that both industry and firm effects “have something to contribute in explaining the profitability differences across firms. Both sets of variables result in a significant increase in explanatory power when added to the other set in the equation. Together they can explain over half of the variation in long-run profitability across firms” (1986: 217).6 Studies have found that particular industries are likely to display similar levels of concentration across countries (Pryor, 1972). Taken together these empirical findings confirm that some industries may be concentrated with stable capital- and research-intensive dominant firms enjoying persistent profitability while others may be characterized by atomistic competition, low levels of research, labor-intensive production and low profitability. The correlation of concentration ratios across countries suggests that these are shaped by the industry’s technology rather than factors that would vary across countries, such as the skill of inventors or managers, the national regulatory environment, or random competitive advantages of particular firms that become magnified as markets grow. Differences in concentration ratios and other measures, then, may point us to very different structures that exist across international industries. Pryor, for instance, in his ranking of concentration ratios in twelve countries, included industries that correspond to those on which this book focuses. He found that clothing and shoes ranked 18, textiles ranked 16, primary metals ranked 12, electrical equipment ranked 7, chemicals ranked 5, and transportation equipment, including cars, ranked 2 (Pryor, 1972: 135). We shall see in Chapter 8 that these industries similarly vary on research expenditures and capital intensity.7 Empirical work in the field of industrial organization is less helpful in explaining why there are these variations across industries. In part, this is due to the difficulty of analyzing the impact of technologies or the relations among firms with the quantitative indicators and rigorous modelling that is the dominant methodology in the field. Even more qualitative approaches face difficulties from the unwillingness of firms to reveal information that could have negative consequences for their relations with anti-trust regulators or competing firms. Thus, it is hard to establish whether a firm is dominant simply because it operates at a more efficient scale than its competitors or because it engages in anti-competitive practices to protect its position. In this book I handle this problem in two ways. First, because my primary goal is not to explain concentration and other industry characteristics but rather to examine the relationship between these characteristics and the actions of states, much of the industrial organization debate can be circumvented. Second, by drawing on the literature on technology to explore the ways in which firms might be able to control markets and by looking for qualitative evidence for such control over long periods of historical time, as I do in Chapters 2–7, it is possible to mine

14 Technology in the governance of industries a richer array of evidence than would be possible in tests of formal models which are limited by the availability of quantitative data. In the next section I draw on the discussion so far of regimes, technological transformation, and industry structure to construct a model of change that seeks to shed light on recurring patterns in the governance of international industries.

A model of the relationship between technology and the governance of international industries In this section I build upon the points made in previous sections to construct a model of the relationship between an international industry’s technology on the one hand, and the organization, governance and political conflict associated with that industry on the other. I identify two patterns. The first is based on the distinctive mix of technological characteristics that can be found in any given international industry. These characteristics include capital intensity, the importance of scientific and technical knowledge, territorial embeddedness, and the complexity of production processes. It is hypothesized that the mix found in any particular international industry is likely to display significant continuity over the life of the industry and that this has important impacts on the role of states in the industry. The second stresses a pattern of technological maturation that, in key respects, is common to all international industries. Because industries emerge at different times, the stages in this pattern at which various industries are located at any particular historical moment will vary. Moreover, the distinctive technological profile of the industry is likely to alter the pattern of maturation in predictable ways. Nevertheless, such patterns of maturation are strongly linked to the role of states in protecting or restructuring international industries. The impact of technological profiles It is intuitively obvious that certain features of an industry’s technology can have a profound impact on the form that the industry’s international governance takes. For instance, railways need to stop at the water’s edge while ships and aircraft do not and, thus, it is not surprising that international institutions concerned with the governance of railways are primarily continental while air and shipping institutions are more global. Similarly, the interdependence that is dictated by the constraints and rigidities of rail systems has required more international coordination than has the more flexible trucking industry. The physical rootedness of a technological system in a particular geographic terrain can be labeled territorial embeddedness. Other examples of territorial embeddedness could include the degree to which crucial raw minerals or agricultural inputs are dispersed around the world and the physical weight of the industry’s product and thus the transportation constraints on its distribution. Drawing on the literature on technology we can sketch out the likely impacts of other technological characteristics on the industry’s governance as well. As noted above, these include capital intensity,

Technology in the governance of industries 15 the importance of scientific and technical knowledge, and the complexity of production processes. Capital intensity can be a barrier to entry that allows dominant firms to exercise control over markets. With the globalization and increased depth of capital markets industrial organization scholars have argued that financing should be available for competitors to dominant firms and that capital intensity cannot be a significant barrier. However, in earlier periods when global markets were less integrated and when a production process required high levels of capital expenditure and, consequently, had a relatively high minimum-efficient scale, it is possible that a very small number of firms could consolidate a dominant position in a national market. Even today capital markets are far from completely integrated, as evident in cross-national differences in the cost of capital. A second feature of capital intensity is the desire of firms to attain a stable, minimum level of output in order to make efficient enough use of capital invested to cover its costs. Often the marginal cost of additional products is minimal and thus firms may not cut back in periods of downturn, leading to excess supply. This, then, gives such firms a strong incentive to organize market shares in ways that offset the turbulence of competitive markets. Scientific and technical knowledge, if treated as an investment, could have effects similar to capital intensity. This knowledge can also have further profound impacts on the governance of industries if leading firms are able to use their control of technology to reinforce their dominance. This could occur through learning advantages experienced by firms at the edge of a technological frontier. It could involve more deliberate efforts on the part of leading firms to construct competitive advantage by setting industry standards, perhaps in coordination with governments, blocking competitors through the use of patents, or using access to technology to consolidate loyalties of suppliers and complementary manufacturers. The issues raised by the 1999 Microsoft anti-trust case provide an example of the relationship between technical knowledge and power. At any given level of capital intensity different production processes may display a variety of levels of complexity. For instance while both the steel and chemical industries are highly capital intensive they differ sharply in their level of complexity. Although specialty steels have become more complex, the steel industry, in general, produces variations on a single product. By contrast, the chemical industry produces perfumes, fertilizers, pharmaceuticals, paints, and countless other disparate products. Some chemicals are used as inputs for other chemicals with very different properties. The specific properties of a complex product and the concomitant importance of coordination between producers and purchasers can facilitate the creation of social and organizational ties that offset competitive pressures. In part this can be the creation of a quasi-monopoly through product differentiation but unlike such differentiation created through advertising the effect is rooted in the physical properties of the industry’s technology. Complexity can foster the integration and interdependence of an industry and enable it to weather exogenous shocks better, such as a rise in the price of an input or a recession.

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The above four elements of an industry’s technological profile all have implications for the governance of the industry. A first type of implication is the type of governance the industry is likely to demand. For instance simple capital intensive industries with widely available inputs are more likely to make demands on governments to manage markets, including market shares, while complex scienceintensive industries are likely to be more interested in patent regulations and selfmanagement of competitive pressures. A second type of implication is the power of the industry. The concentration that comes with capital intensity and the interdependence that comes with complexity also brings a capacity for coordinated action on the part of the industry. Similarly, scientific and technical intensity can be a source of authority for industry experts. Patterns of maturation There are well-recognized patterns of maturation of technologies that have important implications for the governance of international industries. New industries tend to follow an S curve with slow growth initially as the industry gets established, very rapid growth once a critical mass is reached, and then slow growth again as the market reaches saturation levels.8 In this section I sketch out the types of governance which are likely to correspond to this pattern of emergence and maturation. In the early period, growth is slow because of the difficulty of organizing a new production process and convincing customers of the technology’s value. New technologies involve much more than the selling of a new product. Usually, they require coordination between suppliers, inventors, investors, manufacturers, regulators, and customers. Each may need to be educated in the properties of the technology and adjust their own practices accordingly. Often coordination extends well beyond the industry originating the technology. For instance the mass production of automobiles involved the extension of road networks, the supply of oil, and after-sale service and repair networks. Prototypes of a new technology can be displayed at exhibitions to stimulate interest in it but costs will be high and acceptance slow until sufficient infrastructure and standardized production can be organized. This will be even more the case if it displaces an older technology to which producers or customers have irrevocably committed assets. Once the new technology is established, products become more standardized, the market for the product expands, and firms can begin to invest in production processes that drive costs down. Infrastructure and related industries are also increasingly created, or are aligned with the needs of the new industry. The industry then enters into a period of rapid growth that can spread to other industries, through the increased demand for inputs or decreases in costs due to the application of the new technology to those industries. The last mature phase of the S-curve occurs when most potential customers have had an opportunity to purchase the new product. Railways, for instance, were built very rapidly until all major cities were served at which point the industry slowed and focused on replacement and upgrading of existing railways.

Technology in the governance of industries 17 Drawing on the work of Vernon (1966) and Magee (1977) who have discussed “product cycles” and “industry cycles” respectively, we can begin to analyze possible implications of this type of pattern at the international level. In their model, the early stage of production is centred in wealthy industrialized countries both because of the need to draw on the specialized engineering, financial, and marketing expertise there, and because of the existence of high income consumers who will be willing to pay for products which, because of the small scale on which they are produced and the high costs associated with their development, are expensive. As an industry matures, however, production runs lengthen and become routinized, costs drop, and markets expand. Production begins to shift to less developed low wage countries, in part to satisfy the growing demand for the now affordable product, in part because it is possible to move routinized production processes away from the centralized expertise which was needed to initiate them, and in part because of the need to compete more effectively on cost against other producers, which emerge as knowledge of the production process disseminates. In the mature phase of the cycle exports of the product from the less developed countries into industrialized countries increases.9 In seeking to understand the relationship between this pattern of maturation to governance it is important to stress key organizational impact of technologies. Firms and states use technologies to achieve a dominant position relative to competitors. In part this is accomplished by access to a stream of revenue generated by new technologies. It also involves, however, the structuring effect of the technologies. Dosi and Orsenigo (1988: 24) have commented upon this effect with respect to the relationship between firms: In general, the stability of an evolutionary path, we suggest, is likely to rest upon those technological conditions of opportunity, appropriability, and cumulativeness characteristic of each technological paradigm and on the permanence of the institutions governing behaviours and expectation formation … the permanent existence of asymmetries between firms in terms of production costs and product technologies, represents a sort of factor of order … Technology and power are therefore closely related. What are the implications of this pattern for governance? In the initial stages of a new industry we can expect to find it dependent on a set of social institutions and a particular location since these are needed to sustain the types of relationships between suppliers, engineers, scientists, entrepreneurs, and buyers which are critical to the initiation of an industry but are too complex and extensive to be contained within the structure of any particular firm. Leading firms – hoping to retain their lead, maximize their returns from the new technology, and deter new entrants – will seek to retain centralized control over it as well. Competitive and technological factors will lead over time, however, to the loss of control of the new technology by leading firms. The ease with which routinized production processes are disseminated, the possibility and advantage of using lower cost labor, and the emergence of competing firms in less developed

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countries will all lead to the migration of production from its original central location to other locations around the world. It should be clear that patterns of technological development, which may be common across industries but be specific in their stage in any particular industry, cannot fully explain the governance of international industries. A key question is how, at any particular point in time, a pattern specific to an industry interacts with factors common to the world system as a whole. We shall see, especially in Chapter 9, that there are a number of such systems-level factors that continue to be relevant to each of the case studies. Some of these, such as world wars and the rise and fall of hegemons, have been studied extensively by scholars for their effect on world politics. After constructing an industry-based model of development and governance in this section I will turn, in the next section, to alternative explanations, especially those based on systems-level factors. These provide counterhypotheses to the ones associated with the model developed in this book. It shall be argued, and assessed through the case studies, that while these systems-level factors remain important, we cannot adequately understand regimes, and the governance of international industries more generally, without reference to the industry-based dynamics upon which this book focuses. What then are the likely distinctive features of governance as this cycle evolves? It should be noted that there is likely to be considerable variation across industries in the way in which this cycle evolves, which in turn has implications for governance. In part, this variation is likely to be associated with the physical nature of the technology and products. As noted above, railways, which must stop at the water’s edge, are likely to involve different types of governing institutions at the international level than shipping, for instance. Similarly, industries, like chemicals, which must source from a wide range of geographical locations and can be sold around the world without physically deteriorating are likely to require more sophisticated mechanisms for governing international flows than are industries which generally rely on local production or for which the products cannot be as easily transported such as the dairy industry. Industries are likely to vary, as well, in the degree to which leading firms can retain their lead by continually innovating. While such variations across industries can be better understood by focusing on the role of technology in the governance of international industries, they also caution us against excessive generalization. Nevertheless, it is useful to sketch out those changing features of international governance that are most likely to be associated with each stage of an industry cycle. We can then, using case studies, assess the degree to which these regularly appear, contrast this type of explanation with others, and seek to explain deviation from the model. In looking at governance, following the points made in the section on regimes and governance, it should be clear that I am interested in both private, stateinitiated and hybrid forms of governance, both formal and informal. Table 1.1 outlines key features of governance that we might expect to see correlated with phases of an industry cycle. In the first phase of initiation and growth, governance of the industry is primarily provided through the collaboration of leading firms centralized in a

Technology in the governance of industries 19 Table 1.1 Features of governance of international industries: variation across industry phases Industry phase

Initiation and growth

Maturity

Decline

Spatial features of production

Leading firms in central location

Leading firms experiencing challenge from new entrants in new locations

Many firms decentralized around the world

Role of states

Home states of leading firms help secure foreign markets unilaterally and help overturn the control of older firms and technologies

States support private multilateral arrangements of leading firms

States take the lead in organizing markets, may create new regimes, or may take a more active role in clarifying the framework within which atomistic competition takes place

Role of firms in the industry

Leading firms interact with each other in a single country or location

Leading firms attempt to organize markets, integrating new entrants from other countries

Leading firms lose their position and atomistic routine competition ensues

Role of firms from outside the industry

Firms based in an older technological paradigm may resist the new one. Suppliers and buyers must be linked to the producer

Firms from other industries coexist with those from the industry

Firms from other industries may begin to call for the overturning of the state and private institutions which privileged the leading firms

Key feature of norm creation

Creation of standardized scientific norms such as units of measurement. Promotion of new product

Norms governing organization of markets and specific relations among firms

Norms governing more interventionist market sharing or atomistic competition

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particular location or country. These firms, acting informally or through industry associations, establish the international connections with suppliers and buyers that are necessary to develop the industry. They work with scientists as well to establish new international scientific standards to help ensure the compatibility of new products with the technical and physical infrastructure in foreign countries. Their control over the new technology allows them to organize the industry as a whole. The state in which leading firms are located plays an important unilateral role in opening up foreign markets, facilitating its firms’ foreign sourcing, and reducing the control over markets of older industries. In the second, mature phase, leading firms lose control of the new technology and firms from other countries begin to master it. Competitive pressures arising from new entrants increase and the leading firms act to incorporate those new entrants into market sharing arrangements. Technology continues to be used to consolidate these relationships, as was the case, for instance, with the role of patents in inter-war cartels. States are mobilized to support this multilateral collaboration of firms. The final phase of decline can take one of two paths depending on the strength of the industry relative to others. If the industry provides inputs into, or competes directly with, a more powerful and less mature industry then we can expect to see the emergence of atomistic competition, with states acting unilaterally and in collaboration to establish rules within which this competition can take place. If the industry remains strong and independent relative to others then we are likely to see it successfully mobilize states to reinforce marketsharing arrangements. In short we can expect to see private institutions playing a leading role in the governance of emerging industries and state-led institutions playing a relatively larger role in mature and declining industries. This model suggests that the emergence and the character of regimes are determined by factors endogenous to an industry rather than by the system of states. Regime analysts have tended to focus almost exclusively on the interests and capacities of states with regard to the governance of industries. For instance, hegemonic stability theory has argued persuasively that we will see regimes appearing where a single state is overwhelmingly preponderant in a particular issue area, since the benefits to that state of supporting a regime, because of that state’s size, are large enough to outweigh the entire cost of the regime.10 Preponderance may be measured in a particular issue area or for a range of issue areas. Indeed it has been argued that states, that are hegemonic in the system as a whole, provide the overarching regimes within which regimes for particular industries are nested. For instance, Aggarwal has argued that the post-war textile regime was successfully promoted by the US in part because of its large share of the textile import market, in part because of the desire and capacity of the US to link it to the broader trade regime, and because the textile regime supported East Asian allies which were important to the US in the Cold War arrangements it was constructing against the Soviet Union. The model discussed above provides a quite different explanation. As will become clear throughout the book it is not denied that factors exogenous to an international industry have an important impact on the nature of governance and regimes in it. However, it will be argued

Technology in the governance of industries 21 that such factors by themselves are insufficient. For instance, the desire and need of the US to construct a regime for textiles, quite distinct from other industries which were handled in the trade regime more generally, was closely related to the maturity of that industry, as we shall see in Chapter 2.

Counterposing and assessing this model relative to prevailing approaches How can we assess the model outlined above? The epistemology adopted here assumes that a hypothesis or model is useful if it is consistent with existing facts and relationships already addressed by other theories, but also reveals and explains new facts and relationships that are not addressed by, or are inconsistent with those theories.11 Careful comparison of case studies is the most useful way to assess theories against experience when the need for subtle, normative and historical interpretation, as well as a small number of available cases, precludes quantitative testing. The first task in assessing the model, then, is to determine if it is consistent with the well-known features of the cases that I explore in this book. I am engaging in comparisons across time, which will be most fully developed in the chapters devoted to particular cases, and in comparisons across industries, which will be developed mostly in the concluding chapters. Is there evidence of unilateral control of an international industry by private firms from a single location or country at the beginning of an industry? Are private multilateral arrangements the main source of governance in growing and maturing industries? Does this shift to states as industries fully mature and begin to decline? These are questions that will be asked with respect to all of the case studies. A second task, then, is to ask whether the logic of this model reveals and explains sets of facts and relationships that are not addressed by, or are inconsistent with other approaches. Four such anticipated sets follow from the model and will be assessed with respect to the case studies. First, it is anticipated that formalized interstate regimes will appear in situations where hegemony has declined or is absent. This is because industries associated with hegemony, either of leading firms or a leading state, are, according to this model, likely to be governed by private arrangements organized by those firms, not by inter-state regimes. Inter-state regimes are likely to be needed when these private arrangements decay and there is a need for rules to govern the ensuing competition that can only be provided by the multilateral action of states. This prediction flatly contradicts that of hegemonic stability theory. Second, there has been considerable attention devoted, in the epistemic communities literature, to the role of knowledge in regimes, a relationship upon which this model bears. It has been argued that epistemic, or knowledge-producing communities can contribute to regime formation by creating consensual knowledge – shared perceptions of a problem and its optimal solution. Uncertainty, an element of which can be technical complexity, tends to enhance the role of epistemic communities in policy making. As Haas (1992: 35) has noted, “Generally called upon

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for advice under conditions of uncertainty, they have often proved to be significant actors in shaping patterns of international policy coordination.” Or as Haas and Adler note, “In international coordination games concerning issues with a technical nature, cooperative outcomes may depend, then, on the extent to which nation-states, after taking everything into consideration, including the urge to defect, apply their power on behalf of a practice that epistemic communities may have helped create and perpetuate” (1992: 373). Thus, there is a connection between uncertainty, epistemic communities, and regimes. However, proponents of the epistemic communities concept acknowledge that “learning does not necessarily lead to policy coordination” (Haas, 1992: 30), and suggest that “whether epistemic influence leads to policy coordination is a function of whether the causal beliefs of epistemic communities demonstrate the need for it” (Haas, 1992: 30). The model developed in this book helps us specify, more clearly, the role of epistemic communities in regime formation. It suggests that technical complexity may indeed enhance the role of knowledge-producing communities, but that these communities are likely, in periods of highest complexity, to promote private governance of international industry rather than inter-state regimes. New technologies and the uncertainties associated with them put scientists and other experts in a prominent position, but these are often funded by or directly employed by firms which may be dismissive of, or hostile to the strengthened state regulation that the construction of an inter-state regime represents. In the early stages of an international industry leading firms may turn to their own government for assistance in funding research and development, but this will not lead to regimes. It will be in periods of relatively low technical complexity, when technologies have matured, become routine, and have disseminated, that regimes will be constructed. This, then, offers a quite different interpretation from the prevailing epistemic communities approach. The third set of facts and relationships that this model leads us to anticipate relate to the role of private authority in governance of international industries. Often, it is assumed that the alternative to a regime constructed by states is anarchy. This may not, however, be the case. A third possibility is a well-organized stable industry in which the sources of governance are private institutions. The presence or absence of such institutions, which often falls outside the analytical framework associated with regimes, can have important theoretical and policy implications. Industries may be more stable than they might otherwise appear and thus the need for inter-state regimes may be low. Alternatively, private international collaboration may work against the public interest, such as unaccountable and harmful shifting of risks or extraction of monopoly rents, thus, suggesting a need for stronger inter-state regimes. Analysis of such questions is facilitated by a model that highlights the role of private institutions in international governance. The fourth and related set of facts and relationships concerns the content of a regime. Often, analysts have focused on such characteristics of a regime as its strength, the causes of its emergence and decay, and its scope. The content of

Technology in the governance of industries 23 regime policies, while important in illustrating these other characteristics, is independent of them. As an exception, trade liberalization has often been associated with regimes. However, this content has not been effectively linked to a theory of regimes. Not all regimes are liberal. Why are some regimes liberal and some protectionist with regard to trade? This model suggests that inter-state regimes are associated with mature and declining industries. They are likely to be liberal if there is a younger and stronger industry that either competes with or uses the products of the industry in question, as that stronger industry will influence the state to reduce costs in the older industry by allowing increased competition. They are likely to be protectionist if the industry retains its strength relative to others. These considerations, which relate directly to the nature of technology in an industry, fall outside the purview of most regime theories. Operationalizing and testing the model This book relies on a careful historical comparison of case studies to assess the model developed above. As noted previously, the small number of cases available, the need for interpretation of norms, the difficulty of obtaining adequate and comparable quantitative data across the required period of time and number of industries, and the importance of tracing historical processes in detail preclude quantitative testing of the model. Nevertheless, it is possible, using a combination of qualitative indicators, such as widely agreed assessments in the historical or trade literature, and quantitative measures, to determine whether the model satisfies the two conditions set out above: first, to be consistent with the well-known features of the cases, and second, to reveal facts and relationships not addressed or inconsistent with other approaches. Chapters 2–7 present case studies of six industries in turn. These are historical analyses that identify remarkable continuities in technological profiles of industries across time as well as identifying patterns of maturation where these exist. The impact of technological maturation on the organization and governance of industries will be discussed, and as each additional case is added comparisons across the industries will reveal the impacts on organization and governance of variations in the industries’ technological profiles. Chapter 8 provides an analytical overview of the six cases, drawing out further comparisons and providing more data to aid in this comparison. Chapter 9 concludes by considering the relationship of the patterns identified in this book to the alternative systems-level factors, such as world wars and hegemony, upon which the field of international relations has tended to focus. While these systemic factors are not irrelevant it will become clear that they are limited in their ability to explain variations in the organization, type of governance and degree of political conflict in international industries.

2

The cotton textile industry From the industrial revolution to the present

No other industry has attracted as much interest historically as has the cotton industry. In part this is because it was the key industry associated with the industrial revolution in the late eighteenth century; its social and political effects and its technological innovations have been an enduring source of fascination. It is partly because it was so impressively global and so significant for the international hegemony of Britain. The British cotton industry imported all of its raw cotton from overseas and, at its peak, supplied as much as 70 percent of the world’s manufactured cotton goods (Farnie, 1982: 47). It is also because the cotton industry continues to be a primary vehicle for countries at the early stages of industrialization and as such is highly relevant to questions of development and to the trade conflict that is associated with the growing exports of these industrializing countries. In this chapter I will examine the international cotton industry from the late eighteenth century to the present day, exploring the relationship between private international institutions, states, and technologies, and thereby beginning to assess the hypotheses set out in Chapter 1. As with the other cases, it is neither possible nor necessary to give a complete account of development of the industry. Our goal here is rather to discuss the key institutions involved in the organization and governance of the international industry in each of two very broad periods and to look at the relevance of technological developments for these institutions. The first period, the period of the industry’s emergence, extends from the rise of British dominance of the industry in the late eighteenth century through the disruptions associated with the American Civil War in the 1860s, and ending with World War II. During this period the cotton industry was organized by a set of private institutions. Through most of the nineteenth century these were centralized in Manchester and Liverpool. These institutions organized the activities of market actors, but also sought, often successfully, to shape the actions of the British state in ways that would benefit the industry. As the nineteenth century progressed British dominance was increasingly challenged by the growth of cotton industries in other countries. In response there was an increased effort on the part of private actors to create private institutions that were more multilateral than those of the first period. Although there was some effort between the two World Wars on the part of the British industry to enlist the British state on its side

The cotton textile industry 25 this was relatively unsuccessful. Nor were there any significant instances of inter-state cooperation in the governance of the industry. In the second period, the period of the industry’s maturity, from World War II to the establishment of the World Trade Organization (WTO), states became the primary actors in the organization of the international industry, as evident in the negotiation of the Short- and Long-Term Arrangements and the Multifibre Arrangement which were state-organized market-sharing arrangements. Industry associations, while still active, played a role of reduced significance relative to these inter-state arrangements as compared with the previous period. This examination of the history of the industry as a whole will demonstrate that private institutions linking firms together played an important role in the organization and establishment of the international cotton industry. This contrasts with the frequent perception of the industry as composed simply of individualized and atomistic market actors. Moreover, the character of these institutions reflected the distinctive technology of the cotton industry. Although the capital required for any particular cotton manufacturer was quite small the industry as a whole required a critical mass of coordinated activity in order to be able to operate viably. Institutions needed to be established to bring large quantities of cotton of predictable quality from overseas to the factories and to distribute manufactured products around the world. As well institutions were needed to facilitate the dissemination of knowledge about the new technology among enough firms to sustain this critical mass but not among so many firms that the profitability of the leading firms was too quickly undermined. The word “needed” here is not intended to imply the existence of a system that automatically brings about the satisfaction of its functional requirements. The private institutions that were created might have failed under other circumstances. However if they had done so the international cotton industry, British industrial hegemony, and perhaps the industrial revolution itself would not have happened. It will become apparent as well, that the hypothesized pattern of development discussed in the first chapter – the shift from private unilateral governance to private multilateral, and finally to an inter-state regime – is visible in this case. The management of the industry by private inter-firm institutions was eroded as the technology spread from Britain to competing countries. In its place, following World War II, governments stepped in to organize markets. Nevertheless, there are qualifications and additions to these hypothesized relationships that become apparent from the case and these too will be noted and discussed.

The emergence of the industry: from the industrial revolution to World War II Often the British cotton industry in the nineteenth century, centered in Lancashire, is characterized as composed of highly competitive and relatively small firms with little capacity for collective action. Farnie (1982: 73), writing about the 1846–1914 period, comments for instance, that firms “remained more divided by the struggle to survive than united by any common overriding interest.” Similarly

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The cotton textile industry

Lazonick with Mass (1990: 46) have argued that the twentieth-century British failure to make the coordinated investments needed to remain competitive was due to “the fragmented and market coordinated structure of industrial organization that the British cotton industry inherited from its era of international dominance.” Such a characterization of the cotton industry seriously underestimates the way, in the emergence of the international industry, that formal and informal institutions tied together British participants in it and facilitated their domination of international markets. These institutions ranged from the most formal, such as the Manchester Chamber of Commerce (MCC) and the Liverpool Cotton Brokers’ Association, to the informal, such as unwritten codes of conduct and business practices cemented by recognized modes of dress, intermarriage, and other traditions. It is a mistake to focus narrowly on spinning or weaving machinery when discussing the technology of the cotton industry during this period. Certainly mechanization was important in improving productivity. However the machinery could only be operated successfully as part of a larger technical system that included new types of social institutions centered in Manchester and extending around the world. Despite efforts of cotton manufacturers to prohibit machinery exports, machines were relatively easy for firms in other countries, to acquire. However it took much longer to develop the corresponding and necessary social institutions and it was this aspect of the technical system that sustained British dominance. There are five types of actors that were connected to this technical system. The first were the British manufacturers and merchants: many of the new social institutions played an important role in coordinating transactions efficiently, in producing and disseminating information, in resolving conflicts among participants, and in reducing fraud. The second type of actor affected was the British state. The most prominent example of this was the MCC’s role in the anti-corn law campaign, which aimed to eliminate the tariff on grain imports – important for the cotton industry as workers’ food was a significant cost factor and because freeing trade in grain imports facilitated reciprocal access for exports of cotton manufactures from Britain. The third type of actor affected was the foreign suppliers of raw cotton which, in this period, were primarily the planters and merchants in the US south. The fourth type was foreign purchasers of British cotton products, including merchants and consumers. The final type of actor was the workers in the factories and their children. Employers associations were created to combat unionization. Additionally, and especially during the cotton famine associated with the US Civil War, there was a great deal of concern and attention devoted to the moral, physical, and intellectual capacities of present and future workers. Thus we shall see that private institutions were involved in organizing all phases of the international process, from supply of inputs through production to the marketing of the final product. They enabled British manufacturers and merchants to organize themselves, and, building on this foundation, to organize others, thereby bringing about their remarkable dominance of international markets. I now turn to look at these institutions, looking first at their relationship to the merchants and manufacturers in Lancashire and then their relationship to the other four sets of actors.

The cotton textile industry 27 The heart of the technical system: the role of private institutions in the organization of British-based cotton merchants and manufacturers Britain’s astounding success in creating and dominating a global cotton textile manufacturing industry could not have been accomplished only by talented entrepreneurs working in isolation from one another. The organization of the international industry involved massive challenges of coordination and control. Extensive coordination was needed for suppliers of raw cotton, spinners of yarn, weavers, finishers, marketers, cotton machinery makers, and other ancillary industries, such as chemical dyes, to adopt or be compatible with each new technological innovation as it emerged. To successfully address these, the cotton merchants and manufacturers relied on a well-developed set of formal and informal institutions linking one firm to another. As noted above, these institutions made it possible for cotton textiles to be produced with quantity, quality, and cost, sufficient to outcompete rival textiles and dominate world markets. There were four especially important challenges facing the cotton manufacturers in their interactions with each other. I will review each of these challenges briefly before discussing the institutions that addressed them. First was the need to maximize the efficiency of the buying and selling of cotton. The quality of raw cotton was very important, not just for the texture of the final fabric, but more importantly because of the negative consequences of poor quality cotton for the mechanized production process. Finding cotton at the right quantity, quality, and price involved high search and negotiation costs. Second, manufacturers needed to produce and control knowledge about the manufacturing technology. On the one hand, there was a need to share information: new innovations needed to be spread among leading firms to create the critical mass of users of the technology needed to support the supply and service of the machinery, and among the workers and supervisors that the firms needed to employ. On the other hand, the leading firms were eager to slow down, as much as possible, the dissemination of manufacturing technology to potential competitors in other countries. Third, in developing the unity needed to address common problems in Lancashire and abroad, the merchants and manufacturers needed to be able to resolve conflicts among themselves. One such conflict was between firms that wanted to export machinery and those that feared this would lead to foreign textile-manufacturing competition. Another was between spinning firms that wanted to export their yarn, and weaving firms that wanted abundant yarn at home rather than in the hands of competing weavers abroad. Fourth, prevention of fraud was a challenge. A distinctive feature of the British industry was the ability of firms to exchange huge volumes of cotton without written contracts or detailed examination of the bales. The formal and informal institutions that developed in Lancashire created the level of trust, monitoring, and enforcement of norms that made this possible. In contrast, in the Bombay market, exchanges took place amidst hundreds of thousands of stacked bales.

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The cotton textile industry

Two types of institutions were especially important in addressing challenges such as these. The first were shared cultural norms and business practices facilitated by the embedding of the cotton industry in a single location – Lancashire and, more specifically, Manchester – a location removed from the traditional commercial center of London. As a provincial town, Manchester was relatively free of the constraining effect of older social institutions, and a new set of social institutions and cultural practices that were distinctive to the cotton industry could and did develop there. Spatial and social closeness facilitated the transmission of expertise among residents. Geographic and social distance between Lancashire and other potential manufacturing centers reduced the likelihood that the technologies, practices and systems developed in Lancashire would be used or imitated by rivals. The second were formal organizations such as the MCC and the Royal Exchange. I will first discuss norms, and then formal organizations. There were elaborate social ties among leading manufacturers that helped address the four challenges to the technical system discussed above. Despite the considerable number of cotton manufacturers in Lancashire there was a smaller subset of larger firms that accounted for the majority of manufacturing. For instance in 1841 there were 1105 spinning and weaving firms. Of those, the 80 firms that employed more than 500 workers accounted for 34 percent of total employment. Another 147 firms employing more than 250 accounted for an additional 27 percent of employment (Howe, 1984: 5, Table 1.2). This concentration in manufacturing facilitated a capacity for close ties among a small elite. Although entry into cotton manufacturing was easier than in some industries considerable class and family continuity remained. For instance Howe in a study of 351 owners who entered the industry before 1849 found that 51 percent inherited their firm and that most of the others came from middle-class backgrounds, with only an estimated 5 percent rising from “the ranks of shopkeepers, artisans and operatives” (Howe, 1984: 53). About 80 percent came from Lancashire and about 81 percent married Lancashire women (Howe, 1984: 51, 76). The industry was further structured by financial constraints and relations. The local banking industry in Lancashire at the time of the emergence of the cotton industry was fragile and small. In the first half of the nineteenth century it primarily served marginal firms that, along with the local banks themselves, grew quickly in periods of boom and found their viability threatened in the industry’s periodic downturns. The older successful manufacturers had established earlier and closer links with London and foreign banks which had helped them to accumulate the capital needed to weather turbulence in the cotton industry: “numbers of the pace-making Lancashire merchant-manufacturers of the first generation sought direct access to London finance … these were the giants of the industry … the manufacturer who missed the opportunity of rapid growth in the halcyon years, 1780–1810, probably never had the same chance again.” (Chapman, 1979: 52). Some wealthy merchants began financing other firms: “the provision of finance for exporting became the specialized function of a small group of London and foreign merchants, properly called acceptance houses or merchant banks.” (Chapman, 1979: 54). The end result, then was a “web of credit”

The cotton textile industry 29 (Chapman, 1979: 53) which tied together the industry, creating a dependence of smaller firms on the authority of the larger ones. We shall see below that this financial web tied together not just the British merchants and manufacturers, but extended to the cotton plantations in the US south as well. While the above institutions were centered in Manchester they were closely linked with nearby port city of Liverpool in which the focus was on the supply of raw cotton. The impact of informal ties is evident in the careful description by Ellison (1968[1886]: 168–9) of the specific buildings that participants met in, the few key families that organized the trade, and their distinctive dress. Such ties facilitated trust, enhanced the efficiency of transactions by creating a base-level set of ongoing expectations which did not have to be renegotiated each time, reduced fraud, helped stabilize prices (brokerage fees were fixed) and encouraged the sharing of information: “there was universal trustfulness; all transactions were plain, honest and above board, and no broker was afraid of being tripped up by any of his fellow-brokers. There was no secrecy; every broker who cared to know, could know what his fellow-brokers were doing” (Ellison, 1968[1886]: 273). Even after the formation of the Cotton Brokers’ Association in 1841 the informal norms continued to be important: For many years after the formation of the Association, the business of the market was conducted on the lines of an unwritten code, which clearly defined the functions, and plainly set forth the rights and duties, of both merchants and brokers, in their individual capacities and in their conduct towards each other. (Ellison, 1968[1886]: 272) Brokers and their clients had exclusive mutual commitments to each other: it was against the etiquette of the market for any broker, buying or selling, to poach, as it was called, upon the ground of any fellow broker … guerrilla warfare in the manufacturing districts brought down upon the delinquents universal condemnation. (Ellison, 1968[1886]: 273) The above sets of informal social institutions and social practices which tied together the British cotton firms supported and were supplemented by more formal organizations which addressed more specific collective interests of the firms. Two of the most important private institutions involved in enhancing the efficiency of transactions were the Manchester Royal Exchange (founded 1809) and the Liverpool Cotton Brokers’ Association (founded 1841). The exchange, described by Farnie as “the centre of the most important aspect of Manchester’s life” was opened “by a private association of merchants and was closed to all but subscribers … it centralized the supply of information, both public and private, as the indispensable basis for all transactions. Members conducted their business beneath a congenial cloak of secrecy and did not need a directory until their

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The cotton textile industry

numbers had, in 1891, exceeded 7,000” (Farnie, 1979a: 97). Centralization of the world’s trade in cotton products in this relatively small restricted institution (until 1844 there were fewer than 2,000 subscribers) fostered the types of knowledge availability and “strict probity” that allowed the exchange of massive quantities of goods without samples, written contracts, or “the use of a single Government stamp” (Farnie, 1979a: 99). The Liverpool Cotton Brokers’ Association played a similar role for the exchange of raw cotton, which collected and disseminated information on the quantities and prices of goods sold, and which fostered agreed business practices. As the trade grew the informal social ties described above became inadequate. Ellison, writing at the time, gives a detailed account of the formalization of these institutions as competitive pressures increased. The informal rules that had governed the Association from its founding in 1841 were supplemented with a set of written rules “issued on a single sheet of paper or cardboard, to be hung up in the offices of the members” (Ellison, 1968[1886]: 274). By the 1870s the Association had a well developed set of rules, an established arbitration procedure, and an elected Committee, “the final court of appeal to whom all disputes in the Cotton trade are referred for settlement” (Liverpool Cotton Brokers’ Association, 1877: 36). These were further strengthened at the beginning of the 1880s with its reorganization into the renamed Liverpool Cotton Association, with 17 specific articles in its founding agreement (Ellison, 1968[1886]: Part II, Chapter IV). There were other formal organizations that also played a role in controlling information flows. The Manchester Committee for the Protection and Encouragement of Trade, founded in 1774 and a forerunner of the MCC waged a vigorous and successful campaign against “exclusive patent rights over textile machinery”, especially those held by Arkwright (Redford, 1934: 4–5). The Manchester firms also collaborated in preventing the flow of information abroad through the Society for the General Protection of Trade, formed in 1799 and active at the beginning of the nineteenth century, which aimed at the “Prosecution of Persons for exporting Machinery and inveigling Mechanicks” (Redford, 1934: 67). Some of the firms’ efforts were focused on the British state, which, as noted below, had enacted laws to keep machinery and mechanics in Britain, but the firms were also personally involved in inspection of cargo, drawing on their expertise to identify sensitive technologies which they felt should not be exported (Musson, 1972: 36). Advertisements in newspapers warned citizens about foreigners scheming to steal trade secrets (Redford, 1934: 4). The Manchester Statistical Society, formed in 1833 by a “small group of friends … all connected in some degree with local industry or banking” (Ashton, 1977[1934]: 4), was an organization which was wholly devoted to the production of information, priding itself on an independence from politics and the state which allowed it to “conduct inquiries which no Government could then have undertaken without exciting the distrust inspired by an inquisition, or the suspicion aroused by a tax collector” (Ashton, 1977[1934]: viii). Initially the Society’s primary concern was with local social problems such as poverty and crime and the threat they posed to social institutions but by mid-century it began devoting

The cotton textile industry 31 considerable attention to economic problems such as trade cycles, banking and money, and in the last quarter of the nineteenth century, to cotton statistics (Ashton, 1977[1934]). There were also formal institutions that played an important role in resolving conflicts and creating a common political identity among firms involved in the cotton industry. An early example of this role was the part played by the Manchester Commercial Society (founded 1794, and the immediate predecessor of the MCC) at the end of the eighteenth century in negotiating with London merchants over the scheduling of convoys (which were protected by naval ships). The London merchants, who at the time were most concerned with the re-export of products such as spices that they purchased from the East India Company, would often delay convoys as they waited for their goods to arrive, which jeopardized the Manchester firms’ time-sensitive access to foreign fairs. While the Society appealed to the British state it also negotiated directly with the London merchants (Redford: Chapter 3; Helm, 1894: 16). A similar role was played in resolving conflicts with insurance underwriters (Redford, 1934: Chapter 4). As noted above, the question of whether the export of cotton yarn should be permitted was very divisive. Initially the Commercial Society agreed that the export of cotton yarn was “detrimental to the manufactures of this country” and decided to inform the government of their views on this, but in subsequent meetings the spinners presented their case and succeeded in reversing the position of the Society (Helm, 1894: 17–19). The MCC played a similar role in resolving conflicts over the export of machinery. A series of progressively stronger laws in the eighteenth century had prohibited the export of technology, a concern, as noted above, of the forerunners of the MCC. Concern over this issue continued, and in 1824 the Chamber stepped up its efforts and took major initiatives to support the ban: “Manchester’s representatives presented a united front before the Commons Committee. Particularly notable was the close agreement achieved between the cotton-spinners and manufacturers, on the one hand, and the machine-makers and engineers on the other” (Musson, 1972: 27). In subsequent years, however, this consensus began to dissolve as the machinery makers’ need for export markets grew, as the ineffectiveness of the ban became recognized, and as the inconsistency of this position with free trade in cotton manufactures became politically problematic. The Chamber, faced with internal divisions on this issue, ultimately dropped it. Nevertheless, at certain critical junctures on both the yarn and the machinery export issues, the Chamber played an important mechanism for conflicts within the industry to be worked out. On another issue on which there was more long-lasting unanimity, the repeal of the Corn Laws, the Chamber similarly played a key role in strengthening the industry’s unity, a point to which we shall return. Besides the trust, norms, and monitoring facilitated by the dense web of Manchester-centered institutions, there were some additional efforts targeted specifically at preventing fraud. One of the goals of the Committee for the Protection of Trade was to facilitate the prosecution of buyers and sellers of stolen goods (Redford, 1934: 5). The Commercial Society declared in 1794 its

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The cotton textile industry

intention to “detect swindlers, expose chicaners and persons void of principle” (Redford, 1934: 22) and one of its first acts was to “print 10,000 copies of a circular to be sent to foreign correspondents, informing them of the steps which had been taken to prevent the ‘unmercantile’ practices complained of ” (Helm, 1894: 15). These arrangements were especially targeted at employees and at foreign firms that were purchasing British cotton manufactures but it is likely that, along with informal norms, they created a deterrent to fraud amongst the British firms themselves. The rules of the Manchester Exchange and of the Liverpool cotton Brokers Association played a similar role. Both organizations had the capacity to expel violators, a serious sanction given the importance of membership for participants in the trade. The extension of the technical system beyond Manchester The private institutions described in the previous section in which the activities of the British cotton firms were embedded, when linked to other actors and institutions, extended the technical system beyond Manchester and in doing so constituted a system of governance for the international industry as a whole. Initially this system was entirely centered in Manchester but over time competing centeres of cotton manufacture began to emerge and to have an impact on international markets. This led to the construction of more multilateral arrangements, most significantly with the creation in 1904 of the international organization that is known today as the International Textile Manufacturers Federation. In this section I start by examining the institutions that linked three types of actors to the cotton manufacturing technical system: the British state, the suppliers of raw cotton, and the purchasers of cotton manufactures. I then discuss the changes that led to a more multilateral form of governance. The British state One of the key accomplishments of the cotton merchants and firms was to enlist the British state in their efforts to create an international industry. Contrary to theories that see states as responsible for all significant elements of national success, it is clear that the launching of the cotton industry took place with relatively little state involvement. This is highlighted by the centering of the industry in Manchester rather than in London. The state did provide assistance in securing foreign markets and on tariff and free trade issues. However, this assistance was forthcoming because of the organizational successes of the Manchester-based firms. Thus the role of the British state in the cotton industry was due more to its linkage to the technical system based in Manchester than to developments internal to the state or to the relationship of the British state to other states. The previous section indicated that the Manchester-based institutions connected with the technical system involved the types of conflict-resolution and group identity-formation that are inherently political. Here we focus on the more specific political relationships that were established with the British state.

The cotton textile industry 33 From the industry’s inception, the MCC and related associations were actively involved in getting the British state to facilitate their access to foreign markets. The first such activity was the attempt, beginning in the late eighteenth century, to cope with disruptions to the cotton trade created by the political and military conflict with France. The Commercial Society was heavily involved in asking the British state to provide warships for convoys to the Mediterranean, to facilitate payments from merchants in Italy, to seek compensation for property seized by other governments, and to keep open the links between British, German, Swiss, and Italian markets (Redford, 1934: 22–48; Helm, 1894). A major challenge for the cotton industry was to weaken the control of the East India Company and the Levant Company over the Middle Eastern and Asian markets. These state-chartered companies were criticized as too sluggish. For instance, the East India Company’s land and transport taxes were so onerous that they discouraged Indian farmers from supplying cotton to Manchester – a key policy goal of the British cotton producers and merchants who were wary of their increasing dependence on US supply. Similarly, the East India Company was slow to institute steam driven mail delivery, a key improvement in communications technology for the merchants (Redford, 1934: Chapters 9 and 14). The Levant Company, until the Manchester merchants succeeded in having it abolished in 1825, controlled all access to the Turkish empire (Redford, 1934: 90).1 The best-known campaign of the cotton firms was for the abolition of the Corn Laws, which was brought about in 1846 (Redford, 1934: Chapter 11). The cotton firms wanted to eliminate tariffs on the import of grain to reduce the cost of labor (of which food was a large part); to foreign grain exporting countries with money to import British cotton manufactures, and to promote the principle of free trade in general, a campaign which came up against the landed agricultural interests. An extensive and highly visible campaign was organized by the AntiCorn Law League, a “well-organized administrative machine” headquartered in Manchester (McCord, 1968: 172). The key people running the campaign and 90 percent of its funding in its early years were from Manchester (McCord, 1968: 164, 178). In the MCC there was overlapping membership and support for the campaign was strong – indeed it was so strong that it led skeptics to split from the Chamber, forming the Manchester Commercial Association that was in existence from 1845 to 1858 (Silver, 1966: 15). Suppliers of raw cotton A key challenge for the British cotton firms was the organization of the flow of cotton from overseas. The major source of raw cotton was the American south that, by the 1840s, was accounting for about three-quarters of imports (Silver, 1966: 11). Indeed the low cost and high quality of US cotton contributed substantially to the competitiveness of the manufactured British product. Until the US Civil War the flow of cotton from the US south to Britain was structured by an extensive system of informal but effective private institutions in which the practice of factorage played a key part. The factor was a firm, located in

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The cotton textile industry

cities such as New Orleans or Liverpool, to which the southern planter, often deep in the interior, consigned his raw cotton. The planter delegated responsibility for the sale of the crop to the factor, subject at times to certain minimal conditions regarding pricing, timing, or place of sale. While ostensibly the factor might appear to be the planter’s agent, in practice the planter was heavily dependent on the factor for credit which was extended yearly in advance of receipt of the crop. Given the lack of a developed southern banking system, the factor’s credit, which included the endorsement of planters’ notes that could then be used to obtain credit elsewhere, was vital. The factor also provided supplies to the plantation on credit. Even where, as was generally the case, the factor was headquartered in a US city, that factor was in turn dependent for credit on British merchants or manufacturers (Buck, 1925: Chapter 3). Some factors were firms that included US and British partners (Woodman, 1968: 17). There were strong information asymmetries as the planter was isolated while the factor was located close to the center of the market. A distinctive feature of the factorage system was the strength of informal social institutions. As Stone (1915: 559), the son of a planter, noted: The relations between the cotton factor and planter were of the most intimate and confidential character, as close probably as was ever the case between business associates. The ties between them frequently were life-long, and their relations were of a social and personal as well as business nature … millions of dollars have been advanced by Southern factors upon the mere personal word of the planter, which no formal security at all, and with only a memorandum to witness the amounts involved. Similarly, Woodman comments that it is surprising “how much of the relationship was governed by custom and tradition rather than by formal law” (1968: 60).The stability of the system was further evidenced by the standard nature of the fee charged throughout this period of 2.5 percent, of which the Louisiana Supreme Court noted in 1860 was “well established by the custom of merchants and recognized by law” (Woodman, 1968: 50). This was, however, supplemented by other charges. Resentment among planters at their dependence and perpetual debt under the factorage system led to numerous proposals, often put forward at planters’ conventions, to alter the system through some coordinated action of planters to, for instance, hold back crops to raise prices or to find ways to bypass factors. These were never successful, however. The Civil War marked a turning point for the factorage system. The war itself, with its blockade at sea and fighting on land created enormous disruption in the system of raw cotton supply. Exports of cotton from the US to Britain slowed to a trickle, leading to a cotton famine that had disastrous consequences for the Lancashire cotton industry and those dependent on it for their livelihood. The old institutions in southern cities such as New Orleans never recovered their pre-war prominence (Woodman, 1968: 280).

The cotton textile industry 35 Concern at the vulnerability of British cotton firms, given their heavy reliance on the US south, led to stepped up efforts to find alternative sources of supply. Attention focused on India. John Bright, MP for Manchester and future head of the MCC initiated and led a Parliamentary Committee in 1847 that sought to investigate the failure of the East India Company to encourage cotton cultivation in India (Silver, 1966: 23–4). For the next quarter-century the British cotton interests would try, with little success, to increase the supply of Indian cotton. Cotton from India, already a type less suited to Manchester’s mechanization, traveled through many middlemen who were not bound by the types of institutions associated with the factorage system and, therefore, adulterated the cotton by adding dirt or moisture to increase their revenues (Silver, 1966: 34). Indian peasants were indebted to local merchants who refused to make sufficient advances to introduce new varieties and the East India Company had lacked sufficient personnel and expertise. Efforts to encourage cultivation failed due to the lack of property rights for foreign investors; difficulties in obtaining infrastructural investments; insufficient technical knowledge, and lack of mechanisms for establishing and enforcing quality standards. The Cotton Supply Association formed in 1857 by a group of cotton firms, conducted a sustained campaign to find new sources of cotton, distributing seeds, reporting on promising areas for cultivation, and engaging in sustained efforts to change the policies of the East India Company and the Crown who were responsible for governing India in turn. All these activities were only very minimally effective. The Manchester Cotton Company, established in 1860 to develop new sources of cotton, folded four years later after massive losses, mostly due to deficiencies of infrastructure and governance in India (Watts, 1968 [1866]: Chapter XXIV). Relations with foreign markets for British cotton products While the competitiveness of the industry and its low prices were important for the capacity of the British industry to dominate in sales to world markets, there were a contributing set of institutional arrangements as well. These included the integration of foreign firms into a set of relations centralized in Britain, on the one hand, and the creation of a network of offices of British firms abroad, on the other hand. These institutional linkages facilitated the flow of goods, credit, payments, and increasingly, of information on tastes and fashion. Both foreign firms with offices in Britain and British firms with offices abroad were instances of a form of organization especially prominent in the late seventeenth and in the eighteenth centuries, the international house (Chapman, 1977). These family-based firms would send family members abroad for some years to run permanent foreign offices. Often they would originate in communities of expatriate minorities, such as Jews from Continental Europe, French Huguenots, and Greek Orthodox minorities from the Ottoman empire: “they shared a sectarian outlook that interlocked families in chains of partnerships and marriages and loyalties that spanned the diverse partnerships” (Chapman, 1977: 8). The degree of internationalization of these firms is considerable – even in 1760 it has

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been estimated that of 810 merchants who kissed the hand of George II at his accession there were at least 250 foreigners (Chapman, 1977: 6). There was a wave of new arrivals to Manchester from Europe during the Napoleonic wars and the multinational form of organization they brought became characteristic of the cotton trade as it established its effectiveness. At the midpoint of the nineteenth century there were 1495 foreign houses from around the world that had established offices in England as compared to about 506 foreign houses with offices in France and 130 houses with offices in the Americas (Chapman, 1977: 42). Many houses had foreign offices in several countries. Kirkman Finlay of Glasgow who had warehouses in Malta, New Orleans, New Providence and the Bahamas and, in 1803, a network of 700 correspondents in Europe (Edwards, 1967: 167; Henderson, 1965). Chapman quotes an 1836 circular which noted that “Trade has … undergone a great change during the last ten years; weak and struggling manufacturers no longer consign goods to commission houses at New York, Philadelphia, Hamburg, Frankfurt and St Petersburg, but those who supply the consumers in the countries where the great commercial cities are situated come to our markets to select and purchase their own goods, and they pay for them by the aid of the wealthy and powerful firms connected with their respective localities” (Chapman, 1977: 14; Price, 1989). By 1850 there were 97 German and 55 Greek merchant houses in Manchester (Chapman, 1977: 39). Between a half and a third of London merchants were foreigners (Edwards, 1967: 162) Greek houses were especially effective in opening new markets for British goods in the eastern Mediterranean. A combination of close linkages among the Greek firms and close links to manufacturers facilitated the supply of credit from the latter in situations where bank credit was not available. Moreover “the close financial connections between the calico [cotton] printers and the Greeks hint strongly at close working relations between the two parties, for sales depended above all on the right choices of colours and patterns, and the best results were obtained through personal connections.” (Chapman, 1977: 42). Overall, this network of close ethnically and family-based relationships centered on Britain was flexible and strong enough to sustain the flows of goods, credit, and information that facilitated Britain’s dominance of the industry. The emergence of multilateral arrangements Over time the coherence and effectiveness of the private institutions centered in Britain were increasingly challenged by the emergence of manufacturers in other countries and by changes in the relationship between Britain and the US south. New and more multilateral and formal private institutions emerged. Initially the primary concern of these institutions was the quality, quantity, and price of the cotton supply. Closely related to this was the problem of regulating futures markets, which were seen by manufacturing firms as contributing to huge and destructive volatility in the price and quantity of raw cotton. Both these problems were associated with the declining effectiveness of the informal institutions centered in Manchester and Liverpool that were examined above. The factorage

The cotton textile industry 37 system began declining rapidly after the US Civil War. In part this was due to the damage inflicted by the war itself. Additionally, post-Civil War advances in transportation (the building of railways in the interior of the south), communications (telegraph connections between southern planters and Liverpool) and banking (the ability of southern banks to lend to planters on the security of their land rather than a future crop) allowed planters to dispense with factors (Woodman, 1968). Along with the now superfluous features of the factorage system went the traditional relationships and the trust and confidence that they sustained. One major problem that emerged was the maintenance of quality standards for raw cotton. The first significant complaint about “fraudulent practices in the packing of cotton” was made in a 1835 letter from the Liverpool Cotton Brokers’ Association to the American Chamber of Commerce, which stated that there was “a wholesale and systematic plan of deception and plunder by means of ‘false packing’ ” – wrapping inferior cotton with a layer of better cotton (letter as reproduced in Boyle, 1934: 53–4). Complaints continued and in 1860 the New Orleans Chamber of Commerce, issued a report that noted “Up to the planters to remedy the evil. Final recommendation – Cotton Factors of New Orleans call a meeting of planters and work out remedies with the planters.” (Report reproduced in Boyle, 1934: 55–6). Boyle (1934: 56) noted that with this informal cooperation the problem was “practically eliminated”. However in 1876 recurring problems regarding standards for the handling of cotton and for futures contracts led to the convening, in London, of an international conference that made recommendations. The following year in Liverpool the International Cotton Convention held its first meeting, attended by nine representatives of the National Cotton Exchange of America, fourteen representatives of British cotton associations, five representatives of the American and Liverpool Chambers of Commerce, and five representatives of European cotton associations. Citing the Convention as “the most important gathering ever held in connection with the Cotton trade”, its President went on to state that “we have noted with much pleasure that one result of the preliminary Conference held, last year, in London, has been the establishment of a better supervision of Cotton in New Orleans before shipment, which has borne most satisfactory results.” The Convention heard detailed reports on the handling of cotton in American, British and European port cities, and made further recommendations on this issue and on futures trading (International Cotton Convention, 1877). This marked the ascendance of a more multilateral form of private institution in the governance of the international cotton industry. Technological developments such as the transatlantic cable and price instability associated with the conflict led to the rapid growth of a futures market in cotton after the US Civil War which brought both new ways to insure against risk and new risks associated with speculation. This started with the sale of cotton “to arrive” – a contract entered into when the cotton was in the US for a fixed price to be paid on the day it was expected to arrive in Liverpool. Over time speculators would sell “cotton to arrive” without having possession of the actual cotton

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in anticipation of buying it at a price below that agreed in the futures contract when the time came to settle. This could be used by a planter to reduce price uncertainty and it thereby contributed to the decline of the factorage system (Woodman, 1968), in effect substituting an abstract relation for an interpersonal one. There were, however, two new types of risk that emerged: the possibility that a counter party would default and the creation of price volatility in response to the increased importance of predictions about future prices. This led to the adoption of a new set of rules governing futures exchanges by the Liverpool Cotton Brokers’ Association in 1869, and the creation of the New York Cotton Exchange and the New Orleans Exchange with rules for futures trading in 1870 and 1871 respectively (Woodman, 1968: 292). In addition to providing rules the exchanges were also seen as important in dampening speculation by disseminating accurate information. A similar process of institutionalization occurred in India as well. Complaints from Liverpool about cotton quality had led to strengthened laws by the state, including a two-year jail term for the adulteration of cotton. Despite the severity of these laws they were ineffective. The India cotton crop was produced by large number of small peasants and carried to Bombay (which accounted for 80 percent of exports) by large numbers of middlemen using bullocks. In addition to the negative impact of the prevailing technology on the dirtiness and dampness of the cotton, the fragmented nature of the institutions, with each lot being mixed in unaccountably with others, was a sharp contrast to the prevailing social institutions linking the US planter and Liverpool (Dantwala, 1947). In the face of persistent problems with the system for marketing raw cotton the Bombay Cotton Dealer’s Association was formed in 1855. Its first task was to substitute regular cash payments to middlemen in place of the practice of taking quantities of cotton from bales. In 1857 the Association established “a set of rules for the cotton business. The rules provided for uniform contracts, uniform packing of bales, settlement of disputes by arbitration and penalties payable to charitable institutions for any breach or violation” (Pavaskar, 1985: 20). The negative effects of futures trading led to the formation of the Bombay Cotton Trade Association in 1875. It was “closed preserve of the Europeans” (Pavaskar, 1985: 20), allowing only a few Indian firms to have associate membership status with no voice in governance. The Bombay Native Cotton Merchants Association, formed in 1884 due to discontent with the virtual monopoly of the European firms over the export trade, was ineffective, but the creation of the Bombay Cotton Exchange in 1893 by Indian firms involved in selling to the European exporting firms began to offset this European dominance. In 1915 the Bombay Cotton Broker’s Association was formed to regulate futures. During and immediately after the war the Government intervened in the regulation of the industry and was instrumental in the consolidation of the existing associations into the privately run East India Cotton Association, which had the authority to regulate the trade. In the early 1930s, after considerable turmoil, the Association was reorganized internally to eliminate the dominance of European firms, and it began to develop a more nationalist stance (Dantwala, 1947).

The cotton textile industry 39 As noted above, the first International Cotton Convention also targeted the negative effects of futures trading. Attention focused on a call from Francis Muir of Savannah asking that the Liverpool Cotton Brokers’ Association establish new rules including a standard contract and requirements for cash margins. He went on to note: At the present time commercial credit was not what it was ten or twenty years ago, when a man’s word was as good as his bond. The immense extension that had taken place in business of recent years had brought all sorts of people into the Cotton trade. Some of those men were without means, and some had very little character. It was therefore absolutely necessary that respectable men in the trade should have rules for their own protection – (Hear, hear.) If they allowed the persons to whom he had previously referred to continue to have such facilities as they had at present, the whole trade would be injured … owing to the conduct of such men, not only, at one time, were the Liverpool “spot” market and the Manchester “spot” market affected, but every Cotton market in the world. (International Cotton Convention, 1877: 46) A system of rules, margin requirements and standard contracts were indeed being considered by the Liverpool Association, and by the mid-1880s, after some controversy, they were instituted (Ellison, 1886: Chapter VII). Simultaneously, a process of market concentration accelerated as consumers of raw cotton “increasingly sought out the more responsible buyers who would guarantee the quality of the cotton to be delivered” (Woodman, 1968: 288). By 1921, 24 firms would handle 60 percent of the US cotton crop (Woodman, 1968: 289). Alarm at supply shortages involving corners led to the First International Congress of Master Cotton Spinners’ and Manufacturers’ Associations in 1904 in Zurich, initiated by the British Federation and involving 18 British and European associations (International Congress, 1904). This initiated the international organization that continues today, as the International Textile Manufacturers Federation, to be the principal private international organization concerned with the cotton industry. The report of the 1904 proceedings starts by noting that “the cotton industry of the world has been passing through a crisis the severity of which has been rarely equalled in its history.” Shortages were blamed on speculators and on the concerted action among growers to keep the price up, and ambitious proposals to counter these problems by jointly buying and stocking raw cotton were made. The Congress established an International Committee, with members from England, Switzerland, France, Germany, Austria, Italy, Portugal, and Russia, and unanimously called upon it to “take such steps as may be deemed necessary to establish a permanent International Organization to watch over the common interests of the industry.” It also passed the following motion: That this first International Congress of Master Cotton Spinners and Manufacturers, having considered the question of speculation in cotton

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The cotton textile industry futures, requests the Committee to bring before the notice of the Cotton Exchanges of New York, New Orleans, Liverpool and Alexandria the great injury done to the cotton industry by the enormous speculations, and urges such Exchanges to consider what means can be adopted to prevent persons who have no interest in the trade, either as growers, merchants, spinners or manufacturers, from operating in the market to the detriment of the whole industry, and further invites the Committee to bring the matter before their respective Governments and to take all other steps they may consider necessary for dealing with this important question.

By the third Congress, held in Bremen in 1906, shortages had subsided and support for ambitious proposals for joint purchases of cotton had dissipated. The international cooperation displayed in Zurich was credited with reducing the ability of growers and speculators to raise prices and positive comments were made about attempts that had made to establish closer cooperation between spinners and planters. The Congress addressed the perennial issue of quality standards for raw cotton, and also called for efforts to standardize rules among cotton exchanges. The new international organization was very active before World War I, holding a Congress every year except 1912. The quantity and quality of the cotton supply continued to be the main concern. Japan joined in 1907 and India in 1910, increasing the reach of the organization. The US, however, remained outside. By 1913 the organization covered three-quarters of the world’s spinning capacity (International Federation of Clothing and Allied Textiles Industries [IFCATI] 1960). England was rapidly losing its share of world markets in the first third of the twentieth century, and much of this was to firms in countries not members of the International Federation: in 1913 England accounted for 38 percent of world markets and non-members accounted for 24 percent but by 1939 England’s share had dropped to 25 percent and non-members’ had increased to 43 percent (IFCATI, 1960). Indeed these figures based on capacity overstate the health of the British industry: by 1932 the British mills’ share of world raw cotton consumption had dropped to 9.5 percent, equal to the consumption of China’s mills (about 40 percent of which was used by Japanese subsidiaries in China), to India’s mills, and below the 11 percent share of mills in Japan (League of Nations, 1932: 145; Yonekawa, 1982: 23). The Japanese cotton industry was extraordinarily successful in increasing its efficiency and its share of international markets and the International Federation failed to resolve the resulting conflict between British and Japanese firms, and even to retain the Japanese firms as members. The tensions in the international cotton industry in the 1930s can be seen as resulting from the dissemination of the technology that had given British firms their manufacturing lead and their ability to organize the larger technical system. The creation of the International Federation signified the need of British firms to coordinate with other producers and initially it was sufficient since competitive pressures from new producers were not severe. However, by the 1930s competing

The cotton textile industry 41 textile centers had mastered the technology sufficiently to pose a severe threat to British producers. Lazonick (1986) has argued that decline was due to the inability of the British industry, given its fragmented nature, to implement needed technological changes. However we have seen above that the industry was far from fragmented in the middle of the nineteenth century. It is true that the weaving and spinning machinery itself could be operated on a relatively small scale, a contrast for instance to the steel industry that we examine in the next chapter. We shall see in that chapter, however, that the need for a large-scale integrated production process was no guarantee that the founding firms would be able to retain their lead. The problem was the ease with which the technical system could be mastered by competing centers. Neither the social-institutional aspect nor the machinery aspect of the Manchester-centered technical system was sufficiently complex to prevent dissemination of manufacturing capacity beyond the leading British firms. The factors contributing to the ability of the Japanese firms to jointly coordinate their own activities and thereby successfully challenge the dominance of Manchester are illustrative. The Japanese industry was highly concentrated and unified: a few top spinning firms dominated the industry, with the three largest accounting for 54 percent of capacity. The Japan Cotton Spinners’ Association ( JCSA) “exercised numerous supervisory functions over every branch of the industry, in such areas as production, sales, and even employment” (Wurm, 1993: 200). Centered in Osaka, the Japanese cotton industry retained more autonomy from the government than did other Japanese industries. The large Japanese trading companies and the JCSA were important in ensuring a reliable and cheap supply of cotton (Takamura, 1982: 281). The knowledge needed to run the industry was obtained with the assistance of the JCSA and by the use of universitytrained employees. Even before World War I two leading Japanese firms were employing about 100 college or university graduates (Yonekawa, 1982: 30). The fact that the relevant technology could be transferred in this formal way is a sign of its maturity and propensity to be easily disseminated. It is interesting, however, that the various preconditions for a successful industry that Japan succeeded in satisfying were not at this time present in China and this is why Japanese subsidiaries in China were able to compete so effectively with Chinese firms (Kuwahara, 1982: 139). The International Federation of Master Cotton Spinners’ and Manufacturers’ Associations did not cease in its activities during the inter-war period and indeed there were some significant developments regarding the quality and supply of cotton. A major International Federation mission in 1919 to Brazil led to a detailed report on the potential of that country for supplying raw cotton and contributed to the subsequent increase in Brazilian production from 300,000 to 2,000,000 bales (IFCATI, 1960: 30). Collaborative relations with Egyptian producers of raw cotton were developed and institutionalized in a Joint Egyptian Cotton Committee, which included the Egyptian government, the Egyptian cotton shippers, and the Federation’s spinners of Egyptian cotton. This collaboration sorted out

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problems related to quality and supply and involved, as well, the establishment by the Egyptian state of laws regarding quality standards (IFCATI, 1960: 32). However, by the 1930s the Federation was increasingly focused on the world economic crisis and its relationship to the cotton industry. As competition from Japan escalated the Federation arranged, in 1933 and 1934, talks between Japanese firms and others. However, as a Federation report noted, “the International Federation proved its usefulness as a clearing house for information during that critical period. It had, however, to be left to the national industries and the Governments to take, each individually, the measures which were deemed necessary” (IFCATI, 1960: 34). The intense competitive pressures that resulted led in the 1930s to an increased involvement of states in the governance of the international industry, working with industry associations in attempts to negotiate market shares through adjustment of tariffs and in an unsuccessful attempt to establish a cartel. This increased state involvement would come to full fruition after World War II. In the 1930s the British industry began to escalate demands for a more aggressive policy on the part of government. New associations began to play a role, stimulated by the perception of cotton manufacturers that the MCC was too dominated by merchants, and also was no longer as focused on the cotton industry as it had been in the nineteenth century (Wurm, 1993: 198): the Joint Committee of Cotton Trade Organizations, formed in 1925 and representing all groups in the cotton industry including trade unions; and the Cotton Trade League, formed in 1933 in protest against the moderate policies of the MCC. The Chamber itself, in 1931 and 1932, began to alter its traditional support for free trade, and began to call upon government for protection against Japan. In 1932 it initiated a new and formally independent Ad hoc Committee on Japanese Competition (later known as the Special Committee on Japanese Competition) which would come to play the leading role in interactions with the government (Wurm, 1993). As Wurm (1993) has extensively documented, the British government was concerned about the fate of the British cotton industry but was limited in its willingness to help the industry as a result of its concern with overall strategic factors in the British–Japanese relationship and its treaty and political commitments with respect to imperial markets, especially India’s. The major aggressive move on the part of the British state was to arrange to restrict Japanese exports to India and to give British goods preferential status. Such British state policies provided some partial and temporary relief for British firms and angered the Japanese but failed to put enough pressure on Japan to persuade Japanese firms to enter into a market-sharing cartel.

Period II: post-World War II developments The period from World War II to the end of the century saw three main developments in the governance of the global textile and apparel industries. The first was the ongoing globalization of the industry which included, first, the continued

The cotton textile industry 43 spread of production capacity to new areas of the developing world and, second, the emergence of a more integrated multinational production process with more differentiated stages, from fiber to final sale, dispersed across countries in an increasingly complex chain of relationships. The second post-World War II development was the creation by states of an elaborate sequence of market-sharing agreements – the Short-Term Arrangement, the Long-Term Arrangement, and the Multifibre Agreement (MFA). The third main development was agreement by states, in the 1994 conclusion of the Uruguay Round, to wind down these arrangements. We shall see that technological factors were important in all these developments. The ease with which the technology was disseminated and the portability of the production process and final product is a key factor in explaining the intensity of the post-World War II competition and consequent adoption of a unique state-run market-sharing regime. The emergence of an integrated multinational production process can be seen as the private sector response to these same pressures but one that differed significantly from other multinational production processes, such as automobiles, because in textiles and apparel fixed costs, economies of scale, and thus barriers to entry were all lower, making it more difficult to offset competitive pressures. These intense competitive pressures were less severe for textiles than for apparel. A major technological change in the textile industry over this period was the increased role of synthetic fibers. Synthetic fiber production is a chemical process that is often carried out by large chemical firms such as DuPont. As we shall see in Chapter 5, the chemical industry is capital intensive and scientifically complex and its technological profile is, therefore, very different from the older cotton textile industry and from the apparel industry. In contrast, the adoption of new technologies – such as the use of microelectronics – in the apparel industry has been slow, in large part because machines are not well suited to handling soft cloth, to do such precise work as three dimensional fitting or matching of stripes, or to handle the large variety of sizes and styles that characterize apparel (Hoffman and Rush, 1988). Even if machines that could address these problems were developed they would not likely be developed in-house by apparel firms but rather by electrical machinery firms, and these latter firms would be eager to diffuse the technology as rapidly as possible. The greater capital intensity and scientific complexity of the textile industry made it better able to cope with the pressures of international competition. We shall see that by the Uruguay Round trade negotiations of the 1990s the apparel industry had become so weak relative to other industries, and the textile industry had become comfortable enough with freer trade, that the MFA was abandoned and consequently the state-led market sharing arrangements were replaced by a commitment to trade liberalization. The spread of production capacity was dramatic. In 1950s imports accounted for only about 2 percent of the US textile market but by the 1990s they exceeded 30 percent. Developed countries, which accounted for 80 percent of exports in 1955, only accounted for 53 percent in 1996 (Dickerson, 1999: 185, 324). Developing countries also increased their capacity in the more capital and technology intensive segments of the production process. For instance their share

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(including Eastern Europe and China) of world production of manufactured synthetic fibers increased from 14.3 percent in 1970 to 64.2 percent in 1996 (Dickerson, 1999: 169). Serious initiatives on the part of industrialized country-states to restrict imports from newly industrializing countries began in 1955 (Aggarwal, 1985). By this time cotton and textile industries that had been damaged by the war had been rebuilt and the longevity of the post-war boom was in doubt. Japan’s 1955 joining of the General Agreement on Tariffs and Trade (GATT) raised concerns about the ability of industrialized states to restrict clothing and textile exports from that country’s rapidly growing industry given GATT restrictions on tariffs and quotas. Beginning in 1955, Japan, yielding to US pressure due to its heavy political and economic dependence on that country agreed to “voluntary” export restraints that restricted exports while technically remaining consistent with the GATT given the restraints’ ostensibly voluntary nature. By the late 1950s a series of bilateral and multilateral restraints against a number of developing countries, some legal under the GATT and some not, had been put in place by European governments. The US, faced with the limitations of bilateral agreements, namely the greater difficulty of negotiating with exporting countries less dependent than Japan, the desire to persuade the Europeans to take a bigger share of world textile imports, and the tendency of exporters not yet covered by agreements to step in to take the place of restricted countries, began to aggressively promote a multilateral approach (Aggarwal, 1985).This resulted in a series of Arrangements which increased in complexity and coverage over the years. A Short-Term Arrangement in 1961 and 1962 was followed by a Long-Term Arrangement that, with renewals, lasted from 1962 to 1973. These were followed by the MFA which went beyond cotton to include manufactured and other fibers. With various renegotiations and extensions the MFA was in place from 1974 to 1993. The basic structure of these agreements was the legitimization of a series of bilateral restraints, which included quotas, in exchange for an agreement on the part of importing countries to allow a set growth of imports. Exporting countries that participated obtained a more stable guarantee of access than might otherwise have been possible, even if this access was substantially reduced, from levels that would have occurred under free trade. Although the US was most active in the first decade the European Union (EU) played a leadership role in the 1977 and 1981 renegotiations (Underhill, 1998). Tough unilateral Acts which were passed by the US Congress in 1985, 1987, and 1990 but vetoed by the President were a measure of the strength of the US textile lobby and provided a threat that fostered compliance with the lobby’s goals by US and foreign negotiators (Dickerson, 1999). The MFA was terminated as a result of the Agreement on Textiles and Clothing (ATC) negotiated during the Uruguay Round of the GATT. Agreeing to bring textiles and clothing under GATT rules was an essential element in getting developing countries to agree to priorities of the developed countries such as services and intellectual property protections. A ten-year phase out of the quotas that had been established under the MFA was allowed, with many of the more

The cotton textile industry 45 sensitive products being scheduled for liberalization in the last, 2005 stage (Spinanger, 1995). Moreover, during the ten-year period a safeguard mechanism allowing the imposition of restraints on particular countries was permitted and was used 24 times by the US against 14 countries in the first year although not all of these were accepted by the Textiles Monitoring Body at the WTO (Dickerson, 1999: 376). It should be noted as well that even after quotas are phased out tariffs for textiles and clothing were to be 12 percent, the highest of any sector and three times the 4 percent rates on other goods (Majmudar, 1996: 6). Despite indications, such as these, of efforts to circumvent the intent of the ATC, it nevertheless marked a sea change in the regime for regulating international trade in this industry. There are two main reasons for the historic change represented by the ATC. First, the industry in the industrialized countries had begun restructuring and was less in need of quota protection. While the arrangements substantially reduced the growth of developing countries’ textile exports they were not really effective at preventing the exposure of US and European industries to painful competitive pressures from these exports. One response of apparel firms in high-wage countries was to move the more labor-intensive segments of their production, especially sewing, to low-wage countries while retaining other parts of the production process, including design and marketing, at home. This offshore processing was facilitated by provisions in the US and European tariff codes which only taxed the reimported products on the value added abroad. Where possible, investments were made in automation although the texture of cloth and the difficulty of standardizing sizes and styles prevented substantial progress in apparel industries. By contrast the textile industry became increasingly capital intensive with significant research and development devoted to the improvement of manufactured fibers. In short, whether by offshore processing or increased automation the textile and apparel industries in the industrialized countries were better able to cope with competitive pressures in the 1990s. Indeed some apparel firms found the quota system was interfering with their internationalization strategies or began to see more potential in gaining greater access to foreign markets than having protected access to their own (Underhill, 1998; “Government, US Mills Prefer WTO to GATT”, 1999). In the ten-year transition period before the full implementation of the ATC, US textile firms, organized in the American Textile Manufacturers’ Institute (ATMI), successfully promoted a strategy of encouraging the transfer of offshore apparel manufacturing from East Asia to the Caribbean and the Americas. Proximity would lead such factories to use US textiles rather than East Asian textiles, and this was strongly reinforced by the Caribbean Basin Trade Partnership Act (CBTPA) of 2000 that allows products from CBTPA countries to enter the US free of duties and quotas if they are made with US textiles. The ATMI had previously supported NAFTA for the same reason. Provisions in the ATC to determine the origin of clothing based on the location in which the textiles in the clothing were made rather than the sewing of the clothing have also been useful in this strategy. US apparel manufacturers, for whom, in the words of one apparel

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CEO, onshore manufacturing is “more or less history” (“Exploring the Hot Topics”, December), were also enthusiastic about the shifting of offshore production to a region in which time-zone differences and long-plane trips will be less of a disadvantage. This is the reverse of the strategy of high-end German apparel manufacturers who are using their close technical relationship with lower cost textile manufacturers in Central European countries to successfully produce specialized garments (On the US and German strategies, see “US Mills Hope Caribbean Trade will Blossom”, 2000; “Trade Issues Dominate ATMI History”, 1999; Spinanger, 1999; “ITMF Leaders Peer into Industry’s Future”, 2000; “Chastain Charts ATMI’s Global Challenges”, 2000; “ATMI Celebrates 50 Years”, 1999). Second, and in part due to this restructuring, the textile and clothing industry, which achieved remarkable political success in the first three decades after World War II (Friman, 1990; Underhill, 1998; Dickerson, 1999), found itself in a much weaker political position in the 1990s. Employment had declined, reducing the industry’s ability to mobilize politicians. Retailers, partly due to the consolidation of firms, had gained in power relative to manufacturers – in the Congressional debate over the 1985 Act to unilaterally restrict textile and clothing imports a Retail Industry Trade Action Coalition was formed to lobby against it (Dickerson, 1999: 365). More generally, the “trading off ” in the Uruguay Round of textile and apparel for concessions on services, intellectual property, and other issues relevant to knowledge-intensive industries indicated that the industry had lost its priority position relative to other industries in the consciousness of policy makers. Technological factors are central to the way in which the textile and apparel industries were organized after World War II. In the initial period, as in the first half of the century, technology diffused rapidly, increasing competitive pressures. The small minimum scale of the industry and the easy transportability of its products reduced the ability of leading firms to structure the industry through the maintenance of barriers to entry or through personal relationships embedded in collaborative production processes. States then were called on by firms in industrialized countries to step in and manage a market sharing agreement – the textile and apparel industry is unique in the degree to which this occurred in the post-World War II period. In the second period the industry in high-wage countries began to split into two parts – a traditional part that desired continued state protection and a more transnationalized and complex part in which firms were able to establish positions in which the more intensely competitive pressures were offset by barriers to entry or scale economies. The integration of the chemical and textile industries, tied leading textile firms using or producing manufactured fiber firms to a technology-intensive and highly internationalized industry that has long relied on private governance with little assistance from states.2

Conclusion: technology and the organization of the international cotton industry The experience of the international cotton industry conforms in key respects to the model set out in Chapter 1. During its emergence, in the first half of the

The cotton textile industry 47 nineteenth century, it can be treated as a vast technological system, centralized in Lancashire, but linked around the world to sources of raw cotton and markets for its products. There were technical problems to solve, including ensuring a constant supply of reasonably priced cotton of the level of quality required by mechanized spinning and weaving; ensuring the availability of competent workers; and devising institutions that could cost-effectively support the myriad of ongoing transactions involved in the industry. Now, almost two centuries later, when we have grown accustomed to international industries that can build on the accumulated experience of earlier industries, we should not underestimate the difficulty of solving such problems. The problems of this international industry were solved initially not by the construction of inter-governmental institutions, but rather by the creation by leading firms of a web of formal and informal private institutions. These, like the industry itself, were centered in Manchester and Liverpool, but extended back through the factorage system to the plantation, and forward, through the foreign merchant community resident in Britain, to the world market for cotton manufactures. The institutions reflected the character of the technological system in their spatial contours and linkages, in the problems they addressed, and in their contribution to self-sustaining levels of scale and profitability. Taken together, this centralized technical system and its accompanying institutions gave the leading British firms an advantage that competitors from other countries found difficult to challenge. This was reinforced by the flows of information, which were relatively free among firms in Lancashire, but restricted internationally by deliberate effort and natural geographic barriers. By the mid-twentieth century, however, the industry had changed dramatically. The technology had matured and diffused and competing centers of cotton manufacturing had emerged in other countries. Many of the challenges of the industry’s early days had become easier to solve as the industry’s communication, transportation, selling, and quality control technologies became standardized and routine. Consistent with the expanding geographic spread of cotton manufacturing, the industry saw the development of private multilateral efforts to address the industry’s challenges, culminating in the creation by firms from a variety of countries, of the International Congress of Master Cotton Spinners and Manufacturers in 1904, which has continued to operate, albeit with name changes, to the present day. In the post-World War II period the process of technological diffusion continued, and competition among different centers of cotton manufacturing intensified. We shall see in the following chapters that in some other industries, notably electrical machinery and chemicals, the high level of technological complexity allowed the leading firms to continue to manage the global industry and to preserve their profitability. This was not the case for cotton manufacturing. Thus, consistent with the model developed in Chapter 1, the mature international cotton industry saw the emergence of an inter-state regime with a capacity to manage market shares that lasted until the implementation of the Uruguay Round ATC at the end of the century.

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While the dismantling of the inter-state market-sharing regime through the Agreement on Textiles and Clothing can be interpreted as consistent with the model of Chapter 1 to some degree it also highlights the ongoing importance of some systems-level factors in the governance of particular industries. A key factor consistent with the model is the dwindling importance of cotton manufactures relative to other industries. These other industries include the more high-technology capital intensive synthetic textile industry with its links to the chemical industry which could more easily manage its own affairs without state assistance. States were, therefore, more willing to abandon their support for the industry than was the case in earlier periods. However the ATC also reflected a widespread diminished enthusiasm for state intervention among policy makers that was not specific to the textile and apparel industry and which affected other industries as well. Other systems-level factors that became evident in this chapter’s examination of the cotton industry include the US Civil War and the impact of strategic factors on the British unwillingness to consider a formal cotton cartel in the inter-war period. We return to an evaluation of such systemic factors in Chapters 8 and 9.

3

The steel industry Nationally-based cartels and market-sharing arrangements

The steel industry has been regarded as strategically important for its contribution to the state’s war-making capacity and for its contribution to national economic growth. The modern steel industry was important in the search for improved materials for artillery and the mass production of small arms in the mid-nineteenth century (Pearton, 1982: 81–2; McNeill, 1982: 236–7). Before World War I innovation and growth were stimulated by the needs of armies and navies and by railroadification, itself a major contributor to growth of other sectors. After World War I this commitment of states to steel spread to other countries and was reinforced by a belief in its centrality to rapid industrialization more generally. This strategic importance, which makes the industry intrinsically interesting, also might lead one to assume that inter-state relations rather than technological factors and private institutions would shape the industry’s international interactions. In this chapter we will see that inter-state arrangements were indeed important but only after World War II when the industry had matured and the private international arrangements of the inter-war period were no longer viable. We shall also see – consistent with the model of Chapter 1 – that these inter-state arrangements were strongly shaped by the industry’s technological profile. Steel plants have traditionally been very capital intensive and tied to a particular place by the physical interdependence of a production process involving molten and heavy materials. The high minimum-efficient scale of blast furnaces and the relatively low marginal cost of producing more steel once this scale is reached gives steel firms an incentive to flood international markets. Widespread use of cartels in the industry reflected an attempt to address this problem by collectively dividing up markets and restraining production. Before World War II cartels were privately organized with assistance from the state. The state became more prominent in the international organization of the industry after World War II. In subsequent chapters we shall see that chemicals and electrical machinery, two other strategically important international industries, did not have this heavy state involvement in their organization, even after World War II. In those chapters, I shall demonstrate the way in which those industries’ technological complexity allowed leading firms to manage the industry with minimal state involvement. In this chapter, by contrast, the relative simplicity of iron and steel technology will

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be evident as will the impact of that simplicity on the rapid diffusion of steel producing capacity to newly industrialized countries.

The emergence of the steel industry The eighteenth century British-based industry Like the cotton industry the modern iron and steel industry has its roots in the British industrial revolution. During the eighteenth century a series of technological developments in Britain transformed a geographically dispersed, small-scale, and relatively stagnant charcoal-based iron industry into an organizationally and geographically concentrated, mechanized industry in which large-scale advances in throughput brought about rapid decline in costs. These changes allowed British producers to dominate the world market, accounting for 46 percent of world iron production and 40 percent of world steel production in 1878 (Morrell, 1979). By the end of the nineteenth century, however, the British lead had been permanently eroded by the establishment of even more concentrated and technologically sophisticated steel industries in the US and Germany. This section analyzes this period in which the modern iron and steel industry emerged, looking at the role of technologies, private institutions and the state. We shall see in this section that the emerging modern iron and steel industry shared certain organizational features with the early cotton textile industry but also differed from it in important respects. In later sections it will become apparent that these differences, which were related to technological factors, have continued until the present to exercise a profound influence on the organization and governance of the industry as a whole. As with the cotton industry informal social institutions helped foster the critical mass of interdependent firms needed to launch this leading industry. Even in the pre-modern charcoal-based industry, in which geographic dispersion was required due to the scarcity of the trees needed for fuel, the industry “was highly integrated, both vertically and horizontally. The blast furnace was usually part of an integrated enterprise that ran forges and slitting mills as well. All the various processes of ironmaking … were usually carried out by the same enterprise” (Hyde, 1977: 15). At the beginning of the eighteenth century two family-based syndicates controlled about half the output of Britain (Hyde, 1977: 16). The non-conformist Quaker religion and intermarriage provided an important source of cohesion and collective identity in the early industry. For instance the Quaker Darby family, the best known of the ironmasters of the eighteenth century, have been described as a dynasty: “not only was the sovereignty at Coalbrookdale [their firm] handed down from father to son for several generations, but like a royal family, the Darbys allied themselves by marriage with other powers in the iron world” (Ashton, 1963: 214). Coalbrookdale and a few other leading firms “became schools of instruction in the arts of smelting and refining, and each of them gave birth to a lusty progeny bearing a close likeness to the parent firm” (Ashton, 1963: 53). These social institutions facilitated the sharing of knowledge

The steel industry 51 and the creation of interdependent production processes that were needed to launch the modern iron and steel industry. As the industry developed technologically it became further concentrated. A key innovation was the shift to the use of coked coal instead of charcoal which led to the industry’s geographic centralization around coal deposits. The development of the steam engine and its application to iron making allowed further expansion in the scale of production and freed the industry from the geographic constraints imposed by the need for waterpower. Increased capacity of blast furnaces led to their increasing domination over, and integration of the previously more independent forges in which iron had been refined. These technological developments also facilitated and inspired the widespread tendency of eighteenth-century ironmasters to collaborate in setting prices and output and in political lobbying. Such associational activity was already welldeveloped in the charcoal-iron period assisted by the religious and family social institutions noted above. Coke and steam engines led to escalating capital intensity of production in which cyclical downturns and under-utilized capacity were constant threats to profitability. Consequently from 1777 until the 1820s there was a widespread construction of new collaborative mechanisms, including formal and regular meetings of ironmasters to regulate iron markets (by price fixing and at times agreed cuts in output). Through the Birmingham Commercial Committee (established 1783) and the General Chamber of the Manufacturers of Great Britain (established 1785) the iron masters were very active in policy issues such as the taxation of coal and the import of iron from Ireland (Ashton, 1963: Chapter VII). The cohesiveness of the iron masters to which the technological profile of the industry contributed was based primarily upon the material linkages in the production process such as the dependence of forges or casting operations on the quality and proximity of the blast furnaces and upon the common desire to regulate price and quantity in the markets. Other possible sources of cohesiveness, including the need to jointly possess complex and highly specialized knowledge, or the need to develop extensive international networks for the supply of raw materials or the sale of finished products, were less important in the earlymodern iron and steel industry than has been the case in other industries. With regard to knowledge, although the social institutions discussed above were important in the development of the technical capacity needed to launch the modern industry the key technological advances were relatively easily learned and disseminated. This dissemination was facilitated by the particular relationship to the industry of one of its most important inventors: James Watt. Watt’s steam engine could not have been developed without a capacity to build its cast-iron parts. Once built and applied to iron production the steam engine revolutionized the latter industry. This close interdependence was reflected in a two-decade collaboration at the end of the eighteenth century between Watt and the ironmaster who created the key engine parts, John Wilkinson, in which together they established a virtual monopoly over the production of steam engines. Yet, Watt himself, as an engineer, did not produce the engines. He was eager to obtain

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business, working with foreign companies that wished to use his engine. This technological dissemination was facilitated by Wilkinson’s brother’s extensive foreign contacts and, ironically, by the unauthorized production and sale by Wilkinson of steam engines, including ones sold in Cadiz, France, and Prussia. Watt’s international orientation was evident in the leading role he played in 1787 in advocating a free trade treaty with France (Ashton, 1963: Chapter III, pp. 172–3). Key features of the above technological and organizational profile of the eighteenth century British-based industry become even more pronounced in the nineteenth century despite the dramatic decline, with the rise of US and German production, in British capacity relative to other countries. It is to this topic that we now turn. The nineteenth-century industry In the first half of the nineteenth century, Britain continued to dominate world trade and production in iron. Between 1830 and 1850 the proportion, by value, of British iron production that was exported increased from 16 to 50 percent (Deane and Cole quoted in Birch, 1968: 227). The most important market for British iron was the railway construction booms that swept across the world in this century. An American agent in the 1830s remarked that “all countries throughout the world must get their railway iron in England where it is manufactured with economy, such rapidity, and so perfectly that it is useless to compete with this branch of industry” (quoted in Birch, 1968: 220). Roughly a quarter of British exports went to the US at this time (Birch, 1968: 227) and the intensity of this relationship was enhanced by the intermediation of banks such as Barings, which financed and arranged the trade. Continental Europe was also an important market. During the second half of the nineteenth century, however, Germany and the US successfully displaced British firms in these countries’ rapidly growing home markets and Germany began to push British firms out of other foreign markets as well (see Pashkoff, 1991: 78). The Bessemer process (blowing air through molten ore) and the Siemens–Martin process (open hearth technology) were the key technical features of mid-nineteenth century steel-making and German firms despite an initial British lead quickly mastered these. German leadership was assisted, when in 1879 the Thomas–Gilchrist method made it possible to dephosphorize Germany’s excessively high phosphorus ores.1 In both Germany and the US the tendency of firms to collaborate, concentrate, and control markets that had been evident in the eighteenth-century British industry became far stronger, related, as in the earlier case, with the industry’s high economies of scale and firms’ desire to guarantee markets given the negative effects of market downturns when high throughput was needed to earn adequate returns on the huge amounts of capital invested. Webb (1980) has argued that the greater use of cartels and tariffs to stabilize the industry in Germany as compared to Britain can explain the greater productivity increases in the former country. In Germany production came to be organized by cartels and by the dominant leadership role played by Krupp. Cartel-like agreements among German rail

The steel industry 53 producers began in the 1850s. By the end of the 1860s these were very strong. For instance, in late 1869 the three leading firms were dividing the market, with Krupp taking three-fifths and the others taking one-fifth each. Tenders were allocated by two of the three firms bidding higher than other (Wengenroth, 1994: 120). Competition from foreign firms and new German entrants, while posing some constraint on the cartel’s power, was not serious and cartel activity continued. Between 1879 and 1882, eighteen iron and steel cartels were formed in Germany (Maschke, 1969). These cartels facilitated a well-established set of differentials in foreign and German prices that allowed German producers to maintain throughput at a more optimal scale and to outcompete British firms in foreign markets. At times the German cartels were aided by significant German tariffs, but even when these were minimal German producers were able to maintain their price differentials as a result of the preference displayed towards them in purchases by the Prussian state and by railway companies (for whom the transport of iron and coal was an important source of revenue). Banks, which wished to avoid cutthroat competition among the iron and steel firms they were financing, played an important role in the formation of the cartels (Wengenroth, 1994: 125). The organizational power constituted by the cartels was supplemented by a highly influential Association of German Iron and Steel Industrialists, formed in 1874 and active through the inter-war period (Feldman and Nocken, 1975). The German cartels were extended to other European countries. An agreement was signed with the Belgian steel makers in 1882 and Austrian steel makers in 1883. These private agreements reinforced state commitments to procure rails only from their own nation’s firms. These three countries then joined with Britain in the most notable pre-war international cartel, the International Rail Makers Association, in 1883. The cartel involved specific quotas both for exports, administered by the cartel as a whole, and for domestic production, administered by the national cartels. By 1885, with the entry of two French firms and coordination with the Italian government’s procurement, the cartel controlled almost all the European rail market. Wengenroth (1994: 153) comments that “discipline within the cartel on the part of member works seems to have been excellent.” Nevertheless, stresses led to its demise in 1886. The cartel was revived in 1904 for three years during which time the Americans, Spanish, Italian, Austro-Hungarian, and Russian producers became involved (Plummer, 1934: 130). By this time, however, the world market for rails had matured and the iron and steel industry had begun to look for other uses for their products. In the US similar patterns of control over markets developed at the end of the nineteenth century. As in Germany the close association of iron and steel with the construction of the national railway system facilitated this. Misa (1995: 42) comments that “to a striking extent, steel making in the United States was created for a single product: Bessemer steel rails.” This had technological and organizational significance. In the US a unique permutation of the British Bessemer process (which used air to purify molten iron) led to the industry’s orientation to highvolume low-quality rail production. The coexistence of a holder of the American rights to Bessemer’s patent and an overlapping patent developed by an American

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led to a potential roadblock to technological development which was overcome by the creation of a patent pool involving these two technologies in 1866. By 1877 this Bessemer Association had licensed eleven US plants, constituting all the major rail producers, and thereafter it exercised strict control over the technology to prevent competition. “From 1877 until 1915, with the exception of the depression decade of the 1890s, the price of steel rails was largely determined by the Bessemer Association and its successors” (Misa, 1995: 21). At the center of the US steel industry was Andrew Carnegie, who by being the first to build an integrated Bessemer rail mill managed to build an enormously powerful position by rationalizing, increasing throughput, and driving costs down. In 1901, after a series of late nineteenth-century mergers involving Carnegie’s firm and its leading competitor, which had led to an industry that was already more concentrated than those in Britain and Germany, the two firms were merged with other smaller firms to create US Steel, the world’s largest firm. With assets eight times as large as its nearest competitor US Steel enjoyed a remarkable dominance in the US market (Chandler, 1990: 132). The merger had been facilitated by the Morgan bank that had been concerned about the negative effects of competition on the value of its steel holdings. Morgan’s representative saw the function of the corporate headquarters not as managing the production process in the firm as a whole but “more like that of a federation or cartel which set price and output schedules” (Chandler, 1990: 134). Over the next three decades, in part to forestall the threat of anti-trust action and in part to dampen competition in the market as a whole, US Steel established an informal but consistent relationship with its competitors in which it did not maximize its output and in exchange other firms respected its price leadership (Chandler, 1990: 134 –8). A 1917 speech by Joseph Butler, a leading authority on steel who had served as president of two iron associations, highlights the importance of collaboration in the early US industry: “We have been the first to realize the great truth that business success depends upon cooperation rather than competition, a truth now generally admitted.” He saw US Steel as a logical extension of pools and other earlier cooperative efforts: “We have had occasion to know by experience that the United States Steel Corporation, managed as it has been, has been a most excellent thing for the iron and steel industries in this country and the world, and so far as I am aware, there is not an independent steel company which has not benefited by the broad policy it inaugurated and made possible for all of us” (Butler, 1917). Emergence: conclusion By the end of the nineteenth century a consistent technology-driven pattern in the structure of the iron and steel industry had emerged. In Britain, Germany and the US, which together accounted for 80 percent of world production (Morrell, 1879), the industry was characterized by nationally based well-organized arrangements in which private collaboration rather than atomistic competition predominated. In foreign markets competition, while not insignificant, was dampened by

The steel industry 55 the International Railmakers’ Association, established in 1884, which was effective at dividing up markets between the British and major European producers and controlling prices (Wengenroth, 1994: 153) and by the relative lack of attention devoted to overseas markets by the nationally-focused US firms.2 Three distinctive features of iron and steel technology contributed to this industry structure. First, the very high throughput needed to maximize economies of scale contributed to highly concentrated industries in which stabilizing output and prices was a priority. These large firms had both the incentive and the capacity to try to reduce cyclical patterns of boom and bust by engaging in collaborative agreements to control market shares and prices. The very high capital intensity of the industry brought banks into a very prominent role in all three countries. With holdings in competing iron and steel firms, banks had a desire and capacity to stabilize the industry as a whole. A second technological feature of the industry, the material characteristics of both inputs (iron ore and coal) and outputs (rails), contributed to the embedding of the industry in national settings. All three leading producers possessed iron ore and coal deposits. The weight of these inputs combined with the capital intensity of the process needed to extract them contributed to the rooting of the iron and steel industry in particular geographic locations. The spatial configuration of railways also had a territorially-based fixity and one that was closely linked to the construction of nation-states. The close relationship between iron and steel and railways, with the former producing the latter and the latter transporting the former further contributed to the density of nationally-based institutions in the organization of the industry. The importance of iron and steel for armaments reinforced the national orientation of the industry. Indicative of this second technological feature of the industry is the comment of an observer of the Universal Exposition at Paris in 1878, who commented that in contrast to other industries it was not practical to exhibit the actual machinery involved in the processes of iron and steel production (Morrell, 1978). A third technological feature of the industry was the relative simplicity of the knowledge upon which its innovations were based. There were certain constraints associated with the dissemination of the technology, as evident in the importance of informal social institutions for the dissemination needed to launch the industry in Britain and in the example of the patent-based control over prices exercised by the Bessemer Association in the US. Nevertheless, as compared for instance to the electrical industry of the same period, the industry experienced a few major technological breakthroughs rather than continuous knowledge-intensive innovation and these breakthroughs were disseminated relatively quickly. Lags in using new technologies were due to organizational inertia rather than difficulties in obtaining knowledge about the technologies. Wurm (1993: 11) notes “in contrast to industries which were heavily reliant on research such as chemicals, the technology of steel production was easily available: it was an industry which saw relatively little technological progress between the wars.” The primary integrative linkages between firms were material production processes rather than shared scientific knowledge-producing processes.

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Maturity The inter-war industry In the period between World Wars I and II the key development in the organization of the world’s industry was the creation of new private cartels. Initially these were based primarily in continental Europe but by the end of the 1930s both the British and the US firms had been integrated bringing an estimated 90 percent of world steel trade under cartel control (Mirow and Maurer, 1982: 152). These developments reflect both the dynamic and enduring technological factors upon which this book focuses. The dynamic factors are evident in the competitive pressures that developed as the industry matured. As the technology disseminated new steel-making capacity was developed in countries such as Canada, India, South Africa, Czechoslovakia and Poland. The cartels were designed in part to manage this intensifying competition through multilateral private negotiation. The enduring technological factors are evident in the degree to which the private cartels were based on the same pattern of highly organized nationally-oriented industrial structures as had characterized the industry in the nineteenth century. As we shall see in subsequent chapters, this national structure was more pronounced than in other industries such as chemicals or electrical machinery that had developed at roughly the same time as the steel industry. The persistence of the concentrated nationally-based industrial structure was especially evident in Germany. Despite the loss with the Versailles treaty by Germany of 75–80 percent of its blast furnace capacity and 45 percent of its pig iron production (Stocking and Watkins, 1946: 173) the German industry continued to successfully consolidate itself along national lines. The Vereinigte Stahlwerke AG (VSt), which had emerged as a result of a series of mergers and rationalizations in Germany, was, along with the chemical firm IG Farben, one of the largest two firms in Germany and, by 1939, among the top four private sector employers in the world (Feldenkirchen, 1987: 418). This highly concentrated German capacity then facilitated the construction of the first inter-war steel cartel, the Entente Internationale d’Acier (EIA) that was negotiated and signed by the steel producers of Germany, France, Belgium, Luxemburg, and the Saar in 1926. The following year the Central European Group (Austria, Hungary, and Czechoslovakia) joined. Between 1927 and 1930 EIA members accounted for more than 70 percent of world exports (Hexner, 1943: 72–3). The cartel attempted to stabilize the market by establishing national production quotas and penalizing non-complying members. German firms to some degree supported the cartel by refraining from undercutting the weaker Belgian producers while tolerating their violations (Gillingham: 35). The international cartel began to break down during the depression of 1930, in part due to Germany’s demand to restructure the existing quota system,3 and it was disbanded the following year. A new steel cartel was re-established by the original EIA members, however, in 1933. The British industry, while not as concentrated as the German industry, would by the 1930s display the same pattern of nationally-oriented highly organized

The steel industry 57 domestic structures reinforced by international cartels. During the 1920s, the British industry, as in the late nineteenth century, failed to achieve the degree of rationalization of the German or US industry and the resulting failure to operate at optimal scale contributed to its continuing decline relative to the industries in these other countries. While the reasons for and seriousness of this British decline have been much debated it seems clear that the inertia of the institutional features of the British industry inherited from the nineteenth century played a part. In any case, in the first half of the 1930s the British industry displayed a notable growth of organizational cohesion through the increasingly prominent role played by private industry associations working for tariffs and to negotiate with the EIA, with which it entered into an agreement in 1935 (Wurm, 1993). Initially the British industry had been relatively fragmented both due to the relatively small scale of its firms, but also to the clashing interests of those firms relying on imported inputs or export markets and more domestically oriented firms. In responding to intensifying international competition with tariffs and negotiations with the EIA a more nationally-oriented coalition was constructed. The tariffs, national cohesion, and entry into the EIA were symbiotically related. Tariffs provided a weapon against the European producers and were seen as a necessary precondition by British firms for achieving an acceptable agreement with the EIA. Tariffs also, however, strengthened the position of nationally oriented firms relative to more internationalized producers. Agreement with the EIA gave the industry associations managing the resulting export quotas leverage over the domestic industry, further strengthening its cohesion (Wurm, 1993). The US industry displayed a similar pattern of nationally-oriented production to that of its major competitors and, as in the late nineteenth century, this was shaped by the technological configuration of the US industry. As the need for rails subsided the US industry became heavily involved in the production of structural steel for construction of cities as evident, most dramatically, in the emergence of the distinctive steel-based Chicago skyscrapers (Misa, 1995). While the dominance of US Steel was slowly eroded it continued to exercise oligopolistic leadership throughout this period. Compared to other countries foreign markets were relatively unimportant for US firms. Despite increasing its share of world production from 32 percent in 1913 to 49 percent in 1927–8 its share of world imports over this period only increased from 1 to 2 percent, and its share of world exports declined from 21 to 13 percent (Wurm, 1993: 11–13). However by the end of the 1930s even the US industry perceived advantages in stabilizing markets through international collaboration and it too joined the steel cartel in 1938. Despite some similarities of the steel cartels to other inter-war cartels such as chemicals the technological and national-based configuration of the industry was evident in the distinctive character of the steel cartels. Unlike chemicals, for instance, technology was not the main mechanism for controlling the cartel. Hexner (1946: 206), the leading authority on inter-war cartels, notes that “it is significant that unlike marketing controls in many other industries, those of steel were not based on patents and on secret technological experience … no accusations were ever made against international steel industries for abuses of patents or

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The steel industry

processing secrets.” Relatedly, unlike the chemical industry and many others, the steel industry was never charged under US anti-cartel investigations associated with World War II (Nussbaum, 1986: 142–3). Instead of the control of knowledge, for the steel cartel, “the establishment of strong national groups was a precondition upon which the new cartel structure was based. Many months elapsed, in fact years, before the Belgian and French national groups attained adequate internal cohesion” (Hexner, 1946: 212). Securing national tariffs were an important part of creating this solidarity (Wurm, 1993). This required support by the state: In spite of the private character of the cartel, however, the national groups affiliated with it, excepting the American group, were closely associated with their respective national governments. Every European national group looked to its government for support and cooperation in negotiations with other national groups … such close cooperation between the national groups and their governments tended to develop an identity of interest between them. (Stocking and Watkins, 1946: 211)4 As we shall see in Chapter 4, by contrast, chemicals involved a series of cartels by subsector with overlapping member-firms. Hexner discusses only three main subcategoris under steel: steel, ferrosilicon, and ferrotungsten, while in chemical and pharmaceuticals he includes thirty (e.g. A–D includes acetic acid, active coal, alkalis, borax, calcium carbide, camphor, cellophane, citric acid, and dyes). Where his account of the steel cartel focuses on negotiations between national groups his account of chemicals focuses on complex inter-firm agreements.5 The relatively weak capacity of individual firms in this technologically simple industry for bringing about international collaboration was evident in the difference between the role played in its cartel by VSt, the huge German steel firm, and the role of IG Farben in the chemical cartels. Where IG Farben used its control over patented knowledge to craft complex inter-firm agreements and foreign investment, VSt’s belligerence in demanding a larger quota in negotiations led to the collapse of the first EIA. We shall see in Chapter 4 as well that the chemical cartels were much more successful at reallocating and organizing international markets as compared to the steel cartels, which struggled simply to lock in existing market shares. The industry from World War II to the 1970s The most important development in the governance of the international steel industry in the immediate post-World War II period was the creation of the European Coal and Steel Community (ECSC) in 1951. The formal launching of this new intergovernmental organization involving six leading continental European steel and coal producing countries marked the culmination of a long process of discussion and negotiation that was associated with the occupation of

The steel industry 59 Germany and the rebuilding of Europe. We shall see in this section that despite the significant impact of political and military factors not directly connected to the industry’s technological and organizational trajectory, these latter factors continued to strongly shape the development of the post-war industry. Indeed in a number of key respects the war had little impact on the trends and continuities that were evident in previous periods. After the War a key question was what should be done about the German coal and steel capacity, a question that involved several distinct themes. A first theme was the perceived need to ensure that these industries, which had been central to the German war-making capacity, should not be the basis of future militarism. A second theme was the desire of the victors to enhance the prospects of their industry and reduce the likelihood of oversupply by restructuring the German industry. A third theme was the desire to integrate the German coal and steel industry with its counterparts elsewhere in Europe in such a way as to aid in the economic recovery of Europe. A fourth theme, which became especially pronounced with the outbreak of the Korean war in 1950, was the desire on the part of the US and its allies to quickly rebuild and rearm Germany in order to bolster the Western alliance against the Soviet Union. An initial Allied tendency in occupied Germany was to strictly limit steelmaking capacity by setting explicit ceilings on its output and by using wrecking crews to dismantle and destroy machinery. Motivations based on the principled desire to reduce the dangers of militarism were ambiguously mixed with the pursuit of competitive advantage. For instance, the most active proponents of the destruction of machinery were the British who, by reducing German capacity, could address their expressed concern about the negative international impacts of future oversupply in a way that reduced their own need to restructure (Gillingham, 1991: 208). Similarly, as one US commentator noted at the time, “Since post-war production capacity of American steel plans will be about 95,000,000 tons annually, more than double normal peacetime demand, there is grave danger of the creation of another steel cartel dominated by Germany, unless measures of control are instituted.” (Bronson, 1947: 68, citing 1944 New Republic article). The French government pushed hard in negotiations to free up the supply of German coal that previously had been so integrated with German steel-making capacity and to take other measures that would facilitate the modernization of their own steel industry that operated at higher cost than the German industry. An ongoing effort to eliminate German steel and coal cartels, like these other measures, was pursued both to undercut a potential organizational base of support for German militarism, and to reduce the economic power of the German industry relative to its competitors in other countries. As policy switched to the reconstruction rather than destruction of German economic power the creation of a supranational European authority that would supervise the German industry and integrate it with other countries, became a top priority. Despite the professed enthusiasm of US policy makers and of French planner Jean Monnet for competitive and free markets, expressed in legal provisions and policy initiatives designed to combat cartels, the European steel regime

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that was established with the ECSC displayed a remarkable degree of continuity with the inter-war period in the prominence of a highly organized nationallybased industry structure. This continuity was evident in the persistence of cartels and high concentration despite the efforts of advocates of competitive markets. For instance, although the British launched a decartelization program and jailed steel industrialists in 1945 they would continue to rely on the cartels to administer the industry: cartels which had been dissolved, reformed under new names, and brought together under a strong national Economic Association of the Iron and Steel Industry were allowed to continue to operate. Gillingham (1991: 226) comments about the German steel and coal firms: “They managed to keep essential cartel structures together and discharge quasi-official responsibilities on behalf of the zonal governments.” In 1949 the National Iron and Steel Association provided, on secondment, the 143 officials that constituted the staff of the newly created iron and steel agency of the West German government (ibid). Despite efforts to break up the largest steel companies by 1957 the German iron and steel industry was only marginally less concentrated than in the inter-war period, with eight large firms accounting for 79 percent of Ruhr pig iron production, 75 percent of steel production and 60 percent of rolled steel production.6 Cartels and concentration within the German steel industry were accompanied by concentration and managed markets in other European countries as well. French cartelization, which had been given a boost by German-influenced government policies during the wartime German occupation, continued actively after the war and the French steel industry, prior to the launching of the ECSC, was eager to re-establish the types of industry-to-industry relations that had characterized the inter-war period. The ECSC itself, despite anti-cartel wording in its founding treaty, enhanced the re-establishment of relationships between national steel associations by giving them a common interest in promoting industry influence in the new institution. The support of Belgian producers was bought by negotiators who obtained an agreement to subsidize them from the German industry. In effect the main significant change from the 1930s was the reinforcing of the types of activities pursued by the interwar cartels by the construction of an intergovernmental institution with the power under certain conditions to set maximum and minimum prices and to allocate steel production and investment. Gillingham comments that “in the first quarter of 1953, twelve new European steel syndicates formed for cooperation on third markets … the last thing Monnet had wanted to do was make Europe safe for cartels. The future of the Coal and Steel Community was nonetheless now in their hands” (Gillingham, 1991: 330). With regard to concentration, by 1958 the ECSC High Authority had approved every merger of the more than 100 submitted to it for review (Gillingham, 1991: 340, citing Diebold). By the mid-1970s “virtually all the ECSC’s integrated producers had been consolidated into a few large groups and fairly sophisticated techniques of industrial organization for controlling price competition had already been developed” (Howell et al., 1988: 75). In some cases this consolidation was encouraged by governments through nationalizations, the fostering of mergers, or the acceptances

The steel industry 61 of cartels, as in Germany where four associations managed agreements on prices and outputs (Howell et al., 1988: 74). Between 1952 and 1964 there were no cases of enforcement of the anti-collusion provisions of Article 65 of the Treaty of Paris, despite widespread instances of collusive activity (Howell et al., 1988, 73).7 Even at the end of 1990s there were allegations that private cartels continued to operate in secret. A complaint by a lawyer for the US producers led to the drafting of a letter by the US Trade Representative to the EU and Japan asking them to investigate cartel practices in steel.8 It was alleged that Japanese and European steel makers have regular meetings to discuss pricing and market allocation and that these are supplemented with secret agreements with producers in Korea, South America, Southeast Asia, and Canada. It is also alleged that the EU and Ministry of International Trade and Industry (MITI) encourage cartels through production forecasts. It may well be, however, that this is merely a move in the US producers’ campaign to get anti-dumping (AD) measures. In the US, despite considerable erosion of US Steel’s dominant position in the industry relative to earlier periods and some minor increase in trade, the steel industry continued, until the 1970s, to be characterized by well-established tacit oligopolistic cooperation in price setting (Barringer and Pierce, 2000). Identical steel price increases would be adopted by all US steel producers and were routinely criticized by political leaders concerned about their inflationary effects. A 1968 “ ‘price war’ was no such thing; it was an attempt to enforce the system of administered pricing by demonstrating the power of the major companies to their smaller brethren” (Hall, 1997: 81). In the late 1960s the threat to the US firms’ control over prices from imports was contained by pressure on foreign governments to control exports: the first steel Voluntary Export Restraint (VER) was adopted by Japan, in 1968, and then with a more formal agreement by Japan and the European Community (EC) in 1969, which lasted until 1973 (Hall, 1997: 116 –18). These and later examples of protectionism were supported by “the cohesive coalition of vertically-integrated carbon-steel producers, the steelworkers’ union, and members of Congress from steel-producing regions. The cohesiveness of this ‘steel triangle’ arose out of the technology and market structure of traditional integrated steel making”.9 Even in 1979 eight US steel makers controlled two-thirds of the domestic market and, along with an effective trade association in the American Iron and Steel Institute (AISI), this contributed to (and was an expression of ) their organizational capacity. The US steel industry continued to be overwhelmingly nationally-focused. Until the 1980s only one US steel firm, Armco, pursued foreign investment as a significant priority. The attitude of the other US steel firms was expressed by the 1962 comment of US Steel’s Benjamin Fairless, then head of the AISI, who stated that foreign direct investment “is hardly feasible for the American iron and steel industry. We can’t very well scrap our existing plants, representing an investment of many billions of dollars, and spend more dollars to build new plants overseas” ( preface to the 1960 AISI Yearbook, cited in Hall, 1997: 93). In the 1960s US Steel would begin to invest overseas with four joint ventures in Italy and Spain but these remained peripheral to US Steel’s overall operations and all were

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ended by the 1980s, abandoned to focus on national production when times were difficult, as they were after 1974. Two specialty steel makers similarly invested in Europe in the 1960s and abandoned these in the 1970s (Hall, 1997: 182). Looking at the experience of the world steel industry as a whole in the aftermath of World War II, then, the enduring impact of technological factors on the organization of the industry is evident despite the heightened role of political factors connected to the World War II and the emerging Cold War. It is true that Germany was able to preserve its concentrated and organized steel industry in part because of the leverage it gained when it began to be considered as a partner in the struggle against the Soviet Union. However throughout this period the case for not changing significantly the structure of the German industry was built on arguments about the economic advantages of such a structure given the physical interdependence and scale economies involved in the production process. Despite bitter clashes over the role of cartels there was no significant current of opinion that favored atomistic, competitive, and free cross-border markets in steel. The need, that derived from the capital intensity and reliance on high throughput of the industry, to manage capacity and output, the need to foster large plants due to economies of scale, and the need to embed materially interdependent production processes in particular territories all led to the persistence of the national and private cooperation that had organized markets in the interwar period. Production remained nationally-oriented: in 1960 global steel trade represented only 10 percent of total steel shipments, a figure which would increase to 25 percent in 1992 (Hall, 1997: 180). Nationalizations also played an important role. In 1950, 77 percent of the world’s steel output was controlled by private companies and the 23 percent public owned capacity was primarily in the USSR and Eastern Europe. By 1980, 60 percent of the world’s steel production was either government owned or heavily subsidized (Hogan, 1983: 5).10 The most striking nationalization was of British steel in 1967. The post-war policy process which led to the construction of the ECSC despite the intensities of the political and military conflicts associated with it, resulted in the end in only marginal changes in the organization and governance of the international steel industry. The industry since the crisis of the 1970s In 1974 the global steel industry entered into a period of crisis from which it would emerge, two decades later, with massive cuts in capacity and employment. There are a number of interrelated reasons for the crisis. The proximate cause was the oil price increases of 1973 with their negative impacts on users of steel. More fundamentally since World War II global capacity had burgeoned while consumption trends had leveled off. Capacity had been increased by the widespread support of governments for national steel industries in the developed and developing countries and by the character of the technology in which very high capital intensity and scale economies give firms an incentive to increase output. Export markets were especially prone to overcapacity as governments and firms sought to preserve national markets to ensure that optimal scale of production was

The steel industry 63 reached and to expand exports, either to further assist in reaching optimal scale, or at very low marginal cost once optimal scale was reached. Consumption had leveled off as the world entered into its slower period of growth that characterized the post-1973 period, as substitutes were found for steel by some of its traditional clients, such as the automobile industry, and as the most rapidly growing industries, such as services or microelectronics, used less steel than previous leading industries had. The structure and governance of the industry in this period of crisis reflects, as in earlier periods, constraints and dynamics that can be traced to the industry’s technological profile. As we shall see below, capital intensity, territorial embeddedness, materially embedded interdependence and relatively low levels of technological innovation continued to be important enduring factors shaping the post-1974 industry as they did in previous periods. We can see as well the dynamics of the stylized industry cycle that was set out in Chapter 1: continued dissemination of knowledge about steel-making and the related construction of steel-making capacity around the world led to increasingly competitive and commodified markets. Our model of this industry cycle suggests that this stage of maturation and decline can take more than one path depending on the strength of other related industries and on the technological complexity of the industry itself. In this section, after first analyzing the very traditional nationallycentered response to the crisis of overcapacity that emerged in the 1970s, we shall turn to the more complex situation in the 1990s in order to assess its relationship to these cyclical dynamics. In the EC, as in earlier periods, state-supported cartelization was the primary response to the crisis of the 1970s, along with escalating subsidies. The problem of overcapacity in steel was severe in the EC, exacerbated by the existence of outmoded plants, inland locations, high-energy costs, and other problems. Even in 1981 overcapacity in steel in the EC was estimated to be 50 million metric tons at a time when total EC raw steel production was 102 million tons (Howell et al., 1988: 16, 55). In 1977 the industry was operating at 60 percent average utilization rate (Howell et al., 1988: 59). In response to the crisis the EC used the powers that had been developed in the ECSC to restrain competition through production and delivery quotas (until 1988) and minimum prices (until 1986) ( Jones, 1986; Howell et al., 1988: 62; Tsoukalis and Ferreira, 1980). Some fines were imposed for violations of these controls. It has been estimated that by 1981, 44,000 EC steelworkers were supported by EC payments to steel companies (Hudson and Sadler, 1989: 135). In 1977 Eurofer, a private cartel of EC steel producers, was formed and it would subsequently work closely with the EC to implement price and output controls. In 1978, 15 voluntary restraint agreements with all the major exporters of steel to the EC were signed establishing quotas and compliance with EC pricing policies for steel imports to the EC (Howell et al., 1988: 79), adding to an existing restraint agreement that governed imports from Japan beginning in 1972 (Howell et al., 1988: 94). Trigger prices under which AD and countervailing duties (CVD) would be imposed were used against other countries (Howell et al., 1988: 96). The heavy use of VERs and non-tariff measures (NTMs) in steel

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The steel industry

relative to chemicals has been evident with respect to Eastern Europe: in 1990, 76.2 percent of iron and steel imports from Poland, Czechoslovakia, and Hungary were subject to NTMs as compared to 9.2 percent of chemical imports (Mastropasqua and Rolli, 1994: Table 2). In the 1990s concern grew about imports to the EC from Russia and Eastern Europe, and agreements governing the rate of growth of imports from Russia and Ukraine entered into force in 1995 and were renewed for five years in 1997 (Eurofer, 1996, 1998). Very heavy subsidies, an estimated $44.8 billion between 1975 and 1985, were granted to the steel industry (Howell et al., 1988: 63). Over time it became apparent that subsidies would have to be scaled down and hard decisions made to eliminate surplus capacity. With the First and Second Aids Codes in 1980 and 1981 the EC tried to limit subsidies and ultimately it would succeed in limiting them to research and development, environmental protection, and financing the cost of closing facilities (Howell et al., 1988: 69). Production quotas were phased out in 1988, facilitated in part by an upturn in steel markets. In the US the crisis of the 1970s began to undermine the system of oligopolistic administered pricing that had characterized the industry since the end of the nineteenth century. Continually increasing levels of imports, combined with the rapid expansion of highly competitive minimills, led to the loss of control by the major integrated mills over the market (D’Costa, 1999). In response to increases in imports a series of bilateral restraint agreements and waves of AD and CVD cases were initiated by the US steel firms and the US government respectively (Moore, 1996). Restraint agreements were in place with Japan and the EC from 1968 to 1974 and with the EC from 1982 to 1985. Especially significant was a global program for export restraints established by the Reagan administration in 1984 (Moore, 1996). In 1989 the 1984 restraint arrangements were renewed for two and a half years (Moore, 1996: 27). AD and CVD cases were used both as a direct means of restraining imports and as a threat that could be used in negotiating a restraint agreement. In 1977, 19 AD actions had been filed against Japan and some European countries; in 1980 US Steel filed AD cases covering about three-quarters of imports from the EC; in 1982, 132 AD and CVD cases were filed against seven EC and four non-EC countries (Howell et al., 1988: Chapter 7). AD and CVD cases continued to be filed against various suppliers in subsequent years. For instance in 1993, AD and CVD cases were filed against about 20 countries by US steel makers. For some years – from 1978 to March 1980 and from October 1980 to 1982 – a “trigger price mechanism” was put into place by the US government, which mandated the initiation of AD cases if the price of imported steel fell below a certain price. Although imports into the US continued to rise for most of the 1970s and 1980s their growth was restricted to some degree by this pattern of restraint agreements and trade actions. The traditional US steel mills also faced intensifying competitive challenges from minimills in this period.11 The minimills, with their smaller optimal scale and their more reduced reliance on complex, materially-embedded, interdependent processes, represent an alteration in the technological profile of the industry in which the growth of scrap played a key part. Several features of minimills

The steel industry 65 contributed to their tendency to erode the oligopolistic structure of the US market. First, their ability to operate at a lower optimal scale and with less capital due to their ability to process scrap rather than maintaining expensive and complex ore-refining facilities provided them flexibility, including the ability to enter and exit markets more quickly than the traditional integrated mills. Second, most minimills were run with a more freewheeling management style and in a non-union environment, providing them lower labor costs and greater flexibility in reorganizing production to adopt new technologies and to increase productivity. Third, the emergence of minimills at the same time as the development of continuous casting technology (in which molten steel is cast directly into slabs, eliminating an intermediate stage of ingots which needed to be cooled and reheated) gave them an advantage both because they were able to quickly adopt the technology and because it undermined the advantage of the larger integrated mill in being able to offer a range of products that could be produced from ingots (continuous casting made the specialization in a particular product more efficient). From 1990 to 1997 considerable effort by firms and governments was expended on an unsuccessful attempt to negotiate a Multilateral Steel Agreement (MSA) which would seek to control subsidies, dumping, and the filing of AD and CVD cases.12 Past subsidies would be forgiven in exchange for commitments to eliminate subsidies in the present and future. A special panel would have been set up to address subsidies more quickly than is the case with traditional CVD cases, in which non-retroactive decisions typically come some time after damage has been done. Governments from the country accused of dumping or subsidies would have committed themselves to responding to cases unlike traditional AD and CVD cases in which the full responsibility for preparing the case rests on the injured party’s government. The goal was to conclude the agreement initially between the US and EC producers but then to bring in other steel exporting countries around the world. Initially the hope was that this would be done as part of the Uruguay Round trade negotiations. Although differences precluded agreement during the Uruguay Round, efforts led by Eurofer continued for several years after the Round’s conclusion. Steel tariffs were reduced to zero over a tenyear period (in the US steel tariffs averaged 4 percent in 1994) by the agreement but the threat of AD and CVD problems continued. In 1996 a Multilateral Specialty Steel Agreement (MSSA) was put together by the Specialty Steel Industry of North America and Eurofer. However the US side subsequently backed out of its support for the MSSA perhaps as a result of pressure from the traditional US producers. In the end neither an MSA nor an MSSA were signed reflecting the preference of US producers for relying on the US trade litigation mechanism. The Asian and Russian currency crises of the late 1990s highlighted sharply the degree to which the international steel industry continues to experience the type of technology-related difficulties that it has from its start. In the mid-1990s it seemed as if both firms and states were turning away from interventionist state initiatives and were engaging more aggressively in competitive markets. However the rapid decline of Asian and Russian currencies and the associated severe

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The steel industry

contraction in those countries led to an outpouring onto international markets of very cheap steel. As imports climbed to a 30 percent share of the US market and as many as 10,000 steel jobs were threatened, the integrated steel makers together with the United Steelworkers of America launched a massive campaign to get the US government to help their industry (“Buyers, Mills Don’t see Eye-to-Eye”, 1999; “Trade Debate Escalates”, 2000). As in previous periods, a slew of AD cases against non-US steel producers were initiated and a campaign was launched to retain restrictions against 17 countries that came up for sunset review in 2000 (“US Producers See … ” , 2000). As well, working with the AISI and through the Congressional Steel Caucus a number of other political initiatives were carried out, including a $1 billion steel loan guarantee and the introduction into Congress of a number of bills, including a highly controversial and unprecedented proposal to award the proceeds of AD duties to the US steel industry (“Steel Takes Spotlight … ” , 2000; “Politicians Flood Congress …” 2000). In episodes reminiscent of the VERs that were prohibited under the Uruguay Round trade agreement, President Clinton actively engaged in bilateral interactions with the Japanese, Russian, Chinese, Indian, and other governments to seek restraints in their US-bound exports (“Clinton Promises …”, 2000; “US–Japan Steel Trade Tensions Rise”, 1999; “US and Russia Talk Steel”, 2000). Many of the other proposed measures also were in conflict with WTO rules. In Europe, Eurofer similarly called for AD measures (“US Dropped the Ball”, 1999) and sought itself to persuade East Asian producers to restrain production in the interest of the market as a whole. Significantly, the minimill sector, which previously had been enthusiastic in their support of free trade, began as well to actively lobby the US government for relief (“DiMicco, Nucor’s New CEO …”, 2000; “Minimills go to Capitol Hill”, 2000). Indeed James Collins, the former president of the Steel Manufacturers Association, which represents North American minimills, called for a revival of the idea of a MSA, indicating by his references to problems with US anti-trust law that he envisioned the type of horizontal collaboration that could be seen as cartel-like (Collins, 1999) and a first step in bringing this about was initiated by the US Senate Finance Committee approval of a “Steel Trade Enforcement Act” in 1999 (“New Bill”, 1999). When combined with various other types of government support, priced by two critics as totaling “$100 billion in trade restraints and corporate welfare” over “30 years of the integrated steel companies’ capture of US trade policy” (subtitle of Barringer and Pierce, 2000), this picture is remarkably similar to the state-supported cartels of the 1930s. Curiously, despite the stepped up involvement of the US government in the industry, each side of the late 1990s US debate over steel policy was framed as ostensibly supporting free trade. Thus the integrated steel companies claimed they needed assistance because foreign competitors were interfering with the market with subsidies while the critics of “big steel” claimed that the problem with US integrated steel makers was an over reliance on government protections and an unwillingness to match the technological investments and upgrading of their foreign competitors (Barringer and Pierce, 2000). Unfortunately, such analyses

The steel industry 67 obscure the underlying technological features of the industry that have given rise to problems of overcapacity since its beginning. Steel was the only US industry to suffer in this way from the Asian and Russian crises (Harrigan, 2000) and it is much more likely that this is due to the industry’s technological profile than to an idiosyncratically high level of greediness in looking for government handouts on the part of the industry. Moreover global overcapacity at this time was estimated at 250 million metric tonnes, more than a quarter of world steel production (“US Dropped the Ball”, 1999), indicating that the problem was not simply the fall-out of the East Asian crisis. In the late 1990s US debate we also saw an indication that, like the apparel industry, steel was beginning to reach a level of maturity in which consumers of the industry’s product and producers from countries to which the technological capacity to produce the product had disseminated, were strong enough to mount an effective resistance to government support for the industry (“Trade Debate Escalates”, 2000). Moore (1996: 26), for instance, argues that the failure of US steel to extend the protectionist regime of the 1980s through the 1990s was due in part to the effective lobbying of the 320-member Coalition of American SteelUsing Manufacturers, organized in 1988 and 1989 (Lane, 1996). In the late 1990s critics of government assistance to the steel industry argued that steel-using industries employed forty times as many people as did the steel industry and that the higher prices from restrictions and subsidies were harmful to them (“New Decade, Same Old Story”, 2000). Foreign steel producers, organized in the American Institute for International Steel, mounted a vigorous attack against government assistance, and made available on their website the scathing and extensively researched study of the costs, Paying the Price for Big Steel (Barringer and Pierce, 2000). The globalization of the auto industry, especially the opening of Japanese subsidiaries in the US, contributed to pressures on the steel industry, as Japanese auto factories in the US began to demand the qualities and costs for steel to which they were accustomed in Japan (“The Pressure to Go Global”, 1998), putting pressure as well on competing US vehicle producers to demand cheaper steel from their US suppliers. We shall see in the chapters on the electrical, chemical, auto, and semiconductor industries that the decline of an industry relative to its users and to other industries, and the competitive pressures associated with this decline, can be forestalled by scientifically complex cross-border collaboration among firms. Despite periodic announcements of cross-border acquisitions or partnerships in steel (“Mills eye global consolidation”, 2000) there is no indication that these will approach the level of more complex industries and this is because the simplicity and physical weight of the industry’s production process restricts efficiency gains from mergers or partnerships to secondary activities such as internet marketing (“International Group Creates Global …”, 2000). Indeed the most prominent cross-border initiatives, such as the alliance between Korea’s Pohang Iron and Steel Co. and Nippon Steel Corp. (“Asian Steel Alliance …”, 2000) and the proposed merger of European firms Usinor, Arbed, and Aceralia (European Firms …”, 2001), involve integration between firms in close regional proximity that are not inconsistent with the patterns in earlier eras.

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Conclusion Across two centuries of development the organization of the international steel industry has displayed remarkable continuities that can be linked to its technological characteristics. From the beginning its capital intensity, the physical interdependence and high minimum-efficient scale within steel plants, and the further centralizing effects of the weight and locational characteristics of iron ore and coal, have all contributed to very large firms concerned with controlling markets to avoid overproduction. The relative simplicity of steel technology has led to its rapid diffusion, exacerbating tendencies for overproduction. Before World War II markets were heavily cartelized by private firms with assistance from states. After World War II private cartels were officially proscribed. However the ECSC, private industry associations, and tacit collusive understandings carried out the key functions of the inter-war cartels and some private cartels continued to operate surreptitiously. By the late 1960s these began to be supplemented by state-organized quotas in the form of VERs. In short, both the distinctive characteristics of steel as a technical system and the process of maturation highlighted in Chapter 1 are visible in steel. Like the cotton manufacturing industry, the steel industry saw significant changes in the 1990s that reflect both the distinctive features of the industry itself, and systemic factors relevant to the global economy more generally. The rise of the minimills indicated the ascendance of a steel technology that differed from traditional technology in its minimum-efficient scale. Combined with a new level of aversion among governments to intervene in support of industries in difficulty – an aversion driven by neoliberal ideology and by concern with costs – this began to alter the above profile of the international industry. However the East Asian and Russian crises of the late 1990s demonstrated that problems of overcapacity, and the inclinations of private firms and governments to seek to resolve the problems by controlling or modifying the operation of market forces is still a distinctive feature of the industry.

4

The electrical industry Enduring complexity and the longevity of leading firms

In this chapter I turn to an industry that differs sharply from the cotton and steel industries in its level of technical complexity. The industry is complex both in the continuous and varied streams of new science-based innovations that it has produced and in the need for extensive and precise technical coordination across products needed to make electrical systems work. We shall see that this technical complexity has led to the ongoing domination of the world’s electrical industry by the same top four or five firms since its beginnings in the late nineteenth century. Technical complexity has both required the type of coordination and scientific initiatives that these large firms have been capable of, and provided the opportunity for these firms to retain their dominance. As with steel, there have been persistent attempts by firms to control markets through cartels and other inter-industry collaborative practices. However, unlike the steel industry, technical complexity allowed leading firms to engage in these collaborative practices without state assistance. There never was a “European Electrical Community”, nor were there systems of state-negotiated export restraints or widespread nationalizations. The technological profile of the international electrical industry has allowed powerful private firms to retain their lead, forestall the competitive pressures that come with maturation, and rely on their own initiatives rather than the actions of states to provide a source of predictability and order in the industry. We divide the industry’s history into two periods, emergence and maturity, and look at each in turn.

Emergence The blossoming of the electrical industry took place in the late nineteenth century and was dominated by a few large American and German firms. From the beginning this industry was heavily knowledge-intensive with initial discoveries and ongoing production both requiring a high degree of scientific and technological expertise. As noted above, the industry’s technology also produced an inherent complexity and interdependence between its component parts. For instance, for lighting to be commercially viable it needed to be linked, along with other electricity users, through a transmission and distribution grid to a generating station operating at sufficient scale. Tight coordination and control over technical

70 The electrical industry parameters such as voltages and frequencies are needed in electrical systems, especially since the absence of economic methods of storing electricity require ongoing modulation to ensure that at each moment the amount being generated exactly matches the amount being consumed. Often electrical systems extend over long distances. The need to establish sites for generating stations and to run power lines through cities gives electrical systems a territorial embeddedness. In its period of emergence the optimal scale of electrical systems matched that of major cities and thus the relationship of the industry to subnational governments was especially important. In this chapter we shall see that these distinctive features of the industry, shaped by the technology upon which it was based, contributed to the international structure and governance of the industry. There are strong elements of continuity in this structure and governance that run through its first century in which it emerged and matured. Although there were many individuals in Europe and America whose discoveries and inventions contributed to the scientific understanding of electricity in the nineteenth century there were fewer who were able to combine this understanding with the organizational and commercial skills needed to launch an electrical industry. Some historians have, therefore, stressed the entrepreneurial brilliance of the two most important founders of the industry, Thomas Edison and Werner Siemens. While these men were undoubtedly unusually gifted, their stories also testify to the particular character of the preconditions for the emergence of electrical industry which required a blend of scientific, technical, organizational and commercial competence that only a few were able to provide. Once established these few firms were able to further develop their lead over competitors by learning from their experience and by using the complexity they had mastered, to advantage, in their relations with other actors. Edison’s key contribution to the emergence of the electrical industry was the development of a commercially viable incandescent lighting system, work that became a principal preoccupation after 1878. There were many interacting components in this system and Edison was able to rework particular components to improve these interactions or the performance of other components. The development of the system did not rest on Edison alone, however. Indeed other talented scientists and craftsmen played key, if often underrecognized,1 roles and their interaction in Edison’s unusually well-equipped Menlo Park, New Jersey laboratory was critical to Edison’s success. Edison, working with Grosvenor Lowrey, a lawyer with strong financial and political connections, also nurtured his relations with New York City’s elite that were critical for his ability to fund and to obtain permission for a franchise including underground cables to establish his first lighting system there. Creating a series of companies to produce the components of the system and a slew of patents (60 in 1880, 89 in 1881, and 107 in 1882 – Hughes, 1983: 42 citing Arthur E. Kennelly) Edison was able in 1882 to demonstrate the first working illumination system supplied by a central station in New York’s financial district. Working through Lowrey and with the banking firm Drexel, Morgan and Company, Edison devoted considerable effort to selling the system he had

The electrical industry 71 demonstrated in New York in other cities in the US and Europe. A display of Edison’s system at the International Electrical Exhibitions in Paris in 1881 and London in 1882 were especially important in establishing Edison’s prominence in the field. Most important was an agreement with an impressed visitor to the Paris Exhibition, Emil Rathenau, who would purchase Edison’s patent rights for Germany and establish, with three German banks, the Deutsche Edison Gesellschaft für angewandte Elektricität (DEG: German Edison Company for Applied Electricity) in 1883 (Hughes, 1983: 67), which would in 1887 be reorganized as the Allgemeine Elektricitäts-Gesellschaft (AEG) and become independent of its previous agreement with Edison (Stocking and Watkins, 1946: 316). Werner Siemens established with Johann Georg Halske in 1847 a firm for creating telegraph systems. After a series of major Siemens and Halske projects, including telegraph systems in Prussia, Russia, and under the Mediterranean, Siemens developed in 1866 a pathbreaking dynamo for generating electricity which would come to dominate the market. In 1879, Siemens and Halske displayed an electric railway at a Berlin trade fair that led to orders from other European cities including Brussels, London, Copenhagen and St Petersburg (von Weiher, 1980: 36). Siemens and Halske signed a memorandum of agreement with Rathenau’s firm in 1883, the year it was created, which conceded the electric lighting field based on Edison’s patents to Rathenau in exchange for the latter’s firm agreeing to purchase all its electrical requirements except light bulbs from Siemens (von Weiher, 1980: 37; Hughes, 1983: 68). George Westinghouse, who had developed a successful business in the production of such railway products as brakes, signals and switching, was able to develop a prominent position in the emerging electrical industry with his firm’s development of an alternating current system that would ultimately displace the direct current technology developed by Edison. Alternating current allowed the use of transformers that could step up voltage for more efficient long-distance transmission, and could step down voltage to a more optimal level for lighting. As had been the case for Edison’s lighting system, development of the a.c. system required the invention or improvement of a series of interrelated components including transformers, and alternators and meters for regulating and measuring voltage (Passer, 1953). By the end of the nineteenth century the four firms discussed above – Edison’s firms that were reorganized with their rival Thomson-Houston into the General Electric Company in 1892; Westinghouse; Siemens and Halske and AEG – would exercise a remarkable domination over the world’s electrical industry. Technological factors were critical in this structuring of the industry. Firms used their existing experience for the ongoing development of new innovations, facilitating preservation of their leads. The complexity of the technology reduced the degree to which competitors could copy or imitate innovations and often required the direct involvement of the firm that had developed a technology in training and in setting up and financing the operations of licensees and purchasers of the technology and products. Often the leading electrical companies would accept stock in payment from utility companies or own them through holding companies

72 The electrical industry and this would, in turn, increase the utilities’ commitment to the manufacturer’s products. This was reinforced by the tendency of managers and engineers at the utilities to receive their training in the manufacturing firms to rely on the products they used when being trained (Sultan, 1974: Chapter 1).2 Such complexity explains the early importance of foreign direct investment (FDI) for electrical companies. In the case of Siemens and Halske this had also applied to its telegraph business and it opened an office and workshop in Russia in 1852 and 1855 respectively (Hertner, 1986: 146); a branch in Britain in 1858, a subsidiary in Vienna from 1858 to 1864, and again from 1879, and a French subsidiary in 1878 to 1886. A series of “subsidiary representatives” who had to buy Siemens products on their own accounts were established in the 1870s in Holland, Belgium, Italy, Switzerland, Scandinavia, Latin America, and China. By 1900, AEG had established “bureaux” staffed by sales engineers around the world: 42 in Germany, 37 in other European countries and 38 overseas (Hertner, 1986: 149). Edison established a lighting subsidiary in England in 1882, in Canada in 1883, subsidiary representatives in Sweden, Norway, and Portugal, a special relationship with licensee Rathenau in Germany, and ran the rest of his European business from affiliate firms he set up in France, while relying on a set of agents in South America, India, New Zealand, Australia, Japan, and Korea (Wilkins, 1970: 56–7). Although by 1889 the Edison companies’ foreign equity holdings had been bought by other foreign and American companies, the subsequent merger which created General Electric (GE) brought foreign affiliates, which by 1914 included associated manufacturing operations with a range of equity holdings in England, France, Germany, and Japan and wholly owned sales subsidiaries and branches in Mexico, South Africa, and Australia (Wilkins, 1970: 95). Westinghouse created a fully owned subsidiary in England in 1889 which was responsible for sales, installation, and by the turn of the century, manufacturing for the world outside the Western hemisphere (Wilkins, 1970: 59) and by 1914 had manufacturing plants in Germany, France, Russia, and Canada (Wilkins, 1970: 96). While to some degree the electrical companies’ FDIs were in response to nationalistic purchasing policies or tariffs in foreign countries the fact that it was FDI rather than the emergence of a competing indigenous firm that supplied these markets is a testament to the complexity of the technology. Patents were used aggressively to threaten new entrants and consolidate relations among the leading firms. Over time, Edison reportedly spent more money obtaining, litigating and preventing infringement of patents than he received income from them (Noble, 1979: 98). In 1885, he began several patent infringement suits against incandescent lamp manufacturers. A desire to avoid patent infringement problems and to exchange patents was a key factor in the 1892 merger between the Edison General Electric Company and Thomson-Houston. In 1894 and 1895 Westinghouse and GE, after pursuing aggressive patent action against each other, realized they each had an unassailable dominance in their areas of specialization. In 1896 they, therefore, concluded a 15-year patent-pooling agreement, strengthening their own position and weakening that of competitors. The use of patent infringement suits was an important factor in the ability of the

The electrical industry 73 big companies to buy out small ones. In the late 1890s in the lamp industry GE organized six independents into a price-fixing and market-sharing cartel, the Incandescent Lamp Manufacturers, but this was superseded by acquiring direct ownership of rivals, which resulted in 18 subsidiaries by 1911, leaving only 7 percent of the US output of lamps to independent firms (Stocking and Watkins, 1946: 306). This aggressive use of patents would continue until World War II and even by 1927 GE had reduced the US lamp output of companies independent of GE to about 3 percent of the market (Reich, 1992). By the end of the nineteenth century just two firms GE and Westinghouse, had virtually complete control of the US electrical industry (Byatt, 1979: 162–3; Passer, 1953: 329–34). At the international level the world market was organized through the use of patents and cross-licensing agreements involving the two firms that dominated the Germany industry. In 1883 Siemens wrote, “I believe it would make good policy to make peace with Edison in the whole world. It will make us ruler of the electrical industry” (quoted by Newfarmer, 1980: 61). An 1882 licensing agreement tied Siemens and Halske, the leading German firm, to DEG, Edison’s agent. GE and AEG, DEG’s independent successor, signed a market sharing agreement in 1903, as did Siemens-Schuckert, AEG, and two minor firms. This was followed by one between Westinghouse and Siemens in 1905. There is evidence as well of more informal market sharing arrangements between Siemens and GE (Wilkins, 1970: 94; Chandler, 1990: 217, 467; Byatt, 1979: 172). A 1903 lamp cartel organized by AEG and Siemens and Halske, controlled prices in Germany, AustriaHungary, Italy, Holland, and Switzerland and lasted until 1914 (Stocking and Watkins, 1946: 316). The technologically-shaped structure of the industry had a strong impact on the ability to compete in the electrical industry of countries other than the US and Germany. In England the remarkably slow start of the electrical industry has been blamed in part on the prior development of gas lighting systems in British cities. These gas systems, because their distribution systems were already built, had a greater cost advantage over electricity than in other countries where gas systems were less developed. Additionally, the gas interests were strong and managed to work with local governments to produce a legal environment that was not favorable to the establishment of electrical systems. The fact that electrical technology needed to be introduced not as a component at a time but rather as a system, contributed to its difficulties in Britain. Once delayed, the British firms found it difficult to develop the technologies possessed by the four leading firms or to reach the optimal scale for creating new markets by establishing special relationships with customers and foreign producers and sales engineers (Sakamoto, 1980). The share of the British market for generators increased from 2 percent in the early 1890s to about 25 percent, ten years later (Byatt, 1968: 250). By World War I the British market was dominated by German and American firms and British exports of electrical machinery were primarily of less sophisticated machinery, often produced by foreign firms in Britain, which were destined for underdeveloped countries in the British empire and elsewhere (Byatt, 1968).

74 The electrical industry In continental Europe and Japan it was also difficult for countries other than Germany to develop their own electrical industries. In France, foreign investment characterized the electrical industry before World War I in large part because there were fewer of the big cities needed to foster an indigenous electrical industry than elsewhere although the employment of state engineers of French nationality by foreign firms operating in France offset the foreign character of the industry to some degree (Lanthier, 1989). In Italy by 1913 between 25 and 30 percent of the capital of electrical companies was foreign-owned but at a regional level almost all the leading companies had a majority or an important minority of foreign ownership (Hertner, 1993: 159). This foreign dominance, as elsewhere, was due to the control of electrical technology by the leading firms, the orientation of customers to the existing leading firms’ technical standards, and to the financing strategies of leading firms which allowed them to assume the initial risk for customers in adopting a comprehensive electrical system (Hertner, 1993). In Japan there was a brief period following Edison’s success in New York in which local firms attempted to copy electrical technology from overseas but these products proved unreliable, especially as new developments such as a.c. systems became increasingly complex. Japan’s joining of the Paris Convention with its requirement of protecting patent rights of foreigners further reduced the capacity of Japanese firms to copy technologies. By World War I the Japanese market would be dominated by imports, by foreign-licensed goods produced by Japanese firms and by majority-owned subsidiaries of Western Electric and GE (Uchida, 1980). In 1912 of the estimated 59 generators over 500 kilowatts in Japan all but two were imported – 53 from the top four firms discussed above (Uchida, 1980: 158). The emerging international industry was held together not just by the structures discussed above but by multilateral fora and institutions devoted to coordinating and exchanging information on the scientific and technical matters relevant to the industry. For example, an 1881 conference established the ohm as an agreed electrical unit. A follow-up Conférence internationale pour la détermination des unités électriques organized by the French government in 1882 brought together delegations from a remarkably broad range of countries.3 International exhibitions involved working electrical displays that demonstrated the competitive advantages of particular inventions, provided opportunities for inventors to learn from each other, and fostered public awareness of the accomplishments of the new industry. By the beginning of the twentieth century, international standard setting began to become more formalized. International organizations were formed involving a set of national commissions, which in turn involved both government and firm representatives. The most important of these, and the first to bring a wide range of areas of the industry under one roof, was the International Electrotechnical Commission (IEC), formed in 1904 by a US committee headed, significantly, by electrical magnate Elihu Thomson (International Electrical Congress, 1905: 1–13). The organizers of the meeting made an application “to the State department at Washington, through the Secretary of Commerce and Labor, requesting that foreign governments be invited to appoint official representatives to the

The electrical industry 75 Chamber of Delegates”. Twenty-nine such representatives responded to the invitation (International Electrical Congress, 1905: 16) along with various associations, including the societies of electricians and the Association of Edison Illuminating Companies (International Electrical Congress, 1905: 17). In his opening comments, while noting the ethical value of scientific inquiry, Thomson also highlighted the relevance of the organization’s scientific interests to firms: It is a sign of the times that the value of research is becoming so well recognized as an aid to engineering that our large industrial organizations willingly support research work. Naturally, preference is given to such new work as promises immediate benefit to the industry. The principle is gradually coming to be recognized, however, that constant additions to knowledge of nature are in themselves valuable and likely at any time to open up new channels of industry. The little streams lead to the rivers and few rivers are without commercial possibilities. (International Electrical Congress, 1905: 32) Firms continued to be heavily involved in the IEC, with R. E. Crompton, a leading electrical manufacturer from Britain taking on the responsibility for setting up the new organization and Alexander Siemens chairing its first conference in 1906. This would continue: in 1955 for instance, representatives of leading firms were chairs of key IEC Technical Committees (IEC, 1955). The IEC would come to play an important role in the emergence of international standards for the industry (IEC, 1955: 6). A dramatic professionalization evident in the development of academic programs of electrical engineering (Hughes, 1983: 141–3) helped with standardization as well. For instance, the first teacher in the first systematic program of electrical engineering in Japan was an Englishman who had trained under noted English scientist Lord Kelvin (Imazu, 1980: 135). Professional and standards organizations such as these integrated the world industry both technically and socially: the technological complexity of the industry contributed to the prominent role of engineers in structuring it. These engineers tended to have similar perspectives regarding the central place of technological development relative to economic dynamics such as competitive pricing. In planning and implementing the acquisition and running of equipment, engineers would often play a crucial coordinating role between equipment manufacturers and their customers (Hirsch, 1989; Sultan, 1974: 15). In summary, then, the international electrical industry displayed a number of distinctive technological characteristics that shaped its structure as it emerged. Complex and continually developing technologies involving integrated systems extending over cities and their surrounding regions made the development of electrical products especially difficult. Successful firms needed to blend sustained and large-scale research, a capacity to manufacture a range of components, and the skilful use of financial, political, and marketing networks in order to launch an electrical system. In the late nineteenth century only a few firms were able to

76 The electrical industry develop this capacity. Those four that were most successful were able to build on their initial accomplishments to develop a remarkable dominance of world markets, cemented by their technology-based relations with other firms, including the aggressive use of patents to protect their lead and to consolidate their own relations. In the next section, we shall see that this profile of the industry continued into its maturity.

Maturity The inter-war period The long history of collaboration and patent sharing assisted leading electrical firms in developing elaborate international cartels in the inter-war period. In part, the need to organize cartels reflected the maturation of the industry as knowledge about electrical engineering was disseminated and potential new entrants in foreign countries challenged the dominance of existing firms. The bilateral arrangements, including patent-sharing agreements and equity ownership in foreign affiliates, were supplemented in the inter-war period with new arrangements that were more multilateral and formalized. While the electrical cartels allowed dominant firms to maintain control of their own domestic market, they did this based on the same patent-based techniques used in the pre-World War I period. Unlike the steel cartels, which relied heavily on state assistance in tariffs and in encouraging joint action among national producers, the cohesion of the electrical cartels rested on the leading firms’ control of the industry’s technology. Thus, the inter-war period displays strong continuities with the earlier period: a few leading firms were able to structure world markets by maintaining their control of complex technologies. One of the most important inter-war cartels was the Phoebus cartel for electric lamps created in 1924. The cartel rested on previous tight control over lamp markets exercised by the leading firms. In the US, GE continued to aggressively use patents to control markets: with Westinghouse, with whom it had agreements, it continued to account for 80 percent of US lamp production throughout the interwar period (Stocking and Watkins, 1946: 315). Stocking and Watkins comment: General Electric has controlled the American electric lamp industry through its own and acquired patents, through aggressive leadership directed toward price stabilization and output regulation, through absorbing trade rivals, through patent pooling, and through restrictive cross-licensing agreements. This control kept other American producers from disturbing world markets, in which General Electric had a large stake and which it wanted to stabilize. (Stocking and Watkins, 1946: 315) In Europe a series of national and international cartels were negotiated in the lamp industry as well. The Phoebus cartel built on, but went beyond these previous efforts. Its leading members included Osram (a joint venture formed by Siemens, AEG and a third

The electrical industry 77 German firm Auer), Philips (which with its integrated lamp production capacity had posed a threat to GE’s control of the US market), International General Electric (which GE had established in 1919 to manage its international business), Associated Electrical Industries (the main British firm), Compagnie des Lampes (created by the producers of lamps in France which controlled virtually all French lamp production), Tungsram (the leading Hungarian producer), and GE’s subsidiaries in Brazil, China, and Mexico. The cartel was cemented by the compulsory exchange of patents and technical information and it effectively divided the world into areas of exclusive control for its members. Phoebus activities designed to control markets were varied, including advising national assemblies, consisting of quota participants for that market, on pricing, and restricting or reducing lamp life in order to increase sales, and running an arbitral panel (Hexner, 1946: 359). Although the US operations of GE were not formally part of the cartel GE used its control of the US market to ensure the smooth operation of the cartel, prohibiting, for instance, its US licensees from exporting to territories reserved for foreign firms. GE also acquired stock in its counterparts overseas: by 1935 it owned 29 percent of Osram, 17 percent of Philips, 44 percent of Compagnie des Lampes, 10 percent of Tungsram, 46 percent of Associated Electrical Industries, and 40 percent of Toyko Electric Co. (Stocking and Watkins, 1946: 341). International GE, Osram, and Philips collaborated in various joint production arrangements in third markets (Stocking and Watkins, 1946: 341). Similar agreements existed in other areas of the electrical industry. International cartels for high and low tension electric cables involving 15 and 7 continental European countries, respectively, were in effect from 1928 to 1939, each involving supplementary special agreements with British producers (Hexner, 1946: 356; Mirow and Maurer, 1982: 46). Beginning in 1919, the negotiation of bilateral arrangements involving International GE and other companies sought to control international markets (Hexner, 1946: 360–1) and in 1931 a formal cartel similar to Phoebus involving the world’s nine leading manufacturers of electrical equipment was formed: the International Notification and Compensation Agreement. The agreement divided up the world into exclusive territories and established arrangements to avoid competition in bids on contracts in which firms setting higher prices than the firm selected to win the bid would be compensated by the winning firm. This arrangement had become more elaborate by 1936, with membership expanded to 30, with separate accords for specific types of equipment, and with an International Electrical Association (IEA) established in Zurich to administer the cartel (Mirow and Maurer, 1982: 43). The importance of the industry’s technological profile for its governance in the inter-war period is evident in the centrality of patents for the cartels and marketsharing agreements. At the same time, as in the earlier period, the scale and complexity of the technology also continued to provide the leading firms a strong foundation upon which to maintain their dominance. In the inter-war period the foundations of domestic regulatory regimes were established for the electricity generation, transmission, and distribution industry. Until the market-based reforms of the 1990s these regimes would universally be based on the notion that

78 The electrical industry electricity was a natural monopoly and should be regulated as such. Whether the electrical utilities themselves were publicly or privately owned these arrangements contributed significantly to the stability of the industry as a whole. Monopoly regulation allowed a predictable stream of revenues that could be used to finance the large and risky investments involved in the construction of a hydroelectric dam or other generation project. Thus, the industry’s connection with subnational governments, which had been present from its inception as a result of its technological profile, continued to be an important stabilizing factor as it matured. The utility industry also managed to bring about dramatic declines in prices through advances in load management, in the efficiency with which energy was obtained from fuels, and in the efficiency of turbines and other equipment. For instance, from 1892 to 1932 the price per kilowatt-hour of electricity in the US dropped by 86 percent in real terms (Hirsh, 1989: 46). This then facilitated the convergence of interests involved in monopolistic utility regulation: the industry could maintain relatively high and stable revenues without objection from consumers and regulators. The inter-war period also saw the creation of new international organizations that would last through the rest of the century. The International Conference on Large High Voltage Systems founded in 1921 in Paris would subsequently grow under the auspices of the IEC to 6,600 members in 79 countries around the world, including 44 national committees. The Union internationale des producteurs et distributeurs d’énergie électrique was formed in 1924 by Belgian, French, and Italian professional associations. Participation grew quickly, with 189 delegates from thirteen countries, mostly from Italy and other continental European countries, attending its first Congress, held in Rome in 1926. By the end of the century it would have members from 48 countries (not including the US, and with a particularly heavy focus on Europe). The World Power Conference was founded in 1924 at the initiative of the Council of British and Allied Manufacturers’ Association, with an unusually wide strong support, with delegates from 39 countries, including Britain, the US, France, Italy, Japan, and Germany. In 1968 “Energy” would replace “Power” in the organization’s name and it would become increasingly devoted to broader issues cutting across different types of energies, such as global warming and the development of energy systems in developing countries. It would, by the end of the century, have grown to include member committees from 98 countries. Like the IEC these organizations would bring together representatives of leading firms, scientists, and government officials to share information about new scientific, technical, and commercial developments in the electrical industry. In sum, the inter-war period saw an organization of the international electrical industry which was based, as in the previous period, in strong collaborative relations among a few leading firms in which the control of technologies were essential for cementing relations among the leading firms and for countering potential challenges from new entrants. These were clearly arrangements that were independently developed by the firms themselves with state assistance through tariffs playing a secondary role if any. State–firm relations at the subnational

The electrical industry 79 level were more important for the stabilization of the industry and these too were heavily shaped by the particular character of the industry’s technology. The post-World War II period In the post-World War II period, despite the dissolution of some of the collaborative arrangements of the inter-war period, there were strong continuities in the character of the industry as the leading firms built on their mastery of the industry’s technological complexity to maintain their lead, to organize markets, and to manage challenges from new entrants. Unlike the cotton and steel industries there was relatively little involvement of states in managing conflicts over market shares or in dealing with problems of overcapacity for the electrical equipment or electrical products for consumers. Until the 1990s the stabilizing effect for the industry as a whole of the regulated monopoly status of the electric utilities increased in importance as electricity systems matured in the industrialized countries and were extended with the assistance of the state elsewhere. While it is too early to judge the enduring impact of the expansion of market-like dynamics in the electricity-generation industry in the 1990s the initial indications are that it will not alter the ongoing ability of the leading firms to manage the industry with minimal state involvement – indeed there is a technologically-driven dimension to these reforms that is likely to favor the leading firms that have always dominated the international industry. As in other industries which had been cartelized in the inter-war period, the electrical industry was forced to abandon some of its more formalized collaborative arrangements after World War II in response to stepped up anti-trust policies led by the US in occupied Germany and elsewhere. The lamp cartel was never revived after the war and leading firms and other associations, such as the IEA, were careful not to appear to engage in explicit market-sharing or price-fixing practices which would run afoul of anti-trust laws. Despite attempts to conceal collaborative arrangements there is much evidence that they persisted in a more surreptitious but highly organized fashion after World War II. Perhaps the most dramatic of such evidence was the 1960 prosecution by the US government of 29 US electrical manufacturers, including GE and Westinghouse, and 45 company executives, for such violations of anti-trust laws as price-fixing, bid-rigging, and market-sharing, carried out through a series of clandestine meetings. The indictments covered activities involving $1.75 billion in annual sales (about one-third of the sales of equipment for the generation, transmission, and distribution of power and 10 percent of all sales of electrical manufactures) (Walton and Cleveland, 1964: 12, 33). In December 1960 the government and companies agreed to pleas of nolo contendere4 to thirteen indictments and guilty to seven, including anti-competitive activities related to power switch gear, power circuit breakers, power transformers, industrial control equipment, turbine-generator units, power switching equipment, and condensers and other products which resulted in fines of $1,924,500 and seven jail terms for electrical executives (Backman, 1962: 137–8). Subsequent and related damages from

80 The electrical industry civil anti-trust suits cost the industry an estimated $600–$700 million (Sultan, 1974: 123). It has been suggested that a sophisticated cartel for electrical equipment continued to operate at the international level through the IEA. US and Japanese members were forced by their respective anti-trust laws to resign from the IEA following World War II but by the mid-1950s the IEA had 17 British and 23 other European member firms organized into sixteen sections (Newfarmer, 1980: 85). Leaked documents and confidential interviews by Newfarmer turned up concrete evidence of nine agreements covering a wide range of heavy electrical equipment. These agreements covered such collusive techniques as agreements to reserve particular territories for particular firms, pre-notification of bids, and – for some of the agreements – price, quota, and pooling provisions (commitments to collude in bidding on contracts) (Newfarmer, 1980: 89). One study estimated that the agreement on transformers raised prices an estimated 15–20 percent from 1965 to 1967 (Mirow and Maurer, 1982: 53). The International Cable Development Corporation (ICDC) also resumed activity after World War II. A London Times report in 1975 revealed that 20 countries had engaged in the allocation of market shares, the fixing of minimum prices, agreements on investment plans, and established procedures for fighting potential threats from new entrants (Newfarmer, 1980: 99–100). Statistics on trade patterns in the products covered by the IEA and the ICDC suggest that market-sharing arrangements are in place since imports to the home territories of member companies are less than one would expect in competitive markets. Trade analyses also suggest that the world market for lamps continued after World War II to be tacitly or deliberately shared out by the leading firms. For instance, in Britain the share of the market held by the top four firms increased from 53 percent in 1950 to 89 percent in 1966 and, except for Dutch firm Philips’ intra-firm transfers to its British subsidiary, imports accounted for less than 4 percent of domestic supply even though tariffs were not high (Newfarmer, 1980: 107). Similar patterns, as well as the major producers’ lack of direct foreign investment in each others’ domestic territories, exist in other countries. Also prices exhibit rigidities and differentials across national markets that one would not expect in competitive markets. The Canadian government convicted Canadian GE, Westinghouse Canada and GTE-Sylvania in 1976 of price-fixing in the Canadian lamp market (Newfarmer, 1980: 112). Because certain types of collusive activity by firms is illegal it is likely that there is more of it than the instances that have come to light, such as the ones discussed above, would indicate. In addition to illegal activities, such as explicit price fixing, bid rigging or market sharing, there are many legal opportunities for leading firms to stabilize markets, avoid problems of overcapacity, and counter threats from new entrants. The very large scale and complexity of electricity generation projects for most of the post-World War II period often required sustained interaction between purchasers and sellers to determine detailed technical specifications and customized pricing. Producers continued to be tied together by licensing arrangements. For instance, even in the 1990s GE supplied nuclear energy

The electrical industry 81 technology to Hitachi and Toshiba that in turn supplied equipment to the largest and third largest Japanese utilities. Westinghouse enjoyed a similar alliance with Mitsubishi that supplied the second and fourth largest Japanese utilities (“A Short History of Westinghouse”, 1997).5 On particularly large projects sellers would often be organized into consortia. Thus, at the heart of the electrical industry was a technologically-based set of relationships that facilitated planning and coordination and was very different from more atomized competitive international markets like cotton and textiles or even from a nationally-based, large-scale, but technologically simple industry, producing a commodity-like product, such as steel. The stability of the industry is evident in the enduring dominance of a top few firms. At the end of the twentieth century, as at its beginning, GE and Siemens remained as the most prominent equipment manufacturers. In 1996, for instance, eleven of GE’s twelve divisions were the market leader or runner-up in the markets in which they were competing (“General Electric”, 1997). In 2000, GE was finding that its size and technological dominance was allowing it to use challenges that were problematic for other firms to its own advantage. For instance, in sharp contrast to steel firms, for which the East Asian crisis of 1997 caused massive problems, GE was expanding rapidly and making new acquisitions in East Asia, using its financial strength in GE Capital both to pick up distressed assets and to lend money to potential customers for the purchase of GE products and using its strength in electrical technology to sell specialized plastics to electronics plants in Asia (“GE Digs into Asia”, 2000). Similarly, GE used its size and expertise to move quickly into internet applications (“GE’s E-Biz Turnaround Proves that Big is Back”, 2000). GE’s $45 billion acquisition of Honeywell International in 2000 was the largest acquisition it had made and will further increase its market power in avionics and jet engines (“Jack’s Risky Last Act”, 2000). GE has also benefited from mistakes made by AEG and Westinghouse in their growth strategies. AEG went bankrupt in 1982 from excessive debt-financed expansion and was taken over by Daimler-Benz (Schröter, 1993). Westinghouse made serious mistakes in its strategy for its nuclear and gas-fired generating technologies and in 1996 put its two power engineering businesses up for sale, making a bid to become an entertainment company by purchasing CBS (“Short History”, 1997). Yet these firms’ dominant place was taken over by Swedish–Swiss firm Asea Brown Boveri (ABB) which, by merging its power equipment unit that of with Anglo-French firm Alstom Power in 1999, became the world’s biggest supplier of power equipment, moving GE and Siemens to second and third place (“Business: Power Play”, 1999). However, the firm was hardly a new player: before World War I, Brown Boveri had been the largest Swiss electrical company and at that time had formed a close alliance with GE, which was a major shareholder (Shröter, 1993). In the important and rapidly expanding market for gas-fired turbines the only products on the market in 1998 above a relatively small 13megawatt capacity (heavy turbines generally operate in the 100–250 megawatt range) were GE, Westinghouse, Siemens, and ABB brands (“Gas Turbine Models Proliferate”, 1998). In electric lighting in the late 1990s the three dominant firms

82 The electrical industry were Osram Sylvania, owned by Siemens, Philips, and GE (“Positive Culture Charge”, 1998). The regulated monopoly character of the electric utility industry continued until the 1980s to be an important stabilizing influence on the industry. In this period public ownership of electricity systems increased although there were wide variations across countries. Overall 84 percent of world generating capacity in the mid-1960s was produced by utilities (i.e. primarily for public consumption) with the remainder produced for private consumption. In the US three-quarters of all utilities were at that time privately owned whereas in Canada 88 percent was publicly owned (Guyol, 1969: 78). Regulation stabilized revenues to utilities which then provided a reliable market for electrical equipment manufacturers (Reindl, 1997). Utility managers were freer than they would have been in a competitive market to experiment with and invest in new technologies. The tendency of utility regulators to only permit utilities to earn a return on capital expenditures (not on fuel and labor) promoted a focus on large-scale, capital-intensive technologies (Hirsch, 1989: 80–1).6 The relatively small proportion of electricity that was exported across borders (15.2 terawatts in 1958 to 38.2 terawatts in 1964 vs world production of 1,914 terawatts in 1958 and 3,133 terawatts in 1964 (Guyol, 1969: 109, 119)) reduced competitive pressures in the utility industry. By the 1990s, there were significant changes in the electrical power industry, including experimentation with greater competition in the generation of electricity, the development of smaller scale generators fuelled by natural gas, and an increase in foreign investment by utility companies. These reversed the industry’s century-long trend towards very large-scale regulated monopolies restricted to a single territory. These changes were fuelled by four developments. First, the limits to further growth and productivity increases in conventional electrical utilities were becoming apparent. These limits were technical (ceilings on such productivity improvements as increased efficiency of fuel use were being reached), environmental ( problems such as acid rain and global warming were challenging further growth of coal-fired utilities), political (opposition was growing to largescale electricity generation projects such as nuclear plants or hydro-electric dams like the massive Three Gorges project in China), and due to the completion of the extension of electricity to almost all citizens in the developed countries. Second, there was an ideological enthusiasm for competitive markets, especially in Britain and Chile, which were at the forefront of the restructuring of electricity systems. Third, the development of a new technology that combined turbines running on increasingly available natural gas with steam turbines running off the heat generated by the gas turbines. These new combined turbines could operate with greater fuel efficiency than coal, with minimal negative environmental consequences, and at much smaller scale (Patterson, 1999: 74–5). This new smallerscale generation also meshed with interest in alternative small-scale energy sources such as wind and solar generators. Fourth, many large-scale electricity projects in developing countries were foundering in the wake of the 1980s debt crisis and inviting the participation of foreign investors seemed to offer a solution. Indeed a growing number of electricity companies began to expand their

The electrical industry 83 international operations by purchasing privatized utilities in developing countries (Patterson, 1999: 84, 167). US utilities were authorized to own equity interests in foreign utilities by the 1992 Energy Policy Act and financial assistance for international expansion was made available from a US Energy Association program supported by the US Agency for International Development. By the end of the 1990s many foreign investments of US utilities were being measured in billions of dollars (“Energy Partnerships”, 1997; “International Investing by US Utilities”, 1996). Despite the move towards greater competition and smaller scale in the generation of electricity these changes are not having a dramatic effect on the capacity of the leading firms in the industry as a whole to maintain control of their markets for several reasons. First, careful technical coordination among the components of an electrical system continues to be necessary, providing opportunities for linkages between firms. Second, even systems undergoing privatization and other market-oriented reforms continue to be regulated. Third, despite increases in foreign ownership of utilities, trade in electricity itself has only increased relatively slowly. Fourth, many of the companies engaged in FDI in utilities are themselves utilities with well-established relationships with equipment producers from their home jurisdiction. Also, 1997 acquisitions by GE and Siemens expanded their capacity to sell transmission and distribution automation and control systems (“Intrigue and Acquisitions”, 1997). Combined with the increased importance for privatized generation companies of financing (“Flogging Turbines”, 1995/6), in which the largest equipment producers have a competitive advantage, the changes in electricity systems are likely to be beneficial for the largest firms. Indeed the liberalization and internationalization of the electrical utility business has allowed equipment suppliers, such as GE or Siemens, to offset slowdowns in sales in mature developed markets with new sales in developing markets. In the mid-1990s the World Bank was estimating that developing Asian countries would require about $400 billion worth of new power investment over ten years (“Asia Delivers an Electric Shock”, 1995) and markets in post-communist countries, while risky, seemed promising. Despite the electrical industry’s foreign investors’ numerous unexpected difficulties in developing countries, including political conflict and the financial crises of 1997 and 1998, there is still strong potential over the longer run for growth and the changes in the structure of the utility industry improves the chances of the leading equipment manufacturers to benefit from that growth. In addition to their established relationships with the globalizing utilities, manufacturers will benefit from the fact that privatized utilities have the potential to enjoy higher revenues than public utilities which have had political constraints on the prices they can charge electricity customers. As one industry analyst put it, “under the traditional system the state regulated consumer price, and all other prices were negotiated, creating a political minefield in which politicians were always blamed for rising prices. The deregulated power pool system takes politics out of pricing” (“Renegotiating Power”, 1999). Moreover, despite a period of slow growth, forecasts indicated that a large-scale replacement of aging capacity in developed countries would be needed in the

84 The electrical industry medium term and the fortunes of the leading equipment manufacturers will be enhanced by the deregulatory tendency to split off unprofitable old plants, the removal of which may be subsidized by the state, from the profitable construction of new capacity. The demand for this new capacity is likely to be very large, over time. For instance, in 1998 analysts estimated that 45 percent of US capacity was over 25 years old and 90 percent of that capacity would need to be replaced by 2015 (“Merchant Power”, 1999). The overall health of the equipment market, despite drops in turbine prices of 20–30 percent a year in the middle of the decade (“Asia Delivers an Electric Shock”, 1995; “Flogging Turbines”, 1995/6), was evident by the end of the decade in GE’s and Siemen’s backlog of as much as two years on gas turbine orders (“Merchant Power”, 1999: 4).

Conclusion There are numerous organizational features of the international electrical industry that reflect its distinctive technological profile. Most importantly, leading firms have been able to maintain their dominance, decade after decade. This dominance, based on control of technology, has been extended internationally through cartels, FDI, licensing and patenting practices, and the more informal coordination that comes with the designing and production of large, complex, precise, and unique products such as generating systems. The industry has also been characterized by the importance of international institutions, such as the IEC, in which scientists and technical experts establish standards for the industry – itself a source of order and collaboration. The stabilizing effect of the industry’s relationship to local regulated utilities is also a product of electricity generation’s technological profile as a “natural monopoly”. Like cotton and steel, the 1990s brought changes to the electrical industry in the form of competition among utilities and the growth of smaller-scale natural gas turbines. These changes are not likely to have a significant effect on the organization of the electrical industry, which will continue to be dominated by a few firms, such as GE and Siemens, as it has from the beginning. The complexity of the technology has meant that its diffusion has been much slower and new competitors have not had the impact that they have in cotton and steel. Enduring distinctive features of technological complexity in this industry are more prominent, and have managed to forestall, the cyclical process of maturation that we saw in cotton and steel.

5

The chemical industry Complex technologies and private governance

Since the late nineteenth century the chemical industry has played a key, if often underestimated, role in national strategies of industrialization. Initially this was evident in its origin in dyestuffs and other products related to textiles, the motor of the first industrial revolution. Its importance for the manufacture of explosives and poison gas was recognized during World War I. Its military value was reinforced in World War II by its ability to create substitutes for scarce strategic materials such as rubber. By the mid-twentieth century innovations in plastics, synthetics, fertilizers, pesticides and paints were contributing to a variety of rapidly growing sectors from agriculture to automobiles. Chemicals’ more straightforward quantitative contribution to the economy is hardly negligible. For instance, in the inter-war years IG Farben and Vereinigte Stahlwerke, the chemical and steel conglomerates, were Germany’s largest two firms (Feldenkirchen, 1987: 418). ICI, a British chemical firm, was the largest manufacturer in Britain in 1926 (Grant et al., 1988: 25). A 1970 study of the US industry commented that “the rise in output of chemicals and allied products has far outstripped that for all manufacturing industries regardless of which year is used as the basis for measurement” (Backman, 1970: 37). The chemical industry continues to be the largest US export industry accounting for more than 10 percent of US exports (Standard and Poors, 2000a: 5). A chair of ICI, Britain’s largest chemical company, estimated that chemicals contributed to between 3 and 4 percent of world income (Backman, 1970: 21). World turnover in 1980 was $550 billion in the non-communist world, compared to $200 billion for steel and $80 million for telecommunications (Pettigrew cited in Grant et al., 1988: 4). In this chapter we shall see that the organization of the international chemical industry has been shaped by the high level of complexity of its technology. There are three related aspects of this complexity: the role of science and R&D in growth; the overlapping and interdependence of chemical subsectors and related industries; and the role of patents in inter-firm relations. Science, scientists, and R&D have always had a prominent role in the emergence of chemicals as a leading sector. It is by now conventional wisdom that Germany managed to dominate this sector, displacing Britain1 despite its lead in industrialization more generally, because of Germany’s sustained encouragement of scientific research through government support and by the innovation of private industrial

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laboratories. Germany employed ten times as many chemists in industry as Britain (Kaku, 1980). This commitment to research has persisted (Mussati and Soru, 1991: 19). For instance, in 1960 the ratio of R&D to sales of the US chemical industry was almost ten times that of the US steel industry (Miller, 1971: 139). Similarly, presently in Canada there are 40 knowledge workers for every 100 employees in the chemical industry as compared to 14 in the steel industry (Beck, 1996: 254, 310). Senior managers in chemical firms tend to be drawn heavily from scientists rather than professional managers. Indeed most CEOs of the leading German chemical firms hold chairs and teach courses at universities (Grant et al., 1988). The chemical industry is also noteworthy for the complexity of the processes and subsectors which it involves. For instance, from the beginning, many chemical products have been by-products of other chemical processes, both in terms of their initial discovery, and in terms of their production from the waste produced by older products. Chemicals are major inputs into other products, including chemical products. About half of US chemical production is used as inputs to US manufacturing industries (Standard and Poors, 2000a: 5). Indeed chemicals are the key inputs into products that would prefer, and might reasonably deserve not to be included in the chemical industry, like perfumes and soaps. Subsectors like paints, agrochemicals, synthetic fibers, and pharmaceuticals are large and integrated enough to be considered as distinct industries and yet are considered part of the chemical industry by virtue of their reliance on chemistry and chemical products.2 Complexity and interdependence of chemical products is concretely evident in the tendency of petrochemical firms to locate in “complexes” linked to each other by a tangle of pipelines (Grant, 1991: 48) as in Rotterdam, Texas and elsewhere (Molle and Wever, 1984; Chapman, 1991: Chapter 6). Patents have always played a key role in inter-firm relations within the industry as well. Liebenau (1992: 65) notes of the early stages of the industry that Germany held an overwhelming proportion of American chemical patents and there was “evidence of a concerted effort to use patents as a tool of business … patents were taken out to build walls around whole research areas.” Hughes recounts the difficulty that DuPont, the leading US chemical firm, had in overcoming this control. After founding a lab and investing, by 1921, as much as $20 million, “the company had to swallow its pride and turn to German dye chemists for help” (Hughes, 1989: 176). During the inter-war period, led by German firms, patents and cross-licensing were used as a key way of consolidating the wave of international cartelization that characterized the period. This was especially important in relationship to US firms for whom the exchange of licenses was a way to get around US anti-trust laws (Smith, 1992). An example of the way in which the leading firms in the cartel controlled markets at the end of the interwar period is the case of nylon. Nylon was discovered by the leading US firm, DuPont, in 1937. The following year DuPont licensed ICI, the leading British firm, to produce nylon for a large area of the world in exchange for not interfering in DuPont’s markets (Mirow and Maurer, 1982: 131). Overall, then, complexity contributes to the ability of the leading firms in the chemical industry to govern themselves rather than relying on government

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assistance. Complexity allowed these firms to maintain their economic lead, by diversifying into new science-based products which other firms found hard to imitate; by using their interdependence as a basis for collaboration; and by using patents to consolidate alliances and counter new potential competitors. In this respect the chemical industry resembles the electrical industry both in its technological profile and in its capacity for self-governance. There are, however, some differences between the electrical and chemical industries that have an impact on their organization and governance. The enormous variety of chemical products has provided room for new entrants to master the production of one or more of the more mature of these products. Also, the centrality of chemistry for strategic materials in wartime has led states to intervene at the time of the World Wars to encourage the growth of the industry more than has been the case for electrical machinery. Finally, the importance of oil as a feedstock for petrochemicals has connected the industry to the globally oriented corporations and nationalistic oil producing governments that have been key actors in the oil industry. Thus, competing centers of chemical production have emerged in developing countries at a faster pace than for electrical machinery. We can distinguish two broad periods in the history of the chemical industry. In the first, which lasted through World War II, the industry was dominated by Germany. The two key international issues were (a) the wars and their aftermath; and (b) overcapacity in the industry which was primarily dealt with by cartels. In the second post-World War II period Germany lost its dominance and cartels were prohibited. Initially the industry was growing rapidly and problems were few. By the 1970s, however, two problems had emerged: (a) problems of restructuring and overcapacity stimulated by the oil shock (the impact of price increases in the industry’s major input combined with the impact of decelerating world growth on sales was devastating); and (b) a growing challenge to the industry on environmental issues. I will review each of these broad periods in turn, describing the relative importance of private and inter-state arrangements.

Period 1: through World War II During the first half of the nineteenth century the British chemical industry became the largest in the world. Initially the industry was able to grow in a relatively decentralized fashion as chemists in France, Britain, and elsewhere experimented with the wide variety of chemical processes that they were beginning to understand. The industry’s acids and alkalis were in demand for the bleaching of cotton textiles and the making of soaps and glass. The Leblanc process for producing alkali was especially important and the technology became widely known after Leblanc was pressured to surrender his patents during the French revolution and the Comité du Salut Public ordered the details published (Haber, 1958: 7). A variety of factors transformed chemical manufacturing into a rapidly growing and relatively centralized industry dominated by Britain. These factors included the growth of the textile and other industries which were using chemical products; the reduction, in response to industry pressure, of taxes on its inputs, especially

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on salt; the discovery of new sources of the raw materials needed by the industry; more efficient and more capital intensive equipment; and a capacity to develop commercial products from the by-products of existing processes. By the mid century Charles Tennant’s factory near Glasgow, employing more than thousand workers and producing more than 10,000 tons a year of alkalis was the largest in the world (Haber, 1958: 15). In the second half of the nineteenth century the German industry surpassed Britain’s. Most important was Germany’s intense and highly organized research capacity in its state-supported universities and in German chemical firms. This involved a high degree of concentration in German markets that then was used to dominate world markets. Chandler (1990: 475) notes that the leading German firms’ “new marketing organizations with their worldwide network of branches and agents were among the largest in the world.” Before World War I German firms initiated cartels for caffeine, iodine, camphor, salicin, strychnine, and quinine and incorporated firms from other countries as they extended this form of organization abroad. Firms began to protect their leads with patents. Kaku (1980) for instance notes the leading role of the German Chemical Society and Association for the Protection of the Interests of the German Chemical Industry in bringing about the important patent law of 1877: “the patent law did not create the coal-tar dyestuffs industry; rather to some extent the reverse.” The eclipsing of the Leblanc process, upon which the British alkali industry had been based, by the Solvay process, carefully controlled through patents by the French Solvay firm, further contributed to the erosion of the British lead. The new technology was complex enough that it was not possible for competitors, such as Japan, to imitate it and bypass the patents (Uchida, 1980). The role of states in the international chemical industry increased dramatically with World War I. The biggest impact was the expropriation and sale, by Germany’s adversaries, of German patents, subsidiaries, chemical stocks, and industrial capacity in the territory ceded to France. The US, for instance, seized about 5,000 patents with minimal compensation and distributed them to US firms (Haber, 1971: 220). After the war, in part with the greater recognition of the strategic importance of chemicals, states began to more deliberately promote their national chemical industries. In the German case the state encouraged consolidation. The inflation and consequent devaluation of the German currency was designed in part to promote German exports and helped the chemical industry regain its position in world markets. In other countries tariffs were used to protect domestic industries (Haber, 1971: 238). During the war a £1 million grant initiated British government support for chemical research (Haber, 1980: 102). The US government was spending even more – $16 million in 1910 for instance (Haber, 1971: 222). As in the pre-war period, however, most of the initiative for organizing the industry came from the most powerful firms themselves. As noted, from the beginning, German chemical production was highly concentrated. This reached a peak in 1925 with the creation of IG Farben from BASF, Hoechst, and Bayer, creating a firm that accounted for half of all capital invested in chemical

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production in Germany and that had a total monopoly over the production of German dyestuffs (Schröter, 1992: 34; Feldenkirchen, 1987: 429). As before, highly concentrated German firms then became the key actors in putting together domestic and international cartels. It was the dyestuffs cartel created in 1926 that signaled a new level of sophistication as it sought to regulate not individual dyes but rather all artificial dyes including ones that would be produced in the future.3 More than 70 percent of world production and well over 90 percent of world exports were influenced by the cartel. The core of the cartel was the close relationship between IG Farben and the leading Swiss firm with French firms being brought in, in 1929, and British, in 1932. It was strengthened by the creation of an agreement on nitrogen by IG Farben and ICI, the leading British firm, in 1929. This developed into a strong nitrogen cartel (Convention Internationale de l’Azote, 1930–1, 1932–9). While the Germans played a leading role in this cartelization of the industry, it is clear that the tendency towards cartelization was present in all the major countries. ICI in Britain was created by merger, one year after IG Farben in Germany, and by 1938 accounted for 58 percent of the British market (Schröter, 1992). Schröter comments: The idea of any cartel is basically defensive. The status quo is to be preserved … all the major dyestuffs producers in Europe perceived the dynamic industrialization of other countries as a threat to their business. Because of this common conviction, all of them were basically willing to join a cartel. (Schröter, 1992: 36) Initially the US and Japan were seen as major challengers to the cartel but by the end of the 1930s both had been incorporated into the cartel (Smith, 1992). IG Farben’s fortunes became increasingly entangled with those of the German state as the latter became more militaristic. Links between the firm and Nazi economic planning were close. Moreover, the Nazis saw the control that IG Farben had established over European production as a model for other industries. Nevertheless, IG Farben retained a high degree of control of its own operations: “Planning for production was basically in the hands of IG Farben and IG Farben had a ‘governmental status’ … [it] was the only company to be able to successfully maintain its autonomous development, and it was accordingly less dominated by the state than other firms and sectors” (Grant et al., 1988: 36). The contrast with steel, where VSt, the leading firm, was nationalized, is striking. World War II had a major impact in contributing to the growth of the US chemical industry. Chemical products such as synthetic rubber, toluene (used in explosives) and aviation gasoline were seen as crucially important and the US government aggressively promoted their development by financing and planning production; owning plants; organizing the supply petroleum inputs; purchasing the products; ensuring that the technical and scientific advances were freely disseminated among US firms; exempting certain collaborative activities from

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anti-trust sanctions; and, after the war, selling the plants to the large private chemical companies at prices far below their cost (Chapman, 1991: Chapter 4). Internationally World War II, like World War I, had a profound impact on the organization of the industry. The bombing and post-War dismantling of German chemical plants, along with the seizing of large quantities of German technical documents by the victorious allies, contributed to the growth in the relative strength of the American firms (Chapman, 1991: 79–82). The chemical cartels suffered a major blow as the US vigorously sought to extend its anti-trust laws internationally, forcing the break-up of IG Farben into Bayer, Hoechst, and BASF during the occupation of Germany, and exercising more vigilance with respect to the international activities of American firms. The European Economic Community (EEC) also adopted this attitude as evident in the incorporation of anti-trust provisions in the Treaty of Rome. These political initiatives changed the rules of the game for all the subsequent period: henceforth explicit collaboration between firms was severely restricted. In surveying this period as a whole it is evident that both states and firms played an important role in the international governance of the chemical industry. Militarism, conquest, expropriation, financing, patent regimes, anti-trust laws, and corporation law were used to promote national industries and counter the moves of other national competitors. Nevertheless the industry was hardly anarchic – it was highly organized with elaborate and explicit market-sharing arrangements initiated and run by firms. Contrary to some cartel supporters these private arrangements did not come about through a public-spirited multilateral negotiation among the world’s business leaders. Rather it was based on the dominance of large German firms, involving an organizational capacity that was based on and expressed through control of technology. It is interesting that many of the key restructuring moves in Germany itself were made by merger into IG Farben – cartels were seen as too protective of the interests of their weaker members (Feldenkirchen, 1987: 450).4 This consolidated base enhanced Farben’s capacity to support the cartel. Yet Farben could not have effectively organized the industry unilaterally or without inter-firm institutions. We see here the role of technical knowledge: Farben’s community of scientists, embedded within a hierarchical corporate structure, generated the knowledge that, when standardized in patents, licenses, and market-sharing agreements, produced governance of world markets. In assessing the relative importance of private and inter-state institutions we can conclude that private arrangements were most important for the governance of the industry. However states were not irrelevant. The most dramatic state initiatives were related to preparation and victory in war but states also affected the industry in significant ways in their support of patents, cartels, and the financing of research.

Period 2: post-World War II Following World War II the chemical industry continued to grow in complexity and size as petroleum became the key raw material for a wide variety of new

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products, including synthetic textiles (such as nylon and polyester) and plastics (such as polyethylene). The involvement of oil multinationals in the industry reinforced its domination by large firms. Mirow and Maurer (1982: 120), in their survey of post-World War II cartels, state that for the most part the control of the world chemicals industry is carried out through a complex web of informal and often bilateral agreements centered around patents and licenses. They conclude that “the chemicals industry stands as the ne plus ultra of indirect cartelization.” These informal private arrangements are much harder to discern than were the formal cartels of the inter-war period. The explicit cartels that have come to light through prosecutions by anti-trust authorities tend to involve the older products of the industry: quinine, dyestuffs, and nitrogen.5 One case of deliberate cartelization that has come to light was in polypropylene. In the EEC’s biggest case ever it was revealed that between 1977 and 1983 the top four producers constituted an unofficial directorate, with extensive meetings at all levels with other the top producers with the aim of establishing prices and quotas. In 1988, 23 companies were fined $67 million (Grant and Paterson, 1994: 133–5). It seems likely that such explicit attempts to control markets are supplemented with more informal mechanisms for enhancing private cooperation. Grant and Paterson (1994: 140) quote an analyst regarding American restructuring: On paper the closures were unilateral, but down in the Houston spaghetti bowl all the plants are connected, a lot of product swaps, although they stay on the right side of the law. There’s great discussion between producers; in my opinion they say, “it’s your turn to take the next plant.” There is a need for companies to meet in order for the price structure not to go to hell. They tend to be able to work together so that the industry proceeds on an orderly basis. For the most part, however, bilateral joint ventures, tacit division of markets, and capacity swaps are the key way in which firms coordinate production. For instance Popoff (1993), President and CEO of Dow, referred approvingly to “the effort that’s already been launched through co-producer transactions, portfolio swaps, joint ventures, restructuring and rationalization”.6 After IG Farben’s break-up its successors concentrated on different market segments: fertilizers and petrochemicals for BASF, synthetic rubber and specialities for Bayer and dyestuffs and synthetic fibers for Hoechst (Grant et al., 1988: 45). Similarly ICI and BP agreed to specialize in different types of speciality plastics (PVC and LDPE, respectively) and reorganized their production to accomplish this. ICI subsequently entered into a joint venture with Enichem of Italy, another major PVC producer for joint production, R&D and marketing of PVC (Grant et al., 1988: 225–6; Chapman, 1991: 250). In 1992, ICI exchanged its European nylon business for DuPont’s American acrylics business (Henderson, 1993: 945). In 1997 Unilever sold its speciality chemicals business to ICI for $8 billion in order to focus on consumer products (Standard and Poors, 2000b: 7) and in 1999

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DuPont acquired the paint unit of Hoechst for $1.9 billion (Standard and Poors, 2000b: 9). Along with mergers, high barriers to entry (from capital intensity; scientific complexity and environmental risks and regulations) and high economies of scale, this capacity of chemical companies to reshuffle the portfolios of products in which they specialize is a source of flexibility and strength, allowing different small sets of leading firms to dominate particular submarkets. Thus, for instance, the top three US producers accounted for 54, 58 and 52 percent of US 1990 ethylene oxide, ethylene dichloride and styrene capacity respectively (Chapman, 1991: 104, Table 5.2). Industry associations play an important role in coordinating firms, as well, although they are prohibited by anti-trust laws from coordinating prices or production.7 The most global of these is the International Council of Chemical Associations (ICCA) that meets twice yearly and has a Council Secretary for administrative tasks that rotates among members every two years (“About ICCA” at www.icca-chem.org/about.htm). Formed during the Uruguay Round, the ICCA coordinates industry responses to trade issues (for instance pressing for intellectual property rights and liberalized trade), environmental policies, the management of its own health safety and environmental programs, especially Responsible Care, and other issues. In 1998, the chair of one member association commented, “The ICCA has moved forward considerably. It started informally but has grown into a cohesive forum for the global chemical industry to work together to promote safe management of chemicals and the spread of ‘Responsible Care’ ” (“Major Global Chemical Industry Initiatives Launched in Prague” quoting Art Sigel, at www.cefic.be/press.98/981012.htm). The strength of this relatively young international institution is also evident in the agreement and publication by its members of operational guidelines, including decisionmaking procedures, and in its ability to launch in 1999 a $25-million, long-range research initiative on the health and environmental effects of chemicals (“CEFIC Advances Chemicals Research”, 1999; ICCA, 1997). Of the regional associations the most important is the European Chemical Industry Council (CEFIC). CEFIC is a federation of 16 national federations and 79 sectoral groups (CEFIC, 1994) and is “one of the better-resourced industry associations operating at the European level” Grant, 1991: 58). Taken as a whole associational activity plays an important role in supplementing and reinforcing the more informal contacts among firms, as well as in lobbying the EU and national governments. For instance, at the end of the 1990s CEFIC was very actively involved in seeking to influence the review of EU chemicals policy, including hosting a website in which information from CEFIC and from environmentalists is included and engaging in dialogue with a variety of stakeholder groups (www.chemicalspolicyreview.org). Despite the contribution of the industry’s complexity to the ability of leading firms to maintain their dominant positions, there has been a very significant diffusion of technical and productive capacity. As noted above, from the beginning the diverse variety of the chemical industry’s products has allowed firms from a variety of countries to enter into particular industry segments. In the post-World

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War II period this especially included the mastery by many developing countries of the relatively simple chemical formulas for polyethylene and other basic and intermediate petrochemicals (Chapman, 1991: 99). High capital and technical barriers precluded in most cases the entry of private firms from developing countries but states were eager to step in and by 1990, 14 countries that had no traditional strength in chemicals had commenced ethylene production with projects in which the state was the major participant (Chapman, 1991: 145, Table 7.1). Even in these rapidly maturing industry segments the difficulty of transporting gases and other volatile materials constrained competitive pressures, but in other respects, including the propensity for bouts of overcapacity with very large-scale, capital-intensive plants, the experience of these segments resembled the problems experienced by the steel industry as it matured. Nevertheless, there has been significantly less involvement of states in the restructuring of the chemical industry than there has been in steel. There was little governmental initiative to rationalize the industry in the wake of World War II: there was no European Chemical Community. As has been noted, both chemicals and steel were strategic industries and both were implicated in German militarism and these factors cannot, therefore, explain this differing experience of these two industries. Both industries had also suffered serious problems of overcapacity in the inter-war period. The difference, then, was the greater capacity of chemicals for self-organization and to solve problems of growth through innovation and diversification although, as we shall see in Chapter 8, the chemical industry did make vigorous use of anti-dumping (AD) and countervailing duty (CVD) measures to try to offset competitive pressures. The response to the crisis of overcapacity in the wake of the oil shock displays the capacity of firms to restructure themselves. In contrast to other sectors, including steel, no voluntary export restraints were ever proposed or adopted. Proposals were made for initiatives such as a crisis cartel on the part of the EC but, unlike steel, these were discarded. Firms were active in filing trade complaints, but these did not increase as dramatically during this period as they did in steel and were not crucial in the industry’s restructuring (see Chapter 8). Davignon, the EC industry commissioner who had organized the EC’s steel initiative, stated in 1982 with regard to chemicals “there is no doubt that the decision-making responsibility for this orderly reduction of redundant capacity rests entirely with the industry” (Grant et al., 1988: 228–9). Indeed the chemical industry was able to eliminate substantial European capacity: cuts of 25 percent in ethylene and low-density polyethylene between 1980 and 1987 for instance (Grant and Paterson, 1994: 144). Overall, “by the standards of industrial restructuring in Europe in the 1970s and 1980s, what has happened in the petrochemicals sector is something of a success story” (Grant, 1991: 268).8 The response of the industry to the environmental challenge is also illustrative. A recent historical analysis of the coverage of environmental issues in Chemical Week (Hoffman, 1994) is revealing. Initially environmentalists were regarded with hostility and attempts were made to ridicule them. Firm executives, used to dealing with highly technical issues and poorly equipped for political discussion, failed

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to respond to public concerns (Grant and Paterson, 1994: 150).9 Over time, however, there was a complete reversal in the prevailing attitude. Firms and associations began instituting environmental controls voluntarily, taking the initiative in proposing self-regulatory practices and seeking to work with environmentalists. The core of this self-regulatory program is Responsible Care, initiated in Canada in 1985, in the US in 1988, and by 2000 being practiced in 45 countries representing 85 percent of the world’s chemical production (“Industry-wide Initiative Enhances Safety”, 2000). “This world chemical industry initiative towards continuous improvement in health, safety, and environmental production remained very high on the agenda of members even if competitiveness has been declared top priority. They are probably the two sides of the same coin” (CEFIC, 1994: 31).10 In large part this was motivated by a desire to forestall state regulation. As the head of Dow Chemical put it, “global standards are coming… . The question is, who will prepare these global standards? Greenpeace will on chlorine if the industry allows them!” (Popoff, 1993). Some companies also began to perceive growth potential in chemicals used for positive environmental purposes. Nevertheless, the proactive and coordinated nature of the response, and the fact that it was accompanied by a kind of self-reliant pride, is further evidence of the capacity for self-governance of the industry. As the Chemical Week review put it, “the industry appears to have returned to a strategic posture of self-control and proactive management that it held in the early 1960s” (Hoffman, 1994: 44). Indeed this would appear to be an excellent example of the type of institutional learning that Haas (1991) cites in his examples of highly effective international organizations. The SUSTECH initiative provides a further illustration. In 1993 CEFIC, the European chemical industry federation, brought together governmental actors, scientists, and firms with the aim of making recommendations on R&D policy to the EU: The meeting quickly achieved a surprising degree of unanimity; in particular it was agreed that the technologies which would directly or indirectly make the chemical industry more environmentally benign were a shared priority … much of this technology is fundamentally non-competitive by nature and thus an area where collaboration with academia and between companies and across industry sectoral boundaries looked eminently appropriate. (CEFIC, 1994: 45) The CEFIC Board then decided to initiate SUSTECH to develop these technologies. Other industries, including steel, have expressed interest in participating or have begun to do so. The private nature of this initiative is captured by CEFIC (1994: 47). It was initially considered prudent to secure the commitment of companies to SUSTECH and to clarify exactly what they wished to achieve from it, before making too much noise in political circles.

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Once established, however: The practitioners within the industries are now convinced that there is a significant synergy latent in such collaborations, perhaps particularly so across industry sectors. Furthermore, the political influencing potential of strong multi-sectoral alliances is already starting to look substantial. In short, leading European chemical firms have played a leadership role not just in their own industry but for other industries as well.11 A review of the past few years of chemical trade magazines provides further confirmations of these features of private governance. For instance Frank Popoff, president and CEO of Dow Chemical, speaks of the industry’s “most challenging battle. A battle that no single company can win alone. This is the challenge of escalating external or societal costs as they impact the industry’s operation and economy. It is here that concerted, uncommon, unconventional cooperation, issue by issue and cost by cost, is required” (Popoff, 1993).

Conclusion Throughout the past century and a half the international chemical industry has displayed a high degree of interdependence and institutional linkages between leading firms, whether these are the formal cartels of the pre-World War II period, or the more informal collaborative arrangements of the post-World War II period. These are consistent with the industry’s enduring technological profile, which involves heavy reliance on scientific research, a myriad of products linked by their use of other chemical products as inputs, a high level of capital intensity, the use of patents as a mechanism of control, and the opportunity for leading firms to stake out dominant positions in different product lines than their competitors. The proactive response of the industry to its major challenges since 1975, overcapacity and environmental concerns, is a sign of its relatively strong ability to manage its own affairs. While states have certainly been involved in the industry, especially in pursuing AD and CVD complaints, this involvement has been much less than in other industries such as cotton textiles and steel. There have been no state-sponsored market-sharing arrangements or major political crises over trade issues.

6

The automobile industry Assembly lines and international investments

The automobile industry, like the other industries addressed in this book, is important not just for its significant direct share of industrial production, but also for its linkages to other industries, such as steel, paint, road construction and oil, and for its role in transforming daily life through its contributions to the emergence of suburbia and to contemporary cultural enthusiasm for mobility and speed. In the US the automobile and auto parts industry contributed between 4 and 6.5 percent of manufacturing value added through most of the twentieth century. Even in countries that have not traditionally been major players in the auto industry, participation in the international auto industry has been seen as an important part of an industrialization strategy. We shall see in this chapter that since Ford’s initiation of mechanized production at the beginning of the twentieth century the industry has been dominated by a few leading firms and cross-border relationships have been organized by direct foreign investments of these leading firms rather than cartels. We shall see that the product technology was relatively simple and leading US firms began freely exchanging it through the Automobile Manufacturers’ Association (AMA) patent pool. The process technology was more difficult to master, however, and its slow diffusion enabled the leading firms to maintain their dominance. After World War II technological maturation and dissemination led briefly to trade tensions and voluntary export restraints in the 1970s and 1980s but new technologies, including post-Fordist production processes, automotive electronics, and environmental technologies accompanied the involvement of leading firms in cartel-like alliances with former competitors. This was combined with political pressures on the Japanese government and auto firms to allow US firms access to their marketing networks in Japan or to supply the US market from production sites within the US. Taken together these developments led away from nationallybased international conflict such as was experienced in the steel industry, and instead the leading firms have reasserted their control of international markets. In the relatively low amount of inter-state conflict and the high capacity of leading firms to manage the industry, the auto industry is like the electrical and chemical industry. However the technological advantage of leading firms, by being based in the production process rather than in patents or licenses, has led to some significant differences with these two more science-intensive industries.

The automobile industry 97 The chapter starts, then, with the emergence of the international industry in first half of the twentieth century. It then turns to the industry’s period of maturity in the post-World War II period.

Emergence In this section we shall see that the modern automobile industry, which dates from the beginning of the twentieth century, was launched with a set of distinctive technological characteristics that shaped its subsequent structure at an international level. The industry quickly came to be dominated by very large firms, most notably Ford and General Motors (GM). The competitive advantage of these firms was a highly systematic organization of a complex production and marketing process, including the industry’s most popularized feature, the moving assembly line developed by Ford. The dominance of leading firms fostered and was furthered by the industry’s technology but this was not built on science-driven discoveries about the physical properties of the products that it sold. Ford was quite happy to allow competitors access to his plant and patents were freely exchanged rather than being used as a tool to consolidate control, as was the case in the electrical industry. Instead the control associated with technology was built on the knowledge embedded in the organization of the firm and its machinery and by the large scale of production that was required to make optimum use of these resources. This organizational system extended from the initial processing of raw materials as with the production of lightweight steel, through the precision machining involved in the building of motors and chassis, and on through assembly and after-sales service. Not many firms were able to master this extended process. Those that did were few and large enough that they were able to offset the threat of intense competition by building capacity and thereby maintaining barriers to new entrants and, among themselves, by specializing in different market segments and by drawing on internal resources to ride out downturns. The embedded knowledge and large scale of the organization was evident in the prominence of the foreign manufacturing and assembly operations of the large firms. These structural features of the international industry were prominent through the inter-war period, rather than the cartels characteristic of other industries. During the nineteenth century, as with the electrical industry, there were a great number of inventors that eagerly observed and built on each other’s advances, although in the automobile industry road races overshadowed exhibitions. Initially cars were luxury items and the industry was centered in Europe that enjoyed high-quality craft traditions, relatively good roads, and wealthy customers accustomed to spending large sums on carriages. However, by the first decade of the twentieth century a critical mass of automobile-related workshops had developed in the Detroit area and entrepreneurs such as Ford were able to creatively combine components from these workshops to produce competitive cars. In the pre-World War I period there were attempts to control the industry through the use of patents but these failed. Early German and French successes at manufacturing automobiles were facilitated by German legal rulings in 1884

98 The automobile industry and 1886 annulling the Deutz company’s patent rights over the four-stroke principle (Laux, 1982: 5). Harry J. Lawson attempted to monopolize the British industry through his control of patents and while he did initially manage to restrain the development and competitiveness of the industry his patents lost their value over time and the British courts eventually overturned them (by then sold by Lawson) in 1907 (Richardson, 1977: 17–19). In the US George Selden initially succeeded in defending a patent for the automobile engine and an Association of Licensed Automobile Manufacturers was formed, including the greater part of US producers, paying royalties on the patent and seeking to prohibit any unlicensed manufacturer (Adeney, 1988). Ford disregarded this arrangement, however, and after a costly legal battle he managed to effectively overturn Selden’s patent. Thereafter, American automobile producers established a practice of freely exchanging new product technology (Epstein, 1928). An agreement to free cross-licensing of technology, established in 1915, lasted until 1955 (Laux, 1982: 44). This patent pool was established by the major American automotive manufacturers under the auspices of the AMA formed in 1913: “patents were more or less disregarded and not considered of any special importance” (Folk, 1942: 23). The AMA included all American automobile manufacturers, which by the beginning of World War II totalled 34 (Folk, 1942: 24). Unlike the electrical industry, patents such as those held by Selden and Lawson were not the outcome of a sustained ongoing process of scientific research but rather an arbitrary and one-time attempt by an opportunistic individual to monopolize the market. The relative simplicity of the product technology allowed competitors to continue to develop and to overturn the patents. Ford achieved his astounding success not by the aggressive use of patents but rather by a rigorous experimentation with the process of production. An important part of this was increasing the degree of specialization of each worker: between 1908 and 1913, even before the moving assembly line, the average “task cycle” (the time worked before repeating an operation) declined from 8.56 hours to 2.3 minutes. This required “complete and consistent interchangeability of parts and the simplicity of attaching them to each other” brought about through advances in precision machining. The most striking development in this process of organizational experimentation was the introduction of the moving assembly line in 1913, further reducing cycle time to 1.19 minutes (Womack et al., 1990: 27–8). In addition to specialization, automation and interchangeability there were other related organizational innovations that allowed Ford to dominate the industry. The production process, with its reduction of the necessary levels of skill of workers and through the discipline of the organized workflow, allowed Ford to drive workers hard, replacing them at will. High wages, funded by productivity increases, reduced turnover. The Ford organization also built a strong international network of Ford dealers. These, by stocking interchangeable parts and servicing Ford cars, gave Ford an edge at a time when the general knowledge about cars and the service infrastructure was relatively undeveloped. Huge gains in productivity allowed Ford to reduce the price of his car dramatically and, combined with his decision to aim for the lower end of the market, created a mass market

The automobile industry 99 where one had not existed before. High profits allowed internal financing of further expansion that would have been difficult to finance externally due to the risk and uncertainty involved in the new industry. Thus, the Ford production process was an integrated system with an optimal scale and degree of interdependence among the component parts that made it difficult to replicate. It was embedded in local socio-technical institutions (Perez, 1986). European labor unions effectively resisted Taylorism and living standards were not initially high enough to sustain demand for mass production. “Ford permitted full observation of his processes, but to reproduce them took years, and the Highland Park factory was constantly improving its methods. Consequently, for a decade no company could match Ford production” (Wilkins and Hill, 1964: 52). Ford’s international expansion was marked by the distinctive characteristics of the technological system he had developed. The sixth individual car ever produced by Ford was exported to Canada in 1903, before the company was even two months old (Wilkins and Hill, 1964: 1). Its first foreign subsidiary, the Ford Motor Company of Canada, was established in Windsor in 1904. Capital was mostly raised in Canada but majority ownership was given to Ford in exchange for a commitment to provide the knowledge, patents, and oversight needed to make the cars, as well as exclusive rights to sell Fords in the British imperial possessions. In subsequent decades the Canadian operation would mushroom in size and profitability and would involve the opening of branches and assembly plants around the British-controlled areas of the world. The success of this operation was in part due to its ability to get Ford behind the British tariff wall. Yet it was more than that. The physical proximity, and the close personal relations between the Canadian head Gordon McGregor and Henry Ford, combined with the agreement to share knowledge, allowed the Canadian firm to benefit from the prior innovations of US Ford and to transfer quickly new engineering and management practices (Wilkins and Hill, 1964). Both the US and Canadian operations embarked on a process of worldwide expansion that would start with foreign dealerships and, depending on the country, might evolve into assembly plants, which in turn might begin to source locally or even engage in full production of cars (as would be the case, by the 1930s, in England, France, and Germany). With very minor and short-lived exceptions Ford retained control of these foreign operations and did not engage in collaborative ventures with other firms. In part this reflected the autocratic personality of Ford himself. More importantly, however, it reflected the nature of Ford’s technological advantage: costs were kept low and quality kept high by centralizing production as much as possible, and, where shipping costs or tariffs mandated some foreign assembly, sourcing or production, the accumulated Ford organizational and technical practices would be transferred and managed directly by Ford personnel (Wilkins and Hill, 1964). General Motors, which overtook Ford during the 1920s, followed a similar pattern although there were some differences, such as the lack of an equivalent to Ford Canada and the greater decentralization of GM operations. Formed in 1908 as a holding company, GM’s first two decades were characterized by massive

100 The automobile industry expansion through acquisitions, reinvested earnings, and external financing from loans and the issuing of new stock. Two years after its formation GM fully or partially controlled 27 companies. This pace would continue. For instance, between 1916 and 1920 GM assets increased from $24 to $345 million (Dassbach, 1989: 130). Like Ford, GM was successful in foreign markets. By the end of 1925 it sold cars in 125 different countries. Also like Ford it sought to control its foreign operations rather than engaging in joint ventures or cartels, although unlike Ford it tended to rely more heavily on the purchase of established foreign companies relative to greenfield investments. Although tariffs and other nationalistic policies of states (such as requirements to source locally or to export) would come to have an increasingly important impact on Ford and GM strategy through the first half of the twentieth century, this should not obscure the profound impact on the structure of the international industry of its distinctive technology. There were other industries which experienced such policies as well, such as cotton and steel, but which saw no foreign assembly or manufacturing. The ability of GM and Ford to operate successfully in foreign markets, despite great distances and tariff barriers, reflected the enormous advantage they enjoyed from the nature of their organization and scale. By 1929, the US and Canada, mostly Ford and GM, controlled 84 percent of the world market for cars (League of Nations, 1932b: 138). There was some important involvement of states and international organizations in road building. States made major investments. For instance the US government, in 1916, made $75 million available for inter-state highways, the second largest sum it had ever spent (after the Panama Canal) (Denison, 1956: 200). Government expenditures on roads and for vehicle purchase during World War I also helped the early industry. The First International Road Congress (IRC), held in 1915 in Worcester, Massachusetts, aimed to promote the expansion of the highways system (IRC, 1915), a task that would be taken up more systematically following World War II with the creation of the International Road Federation (IRF), with directors from such firms as Packard Motor Car Company, Firestone, and Standard Oil, which argued that in “countries where road systems are rudimentary or largely non-existent so far as transportation by motor vehicle is concerned, the orderly expansion of roads is necessary if these nations are to obtain a satisfactory standard of living” (IRF, 1948). However, besides assisting in the expansion of the mass market needed for large-scale production, these activities did not directly affect the production process of automobiles themselves. In the inter-war period there were competitors to Ford and GM in international markets and while there were episodes of intense competition these never created the difficulties that led to distress or to the organization of cartels in other industries. There are three interrelated reasons for this that I will discuss in turn. First, unlike other industries there was little serious competition in large areas of the world. The difficulty of really developing and mastering the technology upon which Ford and GM’s lead was based was serious enough to forestall the emergence of more than a few competitors. The difficulty of mastering the technology was evident, for instance, in the case of Russia, where Ford had trained 30 or

The automobile industry 101 more Russians in Ford’s main US factory, had transferred complicated machine tools, and had provided technical knowledge, but nevertheless found the system of production that resulted to be very inefficient and the quality of the cars to be, in the words of the Ford manager in Japan sent to inspect in 1931, “simply awful” (Wilkins and Hill, 1964: 224). Even in Ford’s huge plant in Dagenham, England, an expert from US Ford sent in 1932 for three and a half months to optimize the system set up by the British-based managers was able to reduce labour time spent on machinery in six departments from 2,224 to 1,545 minutes (Foreman-Peck, 1982: 878). A similar visit to Germany in 1935 increased efficiency and reduced costs among suppliers (Wilkins and Hill, 1964: 276). The lack of competition was evident in every continent outside Europe. In the inter-war period no non-American firm had foreign investments outside Europe except for a brief unsuccessful project of Rolls-Royce in the US (Maxcy, 1981: 82). In Latin America Ford had, by 1927, 11 branches and companies and 1,172 dealers, earning $10 million from Brazil and Argentina alone in 1925–6, with the only significant competition coming from GM, which had three assembly plants (Wilkins and Hill, 1964: 148). Similarly in Japan, despite the success of Japanese engineering in industries such as textiles, and the vigorous attempts of the government to foster an indigenous industry, Japanese auto firms accounted for only 5 percent of the Japanese market from 1925 to 1935 as compared to the 11 percent share of imported vehicles and the 84 percent share of American assembly plants (Ford, GM and, to a lesser extent, Chrysler) (Udagawa, 1984: 577). Other non-European markets were dominated by Ford and GM as well. Second, in Europe, a competitor might take advantage of Ford’s and GM’s rigidity in responding to locally specific problems and preferences in its market – the down side of these US companies’ production process – but this did not translate into a capacity of that competitor to seriously challenge Ford and GM internationally. In Britain three firms dominated the market in the 1930s, Morris, Austin, and Ford. Ford had dropped from first place in Britain, in the early 1920s, to a far distant third at 4–6 percent of the market, in the early 1930s, largely because of the sluggishness of the US head office in responding to British needs, especially the need for a small-bore engine to minimize taxes based on engine size. However, even in this case Ford was able almost to catch back up to the leaders by 1936, once a car had been specially designed for the British market (Church and Miller, 1977). Moreover the British companies did not pose a serious threat to the US firms in other markets: in 1934 motor vehicle exports from Britain, including those from Ford and GM plants there, constituted 16 percent of all countries’ exports, as compared to the US share of 61 percent (Foreman-Peck, 1982: 878). Third, firms were able to segment the market and thereby reduce the intensity of competition in the specific model ranges in which they chose to specialize. The most important example of this was Ford’s initial domination of the low-priced mass market with the Model T. While this resulted in a dramatic contraction in the European share of world exports of cars it nevertheless left room for some European producers to compete on the basis of quality instead of price. By the

102 The automobile industry end of the 1920s GM had successfully implemented a marketing strategy based on style changes which were a relatively cheap way (as opposed to re-engineering a motor) to differentiate its new products from existing ones and from competitors’ (Dassbach, 1989: 237). These characteristics of the market were linked to the technology upon which it was based: with long production runs and large market shares firms could plan strategically in a way that would not possible in more competitive markets, such as, for instance, the cotton industry. It is the case as well that, in addition to the above technology-based ways in which the stresses associated with intense competition were restrained, the rapid expansion of worldwide demand for cars helped offset the stresses present in other industries. Yet this was of secondary importance – if the technology had not fostered barriers to entry then a rapid influx of new firms into a capital-intensive industry could have led to the excess capacity and cartelization that, for instance, characterized the steel industry. By the end of the inter-war period, then, the international automobile industry had become established, distinctively shaped by the technology upon which it was based. The industry was complex and capital intensive, but these characteristics were inherent in the organization of the production process to a much greater degree than, for instance, the cotton industry, in which by the 1930s machinery such as looms had become relatively cheap and easy to set up, the steel industry, in which the technology and management was easy to master but the blast furnaces were capital-intensive and large-scale, or the electrical and chemical industries, in which intense scientific research produced complex new products. Ford and GM managed to combine the cost advantages obtained from large production runs with the lack of intense competition from new entrants that resulted from the contribution of the technology’s complex organizational embeddedness to the slowness of its diffusion. This is most striking in the case of Japan: despite concerted government encouragement, no local firm was able to move in and compete away these high profits of foreign firms. The organizational capacity of the multinational automobile companies did not mean that the state was absent in this industry, as was evident in the degree to which production location and sourcing decisions were based on nationalistic measures such as tariffs. In the mid 1930s nominal tariffs on automobile imports were 70 percent in Japan, 45–70 percent in France, 40 percent in Germany, 101–11 percent in Italy and 33.3 percent in the UK (Altschuler et al., 1984). Ford in England, for instance, found its vision of its large Dagenham plant being able to supply all of Europe being increasingly impossible to realize as other European countries, most notably Nazi Germany, took measures to increase their share of European production. Yet even in the case of Germany foreign firms managed to offset nationalist challenges through foreign direct investment: the largest car manufacturer in Germany was GM-owned Opel. Thus the strongest and most active states were able to compromise with organization of the international industry which had been brought about by the US firms, encouraging the growth of local employment and sourcing through tariffs and other nationalist measures but allowing US multinationals to dominate world markets. The contrast with

The automobile industry 103 other industries with such strong state initiatives is sharp, however. Unlike steel the organization of the international automobile industry in the interwar period was based on the internationalization of privately organized transnational production and marketing processes, not on state-supported cartels.

Maturity The years since World War II can be separated into two periods. In the first, until the 1970s, the US auto industry continued to dominate world markets although challengers in Europe and elsewhere were becoming stronger. In the second period, from the 1970s to the present, world markets came to be dominated by the Japanese automakers. In both periods there was a shift towards more regionally organized industries. Despite these changes there are strong continuities across the entire post-World War II period and with the earlier pre-World War history that can be traced to the distinctive technological profile of the industry. In all periods the industry’s production process has been structured by the technological paradigm developed by the leading producers – whether US or Japanese – but with modifications, like local sourcing, assembly or production, induced by nationalist measures of states. Problems such as overcapacity, while more severe than in industries such as electrical machinery or chemicals, have been managed by the oligopolistic coordination of firms, enhanced by the barriers to entry and scale economies derived from the organizational complexity of automobile manufacturing technology, and the state has accordingly been less prominent than in other industries, such as textiles, steel or, as we shall see in the next chapter, semiconductors. From 1945 to 1973 In this first period the dominance of US firms, GM, Ford and Chrysler, continued to be an important factor in the organization of the industry despite its relative decline by the early 1970s. The US firms’ share of world auto markets dropped from 82 percent in 1950 to 32 percent in 1973 (Chanaron, 1982: 175, 8). In the domestic US market, which grew from 4 million registrations in the 1930s to 14.4 million in 1973, the big three managed the market by avoiding price competition through compliance with GM’s price leadership,1 by segmenting the market (specializing relative to foreign producers in large powerful low-mileage cars) and by importing smaller cars from their foreign plants to offset periodic surges of smaller imported cars (Maxcy, 1981: 96, 100–1). The stability of the US market was enhanced by the routinization of bargaining with labor, which included the adoption, beginning in 1955, of “pattern bargaining” in which wage agreements were in effect established across the industry as a whole (Dyer et al., 1987: 42). With the exception of a brief unsuccessful Volkswagen initiative in the 1950s there was no investment by non-US auto companies in the US market (Maxcy, 1981: 98). Tacit collusion among the big three was evident in the decision, during the 1950s, to hold off on the production of a small car until there was sufficient demand for

104 The automobile industry GM, Ford, and Chrysler to all be able to enter the market at an adequately efficient scale, and when that level was reached, to all enter the market simultaneously in 1959 (Macxy, 1981: 100). It was also evident in a joint research venture ostensibly organized to find ways of reducing pollution but which was found in 1969, by the US Justice Department, to have involved an organized conspiracy to suppress the development of, or competition associated with, pollution control technology (Adams and Brock, 1991: 464). The US big three were able to build on this stable US market to extend their reach in faster growing markets in other countries, in which new registrations increased 11-fold from the 1930s to the early 1970s as compared to the 3.5-fold increase in US markets (Maxcy, 1981: 96). The share of foreign markets in the total number of cars sold increased significantly from the late inter-war period to the early 1970s, growing from 12 to 25 percent for GM, 15 to 36 percent for Ford, and 0 to 43 percent for Chrysler (Maxcy, 1981: 97, citing H. K. Heider). In Europe and North America GM and Ford would come to be organized on a regional basis. In Europe GM re-established its control of Opel in Germany and by 1950 it was producing almost 73,000 vehicles of which 29,000 were exported. GM’s UK firm, Vauxhall, also expanded rapidly in the immediate post-war period, although more slowly than Opel and by the early 1970s continued poor performance by the UK company would lead to its eclipse by the rapidly growing German firm (Dassbach, 1989: 231, 241, 427–8). Ford’s UK and German operations expanded rapidly after the war, with the former exporting large quantities of its small cars to markets outside the US and the UK while its French operations were wound down (Dassbach, 1989: 280). In 1967 Ford’s German and UK operations were merged into Ford of Europe. Initially headquartered in the UK and producing separate cars in the two countries, by the early 1970s Ford of Europe was rooted in Germany, with the UK firm transformed into a less important subsidiary, and with the production of separate cars ended (Dassbach, 1989: 381). In North America for both firms the 1965 liberalizing Auto Pact between Canada and the US led to a centralization of decision-making and a rationalization of production on a regional basis, with the continent-wide allocation of models across production sites replacing the parallel production of the same set of models for the US and Canadian markets, respectively. In other markets GM and Ford, while increasing the proportion of local content, would continue, as in the inter-war period, to adopt a variety of mixes of exporting, assembly and manufacturing, depending on factors such as the size of local markets and the strength of nationalistic regulations. In general, after World War II, governments in developing countries, as they became more independent, demanded local content more aggressively than in the inter-war period. For instance GM and Ford manufacturing initiatives in Brazil, Argentina, Australia, Mexico and South Africa were stimulated by local content requirements or other inducements by those states. Assembly operations in various countries (for instance, Ford in the early 1970s had assembly plants in 19 developing countries from Angola to Venezuela) were also influenced by nationalistic regulations (Dassbach, 1989: 245, 283–4, 383, 414).

The automobile industry 105 After World War II European firms began to pose more of a challenge to the American firms, both in Europe itself, facilitated by the development of the Common Market, and in non-European markets in which they were becoming more active. British Leyland, Citroen, Daimler-Benz, Fiat, Peugeot, Renault, Volkswagen and Volvo all acquired foreign plants during this period (Maxcy, 1981: 102). In the most significant of these new production sites outside Europe, Argentina, Australia, Brazil and Mexico, these European firms accounted for 41.4 percent of production in 1973 as compared to the 53.5 percent share of the US big three, the 3.1 percent share of Nissan and Toyota, and the 2.3 percent share of other companies (calculated from Table 7.2 in Maxcy, 1981: 114). In two other important sites for foreign direct investment (FDI) of European automakers, such as India and Spain, the European share was higher. In Japan, facilitated by a 1952 Ministry of International Trade and Industry policy restricting foreign involvement to licensing in which a level of 90 percent local content would need to be reached in five years after a license agreement, the domestic producers set out on the path that would lead to their dramatic rise to take second place in world production after the US, beginning in 1967 (Maxcy, 1981: 109–10). Their emphasis was on exporting vehicles to the US and they engaged in relatively small quantities of FDI, including a Nissan plant in Mexico, a Toyota truck plant in Brazil and about 15 joint venture assembly plants, mostly in East Asia. Escalating trade conflict with the US led, by the end of 1973, to various joint ventures between US and Japanese firms involving equity holdings (Maxcy, 1981: 109–13). Looking at the 1945–73 period as a whole, then, despite some changes, there are strong elements of continuity with the earlier history of the industry. There were three main changes. First, more countries, especially in the developing world, were demanding local assembly, sourcing and production in exchange for market access. Second, European firms were becoming stronger in their own markets and abroad. Third, production, especially for GM and Ford, was beginning to be organized on a regional or continental basis rather than a national basis. Yet behind these changes the industry continued to be shaped by its distinctive technology. Economies of scale and barriers to entry reduced the capacity of new firms to challenge the leading ones: indeed over this period the dominance of the top twelve firms was reinforced by the failure of many smaller national firms. Although the number of actors had increased from the inter-war period the dynamics were very similar: complex production processes reduced the capacity of most countries to develop their own auto production companies and thus governments settled for the encouragement of local employment and sourcing through the use of tariffs and other nationalistic measures (Thomas, 1997). The largest companies were able to enjoy strong profits by optimizing their use of organizational and technical know-how and economies of scale in production and by having relatively few competitors relative to the rapidly expanding size of the market. The advantages enjoyed by the US firms were evident in the average rate of profits, which from the end of World War II to 1961 were 20 percent for GM, 12 percent for Ford and Chrysler, and 5 percent for other manufacturers

106 The automobile industry (Dassbach, 1989: 240 citing Jean-Pierre Bardou). Although the comfortable lead of the US firms eroded over the 1960s, the industry only began to feel severe effects of competitive pressures in the mid-1970s. From 1974 to the 1990s The most striking change in the last quarter of the century was the remarkable overtaking by Japan of the US as the leading producer, beginning in 1980. By 1995 the US firms’ share of world auto markets dropped from its already reduced 32 percent of 1973 to 17 percent while Japan’s share increased to 21 percent (Chanaron, 1982: 178; Dicken, 1998: 319). Associated with these changes were new developments in the organization of the industry. Internal to the leading US and European firms, efforts were made to adopt the positive features of Japanese “lean” production processes which were seen to have contributed to those firms’ greater efficiency and quality. With regard to relations between firms there were two new developments: the use of Voluntary Export Restraints (VERs) to slow the growth of Japanese market share and a proliferation of international strategic alliances linking leading firms such as GM and Toyota in joint research and production initiatives. Despite the apparent novelty of these changes there remained important organizational continuities, rooted in the industry’s technology, with the earlier periods. Like Ford and GM in earlier periods the Japanese firms’ success was rooted in innovations in the production process that continued to be complex and involve large-scale economies. And as in earlier periods a compromise, involving ongoing organization by leading firms of the industry along with, where jobs and local sourcing were at stake, FDI induced by nationalist measures of the state. In this period the compromise involved the US and European use of VERs which resulted in FDI in those markets by Japanese firms. As in earlier periods oligopolistic collusion has played an important part in organizing markets, although this has taken the form of strategic alliances, which are more formal and international than were the collusive practices of earlier periods. In all of these developments the distinctive organizational features of the production process continued to be critical. With the growth in Japanese exports came initiatives on the part of European and US governments to restrict Japanese shares of their markets. In 1975 a British quota was set at just over 10 percent of the market and the French at 3 percent, followed by West Germany’s 10 percent quota in 1981 (Cowhey and Long, 1983: 178). A VER with Japan was negotiated by the EC as a whole in 1991 and strengthened the following year (Cowhey and Aronson, 1993: 102–3). The first US VER was established in 1981, supported by all three big US automakers. It was replaced in 1985 by unilateral restraints by Japan (Cowhey and Aronson, 1993: 98). While these VERs had several distinctive characteristics related to the particular context in which they were negotiated they were in essence state-led, market-sharing agreements that are similar to some of the cartel initiatives of the inter-war period. The key difference is the attempt to frame VERs in ways that are consistent

The automobile industry 107 with the contemporary free trade and anti-trust commitments of the states involved in them, especially the US. Thus, in the 1981 negotiations the US administration “officially maintained that it never entered into negotiations with Japan regarding import restraints. All the government-to-government contacts were intentionally characterized as talks, briefings or discussions” (Lochmann, 1986: 104). Maintaining the fiction that the restraints were a Japanese initiative and having the Japanese government administer them was a way to try to make them not violate General Agreement on Tariffs and Trade commitments. Moreover the Japanese government requested and obtained a statement indicating that the VER arrangements would not be seen as violating US anti-trust laws, which, in other circumstances, would likely have prohibited such collusive restraints of trade (Lochmann, 1986). Behind the facade of voluntary initiatives was the harder edge of state power, including US congressional threats to impose formal quotas and the Japanese government’s threat to use its power to require export licences if Japanese firms did not comply with their allocated share of exports. The restraints, while effectively halting the growth of Japanese exports, also benefited Japanese firms, since they, like all firms selling in the US market, were able to raise their prices without having to pay new charges to the US government, as would have been the case with tariffs or the sale of quotas. The US government estimated that the cost to consumers for the VER from 1981 to 1984 was $15.7 billion: US-made cars sold for $660 more and Japanese cars for $1,300 more than they otherwise would have (Djavaherian, 1986: 113). Like the inter-war cartels, then, the VERs restrained trade and brought up prices in response to problems of overcapacity. However, as in the inter-war period, the auto industry would rely less on stateled market-sharing arrangements than would industries such as steel. As in the earlier period the concerns about the indigenous industry that had given rise to nationalistic measures were addressed primarily by establishment by the exporting firms of assembly and manufacturing capacity in the importing country. Thus, from 1982 to 1989, 12 new Japanese plants (three of which were joint ventures with US firms) were established in the US and between 1986 and 1995, six were established in Europe (Inkpen, 1993; Dicken, 1998: 339, 341). Cars built in the US by Japanese-owned firms increased their share of the market from zero in 1982 to 13.8 percent in 1992 (Yang, 1995: 38–9). These plants were accompanied by component manufacturers: for instance more than 300 such plants were in existence in North America by 1998 (Dicken, 1998: 340). In addition to the threat of quotas these Japanese investments were responding to the local content provisions of the North American Free Trade Agreement and European Union (EU) regional trade blocs. The other way in which firms were relied upon to address competitive conflicts and overcapacity was through the type of horizontal collaboration that had been common in inter-war cartels, although not at that time in the automobile industry. These took the form of a proliferation of strategic alliances in which firms made varying levels of commitment to joint research or production. By 1992 the world’s twelve largest automobile firms had alliances with an average of 5.6 of the other 11, up from 2.5 in 1987. Ford had eight such alliances and GM had seven.

108 The automobile industry By one estimate 25 percent of automobile production was linked to strategic alliances by 1989 as compared to 2–3 percent in 1977 (Wolf and Globerman, 1992: 4–5, citing a Booz Allen and Hamilton estimate). A full description of the increasingly complex entanglement of the world’s automakers with each other goes beyond the scope of the present chapter. Examples have included equity arrangements such as GM’s 34.2 percent ownership of Isuzu and, Ford’s 25 percent ownership of Mazda, joint ventures for manufacturing, including GM’s famous New United Motor Manufacturing Inc. (NUMMI) joint venture with Toyota in California, as well as alliances between Volvo and Renault, Daimler-Benz and Mitsubishi, Ford’s various production agreements with Volkswagen, Suzuki, BMW, Fiat, Mazda, and Nissan. In the 1990s GM arranged to exchange components and parts with Renault, Honda, Toyota, Isuzu, Volkswagen and Fiat and similar arrangements link Volkswagen and Toyota, Chrysler and Renault, and Nissan and Peugeot (Munkirs, 1993). While this proliferation of strategic alliances is often portrayed as a uniquely contemporary feature of globalization or knowledge-intensive production, and as consistent with competitive markets, there is good reason to be sceptical of such views and to see them as similar to the cartel arrangements of the 1930s. In an industry in which, in 1987, twelve companies accounted for a 74.2 percent share of world markets (Coates, 1989), such interconnections provide a strong basis for coordinated control of markets. Concentration has continued: in 1998 Daimler and Chrysler merged, thereby becoming the world’s fifth largest producer and in 1999 Ford acquired Volvo’s passenger car business and Renault offered $5.4 billion for a 37 percent share of Nissan’s stock (Miller, 1999: 5–6). More specifically, by jointly planning new products, or by agreeing to produce complementary products rather than competitive products, strategic alliances can facilitate coordination regarding capacity and throughput and reduce competitive pressures. The embedding of collaborative practices in the production process characteristic of the automobile industry enhances their strength and endurance: if a partner’s production is tailored to be an input to another firm’s segment of a production process, the cost of defecting from such an arrangement is high (Cutler et al., 1999). The relationship between competition and strategic alliances has been hotly debated among those interested in anti-trust issues and while the proponents of such alliances have brought about a loosening of US anti-trust laws there are others who have expressed concern. The ambiguity of the issue is evident in an argument made by Globerman and Wolf (1992) that strategic alliances enhance competition by allowing firms to enter a market that otherwise might not have achieved sufficient scale: “For example, Mazda depended upon Ford to buy Ford Probes (based on the Mazda 626) equal to at least 60 percent of the output at the Flat Rock plant” (Globerman and Wolf, 1992: 24). Yet this example also indicates the potential for reducing competition through the coordination of output targets. In one of the most important landmarks, the Federal Trade Commission (FTC), after extensive investigation, decided on a 3–2 vote not to challenge the pathbreaking NUMMI joint venture between GM and Toyota, established in 1983 in California, if NUMMI followed certain guidelines set out in a consent order. The

The automobile industry 109 majority concluded that the venture would enhance US competitiveness by increasing the number of small cars in the US, by reducing the costs of production for GM, and by allowing GM to learn more efficient production methods. The minority expressed serious concerns about collusive information exchanges and the effect of pricing, arguing that because both GM and Toyota act as price leaders a jointly administered increase in price on joint venture cars could ripple through to other automakers and through the full line of cars, because of standard price differentials between models. The FTC approval of this venture was an important factor in the subsequent proliferation of strategic alliances in the auto industry (Begin, 1984). The new permissiveness with regard to horizontal collaboration was evident in the 1984 initiative of the US Congress to offer joint ventures in research and development significant protection from the threat of treble damages under antitrust law to which such ventures would previously have been subject. By 1989, US Commerce Department Undersecretary, Robert Mosbacher was stating “All American industries deserve the opportunity to form cooperative ventures that will enhance their international competitiveness without exposing themselves to unwarranted antitrust attack” (Adams and Brock, 1991: 436). Another development in the late twentieth century was the increased importance in the automobile industry of new environmental and microelectronic technologies. Increased research and development in these areas, often supported by governments, moves the technological profile of the industry a step closer to that of the electrical machinery or chemical industries. These new technologies provide enhanced opportunities for collaboration and for new ways for the leading firms to maintain their dominance through their technological lead. An example of collaboration in microelectronics is the EU’s support for automotive microelectronic research under the MICROMOBILE and SURGE programs (European Commission, 1994; Duncan, 2000). In the US industrial and military laboratories were brought into a collaborative arrangement for developing electric cars in the New Generation Vehicle Project (Schafer and Hyland, 1994). Laws such as the US Clean Air Act Amendments of 1990 (Standard and Poor’s, 1999: 17) both provide leading automakers a strong incentive to install new environmental technologies and protect them against the other producers who have not done so. Should the leading companies be successful in developing initiatives by the 1500-member country Automotive Industry Action Group to globalize an internet-based “virtual private network” that would link all producers and suppliers (“Automakers Eye Global VPN”, 1998; AIAG, 1999), this would provide further opportunities for technology-based collaboration. By the 1990s, then, the already oligopolistic industry had developed substantial further capacity to collaborate. Rooted in the complexity and scale of the production process and facilitated by the relative ease with which the physical products of that process could be transported across borders (as compared to steel for instance) the leading companies could use their interdependence to manage capacity and offset the stresses from competition. US–Japanese competition, which had been the largest source of trade conflict since the mid-1960s, had been considerably offset by industry-level links between US and Japanese producers.

110 The automobile industry As will be discussed further in Chapter 8, the capacity of leading firms to collaborate was enhanced by the replacement of the primary American automobile lobby organization, the American Automobile Manufacturers Association (AAMA), by the Alliance of Automobile Manufacturers (AAM), in January 1999 in the wake of the Daimler–Chrysler merger (AAM, 2000). The former had excluded foreign firms while the latter includes them. A similar shift from nationally-based to multinational lobby-group membership occurred in Europe in the early 1990s. Barriers to entry continued to be high: the only significant new export-oriented producer with local majority ownership to emerge in the last quarter of the twentieth century were Korean firms which by the end of the 1980s had developed a capacity to export over 1 million cars per year and were making significant inroads into the US market (Gwynne, 1991: 73; Dicken, 1998: 348). However, even the Korean producers were integrated into the web of strategic alliances, strengthening the existing links with Japanese firms from which they had obtained their initial technology and, for Daewoo and Kia, adding new links with GM and Ford, respectively (ibid). In 1998 Hyundai purchased Kia but Ford maintained a sizeable stake in the latter firm (17 percent directly and 8 percent through Mazda) (Miller, 1999). Moreover despite initial success, in part due to restrictions on Japanese exports to the US, subsequent performance was uneven due to quality problems stemming from a lack of mastery of contemporary process technologies: Korean car sales dropped by 50 percent between 1988 and 1990 (Womack et al., 1990: 262). While the increased strength of the organized collaborative web linking leading producers superseded reliance on VERs, it did not involve the complete fading away of state involvement in the organization of the international industry. However, the most prominent inter-state conflict of the 1990s was the US government’s campaign to obtain a bigger share for US automotive firms of the Japanese market – a policy that reflected the underlying private organization of the industry that had evolved in response to the difficulties of the 1970s and 1980s. Rather than restrict Japanese exports through VERs, the US government sought to promote the position of US firms within the network of relationships embedded in the automobile industry’s production process. The US campaign was evident in President Bush’s 1992 trip to Japan with the chairs of the big three US firms in which the key demand was that Japanese plants use more US components, and that Japanese dealers handle more American cars (Cowhey and Aronson, 1993: 115). The trip resulted in a “voluntary” commitment on the part of Japanese automakers to increase purchases of US auto parts from $19 billion, up from $10 billion in 1990, and to aim for 70 percent local content in US-based production, and a commitment by the Japanese government to alter standards and certification practices to facilitate US-firms’ access (“US and Japan Make Progress”, 1992). Then in 1993 the US initiated the US–Japan Framework Talks, a key part of which was auto industry issues. Conflict escalated over the aggressive US pursuit of numerical targets and “voluntary” commitments on the part of Japanese firms. In May 1995, the US government initiated a Section 3012 action against Japan and a proposal for a 100 percent tariff on Japanese luxury cars – a measure which by one estimate would have cut the profits of the five targeted Japanese

The automobile industry 111 automakers in half (“Trade Talk Success?”, 1995). Japan then brought the negotiations to the World Trade Organization and a US–Japan Automotive Agreement was signed on 23 August, 1995, the day before the US sanctions were to go into effect. Dispute about the commitments made in the agreement erupted immediately with the Ministry of International Trade and Industry (MITI) issuing a report challenging “misstatements” in a US background document accompanying the agreement for implying that numerical targets and voluntary private sector commitments had been made by the Japanese government (MITI, 1995). Yearly reviews of the agreement by the US government and the AAMA provided opportunities for continued criticism of the Japanese and, by using numerical indicators, reinforced the US approach to market shares (see, e.g., USTR, 1999). A similar US approach was used towards South Korea, with a 1995 Memorandum of Understanding (MOU) committing the latter government to opening its market to US auto firms. Dissatisfied with the growth rate of US automotive sales in South Korea, the US government initiated a Super 301 action against South Korea in 1997 that led to a new expanded MOU in 1998 (USTR, 1998). These political developments strongly reflect the distinctive features of the private organization of the market that is in turn embedded in the distinctive production process of the automobile industry. As noted, rather than using VERs or tariffs to prevent the inflow of Japanese automotive products to the US, the US government sought to alter the standing of US companies within the increasingly integrated multinational production process. The presence on the trade agenda of very detailed questions regarding Japanese repair shops (Lewis and Weiler, 1996), for instance, was a recognition that the character of after-sales support, just as in the days of the Model T, can have an important impact on the success of manufacturing firms. Today, however, this integrated production process has become more multilateral. By pursuing numerical targets and voluntary private sector commitments the US government was in effect promoting the type of marketsharing by private actors that was common in the cartels of the inter-war period.

Conclusion During the century since its establishment the international automobile industry has always been organized by a small number of multinational firms relying heavily on foreign direct investment. This has reflected the distinctive character of the industry’s production technology. The technological advantage of the leading firms has been rooted in their mastery of the production process rather than a highly science-intensive product that can be patented and sold. The automobile industry was able, despite some difficulties in the 1970s and 1980s, to rely on the organizational capacities of its leading firms rather than having to develop cartels or state assistance. However there are signs in the current period that collaboration reminiscent of the interwar cartels is beginning to emerge.

7

Semiconductors Rapid maturation and cartel creation

Semiconductors, the chips that provide the logic and memory for computers and, increasingly, for a wide variety of other machines from kitchen appliances to industrial robots, were in their earlier days seen as the quintessential symbol of the high-tech economy. This was partly due to the astounding scientific accomplishments associated with semiconductors, from the discovery of the unique physical properties of the silicon from which the chips were made, to the optical and chemical processes that permitted phenomenal miniaturization in circuits and corresponding massive increases in computing power. In part, the excitement stemmed from the advances that semiconductors made possible in high-tech activities such as internet surfing or smart bombs. The mythology of Silicon Valley, with its fast fortunes and hard-driving but unconventional work culture also seemed futuristic. Although some of the headiness of the earlier days still lingers in our current images of Silicon Valley, the glamour has tended to shift from the physical properties of the chip to the software and the new applications that fuelled the dot.com and tech stock bubble of the late 1990s. Huge increases in computing capacity of chips have become routine and whole generations of chips seem to become obsolete even before we get familiar with them. There has been an average decrease in the price of microprocessing performance of 30 percent per year between 1970 and 2000 (Standard and Poors, 2000c: 7). Memory chips have become a massproduced commodity and chip factories have been moving out of Silicon Valley to cheaper locations overseas for decades now. In this chapter we shall see that despite its high-tech image, the organization of the international semiconductor industry displays some remarkable similarities to the cotton textile industry. In its initial stages, the industry consisted of many small firms embedded in a distinctive location – Silicon Valley was the semiconductor industry’s Manchester. Although the industry’s emergence depended on scientific advances, especially in Bell Labs, these were made public intentionally by Bell Labs, in part due to fear of anti-trust penalties, and unintentionally through the setting-up of new firms by ex-Bell Lab employees. Thus, leading firms were not able to control the industry through patents and licenses. The rapid dissemination of chip-manufacturing technology and the standardization of each generation of memory chip led to competitive conflicts,

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especially between the US and Japan, overproduction, and the negotiation by the US and Japanese governments of market-sharing arrangements in 1986 and 1991. The US government also fostered the creation of SEMATECH (Semiconductor Manufacturing Technology), a cartel-like arrangement among leading US firms. Negotiations among the US and Japanese industry associations and governments in the 1990s resulted in the creation of the World Semiconductor Council (WSC), in which American, European, and East Asian semiconductor associations consult on developments in the global industry. Government-assisted inter-firm collaboration is also evident in the European Union’s Joint European Submicron Silicon Program ( JESSI) and Microelectronics Development for European Application (MEDEA) projects. Thus, the semiconductor industry involves government supported cartel-like arrangements reminiscent of the steel and cotton textile industries. At the same time, the success of some US firms, notably Intel, in moving into microprocessors, more complex than memory chips, allowed some leading firms to follow strategies that resemble those in the electrical industry. We start with the emergence of the semiconductor industry, from its origins in the 1950s to its rapid internationalization in the 1970s. We then look at the industry’s more mature period, with its accompanying trade conflicts and new types of collaboration among leading firms and governments. Given the relatively recent origins of the semiconductor industry, this chapter is shorter than those for older industries like cotton textiles or steel.

Emergence The semiconductor industry, like the nineteenth-century electrical industry to which it is distantly related, is highly science-intensive. There are important connectivity and standardization issues that echo those in the earlier electrical industry as well. However, unlike the early electrical industry with its need to establish generating stations and grids, the products of the semiconductor industry do not need to be heavily embedded in particular physical spaces. In the degree to which the industry’s final product can be transported, traded, and used by individual actors the semiconductor industry resembles the early cotton industry. In this section we shall see how these distinctive technological features of semiconductors shaped the institutions created to manage cross-border relations in the industry. The highly science-intensive and uncertain nature of early semiconductor research and development required institutional mechanisms for sharing knowledge, providing individual incentives, and financing large projects, preconditions which are not automatically in harmony with each other. There were several distinctive institutional features of the early semiconductor industry that helped solve this problem. The first of these features was the unique role played by Bell Laboratories, which even in 1925 when it was incorporated under that name employed 3,600 people (Noble, 1979: 116). Initially, Bell Lab staff were rewarded for each patent they took out, but this was ended by Bell and the patents came to be legally held by the Western Electric Company, the engineering arm of AT&T (Queisser, 1988: 70).

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As the head of the Lab noted of the earlier period, “It created a situation where men would not work with each other … yet the problem which was before us was a problem which required team action” (Noble, 1979: 101). Bell Lab’s links to a publicly-regulated monopoly helped guarantee the income stream that was needed to finance its leading edge research. By the early 1950s, when Bell scientists were making key advances in transistors, Bell had adopted a policy of open sharing of information with outsiders as well as among staff, in part to fulfil the public policy goals sought by regulators, and in part to foster the intellectual ferment needed for its innovative work. In 1956 under threat of anti-trust action Bell renounced major rights on all its transistor patents, making them available to US and to foreign firms (Queisser, 1988: 71). Bell Laboratory also contributed to the establishment of the semiconductor industry as former staff left to form their own independent companies. The second distinctive institutional feature of the early semiconductor industry was Silicon Valley, which started with the establishment of a laboratory by the 1956 Nobel Prize winning physicist William Shockley. Dissatisfied with the management of Shockley, eight of his scientists left to form Fairchild Semiconductor in 1957. Over the years Fairchild would similarly spawn scores of new firms – in 1968 alone 13 new companies were formed by Fairchild departees (Queisser, 1988: 88). Combined with the locational features of Silicon Valley – distant from the constraint of a more traditional East Coast business culture and sufficiently autonomous and self-contained to foster a sense of identity – this mixture of independence and interconnection matched the need of the new industry to share knowledge but encourage individual risk taking. Queisser (1988: 104), who participated as a solid-state physicist, noted that “a network of small, mutually cooperative, and extremely flexible businesses made Silicon Valley what it is today. Specialized subindustries servicing semiconductors – new tools, ultra-clean chemicals, computer programs, measuring and testing instruments – became part of the patchwork”. The flows of information between Stanford University and these firms were also important. The third distinctive institutional feature of the early semiconductor industry was the demand from the US military. Especially with regard to their role in guiding missiles, semiconductors were thought by the military to be of crucial strategic importance. In the early years of the industry the military demand for semiconductors was huge. Moreover the military was willing to pay an enormous premium for its chips in exchange for extremely high standards of performance and reliability. This provided a crucial boost in the establishment of the industry. The early semiconductor industry was thus facilitated by a unique set of circumstances and institutions that promoted both the sharing of knowledge and the risk-taking and reward of individual firms. Geographic centralization was a facet of this. During the 1950s and 1960s nowhere in the world did a comparable competing center emerge. While this was in part due to political and social factors – including the role of the US military, the accumulated management and technical expertise of US business, and the distinctive California culture – it was also the result of the demanding technological requirements of an industry in

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which science and application needed to be so distinctively linked. In 1965, for instance, the four largest firms accounted for 69 percent of industry shipments in the US and the eight largest for 91 percent (Tyson, 1993: 93 citing figures from Steinmueller). Beginning in the 1970s the semiconductor industry became quickly internationalized. Several technological factors shaped the distinctive relations among international semiconductor actors that developed in this period. The first factor was the maturation of the industry. As with other industries the unique and often tacit knowledge that had been produced by the network of firms and scientists in Silicon Valley began to disseminate and competition intensified, both from within the US and from abroad, particularly Japan. Despite continual innovation a large proportion of the industry’s product was becoming a more standardized commodity, produced in routine ways, lacking the unique features that would earn temporary monopoly rents, and subjected to tough price competition. A second factor was the manual-labor-intensive nature of semiconductor production during the 1970s and 1980s. Initially, labor costs were kept down in Silicon Valley by the heavy use of minority workers, mostly women, commuting in from San Jose. Over time, this became inadequate and routine production was shifted to East Asia. A third and related factor was the ecological and social incapacity of Silicon Valley to sustain the growth of the industry (Forester, 1993: 54–8). Limited space led to skyrocketing land values and traffic congestion, and chemical pollution led to dangerous contamination of the ground water and air. Divorce and burn-out began to replace frontier excitement as the characteristic social feature of the Valley. A fourth factor was the increasingly large costs of establishing a production line: Forester (1993: 63) estimated the cost of a standard chip production line at $100–200 million, four to eight times the cost of what it was a few years previously. By 2000 a state-of-the-art line was costing $2 billion and this was expected to rise to $10 billion by 2015 (Standard and Poors, 2000c: 18). The lumpiness, high cost, and high output of such investments led to severe boom and bust cycles in the industry. Such problems increased the importance of minimizing costs, including through offshore production, and maximizing sales, including export sales. Moving production offshore had begun in 1962 when Fairchild opened a plant in Hong Kong (Dicken, 1998: 373). By 1978 “more than 80 percent of semiconductors shipped in the US were assembled and tested overseas” (Tyson, 1993: 92; Braun and MacDonald, 1982). Together with the more political initiatives of other states, these above technological factors produced a complex new set of interrelationships between the US, Japan, other East Asian countries, and, to a lesser degree, Europe.1 The Japanese displacement of US semiconductor production was stunning. The first significant imports of chips from Japan to the US were in 1978: a year later the Japanese firms accounted for 42 percent of the market for 16 K Dynamic Random Access Memory chips (DRAMs) – the main chip at that time. By the end of 1981 Japanese firms accounted for 70 percent of production of the next generation of chips – 64 K DRAMs. Japanese chips gained a reputation for much higher quality than US chips. A chip surplus for the US in trade with Japan in 1980 had

116 Semiconductors become an $800 million trade deficit in chips by 1984. In 1986 Japan’s share of the world market for semiconductors surpassed the US share for the first time (figures from Forester, 1993: 65–8. See also Tyson, 1993: 105). Shocked by this change in their fortunes, the US semiconductor firms began to organize their opposition to Japanese imports led by the Semiconductor Industry Association (SIA). SIA was founded in 1977 by heads of five top semiconductor firms, Intel, Fairchild, National Semiconductor, Motorola, and AMD (Irwin, 1994: 21; Procassini, 1995: 186). SIA’s creation marked the recognition by these firms that their interests were not being adequately served by the Electronics Industries Alliance (then called the American Electronics Association), a very large umbrella organization that also included US semiconductor users with an interest in cheap semiconductor imports. Initially, also, SIA pulled together the key merchant producers – producers that sold chips in arm’s length markets – as opposed to captive producers such as IBM that use the chips they produce as components in other electronic products. However, in 1982 captive producers, including IBM, Hewlett-Packard, Digital Equipment Corporation and AT&T were brought into SIA (Irwin, 1994: 21). SIA’s members account for 90 percent of semiconductor production in the US (Procassini, 1995: 186). SIA developed a unique and highly effective lobbying capacity. The organization itself, located in San Jose, California, away from Washington, with just 13 staff in 1992 (Irwin, 1994: 22) relied not on its bureaucratic capacity but on the links among top executives of member firms and their personal involvement in publicizing issues and influencing politicians. Procassini (1995: 187), who headed the SIA, has commented that “many semiconductor industry executives had worked together for years in the development of new technology and products … members of the industry knew each other well and tended to agree on the economic, and, now, political issues with which the industry must deal.” With regard to the personal involvement of executives in lobbying, Irwin notes that “Robert Noyce, a co-inventor of the integrated circuit and chairman at Intel, reportedly spent 20 percent of his time in Washington during the early 1980s” (Irwin, 1994: 23). The Japanese counterresponse was led by the Electronics Industry Association of Japan (EIAJ) which, together with other Japanese actors, spent $3.8 million on semiconductor lobbying from 1985 to 1987 (Irwin, 1994: 24). In the early 1980s lobby efforts centred not on measures that would result in tariffs – in part because of the heavy reliance on imported chips both of chip users and chip makers with offshore operations – but on encouraging better access to the Japanese market (the focus of a 1983 bilateral semiconductor agreement with Japan), protecting US chip designs with what would become the Semiconductor Chip Protection Act of 1984,2 and loosening anti-trust restrictions on collaborative R&D ventures through the National Cooperative Research Act of 1984. Then, in 1985, the SIA petitioned the US government for a Section 301 action, arguing that Japanese government policies were unfairly supporting Japanese firms and excluding US firms from Japanese markets. The SIA’s evidence was weak. US producers had all benefited from their industry’s vertical integration,

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government support and discrimination against foreign producers and it was not clear that the US share of Japanese markets was due to unfair barriers or support.3 Initially, the US government reaction was cool. Intense SIA lobbying succeeded, however, in having the United States Trade Representative (USTR) agree to take action on the semiconductor case. Additionally, in 1985 semiconductor firms and even the US government4 initiated anti-dumping actions against Japanese semiconductor producers. These actions provided the pressure needed to persuade the Japanese to enter negotiations that began, involving the MITI and the EIAJ on one side and the USTR and the SIA on the other, in 1986. The resulting Semiconductor Trade Arrangement (STA) of 1986 established a mechanism for setting a price floor on Japanese semiconductor sales in the US and other foreign markets. Such price floors would require the Japanese government to pressure its semiconductor firms to restrict output, for instance through the use of export licenses. The agreement was accompanied by a secret letter with a somewhat ambiguous agreement by the Japanese government to help US firms attain a 20 percent share of the Japanese semiconductor market. Dissatisfied with the Japanese compliance with the agreement, the US government imposed 100 percent tariffs on $300 million of electronic imports from Japan in 1987. These were gradually reduced to $165 million. This tightened up the Japanese government’s restraints on semiconductor exports (Flamm, 1996). The Europeans were angered at an accord that had been negotiated without them, would raise semiconductor prices for users in their markets and might discriminate in favor of US firms with respect to access to Japanese markets.5 They consequently submitted a complaint to the GATT.6 The European Electronic Component Manufacturers Association was formed in 1986 and initiated antidumping cases against Japanese firms and launched a campaign to get a 5 percent market share in Japan (Flamm, 1996: 189). The European Community (EC) also negotiated a price floor with Japan in a 1989 bilateral agreement. It also launched JESSI, a $4 billion collaborative R&D semiconductor venture (Dicken, 1998: 366). Ironically, the Japanese government, in order to obtain compliance with Japanese firms, needed to develop and strengthen cartel-like arrangements with them, including indicating formally and informally investment, production, and price targets, and developing new institutional mechanisms for inter-firm and firm–state collaboration.7 The cartel-like practices that resulted were widely noted in the Japanese press (Flamm, 1996: 205; Tyson, 1991: 119–20). These built on an existing history of collaboration among Japanese firms and the Japanese government, such as the government-supported Very Large Scale Integration project dating back to 1976 involving five major companies in an effort to make major advances in integrated circuits (Dicken, 1998: 365). The US firms at this time, led by SIA, also began, with the assistance of the US government, to construct their own cartel: SEMATECH, formed in 1987 by 14 leading US semiconductor producers which jointly accounted for 75 percent of US semiconductor manufacturing capacity.8 The US government committed

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$100 million, half of its budget, per year for the first five years. This was renewed but taken up only for an additional three years, at which point SEMATECH decided to forgo government support. The consortium, after some difficulties, appears to have produced a serious level of collaboration. Bob Falstad, SEMATECH general counsel, has noted that initially meetings were very quiet: “Everybody would be carefully guarding their family jewels, their trade secrets. Once they started opening up and discussing things, they all realized they were keeping the same secrets from each other.” (“Government … ”, 1998). The cartel-like nature of SEMATECH has led to it being criticized. For instance, T. J. Rodgers, CEO of medium-sized Cypress Semiconductor has called it an “exclusive billion-dollar club”, pointing to the way in which the $1 million minimum and $15 million maximum yearly fees made membership prohibitively expensive for small firms and very cheap for very large firms. Moreover, “consortium members required that [SEMATECH] equipment makers keep the newlydeveloped machines off the market, making them available only to SEMATECH members for up to one year – a devastating blow to the American semiconductor industry, which can’t survive without state-of-the-art chipmaking equipment” (Rodgers, 1997). The STA, along with the shift of the industry from bust to boom, led to significant increases in chip prices and severe shortages of chips in 1988. This led to charges by US semiconductor firms that Japanese firms, now having knocked US firms out of the market, were gaining monopolistic rents – classic predatory behavior (Flamm, 1996: 211). However, it also stimulated US chip users, led by IBM, Tandem and Hewlett-Packard, to form the Computer Systems Policy Project (CSPP) in 1989 to offset the SIA’s influence on trade policy and to oppose an extension of the STA (Hart, 1999). Despite the opposition of the CSPP and waning government support for the STA, a new STA was signed in 1991 that explicitly committed the Japanese government to a 20 percent market share for US firms in Japan in exchange for elimination of the $165 million in duties noted above. Formal floor prices were ended although it is suspected that the procedures put in place continued to operate informally (Flamm, 1996: 162). Also, in 1992 and 1993 a similar process was launched by the US and Europeans against Korea, including anti-dumping duties used to help bring about negotiations on market opening. The lack of support in the US resulted in no agreement being reached with Korea. However, a 1993 agreement between the EC and Korea provided cost data to the EC. Combined with the threat of further anti-dumping actions this provided an incentive to Korean firms to restrain exports (Flamm, 1996: 226). Irwin has commented, in surveying the organizational role of semiconductor firms, that “the semiconductor case is unique because of the unprecedented, overreaching – and in some ways outrageous – demands made by an industry on US trade policy” (Irwin, 1994: 61–2). Over time SEMATECH has expanded its reach by creating links with US suppliers and with foreign firms. Approximately 200 domestic semiconductor suppliers have been integrated through their membership in SEMI/SEMATECH,

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an autonomous suppliers’ organization that has accompanied SEMATECH, a collaboration that was upgraded in 1997 with a heightened level of sharing of costs and technologies. International SEMATECH, founded in 1998, is a wholly owned subsidiary of SEMATECH that includes SEMATECH members plus Hyundai, Philips, STMicroelectronics, Siemens and, TSMC.9 In Europe, both the European Union (EU) and the leading European semiconductor firms have developed initiatives similar to SEMATECH, most notably the JESSI program which was replaced in 1997 by MEDEA and the telecom-oriented Electronic Chips and Systems Design Initiative that began in 1993, as discussed further in Chapter 8 of this book. In South Korea, the Semiconductor Research Association, including 13 leading Korean firms, was supported by the South Korean government (Choung et al., 2000). These government-supported collaborative efforts built on an emerging tendency among firms to engage in cross-border joint ventures that date back before the first STA – a list provided on the EIAJ (1999) website includes 109 international semiconductor alliances between 1985 and 1994. The most prominent of such alliances was that between Motorola and Toshiba in which Motorola has exchanged its strength in microprocessors for Toshiba’s strength in the more commodified DRAM market in Japan (Tyson, 1993: 112). An IBM–Siemens alliance was important, the most important being the US–EC alliance (Tyson, 1993: 150). Collaboration also built on the growing number of Japanese production facilities opened in the US such as those opened by Mitsubishi (1989), NEC (1984, 1987), Hitachi (1989), and Fujitsu (1988), and a very large number of acquisitions of US semiconductor firms by Japanese purchasers (Tyson, 1993: 143–4). The trend towards cross-border inter-firm collaboration was also evident in the form taken by the 1996 US–Japan accord on semiconductors, which replaced the earlier STAs. This 1996 accord was to be “carried out chiefly by the industry associations in the two countries” (Sanger, 1996: 36) with only a light regulatory presence of government. For the first time, other nations were to be invited to join the accord if they reduced protective tariffs to zero. The accord also called for a new industry Council that would discuss market trends, including market shares of foreign-made products (Mitsuko, 1996; Sanger, 1996).10 By 2001, when the 1996 accord was expiring, the council envisioned in 1996 had evolved into the World Semiconductor Council (WSC), with joint policy initiatives in three areas, environment and health, E-commerce and tracking semiconductor trends, and a Joint Steering Committee to carry on business between the annual meetings of the WSC. Membership had been expanded beyond the SIA and the EIAJ11 to include semiconductor associations from Europe, South Korea and Taiwan, with plans to include China, and in 1999 new multilateral agreements at both the industry and state levels replaced the earlier bilateral agreements (World Semiconductor Council, 2001; “China Must Play by the Rules”, 2000). Initially, SIA had been skeptical of the Japanese-initiated WSC idea but by 1999 a trade journal was commenting that “far from being a do-nothing debating society, the global body is actually tackling some meaty issues. For instance, the group helped block the use of IMF rescue funds by Korean chipmakers. SIA already considers

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WSC a roaring success, even if it does nothing more” (“Old pacts never die”, 1999). The willingness of the US to let the 1996 accord expire without renewal was a sign that the types of collaborative initiatives that had developed had brought alternative mechanisms for resolving industry problems. The commitment to zero tariffs on semiconductors, a precondition of WSC membership, had been further reinforced by such tariff-elimination provisions in the Information Technology Agreement, signed by 41 countries under the sponsorship of the World Trade Organization, in April 1997 (“US Trade Policy Initiatives”, 1997). Collaboration in the WSC has been accompanied by ongoing multilateral collaboration sponsored by other organizations as well. International SEMATECH, mentioned above, publishes the SIA-sponsored International Technology Roadmap for Semiconductors, the formulation of which involves all the WSC members (International SEMATECH, 2001). The Roadmap, formerly called the National Technology Roadmap for Semiconductors, has set out specific industry plans for parameters such as wafer size or line width. The significance of the Roadmap for organizing the industry is evident in the initial reluctance of some US chip makers to include foreign firms, since they would, in the words of Electronic Buyers’ News, get an “advanced look at what is essentially US technology blueprints” (“SIA Road Map Goes Global”, 1999). As discussed further in Chapter 8, the Silicon Integration Initiative, Inc., which aims to foster collaboration in the search for efficiency gains, includes all the world’s leading semiconductor manufacturers. The EU and the European semiconductor producers have also worked together on several joint initiatives. These developments in the formal institutional arrangements involved in the governance of the semiconductor trade have been accompanied by less formal changes in the structure of the international industry. In the mid-1980s, it often seemed to American commentators that the Japanese “Silicon Samurai” (Forester, 1993) were moving inexorably from victory to victory against the US in every segment of the industry. Since then it has become clear that the picture involves a much more complex relationship among the US, Japan, and the East Asian newly industrializing countries (NICs). Two key features of this complex relationship stand out. First, despite some Japanese success in carving out a lead in certain technologies such as notebooks and LCD screens, it has become clear that US firms continue to maintain a technological lead overall. In 1995 companies headquartered in the US accounted for 62 percent of worldwide information technology sales (Moschella, 1997: 94). US dominance is built especially around the remarkable dominance in personal computers of the “Wintel” standard – Windows operating systems and Intel microprocessors. This dominance can trace its roots back to the central role of IBM in the early computer industry. Then, As the seminal event in the development for the PC industry, IBM’s 1981 decision to outsource its critical PC components to Microsoft and Intel is now widely recognized as one of the most damaging corporate decisions in business history. The monopoly power that IBM had so carefully built up

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over some sixty years was inadvertently and suddenly bestowed upon two companies that were then just a tiny fraction of its size. (Moschella, 1997: 9) This IBM–Microsoft–Intel relationship allowed these companies to set strong industry standards which then permitted the emergence of highly specialized submarkets – CD-ROMs, sound cards, etc. – each with their own leading firms. In most of these submarkets the leading firm was based in the Western US (Moschella, 1997: 30). Both Microsoft and Intel managed to account for 90 percent of the PC operating systems and microprocessor markets respectively (Moschella, 1997: 34). In the worldwide microprocessor market as a whole, Intel held a 53.2 percent share in 1990 (Tyson, 1993: 127, using Dataquest figures). They were able to maintain their monopoly and high profits in these complex products by continual innovation, leaving the more commodified and competitive chips to the East Asian producers. Intel’s capacity to turn back competitive challenges in the 1990s is a testament to its ability to use technology to its advantage. Standard and Poors (2000: 9) have noted that “Any PC vendor signing on with a rival manufacturer runs the risk of jeopardizing its relationship with the chip-making giant. Since Intel supplies its chips to PC makers on an allocation basis during periods of tight supply, ‘disloyal’ customers face the prospect of having restricted access to chips during periods of strong product demand”. In the late 1990s three efforts to introduce a competing product to Intel’s, by National Semiconductor, Integrated Device Technology, and VIA Technologies, were defeated or turned back, and one – Advanced Micro Devices – was severely undermined by its own technical difficulties and Intel’s promotion of the Celeron chip as a cheaper alternative to the Pentium. Between 1999 and 2000 Intel increased its share of the sub-$1000 PC category from 25 to 60 percent (Standard and Poors, 2000: 9–10). Texas Instruments (TI) was making a strong bid to displace Intel as the leading microprocessor maker but TI’s success was based on its decision to focus on the digital signal processing chips that are used for telecommunications and thus not to directly compete with Intel (“TI Sets Sights on Pushing Past Intel”, 2000). In the memory segments, in contrast, products were becoming commodified and intensely competitive. This was behind the first declines in Japanese shares of global semiconductors that occurred in 1990 and 1991 (Tyson, 1993: 1276). Thus, the second and related feature of the post-1985 industry is the division of labor among the US, Japan, and the East Asian NICs in which the latter two found themselves specializing in the more commodified submarkets such as memory chips which had emerged. Significantly, US firms were able to establish close relationships with East Asian NIC suppliers of components, reducing costs and improving their competitiveness with Japan. The fostering of closer relations with the East Asia NICs to offset Japanese market power was an element of the duties imposed in 1987: Procassini (1995: 179), SIA head, noted that “the duties were imposed, not on Japanese semiconductor chips, which were purchased by American computer makers (which would hurt the US industry), but on many consumer-type

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products made by kieretsu chip-related Japanese firms and for which American consumers could obtain many low-cost substitutes from Korea, Taiwan, Hong Kong, and other foreign countries”. In Singapore, Korea, and Taiwan, local firms, with the assistance of their governments and their relationships with US firms, were able to develop increasingly sophisticated technological capacity in their respective specializations (Borrus, 1997; Henderson, 1989; Ernst and O’Connor, 1992). For instance, by 2000 Taiwan had become the largest source of chips mass-produced in “foundries” – factories focusing on production rather than design, producing for other firms on contract. The Taiwan Semiconductor Manufacturing Corporation in 2000 was the world’s largest foundry (Standard and Poors, 2000c: 13; “Asia on a Foundry-Building Binge”, 1999). Although other factors have played a role, such as the bursting of Japan’s bubble economy in the early 1990s, this new set of global relationships has been shaped by the distinctive technological parameters of the semiconductor industry. The apparent commodification of semiconductors in the 1980s was revealed to involve a hierarchical differentiation of the market, with a few leading US firms playing a dominant role. There is debate about whether political pressure from the US had led Japanese producers to yield the higher end memory chip markets in Japan to US firms (see Flamm, 1996: 283). US firms’ technological lead, with the high profits and paradigm-setting power that this involved, allowed them to maintain their lead. Lack of access to networks had become a key barrier to entry and access or, even better, control, a key competitive advantage. As Standard and Poors (2000c: 17) has noted, “once a chip company’s product becomes entrenched in an important customer’s end product, it is often difficult for a rival firm to unseat it”. This technology-based market control was further facilitated by the involvement of the US state, in the STAs and in the establishment of SEMATECH. Working together with the Japanese government, the US government managed to foster industry cartels in both countries. While professing commitment to competitive markets, leading private and public players in the semiconductor industry have taken advantage of the opportunities provided by the industry’s technology to collaborate in the crucial development and planning stages, called, with a euphemistic eye to anti-trust principles, “precompetitive”.12 Combined with a division of labor across industry sub-markets and many opportunities for informal exchange of information, this has allowed the leading US-based firms to avoid the intensely competitive boom-and-bust market conditions of the 1970s and 1980s, leaving the more volatile commodified market segments to the East Asian producers. Once the US industry was revived, and its position at the top of a vertically integrated international hierarchy re-established, government intervention was eased and private institutions for regulating the international market were relied upon to a greater degree.

Conclusion Looking at the evolution of the semiconductor industry overall, it is clear that its technological profile has played a key role in the nature of governance and political

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conflict in the industry. Initially, the industry displayed some strong similarities to the early cotton textile industry as it clustered in a single location in which many small firms could build on their shared knowledge and create the critical mass of new innovations, skilled labor, equipment manufacture, and specialized services needed to launch the industry. The light, easily transported, and modular character of chips was similar to the cotton apparel produced in the British industrial revolution. These similarities are easy to overlook this since we now take those earlier technological achievements for granted. As the industry developed it became apparent that chips differed in their technological character. Some, especially memory chips, were relatively undifferentiated and quickly developed into mass-produced, highly competitive commodity markets in which the technology was soon disseminated to competing producers in new regions. The high capital cost of chip production lines made these chips similar to steel in their propensity to go through cycles of overproduction, although their easy transportability resembled apparel. The governance arrangements that were devised for semiconductors, including the creation of cartels and government-supported marketsharing arrangements, were similar to those in the mature steel and cotton industries. However, it became apparent that other more complex chips, such as microprocessors, were like the products in the electrical machinery and chemical industries in their level of complexity and the opportunities they provided for technology-based collaboration and control to be developed among the leading firms. Thus, by the year 2000, the center of gravity of leadership and governance had shifted away from the more commodity-like products with their more direct reliance on government intervention to organize markets to the more sophisticated private governance characteristic of scientifically complex technologies.

8

Comparing across industries

In the previous chapters we have seen that industries vary greatly in the character of their technology, the way in which the interactions between private firms are organized, and in the economic and political roles of states in the industry. This chapter will focus more directly on the differences across industries, providing quantitative indicators as well as considering more explicitly the reasons for this variation. I start by comparing the industries’ technological profiles and patterns of maturation. In the second part I look at variations in the character of the international organizations that are involved in these industries. In the third part of the chapter I compare the role of political conflict and the use of political power across the industries. In this third part I also begin to contrast the explanatory capacity of the types of industry-specific factors upon which this book has focused with an alternative explanation that focuses on the role of hegemonic states. This contrast between industry-level and systems-level explanations will be followed through in Chapter 9. This chapter will confirm that the effects of variations in the technological profiles and patterns of maturation across industries, that were already becoming apparent from the case-study chapters, are indeed important in explaining variation in the configurations of institutions and political power that are responsible for the organization, regulation and governance of international industries. Technology matters – not because it is an inexorable natural force that humans cannot resist, but rather because the physical properties of the goods humans produce and of the technological artifacts they use to produce them provide both opportunities and constraints that then influence the ways that participants in an industry choose to organize themselves and interact with others.

Comparing technological profiles In Chapter 1, I suggested that there were four elements of an industry’s technological profile that might affect its capacity to govern itself, and thus the character of the industry’s international governance more generally: territorial embeddedness; capital intensity; scientific and technical intensity; and the complexity of production processes. Having now examined the industries individually, we can compare them more directly on these elements. We will look at each element in turn.

Comparing across industries 125 Territorial embeddedness There were two types of territorial embeddedness revealed by the case studies. The first involved physical characteristics of the raw materials or output of the industry that in turn tied the industry to territorial constraints in distinctive ways. There were four industries in which these were important. The early cotton industry was shaped by its need for linkages with a region and with a climate in which cotton can be grown. Agglomeration was encouraged in the steel industry by the heaviness of iron ore and coal and the heaviness of steel itself encouraged national or intracontinental production to a greater degree than other more global industries. The electrical industry was shaped by the need to run wires over physical terrain – creating physical systems rooted in particular settings often at a sub-national scale. Tendencies towards agglomeration in the chemical industry were fostered by dependence on feedstocks from petroleum refining complexes with ports and on the use of pipelines to transport volatile chemicals. The second type of territorial embeddedness is more social than physical. New industries need a critical mass of skilled labor, practical and technical knowledge and services. The embedding of pioneering firms in a single distinctive location facilitates this. The most striking examples of this were the role of Lancashire in the early cotton industry and Silicon Valley in the semiconductor industry. Both locations were at a distance from traditional manufacturing, commercial or political centers and this allowed a distinctive set of practices, institutions, and other social resources to gather there. In both cases, relatively small firms could thrive because of the formal or informal collaborative institutions that allowed them to enjoy the mutual benefits of knowledge accumulation and the efficient provision of services and labor. The uniqueness of these territorially-embedded communities provided those firms constituting them a competitive advantage relative to firms in other countries. The phenomenal consolidation of IG Farben and Vereinigte Stahlwerke in inter-war Germany provided an alternative institutional mechanism for the efficient handling of interdependencies in chemicals and steel but one that was more directly linked to the complexity of the production process and only indirectly to the territorial constraints of place. Ford’s Rouge River plant was similar to these. By contrast, the social institutions in Lancashire and Silicon Valley were consolidated by their rootedness in particular physical settings. Table 8.1, which summarizes statistics relevant to the comparisons being made in this chapter, includes US figures for the spatial concentration of industries in that country. Interestingly, these data from the end of the twentieth century are consistent with the patterns observed from a much longer time period. By far the most spatially concentrated industries are apparel at 59 percent and semiconductors at 52 percent. This suggests that the social reasons for embedding an industry in central places continue to be important for these industries in which many small firms need to draw on services, technical knowledge, skilled labor, or institutions for providing other inputs that can only be provided efficiently if they are organized in an identifiable location. The relatively large number of small firms in these two industries is shown in Figure 8.1 which compares the distribution of

R&D intensity Capital intensity Concentration Share of manufacturing value added Weight per $million of exports Spatial concentration Foreign assets of world’s top MNCs by industry Foreign affiliate assets vs. parent assets Foreign affiliate sales vs. parent sales Share of related-party trade in exports 28% 24

77 59.2 0

2.6 36 2.6 359 36.4 0

7.4 12 2.1

19% Yarn, fabric: 27 Fibers: 10

25%

0.9

Textiles

12% 6% 16

2796 42.6 8.5

0.3 10.6 37 2.0

Steel

Source: See Appendix (pages 161–3 below) for notes on data for all Tables and Figures in this chapter.

8 9 10

5 6 7

1 2 3 4

Apparel

Table 8.1 Indicators of differing technological profiles for US firms

32% 42% 49

604 30.3 262.1

2.5 5.1 46 2.5

Electrical

57% 54% Organic: 44 Inorganic: 26

1808 22.9 195.6

3.9 12.5 39 6.3

Chemicals

46% 46% 58

232 37.3 386.8

3.6 8.6 84 5.4

Auto

n.a. 58% n.a.

48 52.1 8.6

8 14.0 41 1.6

Chips

100%

90%

Chemical 80%

Electrical Semiconductors Motor vehicles Ferrous metals

70%

Textiles

Share of industry assets

Apparel 60%

50%

40%

30%

20%

10%

0% 1– 50,000

50,001– 250,000

250,001+

Firm size (assets, thousands of US dollars)

Figure 8.1 Size (assets) distribution of US firms by industry. Source: See Appendix (pages 161–3 below).

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Comparing across industries

all US assets in a particular industry across three asset size categories with apparel, textiles and semiconductors being the most evenly distributed and motor vehicles the least. Returning to spatial concentration, the two next most concentrated industries after apparel and semiconductors – steel and automobiles – are ones in which the production process and the weight of materials involved in it require centralization. The chemical industry, perhaps because of the wide variety of products that it comprises, is the least centralized. Table 8.1 also provides data on the physical weight of each industry’s products, confirming the points made in the chapter on iron and steel concerning the effect of the weight of that industry’s products on the tendency to create very large plants close to sources of raw materials in order to reduce the costs of moving the product from one processing stage to the next. The case studies allow us to begin to identify the impact of territorial embeddedness on the international character of the industry as well. There are some very specific effects linked to the physical characteristics of the inputs. In the case of cotton, international linkages were constructed between Britain on the one hand, and the US South and India on the other – not with the territories in British North America which would become Canada, simply because cotton would not grow in the latter’s climate. International institutions such as the Cotton Supply Association formed in 1857, the Manchester Cotton Company, formed in 1860, and the longer lasting International Congress of Master Cotton Spinners and Manufacturers, formed in 1904, were all engaged in trying to find new sources of raw cotton in Africa and Latin America. Much of the latter’s work was also organized around control of the quality of cotton – problems which were exacerbated by the geographic distance separating plantations and factories. Similarly, the linkages between chemicals and petroleum led to more rapid diffusion of petrochemical capacity to oil producing countries such as Saudi Arabia as well as a more global orientation of petrochemical multinationals than would have been the case had coal remained the industry’s major raw material. Thus, the physical properties of an industry’s inputs and products can lead to dependence on particular territories which then shape the content and form of the industry’s international relations. We can also note that the more social territorial factors that were important in Lancashire and Silicon Valley eroded more quickly than the physical territorial factors. As the knowledge became more widely known, codified and disseminated, and as the capacity to provide infrastructure and services was extended across greater distances, the importance of these industries’ birthplaces was reduced. By contrast, the impact of the territorial correlates of the cotton, steel and chemical industries’ reliance on cotton, iron ore, and oil was more enduring. Capital intensity In Chapter 1, I identified two features of capital intensity relevant to the governance of international industries. First, capital intensity can create barriers to entry that reduce the number of leading firms and competitive threats to them from new entrants. Second, capital intensity can lead firms to engage in bouts of overproduction which in turn lead to efforts to exercise more control over the allocation of markets or production. Capital intensity can have this effect because

Comparing across industries 129 many firms, not knowing the intentions of their competitors, may simultaneously make huge investments in new plants which all need to reach a high level of output to operate at a minimum-efficient scale. Once the investment is made the marginal cost of an additional unit of production can be very low. The case studies stressed the capital intensity of steel and chemicals and this is borne out by the figures in row 2 of Table 8.1. The differences between the apparel industry, which continues to rely on labor-intensive operations such as sewing, and the textile industry, which includes capital-intensive synthetic textile mills owned by large multinationals such as DuPont, is evident as well. The most capital-intensive industry is semiconductors, reflecting the massive escalation in costs of new production lines for chips that were discussed in Chapter 7. The case-study chapters also provided examples of leading firms in capitalintensive industries seeking to control market or production shares. This includes the steel and chemical cartels of the inter-war period, the post-war marketsharing arrangements in steel, and the international semiconductor regime organized between the US and Japan. Yet, clearly, capital intensity alone is not enough to explain the propensity to control markets in this way as the low capitalintensity apparel industry was subject to more stringent market-sharing arrangements. Moreover, the chemical industry is more than twice as capital intensive as the electrical industry and yet their enthusiasm for cartels in the inter-war period was similar. Thus, analysis of capital intensity needs to be carried out with consideration of the other elements of an industry’s profile, and we will postpone further discussion of its impact on governance until we have carried out the comparison of scientific and technical complexity and of the complexity of production processes that are the focus of the next two sections. Scientific and technical complexity I suggested in Chapter 1 that scientific and technical complexity could affect the organization of international industries in two ways. First, such complexity can be a barrier to entry that, like capital intensity, contributes to the ability of a few leading firms to dominate the industry. Second, such complexity can be a source of coordination and empowerment of leading firms through their use of patents or more informal mechanisms of information sharing that allow them to consolidate alliances, reward loyalists, and punish challengers. The case studies provided numerous examples of scientific and technical complexity and of the way in which these were used to organize industries. The most striking examples were the use of patents and cartels in the electrical and chemical industries. From the beginning, leading firms such as Farben, GE and Siemens used their control over knowledge to dominate the industry. The most formalized examples of this were the inter-war cartels in which complex market-sharing arrangements were consolidated with exchange of licences. Throughout their history, however, the organizational effects of scientific and technical complexity were evident in other ways. In the inter-war and immediate post-World War II periods, leading firms in the electrical and chemical industries enjoyed a longer period in which they were free of the competitive pressures in other industries in

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Comparing across industries

which simpler technologies disseminated to new producers. Thus, Japan which had dramatically challenged Britain in textiles in the first quarter of the twentieth century, was not able to master chemical and electrical technology as quickly. Similarly, steel-making technology was quickly transferred to new producers and, when linked to the capital intensity discussed above, problems of overcapacity were recognized and acted on internationally from the middle of the nineteenth century throughout the twentieth – from Krupp’s role in early cartels to the creation of the European Coal and Steel Community (ECSC) after World War II. Following World War II formalized cartels were publicly abandoned in response to stronger anti-trust policies but scientific and technical complexity continued to be important in preserving the dominance of leading firms in the electrical and chemical industries. In part the cartels simply became secret, as the case of the anti-trust cases in the 1960s against the US electrical companies and the European polypropylene companies revealed. Moreover, the complexity, interdependence and inherent differentiation of the products produced by the chemical and electrical industries allowed firms to tacitly divide up markets by specializing in certain sub-markets and ceding other sub-markets to competitors. The linking of firms through the exchange of licences or through collaboration in researchrelated activities further supported the solidarity of the industry. Scientific and technical complexity has had both direct and indirect impacts on the international institutions that govern the chemical and electrical industries. The most direct impact is in the large number of international institutions that have been devoted from the beginnings of the industries to fostering scientific collaboration in sharing research findings and setting technical standards. More indirectly, the complexity has contributed to the overlapping and integrated character of international institutions. A striking example of this is the European Chemical Industry Council (CEFIC) at which are headquartered a very large number of more specialized chemical associations – mirroring the complexity of the overlapping chemical substances that the associations produce. Table 8.1, row 1, provides current figures confirming the research intensity of the electrical, chemical and semiconductor industries relative to apparel and textiles. The auto industry ranks higher on this measure than one would expect from the account of it in Chapter 6. In that chapter the relatively simple character of the technology of the automobile itself was stressed. However, that chapter also discussed the difficulty of mastering the process technology and argued that this facilitated the dominance of the industry through most of its history by leading US firms as well as the distinctiveness of the Japanese challenge to this. It was noted as well that following the market-sharing arrangements of the 1970s and 1980s the auto industry has begun to resemble more closely the chemical and electrical industries in the importance of collaboration in joint ventures and reshuffling of production lines which allow leading firms to tacitly and jointly plan production and allocate markets. This coincided with new performance-related demands in response to environmental concerns and innovations in automobile-related electronics. This contemporary phase of experimentation with new production processes and products explains the relatively high level of R&D in the auto industry.

Comparing across industries 131 7000 6000 Chemicals Electrical Semiconductors Automobile Iron/Steel Textiles Apparel

5000 4000 3000 2000 1000 0 1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

Figure 8.2 Number of US patents by industry, 1977–98. Source: See Appendix (pages 161–3 below).

Figure 8.2 displays the number of patents taken out in the US in seven industries. Once again, the chemical, electrical and semiconductor industries lead on this measure, a reflection of their science and technical intensity. Iron and steel ranks at the bottom with apparel one notch above it. On this measure the auto industry ranks low, suggesting that the R&D conducted by it is embodied in processes or aspects of products that are not independently marketable and thus are guarded by their internalization within the firm’s hierarchy rather than by patents. The chapter on semiconductors provided an example of the importance of scientific intensity in its discussion of the way in which US firms managed to regain their lead by specializing in microprocessors rather than simple memory chips. Microprocessors are complex differentiated products while memory chips are commodities. Specializing in the former gave US firms advantages since it was harder to duplicate and compete with microprocessors, especially since their development involved formal and informal linkages to software producers and computer users most of which were located in the US. In this industry, as in others, some products can become simpler commodities and it is important then to assess the degree to which leading firms can move out of these market segments into more differentiated ones. In the early cotton industry, the manufacturing and export of textile machinery offered an opportunity for more complex exports to centers that were successfully competing in the simpler production of cotton textiles but in the longer run this was not sufficiently large to preserve Britain’s lead. Rather, it was the US and German chemical companies and their synthetic fibers that created new and more scientifically intense segments of the textile industry. Complexity of production processes In Chapter 1, I suggested that the steel industry, which involves relatively minor variations on a single product, was less likely to be able to weather economic

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Comparing across industries

difficulties or construct collaborative relationships than the chemical industry in which differentiated and overlapping products, that are often inputs to other chemical products, create opportunities to shield firms from competitive pressures and to build a capacity for cooperation based on their material interdependence. The case-study chapters shed further light on this contrast. The contrast is evident, for instance, in comparing, on the one hand, the “spaghetti bowl” of pipelines that link chemical plants to, on the other hand, the blast furnaces and continuous rolling technology that characterize large integrated steel plants. Both of these technical systems create physical interdependencies but for chemicals these link one firm with another while in steel they are internal to a single plant. The differences in the structure of the international industry reflect these technological differences, with steel involving a large set of relatively autonomous, similar, competitive firms with few linkages between them and chemicals involving differentiated firms that often establish tacit divisions of labor and collaborative practices. Despite the capital intensity, scientific intensity, and precision that are needed for semiconductor manufacture, the production process resembles steel more closely than chemicals. At any particular moment a very large proportion of semiconductor producers are focused on products that are quite similar and interchangeable. For instance the Dynamic Random Access Memory (DRAM) chip accounted for 75 percent of world memory sales and 23 percent of world semiconductor sales in 1995 (Flamm, 1996: 8) and during the 1980s producers focused sequentially on 64 K DRAMs, 256 K DRAMs and IMB DRAMs (Flamm, 1996: 256). In part, this is due to scientific and technical limitations – when 256 K chips were the standard the production of IMB chips was not technically feasible. It is also due to the need to standardize the product if it is to be used by the large number of computer manufacturers and programmers that exist. Both of these constraints are aspects of the large technical system of which individual semiconductors are a part. There are important exceptions to this overall point about the products’ similarities. As noted above, microprocessors are more complex and differentiated. However, the more commodity-like character of the markets for memory chips explain why the problems of overcapacity and the efforts to create market-sharing agreements resemble the experience of steel. Rows 7 and 10 of Table 8.1 compare the degree to which leading firms engage in direct foreign investment across the seven industries. The auto industry far outranks the others, followed by electrical and chemicals. This reflects the importance of process technology in these industries that can often only be effectively exploited when its use is constricted within the boundaries of the firm. In this respect the importance of direct foreign investment is a measure of the complexity of international production processes. The size concentrations of the auto, chemical, and electrical industries that were displayed in Figure 8.1 confirm this.

Patterns of maturation In addition to technological profiles, Chapter 1 hypothesized that industries were subject to similar identifiable patterns of maturation that have an impact on their

Comparing across industries 133 organization and governance internationally. It was suggested that in the early stages an industry would be organized on the basis of tacit or informal private institutions in a particular location, facilitated by leading firms’ technological advantage, but that as technology disseminated more formal, multilateral and public institutions would be created to manage the industry’s international relations. Fully mature industries that are weak, relative to other industries, are likely to lose their capacity to organize markets and instead simply engage in atomistic competition within a framework of rules provided by states. Fully mature industries that are strong, relative to other industries, are likely to enlist the state in organizing markets in order to preserve the dominance of leading firms. It was noted that variations in technological profiles are likely to have an impact on the speed of maturation in an industry; with more complex and science-intensive industries being better able to postpone the atomistic competition that accompanies maturation in other simpler industries. Table 1.1 provided other features of industries that might be expected to be associated with each of the three phases in the process of maturation. The case-study chapters provided various examples of these patterns but it is also clear that not all industries display as smooth and predictable a pattern of maturation as, for instance, train rails, in which there was little room for further growth once the initial boom had laid track throughout the world’s major territories. Indeed, in every case studied here, there were periods in which certain firms found ways to avoid tendencies towards industrial maturation even if other firms in the same industry were experiencing these tendencies. In the case of cotton textiles synthetic fibers provided this opportunity for rejuvenation; in steel, the minimills; in automobiles, new production processes and environmental and micro-electronic technologies; and in semiconductors, microprocessors. And in the electrical and specialty chemical industries innovation was so sustained that processes of maturation were slowed, dramatically, relative to other industries. A second complication in patterns of maturation that was revealed by the case studies is the way in which a second center displaced earlier locations in the case of chemicals, steel and automobiles. In the case of chemicals and steel, the initial British lead was eliminated by the rapid growth of German industry. Similarly, France was the initial center of automobile experimentation but it was overtaken by Detroit. While there was dissemination of technology in these shifts it was part of the industry’s initial emergence rather than maturation, and thus does not exactly match the model set out in chapter one. On the other hand, it could be argued that in some of these cases there was a qualitative difference between the second center’s industry and the first’s. In chemicals, this was the systemic use of science; and in automobiles it was mass production. In this respect there is an analogy between the distance separating British mechanized textiles and earlier textile centers such as India’s. Steel could be treated as a more straightforward case of diffusion with the emergence of German steel capacity simply being the first of many similar competitors that were soon to arise around the world. These interpretations reconcile the issue of a second center with the model in Chapter 1, but nevertheless they also point to a complication in applying it, that is related to how one identifies a significant enough change in a product or production

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process that a new industry should be considered to have emerged. Unless this is done carefully there is a danger of post hoc redefinitions of industries that could make the model of maturation unfalsifiable. Despite these examples of rejuvenation and the complications of second centers, the patterns of maturation discussed in Chapter 1 are still evident in the industry case studies. Three industries displayed strong patterns of maturation: cotton textiles; steel and semiconductors. In each case the leading firms lost their dominant position rapidly to competitors in other countries. In the chemical and electrical industries maturation was postponed more effectively as science-based innovations created new opportunities for leading firms to enjoy rapid expansion in new products, although in chemicals the widespread diffusion of the technology for the production of basic chemicals such as ethylene and the emergence of many competing centers of production of these chemicals around the world is a classic case of maturation. In automobiles maturation was evident in the diffusion of production capacity from the US to other countries after World War II, although leading firms were better able to preserve their lead than in other industries due to the difficulty of replicating the tacit knowledge embedded in US assembly-line practices. While it is difficult to obtain the type of data that is needed to reveal processes of maturation internationally, Tables 8.2 and 8.3, and Figures 8.3 through 8.9 provide some quantitative measures. Table 8.2 compares the growth rates and share of value added in less developed countries (LDCs) and industrialized countries in six industries. Steel stands out on both measures indicating that Southern production outpaced Northern production faster in steel than in any other industry. Growth in Southern apparel and textiles relative to growth in Northern apparel and textiles was lower than one would expect given the maturity of these industries although the controls over these industries in the Short-Term, Long-Term and Multifibre Arrangements may be a reason. The ranking of the other industries is not consistent between the two measures and thus conclusions about them cannot be drawn. Table 8.2 Indicators of differences in diffusion and maturation

Growth rate, North, 1963–79 Growth rate, LDCs, 1963–79 Ratio of LDC growth rate to Northern rate Share in world value added of LDCs, 1965 Share in world value added of LDCs, 1985 Increase of LDC share of world value added in 1985 compared to 1965

Apparel

Textiles

003.8

003.4

005.1

Electrical

Chemicals Auto

3.3

007.2

007.4

5.2

003.9

7.4

010.3

010.4

8.2

134.2

114.7

224.2

143.1

140.5

157.7

012.9

021.4

5.6

005.4

007.4

5.3

016.1

022.1

12.3

007.0

012.3

7.7

124.8

103.3

219.6

129.6

166.2

145.3

Source and notes: See Appendix (pages 161–3 below).

Steel

Comparing across industries 135 Table 8.3 Firms appearing in the Fortune Global 500, by industry and rank, 1999 Industry

#1

#2

Apparel Textiles Steel Electrical Chemical Automobiles Chips

None listed None listed Nippon Steel General Electric DuPont General Motors Motorola

None listed None listed NKK Siemens Bayer DaimlerChrysler Intel

Source: See Appendix (pages 161–3 below).

50% Chemicals Electrical Chips

40% 30% 20% 10% 0% –10% 1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

Figure 8.3 Variation in growth rates: percentage difference between industry growth rates (US figures) and overall US economic growth rates by industry, moving five-year averages, high growth industries. Source: See Appendix (pages 161–3 below).

Figures 8.3, 8.4 and 8.5 display the US growth rates in the seven industries as compared to the overall industrial growth rate. The Y-axis indicates the difference between that year’s growth rate and the overall industrial growth rate. The first of these graphs groups together the chemical, electrical and semiconductor industries, all of which experienced above average growth rates, with the semiconductor industry far outpacing the other two. Starting in the 1980s, growth rates in chemicals fell below those in the electrical industry. In the second graph, Figure 8.4, the growth rates of iron and steel and of motor vehicles and parts are displayed. These are more volatile than those in the previous graph, especially the rates for steel, reflecting the tendency towards overproduction and retrenchment, especially at the time of the recessions at the beginning of the 1980s and 1990s. The linear trends are plotted to display the longer-range tendencies behind these fluctuations. Motor vehicles and parts remain above the average for industry as a whole and indeed have increased on this measure over time. Iron and steel, however, has been consistently falling behind the industrial average. The third

136

Comparing across industries

15% 10% 5% 0% –5% Steel Auto Linear (Steel) Linear (Auto)

–10% –15% 1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

Figure 8.4 Variation in growth rates: percentage difference between industry growth rates (US figures) and overall US economic growth rates by industry, moving five-year averages, medium growth industries. Source: See Appendix (pages 161–3 below). 4% 2% 0% – 2% – 4% Textiles Apparel

– 6% – 8% 1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

Figure 8.5 Variation in growth rates: percentage difference between industry growth rates (US figures) and overall US economic growth rates by industry, moving five-year averages, low growth industries. Source: See Appendix (pages 161–3 below).

graph, Figure 8.5, displays the growth rates of textiles and apparel, both of which are consistently below the overall average for industry, with apparel ranking below textiles. These variations in the growth rate of industries reflect and confirm their different degrees of maturity, with textiles and apparel and steel, once at the center of the growth explosion associated with the industrial revolution, now fading in importance relative to the other industries. If data availability allowed

Comparing across industries 137 12%

10%

8%

6%

4%

2%

0% 1938

1951

1956

1961

1966

1971

Chemicals Electrical Iron and steel

1976

1981

1986

1991

1996

Semiconductors Automobiles Textiles Apparel

Figure 8.6 Seven industries’ share of US exports. Source: See Appendix (pages 161–3 below).

5%

3%

1%

–1%

–3%

–5%

–7% 1938

1951

1956

Chemicals

1961

1966

1971

Electrical

Iron and steel

1976

1981

Semiconductors Textiles

1986

1991

Automobiles

Apparel

Figure 8.7 US industry’s trade balance as a share of total US trade turnover. Source: See Appendix (pages 161–3 below).

1996

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Comparing across industries

30%

25%

20%

15%

10%

5%

0% 1956

1961

1966

1971

Chemicals

Electrical

Iron and steel

1976

1981

1986

Semiconductors Textiles

1991

1996

Automobiles

Apparel

Figure 8.8 Share of seven industries of Japan’s exports. Source: See Appendix (pages 161–3 below). 6% 5% 4% 3% 2% 1% 0% –1% –2% 1948

1953

1958

Chemicals

1963

1968

Electrical Iron and steel

1973

1978

1983

Semiconductors Textiles Apparel

1988

1993

Automobiles

Figure 8.9 Industry’s trade balance as a share of total national trade turnover, averaged for each industry, across the UK, France, and Germany. Source: See Appendix (pages 161–3 below).

Comparing across industries 139 the graphs to include the nineteenth and early twentieth centuries it would be possible to illustrate this pattern more completely. Figures 8.6 through 8.9 display changes in each industry’s share of national trade for five leading countries. Figure 8.6 charts the seven industries’ shares of US exports from 1938 to 1996 (the war years from 1939 to 1946 are omitted). The chemical and electrical industries have increased in importance over this period and during the 1990s, at about ten percent of US exports each, far outpace the others. Apparel has been consistently at the bottom and textiles and iron and steel have dropped dramatically. The semiconductor boom is visible, increasing from zero to 5 percent since the early 1960s. Automobiles remain consistently modest, reflecting in part their lackluster performance and in part the US industry’s reliance on direct foreign investment abroad rather than exports. Similar but more dramatic patterns are evident in Figure 8.7, which charts the trade surplus or deficit of each industry as a percent of total US trade turnover (imports plus exports) for each year. The deficits in automobiles and apparel are especially striking. Taken together these two graphs highlight the rapid migration of mature industries away from the US. Figure 8.8, which illustrates the importance of the seven industries in Japan’s exports, captures the moving of these industries into Japan and then on to even later industrializers. In contrast to the US, textiles remain important until the 1970s and then drop off, iron and steel surge in importance until the 1980s, followed in turn by automobiles and electrical and semiconductor products. The historical sequence of maturation of different industries is clear. Finally, Figure 8.9 provides data for the three leading European economies, telling a similar story to the US figures albeit without as severe deficits. Table 8.3 provides an alternative illustration of both the technological profile and patterns of maturation of the industries. For the electrical, chemical, auto and semiconductor industries, the firms holding the top two spots are ones that have been leaders – as was illustrated in the case-study chapters – from the inception of the industry. Most notable is the electrical industry with GE and Siemens leading as they were 100 years earlier. By contrast, both steel firms are Asian while no leading firm appears for apparel and textiles. In short, in some industries leading firms are able to hold on to their positions while in other maturing ones they are not. Technological profiles and processes of maturation: conclusion The above discussion has further confirmed the differences between industries that the case-study chapters began to reveal. The technological profiles of the industries clearly differ on science intensity and complexity, with the electrical and chemical industries ranking highest on these and the steel and apparel industries ranking lowest. Processes of maturation are evident as well but they can be forestalled by technical innovation by science-intensive firms. Our discussion so far indicates that capital intensity is less important as a variable since it primarily modifies the effect of the others rather than shaping the organization of industries by itself. Thus, capital-intensive industries that are maturing rapidly, such as steel or semiconductors, are especially prone to problems of overcapacity and also are likely to be sufficiently concentrated, due to barriers of entry, to successfully call for

Comparing across industries

Relative technical differentiation

140

Electrical Chemicals 1950

Private informal institutions and regimes

Public formal institutions and regimes

Chemicals 2000

Semiconductors 1970

Textiles, Apparel 1820

Auto Semiconductors 1992

Steel Textiles, Apparel 1990

Degree of maturation

Figure 8.10 Technical differentiation and maturation. Source: See Appendix (pages 161–3 below).

production or market-sharing arrangements to manage that overcapacity. Noncapital intensive industries that mature are, by contrast, likely to become atomistically competitive as new firms enter easily and existing firms find it difficult to organize a response. For firms that are science-intensive or have complex production processes, capital intensity does not add much in explaining their organization. We can further simplify by treating both science-intensity and production complexity as the two constitutive elements of a property which we can label complex differentiation. The research that is used to establish the interconnections between varied products in an industry and the process by which these products are produced can be treated as related. Based on the comparative analysis done in this book so far, Figure 8.10 distributes the seven industries across a two-dimensional space in which technical differentiation and the degree of maturation form the two axes. Based on the model developed in Chapter 1 we would expect the industries on the right side of this space to be more likely to involve inter-state regimes while those on the left will be primarily organized by private international institutions as indicated by the vertical line dividing the space. For those industries that have changed historically on these dimensions two temporal points in their development are plotted. The vectors connecting the two points in these pairs suggest a process of change over time. In this section we have begun to comment on the public and private features of governance that are correlates of variations in technological profiles and patterns of maturation. This has not been systematic, however, and in the next section I focus on comparing the industries on these.

Comparing across industries 141

Comparing international organizations across the industries In this section I compare the institutions that have shaped the governance of the industries at an international level. Many of these institutions, such as the cartels or the industry groups like the International Council of Chemical Associations (ICCA), have been discussed in the case-study chapters. Here, we add further information on institutions in order to better compare their configurations in the various industries. In analyzing these, the goal is not just to compare the strength of organizations but also to highlight differences in the goals and functions of institutions and in the relationship between public and private institutions. The Yearbook of International Organizations, which produces an annual comprehensive listing of international organizations of all types, provides a useful starting point for comparing the international organizations in the seven industries. Table 8.4 provides summary statistics, based on the 1999/2000 Yearbook listings, of the organizations that were associated with our seven industries in the 1990s. I will now highlight noteworthy features of this statistical summary by comparing each industry, in turn, to the others. The Yearbook’s listings, while comprehensive, are not infallible as they rely to a large degree on the self-reporting of the organizations. However, inclusion in the Yearbook can be taken as a reasonable indicator that the organization has reached a minimum threshold of significance that justifies its consideration in this chapter’s analysis. The Yearbook listings are not organized by industry and some judgement was required for some entries in deciding whether they did or did not fall within one of the seven industries on which this book is focusing. Chemicals Chemicals differ from the others in the very large number of institutions and in the high percentage of these that are devoted to “sub-industries” – chemical industries like chlorinated solvents that have a distinctive identity as well as clearly Table 8.4 International organizations by industry, 1990s

Total number of organizations % NGOs User-related (%) Sub-industry organizations (%) Regional organizations (%) Science or standardsoriented (%)

Apparel and textiles

Iron and steel

Electrical

Chemicals

Auto

Chips

57

45

41

185

026

17

86 11 26

93 02 42

93 22 44

097 001 089

100 008 050

94 00 06

40

60

56

062

046

47

19

11

20

016

023

18

Source: See Appendix (pages 161–3 below).

142

Comparing across industries

being part of the larger chemical industry. A very large number of these are European chemical organizations that have their headquarters at CEFIC in Brussels. Like the steel and electrical industries the relatively high number of regional organizations as compared to the other industries is in part a reflection of the historical importance of European firms in these industries that was also apparent in the cartels of the inter-war period. Chapter 5 noted that the chemical industry was marked by its proactive associational capacity, as for instance in its Responsible Care program and its creation of the ICCA. Table 8.4 provides further confirmation of the uniquely well-developed, complex and differentiated character of the international institutions in the chemical industry, mirroring its technological profile. The number of international organizations in the chemical industry that are primarily devoted to scientific, technical, educational or standardsetting activities further reflects the industry’s science-oriented technological profile.

Apparel and textiles The apparel and textile industry, while lagging well behind chemicals, is the next most populated by international institutions. This is consistent with the history set out in Chapter 2. Now, as in earlier periods, the large number of relatively small firms in the industry creates a need for institutions to carry out common functions that in other industries single firms might be able to efficiently provide because of their size. Thus, for instance, the International Textile Center at Texas Tech University responds to more than 500 requests a year for testing, evaluation, specialty processing and manufacturing functions that in other industries might primarily be carried out in the research facilities of leading firms. It is also striking that the textile and apparel organizations define themselves regionally less than any other industry – in part a reflection than the industry is more globally and atomistically dispersed than the others and, relatedly, in part a reflection of the lack of cartelization and other European-based collaborative practices that characterized steel, electrical and chemical industries. The large number of international organizations in this industry also reflects its age. For instance the Textile Institute, a “worldwide professional association for people working with fibres and fabrics” based in Manchester was granted a Royal Charter in 1925 and was founded 15 years earlier (www.texi.org). If we look more carefully at the apparel and textile organizations we can draw some further distinctions with other industries. Some of the organizations are not directly associated with governance of the manufacture of cotton and synthetic fabrics and apparel that have been at the centre of the industry. There are associations concerned with other textile material, including geotextiles, silk, and wool. There are also important organizations of producers of raw cotton, including the International Cotton Advisory Committee, the International Cotton Producers Association, and the International Institute for Cotton, all of which are intergovernmental. Of the remaining organizations four play a role in the governance of the industry as a whole and, in contrast to chemicals, two of these are intergovernmental organizations: the International Textiles and Clothing Bureau,

Comparing across industries 143 which acts as the voice of developing country exporters in Geneva and the Textile Monitoring Body, which is an organ of the World Trade Organization. The two non-governmental organizations are the International Textile Manufacturers Federation (ITMF), located in Zurich, and the International Apparel Federation (IAF), in London. As noted in Chapter 2, the ITMF was founded in 1904 as the International Congress of Master Cotton Spinners and Manufacturers, and it played a role throughout the twentieth century in facilitating the supply to manufacturers of good quality raw cotton, for instance through the promotion of standards and in producing statistics. It has always steered clear of trade politics. Although it has altered its structure over the years to integrate synthetic textile manufacturers it still puts more emphasis on cotton products. The IAF was founded in 1976 and is presently “the largest representative federation for apparel manufacturers and industry-related companies in the world”.1 The IAF’s member federations represent 130,000 companies from 27 countries. It produces statistics, sponsors technical projects, facilitates business contacts among members, conducts training programs, and organizes its World Apparel Conventions. Most recently, for instance, the Technical Committee of the IAF was responsible for the creation of a web-based directory of manufacturers. The Training Committee, formed in 1997, hopes to raise global standards through its programs. There is some of the type of complexity that characterizes chemicals in the “sub-industries” such as the International Federation of Sewing Thread Manufacturers and the International Rayon and Synthetic Fibres Committee, and some regional associations, such as the ASEAN Federation of Textile Industries, but most of the international nongovernmental organizations are concerned with services and standards that are of use to firms more generally. In addition to the ITMF and the IAF, these include, for instance, the International Commission for Fashion and Textile Colours, and the International Group for Textile Care Labelling (responsible for the cleaning symbols on clothing). The International Textile and Apparel Association is composed of scholars working on issues relevant to the industry. The prevalence of these types of institutions reflect the relatively atomistic character of the production process, with different stages between raw materials and final products being carried out by a series of firms in arm’s length relationships with one another. These firms need associations to produce standards and common services that, in industries such as automobiles, would be carried out within the corporate structures of the leading firms. Automobiles The auto industry is notable for the relatively small number of international organizations associated with it. This is consistent with the historical account in Chapter 6 which stressed the centrality for the industry’s governance of a few large transnational firms with high levels of foreign direct investment. These firms have organized their own affairs and have not needed the assistance of industry associations at the international level. A closer look at the types of institutions comprising the total in this industry confirms this point: almost all are not directly associated with the central activities of

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the large auto companies. Instead, they mostly fall into three categories. First, there are associations of firms that supply or service the large auto firms and their products. This includes the European Association of Automotive Suppliers, the European Association of Manufacturers of Moulded Polyurethane Parts for the Automotive Industry, and the International Federation of National Associations of Tyre Specialists and Retreaders. Second, there are associations concerned with the operation or use of the car once it is manufactured. These include the International Road Federation, which has played a role in promoting the construction of roads; the International Automobile Federation, which provides services to car drivers; the International Federation of Automotive Aftermarket Distributors; and the Association Internationale des Réparateurs en Carosseries (car repair firms). Finally, there are associations concerned with the development of electrical cars, including the World Electric Vehicle Association, the Electric Vehicle Association of the Americas, the Electric Vehicle Association of AsiaPacific and the European Association of Cities Interested in the Use of Electric Vehicles. These facilitate the development of a new technology that is not yet proven but that is likely to be in demand for environmental reasons. The international institution that seeks to represent the industry globally is the Paris-based Organisation Internationale des Constructeurs d’Automobiles (OICA), founded in 1919. This organization is comprised of national associations of vehicle manufacturers, one of which, the Association des Constructeurs Européens d’Automobiles (ACEA) is an international association in its own right. The OICA has deliberately steered clear of politically conflictual trade issues. Instead, it has been active in standard setting. There is a lot at stake for vehicle manufacturers in having uniform regulations and standards worldwide since these would facilitate the cost efficiencies associated with standardized production processes. Moreover, some regulations, such as environmental and safety standards, can impose substantial costs on manufacturers. Thus, the OICA has worked with the UN Economic Commission for Europe Working Party 29, that is, the intergovernmental World Forum for Harmonization of Vehicle Regulations. Often it is not clear who should bear the costs of regulation – for instance should the oil companies be told to produce cleaner fuels or the car industry to use fuels more cleanly? In such situations the OICA sees itself as defending its industry against others. In its conflict with the fuel industry over who should bear the costs of reducing harmful emissions, it has produced and updated a World-Wide Fuel Charter calling, for instance, for sulfur-free fuels. The OICA has also debated European Union (EU) initiatives to force the auto industry to pay more for “external costs” such as pollution, roads, and personal injuries. Most of the lobbying on politically conflictual issues is carried out by individual firms or by the associations that constitute the membership of the OICA. In the US the American Automobile Manufacturers Association had been an effective associational vehicle for the US big three but it folded abruptly soon after the Daimler–Chrysler merger, and in January 1999, the Alliance of Automobile Manufacturers was formed, a Washington-based coalition grouping US and nonUS firms that together account for 90 percent of vehicle sales in the US. A similar transformation occurred in Europe with the replacement of two associations by

Comparing across industries 145 ACEA in 1991. One of the two earlier European associations had been an association of national associations in which US branch plants and subsidiaries were members while the other was restricted to European-owned companies (McLaughlin and Maloney, 1999: 110). Thus the late twentieth-century international interconnections among the leading firms that were discussed in Chapter 6 have been accompanied by a shift away from nationally-based trade associations to more international ones (although the Japan Automobile Manufacturers Association continues to be an important exception). In contrast to some industries, individual leading firms continue to play a key role in public policy networks, evident both through their prominent role in their associations and through their individual capacity for lobbying. For instance, seventeen Brussels offices were maintained by the major auto companies in the late twentieth century (McLaughlin and Maloney, 1999: 119).2 This reflects the domination of the industry by a relatively small number of very large multinational corporations. Iron and steel In Table 8.4 the steel industry is noteworthy for the low percentage of scientific and technical institutions. This latter feature is consistent with the points made elsewhere in this book about the lack of technical complexity in this industry. Examples of scientific and technical associations include the European Committee for Iron and Steel Standardization, the European Group for the Certification of Constructional Steels, the Fédération internationale de l’ encadrement des industries métallurgiques, and the International Committee of Foundry Technical Associations. Most of these are devoted to standards and knowledge about the existing technology rather than collaborative efforts to create new scientific discoveries. Also noteworthy in Table 8.4 is the high number of regional organizations in the iron and steel industry. Most of these are European, reflecting the historical importance of intra-European organization that dates back to the cartels, as well as the organizational effects of the ECSC. There are also other regional organizations, however, including the Arab Iron and Steel Union, the Latin American Iron and Steel Institute, the South-East Asia Iron and Steel Institute and the Southern African Stainless Steel Development Association, reflecting the dissemination of steel producing to developing countries. The steel industry, like the automobile industry, has a significant number of sub-industry associations. However, unlike the automobile industry these associations are generally focused on processing the different products of the steel industry itself, rather than services and inputs for the industry or its users. Examples are the European General Galvanizers Association; the International Cablemakers Association and the Steel Shipping Container Institute. Like the underlying industry, then, the associations are built around the common production process for steel. The main association on the input side is the Association of Iron Ore Exporting Countries. The association that resembles the industry-wide ICCA in chemicals or the OICA in auto is the International Iron and Steel Institute (IISI). Located in

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Brussels, the IISI is a non-profit research organization whose members are comprised of steel producing companies, steel associations, and steel research institutes. According to the IISI “the 50 countries in which IISI steel-producing member companies are located produce over 70 percent of world steel production. Nearly all of the world’s major steel producers are members of the institute” (www.worldsteel.org). The IISI provides its members with industry data and technical information as well as providing a vehicle for industry involvement in environmental policies being developed by governments and in market development issues, such as the promotion of steel in its competition with other materials, such as plastic or aluminum. However, “the Institute exerts no pressure or politics on its members. It is not involved in trade negotiations or in competitive issues between steel companies” (www.worldsteel.org). Also influential in the international politics of the steel industry is the European Confederation of Iron and Steel Industries (Eurofer). Formed in 1956 and located in Brussels, Eurofer has played a key role in the reorganization of the European steel industry during its most troubled years in the 1970s and 1980s. It took the initiative in the unsuccessful efforts to negotiate a Multilateral Steel Agreement in the 1990s. Its industry statistics are used by firms to plan their production. It has represented the European steel industry to the European intergovernmental institutions such as the ECSC. With the phasing out of steel subsidies by the EU and the winding up, after 50 years, of the ECSC, Eurofer’s focus is likely to change from seeking to influence the governments’ use of subsidies and tariffs. Instead it will focus, on the financial side, on promoting the disbursement of funds for research and environmental matters, and on the trade and production side on encouraging the exchange among steel companies of the type of information that could facilitate joint tacit coordination of capacity. Electrical The data on the electrical industry in Table 8.4 indicate that, like the chemical industry, there are a significant proportion of its international associations that focus on scientific and technical matters. As noted in Chapter 6, one of the more important of these is the International Electrotechnical Commission (IEC), created in 1904, which sets standards for the electrical industry. Others include the ASME International Gas Turbine Institute, the Institute of Electrical and Electronics Engineers and the ASEAN Network on Cogeneration Technology. The electrical industry also resembles the chemical and steel industries in the relatively high number of regional organizations. Most of the regional manufacturing associations are European, such as the European Confederation of Associations of Manufacturers of Insulated Wires and Cables or the Committee of Associations of European Transformer Manufacturers. Exceptions are the ASEAN Federation of Electrical, Engineering Contractors and the ASEAN Federation of Electrical, Electronics, and Allied Industries. The other regional associations are primarily focused on the supply of electricity, such as the Central American Electrification Council, the Arab Union of the Producers, Transporters

Comparing across industries 147 and Distributors of Electricity, or the Union of Producers, Conveyors and Distributors of Electric Power in Africa. Indeed a distinctive feature of the international associations in the electrical industry is the number of them that are focused on the production of electricity rather than the manufacturing of electrical machinery. In addition to the regional ones just mentioned, these include the World Council of Power Utilities, the International Union of Producers and Distributors of Electrical Industry (UNIPEDE), the International Union of Electricity Stations, and the International Conference on Large High Voltage Electric Systems. These are categorized as “user-related” in Table 8.4 and account for the high proportion of these in this industry. As noted in Chapter 4, initially, with Edison’s first projects, the generation of power and the manufacturing of electrical equipment were carried out by the same firms. However, as the industry evolved, the utilities became a separate and different set of economic organizations. Most were public or heavily regulated local enterprises and, as discussed in Chapter 4, this feature of the industry contributed to its stability. Also distinctive in the electrical industry is the lack of any association coordinating the producers of electrical machinery. This is consistent with the heavy dominance of the industry by a few very large multinational corporations such as GE and Siemens. These large firms do not need to delegate matters to industry associations as they have sufficient organizational capacity and informal ongoing links among themselves. The IEC is the closest in representing the industry overall in the way that the ICCA does for chemicals or the OICA for automobiles, but it devotes itself to standards and not to the types of interest-related activities in which the ICCA and the OICA engage. Overall, then, the international electrical organizations reflect the underlying technology and the associated economic organization of the electrical industry. Governance functions related to manufacturing are carried out directly by large multinational firms. More general technical and standard matters as well as issues related to the use of the manufactured equipment for the generation and distribution of electricity are the primary focus of the industry’s international associations. Intergovernmental organizations do not play as prominent a role as in textile and apparel or in iron and steel. Semiconductors The most noticeable characteristic of the international organizations concerned with semiconductors is their small number relative to the other industries. The age of the industry is an obvious explanation. In one sense this is simply the lack of time for firms and other actors to organize international institutions with sufficient visibility to appear in the Yearbook of International Organizations. Indeed there are a number of significant collaborative initiatives that do not appear in the Yearbook that I discuss in this section. A significant number of the listings in the Yearbook are European institutions such as the European Electronic Components Manufacturers Association and the

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European Semiconductor Council. The data in Table 8.4 also include organizations of users of semiconductors in Europe, such as the European Association of Consumer Electronics Manufacturers and the European Association of Manufacturers of Business Machines and Information Technology Industries. The intergovernmental Joint European Submicron Silicon Program ( JESSI), part of the government-funded EUREKA network for industrial R&D aimed to stimulate the European semiconductor industry. Following its 1996 completion, JESSI was replaced, in 1997, by MEDEA (Microelectronics Development for European Application), also part of EUREKA. MEDEA has claimed that “JESSI was crucial for Europe’s microelectronics industry in catching up in key technologies with the global competitors from the USA and from Asia/Pacific … The top 3 – Philips, STMicroelectronics, Infineon Technologies (ex-Siemens Semiconductors) – entered into the ‘World Top Ten’ of 1998. In 1989 they were only #10, 13 and 16” (www.medea.org). The European Electronic Chips and Systems Design Initiative (ECSI) was established in 1993 with EU support and it involves the leading European semiconductor and telecommunications firms, including Philips, Infineon, Ericsson, SGS-Thomson Microelectronics, and Alcatel. It aims to promote collaboration in standards and design technologies. There are no regional association from outside Europe.3 The prominence of European organizations in the Yearbook confirms that the industry has diffused beyond its Silicon Valley origins – but not yet worldwide. Several of the institutions in the Yearbook are devoted to more global promotion of research and standards in the semiconductor industry, including the International Council on Defects in Semiconductors and the International Union of Pure and Applied Physics. Given the science-intensity of this industry the presence of such institutions is not surprising. Other such international initiatives not appearing in the Yearbook are also important. For instance, Si2 (Silicon Integration Initiative, Inc.), founded in 1988 as the CAD Framework Initiative, and chaired in 2000 by an IBM executive, includes all of the world’s leading semiconductor manufacturers among its 46 corporate members. Si2 “provides engineering consultation and services … for synergistic multi-company efforts focused on improving productivity and costs in the design and production of integrated silicon systems” (www.si2.org). The Virtual Socket Interface Alliance (VSIA), formed in 1996, is a globally oriented organization with its main office in California and other offices in Europe and Japan. It facilitates collaboration in the increasingly crucial area of system design involving interoperability of “virtual components” (modular blocks of complex code). The organization which plays the broadest role for the governance of the industry overall is the World Semiconductor Council, which was discussed in Chapter 7. As noted there, this council came about after the interactions between the US and Japanese governments that had managed international semiconductor markets in the 1990s. The World Semiconductor Council and the other collaborative initiatives in the semiconductor industry are portrayed as consistent with competitive global markets. This portrayal primarily rests on the notion that the collaboration

Comparing across industries 149 involves “pre-competitive” research and not the organization of markets. VSIA is careful, for instance, to state in its description of its activities: “Equally as important is what the VSIA does not do. The organization’s charter specifically prohibits VSIA from attempting to make product development, price or business strategy decisions for individual members” (www.vsia.org). Yet, as with the collaborative auto ventures described in Chapter 6, the abundant opportunities for tacit coordination in planning expansions or reductions in production capacity provide members of such collaborative initiatives a mechanism for shaping the market’s direction that can offset some of the negative consequences of unrestrained competition in ways that in other contexts have been brought about by publicly or privately organized cartels. In structure then, the industry is composed of numerous firms among which are more prominent ones such as Intel or Texas Instruments. The leading firms organize their part of the industry informally but also have found it necessary to work with governments to create institutions such as MEDEA or the World Semiconductor Council. Other associations are not primarily associations of suppliers or users of a few leading firms, as in the automobile industry, but rather industries in their own right, such as computers, which use semiconductors as one of their inputs. In this respect the industry resembles the more sequential pattern of the textile and apparel industry.

Comparing political conflict and political power Frequently, governance in international affairs is carried out not through formal bureaucratic organizations but rather through more fluid and interactive political relationships and conflicts among states. It was apparent from the case studies that the industries have varied in the way in which such political relationships have developed. In some industries, especially post-World War II textiles and apparel, states have been actively involved in politically managing market shares. These, as with voluntary export restraints and other interventions by states have been associated with political conflict. In other industries, such as the electrical industry, firms have taken the lead and there has been very little political conflict. In this section I provide some comparative statistics on the use of anti-dumping (AD) and countervailing duty (CVD) measures, which are good indicators of this type of political management. I supplement the resulting insights with further comparisons of political conflict in these industries that can be drawn from the casestudy chapters. In this section I also consider the relevance of an alternative approach to understanding the relationship between political power and governance that focuses more on the distribution of capacity among states. One well-known variant of this type of approach is hegemonic stability theory, which stresses the importance for governance of having one dominant power. In After Hegemony (1984) Keohane fruitfully applied this approach to different issue areas – oil and money – suggesting that it may be possible to disaggregate distributions of

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capabilities among states by industry rather than focusing on hegemony as a feature of the system as a whole. One might expect that such a disaggregated approach would provide insight into the types of variations among industries that this book seeks to understand. We shall see that the state-capability approach modestly supplements the approach developed in this book but does not significantly challenge it. Anti-dumping statistics and other ways to compare political conflict across the industries AD and CVD measures have long been an important tool of trade policy for states. Dumping, or selling below cost, can be an effective anti-competitive practice as the firm engaging in dumping may be able to subsidize its products in a target market from revenues in another market, destroy competitors, and then obtain a dominant position from which it can recoup its costs. Internationally, the General Agreement on Tariffs and Trade allows anti-dumping measures in which a state imposes restrictions on imports that are sold below the price they are being sold at in the producing firm’s home market. Countervailing duty measures similarly allow a state to impose duties on injurious imports that have been produced with government subsidies. In theory AD and CVD measures can promote free trade by restricting activities – dumping and subsidies – that are inconsistent with perfect competition. However, the methods for determining that dumping or subsidies caused unfair damage are not incontrovertible and there is always the possibility that AD and CVD measures can themselves be unfairly used as a weapon against foreign products. Even if the measures are not imposed, the initiation of them can be disruptive for those against whom they are targeted, and even the threat to initiate them can be used to persuade targeted firms to restrain sales. As trade negotiators have reduced tariffs, AD and CVD measures have become a relatively more important trade policy tool. The Uruguay Round tightened up the rules on the use of AD and CVD measures in response to complaints that they were being abused by importing countries, but critics contend that they continue to be vulnerable to manipulation. Tables 8.5 and 8.6 present data comparing the use of AD and CVD measures across industries. In Table 8.5 the numbers of AD and CVD cases initiated in the US are displayed. The very high number of cases in the steel industry confirms the assessment in this book that this is an industry in which governments have been very active in trying to organize and allocate markets. The contrast with the electrical industry, in which leading firms have exercised control without government assistance, is striking. The figures for the car industry also confirm the analysis in the case-study chapter: conflict escalated in the late 1960s and 1970s but subsided subsequently as leading firms engaged in strategic alliances and devised new ways to collaborate in the organization of markets and to retain their dominant position through technological innovation. The relatively low number of cases in the apparel and textile industries is a reflection of the strength of the various arrangements for market-sharing negotiated by states, including the

Comparing across industries 151 Table 8.5 Number of US AD and CVD measures initiated by decade and industry

Before 1930s 1930s 1940s 1960s 1970s 1980s 1990s Total

Apparel

Textiles

Steel

Chemicals

Electrical

Chips

Cars

01 08 04 03 15 05 00 36

005 013 005 019 034 022 007 105

012 005 000 042 053 201 241 554

013 041 04 047 051 057 054 267

01 04 01 12 31 12 12 73

0 0 0 0 0 3 4 7

00 00 01 17 19 06 04 47

Source: See Appendix (pages 161–3 below).

Table 8.6 AD and CVD measures initiated in non-US jurisdictions by industry

Apparel Textiles Steel Chemicals Electrical Chips Cars

US products subject to measures in other countries 1/1/98 to 6/30/98

EU measures, 1999

00 10 17 73 06 01 01

02 32 95 66 46 00 00

Source: See Appendix (pages 161–3 below).

Short-Term, Long-Term, and Multifibre Agreements. The lack of apparel cases in the 1990s reflects, in part, the loss of power of apparel producers relative to importers in the US as well as the protective effects of the transition period that was agreed for the MFA phase-out. The significant number of chemical cases reflects the diffusion of the industry to newly industrializing countries that was discussed in the case-study chapter. The increase in cases in semiconductors in the 1980s and 1990s is evident although the total number is low relative to other industries. This may in part be due to the size of the industry relative to the others, as was evident from Table 8.1 above, but nevertheless it is surprising that semiconductor firms did not make more active use of these measures in addition to their lobbying for more high-level political intervention that was discussed in the semiconductor chapter. Table 8.6 provides the use of AD and CVD measures in countries other than the US. The EU figures display a distribution across industries similar to the US pattern. A difference in the case of US products subject to measures abroad is the exceptionally high number of chemical cases. Most of these were in developing countries, the top three of which were Mexico with 16, Brazil with 15 and India with 6. While this is consistent with analysis in this book which indicated that

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chemicals is an industry which is presently in the process of diffusing to the developing countries, with the trade conflicts that are thereby generated, the figure is still higher relative to the other industries than one would expect. Conclusions about the varying role of states across industries The quantitative data on trade conflict presented above confirm the observations about differences across industries in the role of states in governance that began to emerge as we proceeded through the case-study chapters. Here, we can sum these up and draw some overall conclusions about the degree to which the hypothesized relationship set out in Chapter 1 and displayed in Figure 8.10 above is supported by the evidence. If we take the points in Figure 8.10 ranked by their degree of maturation and complexity, proceeding from the top left axis to the bottom right, we can see that it matches the degree to which states have intervened in the industry. Including the two time periods that were charted on this graph for some industries, we can construct a table that summarizes this relationship, as in Table 8.7. The table illustrates the correlation between the complexity of an industry, as defined above, and a minimal involvement of states. In complex industries, leading firms can organize their own affairs. As we proceed down the table to more mature and less complex industries the role of governments in organizing the industry internationally increases. Alternative explanations based on relative power of state So far my emphasis has been on assessing the relationship between an industry’s technology, its economic organization, its international organizations, and the involvement of states in its international governance. There is a well-established alternative approach that is important to counterpose to this book’s approach in order to assess their relative explanatory strengths. This is the approach, most closely associated with realism in international relations theory, that sees the character of international institutions and political conflict as determined by the distribution of capabilities across states. As noted above, Keohane applied such a capabilities-based approach in a disaggregated manner in After Hegemony. Put simply, the approach suggests that we are likely to see more institutions in industries in which capabilities are unequally distributed. The logic is that a state with sufficiently large presence relative to others will be willing and able to support institutions because it will enjoy enough of the benefits to cover the costs. Smaller states, by contrast, may contribute and find the benefits too dispersed for them to be able to offset their costs – the problems of prisoner’s dilemmas and free riding. Some theorists have also emphasized the capacity of a hegemon to bring about compliance through the use of positive and negative inducements. In its sparer versions, such approaches do not comment on the content of a regime’s policies. However, generally hegemonic stability theories have assumed that the hegemon benefits from, and will support, free trade policies. Additionally, it is a straightforward step, consistent with realism, to trace the content of a regime’s policies to the preferences of its most powerful member, as have some scholars (Ruggie,

Comparing across industries 153 Table 8.7 Summary of relationship between industry complexity and state involvement Industry Most complex, least mature Electrical

Role of states States have played no significant role internationally except for post-WWII anti-trust activities. Subnational governments contributed to the industry’s stability by regulating or owning utilities.

Chemicals, 1950

States have played no significant role internationally except for post-WWII anti-trust activities and the allied and US role in breaking up IG Farben and distributing German patents. Steady modest use of AD/CVD in US.

Chips, 1970

No role of states in international governance. US military spending stimulated early industry. Anti-trust action against Bell disseminated technology to US firms.

Textiles and apparel, 1820

No significant role of states in international governance.

Chemicals, 2000

NIC governments stimulate diffusion of industry to their firms, through state ownership, financing or AD/CVD measures.

Auto

Tariffs encourage MNCs to locate production internationally but otherwise industry is organized by a few leading firms. Exception is period of export restraints in 1970s.

Chips, 1992

US government creates market-sharing agreement with Japan. Europeans seek to stimulate their industry with state assistance.

Least complex, most mature Steel

Textiles and apparel, 1990

In interwar period states reinforce private federations of national cartels by use of tariffs. In post-WWII period, the European Coal and Steel Community is set up. Many governments create state-owned industries or otherwise contribute to their national steel capacities. At end of twentieth century AD, CVD and restraint agreements are common. Decades of multilateral market-allocation agreements organized by states continue.

1993; Burley, 1993). Some scholars have argued that a small group of powerful states can carry out the same functions as a hegemon (Lake, 1993). A first step in assessing the relative merit of the distribution of capabilities approaches is to examine data on such distributions for the industries studied in this book. Obtaining data for earlier periods is difficult, but nevertheless, it is

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useful to examine that data that is available which I do in Figures 8.11 and 8.12 (for the share of production) and Figures 8.13–8.16 (for exports and imports). Figures on production can be obtained for most of the twentieth century but not for all industries nor for the measures of an industry that would be most useful today. Cotton consumption provides a measure for the textile industry, and sulfuric acid production, used in a high proportion of chemical processes, is a good measure for the chemical industry. Figures are also available on crude steel and on automobile production. Figures that can relatively unproblematically be used to measure export and import shares have been published by the UN since 1970 (earlier data is available but aggregating the data across countries and differentiating industries was too costly for the scope of this book). 100% 90% 80% Cotton consumption Crude steel Auto production Sulfuric acid

70% 60% 50% 40% 30% 20% 10% 0% 1897

1907

1917

1927

1937

1947

1957

1967

1977

1987

Figure 8.11 Top country’s share of world production. Source: See Appendix (pages 161–3 below). 100% 90% 80% 70% 60% 50% Cotton consumption Crude steel Auto production Sulfuric acid

40% 30% 20% 10% 0% 1897

1907

1917

1927

1937

1947

1957

1967

Figure 8.12 Top five countries’ share of world production. Source: See Appendix (pages 161–3 below).

1977

1987

1992

1992

Comparing across industries 155 40%

35%

30%

Market share

25%

20%

15%

10%

5%

Chemicals Electrical Electronics Auto Steel Textiles Apparel

0% 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92

Figure 8.13 Market share of top exporting country by industry. Source: See Appendix (pages 161–3 below).

Figure 8.11 displays the top country’s share of world production for textiles, steel, auto, and chemicals and Figure 8.12 provides top five countries’ shares. In each chart the data points are average figures for all years in the second half of the decade (except the 1990s which is the first half), reducing year-to-year fluctuations and avoiding the measurement problem posed by World War II. The rapid loss

156

Comparing across industries 85%

80%

75%

Market share

70%

65%

60%

55%

Chemicals 50%

Electrical Electronics Auto Steel

45%

Textiles Apparel

40% 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92

Figure 8.14 Market share of top five exporting countries by industry. Source: See Appendix (pages 161–3 below).

of US predominance in autos and steel is especially striking. Along with the low share of cotton consumption and the relatively constant share of chemical production, this figure is consistent with points made so far about variation across industries in patterns of maturation and diffusion. Now, however, we are examining it for insights into the organization of collaboration among states. Unfortunately, for the distribution of capabilities approaches, the figure suggests that distribution of capabilities has little relevance. The most unequal distribution

Comparing across industries 157 50% Chemicals Electrical 45%

Electronics Auto Steel Textiles

40%

Apparel

35%

Market share

30%

25%

20%

15%

10%

5%

0% 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92

Figure 8.15 Share of world imports of top importing country by industry. Source: See Appendix (pages 161–3 below).

was the mid-century auto industry – a time and industry where governments played no role in the industry’s international governance. Similarly, the period when the US was most active in seeking to organize international steel markets (the 1970s and 1980s) was one in which its capabilities had declined dramatically compared to earlier less interventionist periods. Thus, hegemonic capabilities appear to be negatively correlated with regime construction.

158

Comparing across industries 80% Chemicals Electrical 75%

Electronics Auto Steel Apparel

70%

Textiles

65%

Market share

60%

55%

50%

45%

40%

35%

30% 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92

Figure 8.16 Share of world imports of top five importing countries by industry. Source: See Appendix (pages 161–3 below).

Figure 8.12 displays the same time period and industries, but for the top five countries. Once again, the chart, in highlighting a pattern of diffusion of capabilities that is present in all industries, is consistent with this book’s discussion of patterns of maturation although the sequencing, with chemicals falling below the

Comparing across industries 159 other three, is not. This is partly due to the emergence of new and very populous leading countries, such as India and Russia, in industries other than chemicals. In any case, like Figure 8.11, relative capabilities appear to have little explanatory value: the most organized industry (textiles) is the least concentrated and the periods in which control of international markets by interacting states was strongest in textiles, steel and automobiles were, for each of these industries, a period when concentrations of capabilities had declined. It could be argued that in both of these figures it was in periods of concentrated capabilities in an industry that its trade was at its freest. This might especially be the case, for instance, for the auto industry with the enormous US share of world production mid-century. However, this is an odd application of a theory that is supposed to explain international institutions as the US needed to do very little to promote the free flow of automobiles after World War II – it was US firms operating abroad and the lack of capacity in other countries to produce cars that was responsible. Overall, such an emphasis on free trade offers little insight into variations across industries of the freeness of trade. For instance in the 1950s steel was more concentrated and less free than chemicals – the opposite would be predicted by hegemonic stability approaches. Perhaps it is the distribution of trade capabilities rather than production that is important. Figures 8.13–8.16, which examine exports and imports, give us an opportunity to address this question. In Figure 8.13, which measures the top country’s share of world exports, the pattern is similar to that in the production figures. In the latter period covered by the graph the leading country varies. For instance, in some of these years Japan led in auto, Germany in chemicals, and China in apparel. Nevertheless, a decline in concentration levels is an indicator that the industry is disseminating. Apparel is lowest throughout the period, steel and textiles declined markedly during the two decades, chemicals declined more slowly, auto declined least and electrical remained relatively constant. Although this again highlights the differences in the industries that have been the focus of this book, these data, like those on production, shed little light on variation in the governance of the industries. The same conclusion can be drawn from Figure 8.14, which charts the market share of the top five exporting countries. The data on imports, however, provide more support for the distribution of capabilities approach. The industries for which the market shares of the lead importer (Figure 8.15) and the top five importers (Figure 8.16) are highest are, in order, auto, apparel, electronics and steel, although steel’s fourth place position was less constant in the five-country figures. These are the industries that, during this period, experienced heavier government intervention than did the electrical or chemical industry (textiles is surprisingly low, perhaps because a large proportion of textiles are imported by countries other than the US to supply their apparel industries). Thus, one could argue that rules governing sales on world markets are likely to emerge in industries in which a single country accounts for a large proportion of imports for the reasons identified by hegemonic stability theorists. It should be noted that the content of the regime associated with this concentration of capabilities is not, however, one that is usually associated with theories of hegemony, which stress the support of the hegemon for open markets.

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Moreover, these data could also be interpreted as expressing the relationship developed in this book, as the concentrations could reflect the heavy reliance of the wealthiest countries on imports of products that have matured and are now produced in developing countries (with auto’s high imports perhaps in part due to the importance of intra-industry trade in this industry).

Comparing industries: conclusion This chapter has compared the leading industries upon which this book has focused, beginning with their technological profiles and patterns of maturation; then moving to their international institutions; and then looking at the role of the state, its propensity to intervene and to engage in conflict over market shares; and at the relevance of the distribution of capabilities across states. It has reiterated and confirmed the relationships that had emerged in the case-study chapters. Overall the empirical material has supported the model set out in Chapter 1. The case-study chapters revealed that industries’ technologies vary and thereby contribute to variation in the industries’ organization. These differences in technology and organization are remarkably enduring. As well as examining variation in technology and the organization of the industry, this chapter also compared the structure of international organizations and of international political relations across the industries. International organizations were shaped by the technoeconomic organization of the industry in a number of respects. Not surprisingly, industries with high scientific complexity had a greater proportion of international institutions that were devoted to scientific and technical matters than did industries based on simpler technologies. More interestingly, industries such as electrical and auto, which are organized by a few very large multinational corporations, have fewer international institutions than do industries populated by a great variety of firms and products, such as textiles and apparel or chemicals. Industries with firms organized around integrated production processes tend to have a greater proportion of international organizations arising at the input or output end rather that the central production process itself. In short, the structure of the set of international institutions associated with an industry reflected that industry’s underlying techno-economic organization. The patterns of maturation that were sketched out conceptually in Chapter 1 were also revealed by the comparative data. A number of the figures confirmed that industries such as apparel and steel had matured while others, such as electrical and chemicals, had resisted maturation. Mature industries were indicated by slower growth rates and by heavier deficits in the balance between exports and imports in high-income countries. This chapter used the term complex differentiation to refer to industries in which production processes and the scientific and technical systems associated with these processes involved varying but linked elements that could only be organized or understood with high levels of research. Industries characterized by complex differentiation resist maturation and tend to organize their own affairs. Mature, simple industries, especially capital-intensive ones, have higher levels of state

Comparing across industries 161 involvement both at the national level and in frequently conflictual negotiations over market shares. This is consistent with the model set out in Chapter 1.

Appendix List of sources and notes on data for Tables and Figures Tables Table 8.1 Indicators of differing technological profiles for US firms. R&D intensity: R&D as percent of net sales, 1995, National Science Board Science and Engineering Indicators 1998, Table 4-25, p. A-147; Capital intensity: capital expenditures as a percent of value added, 1992, US 1992 Economic Census: Census of Manufactures; Concentration: top four companies’ percentage share of total value of shipments, based on data from US 1992 Census of Manufactures, Report MC92-S-2, “Concentration Ratios in Manufacturing”, web version at www.census.gov/mcd/maccen/download/mc92cr.sum; Share of manufacturing: Steel based on SIC 3312, blast furnaces and steel mills; electrical based on 3613, switchgear (transformer figure was 51, motors and generators was 36); semiconductors on 3674, semiconductors and related devices; cars on 3711, motor vehicles and car bodies; textiles on 2281, yarn spinning; and apparel on 2331, women’s and girl’s blouses and shirts (men’s and boys’ shirts were 28); chemicals on 2819 industrial inorganic chemicals, not elsewhere stated (other chemical ratios vary widely, from 2823, cellulosic manmade fibers at 98 to 2875, fertilizers, mixing only, at 19) US 1992 Economic Census: Census of Manufactures; Weight per $million exports: 1978 figures were used since weight was not routinely recorded in more recent years. Categories used were clothing, not of fur (841); woven textiles non-cotton (653); iron and steel shapes (673); electric power machinery, switchgear (722); organic chemicals (512); passenger motor vehicles, excluding buses (7321); transistors, valves, etc. (7393). Source: International Trade Statistics Yearbook, Volume I, Trade by Country, United Nations; Spatial concentration: top three states’ share of establishments with twenty or more employees US 1992 Economic; Census: Census of Manufactures Industry series (same SIC codes as for concentration ratios above); Foreign assets of world’s top 100 MNCs: billions of dollars of foreign assets owned by the world’s top 100 multinational corporations, by industry of the parent corporation. Calculated from Table II.1, World Investment Report 1998: Trends and Determinants United Nations Conference on Trade and Development, 1998, pp. 36–8; Foreign affiliate assets and sales vs. parents’: affiliate assets as a percent of parent assets (row 8) and affiliate sales as a percent of parent sales (row 9) based on US Direct Investment Abroad: 1994 Benchmark Survey, Final Results, US Department of Commerce, May 1998, Table II.A 2 (p. 26) and Table 6 (p. M-13). Share of related-party trade in exports: Related Party Trade 1998 US Census Bureau; Exhibit 5. Categories include electrical machinery, apparatus and appliances (77); Motor vehicles (78); Articles of apparel and clothing (84); iron and steel (67) and those chemical and textile figures listed in chart.

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Table 8.2 Indicators of differences in diffusion and maturation. Growth rates: growth rates of manufacturing value-added, United Nations Industrial Development Organization (UNIDO), Vienna, Industry and Development Global Report 1985 (New York: United Nations), Table 1.1, p. 11; Share of world value added: UNIDO Handbook of Industrial Statistics 1985, Table 6, p. 45 (New York: United Nations). Table 8.3 Firms appearing in the Fortune Global 500, by industry and rank, 1999. Source: Fortune (www.fortune.com), which ranks firms by revenues. Electronics and electrical equipment are grouped together in the Fortune tables and some firms, such as Siemens, that produce semiconductors and many other electrical products, are larger than Motorola and Intel, which focus on semiconductors. Since the share of the larger electrical firms’ revenues that were derived from the production of semiconductors was not reported it was not possible to judge their relative importance in the semiconductor market from the Fortune figures. However other reports on the semiconductor industry place Motorola and Intel above the large electrical equipment firms. Table 8.4 International organizations by industry, 1990s. Yearbook of International Organizations 1992 and 2000 issues. (Brussels: Union of International Associations and Munich: K.G. Saur.) Inactive organizations were not included. The Yearbook’s categories do not correspond to those used in the table. Organizations were allocated to one or more categories by the author based on the descriptive information in the Yearbook or other sources, such as their websites. Table 8.5 Number of US AD and CVD measures initiated by decade and industry. Compiled from data provided in the website of the US Department of Commerce’s International Trade Administration at www.ia.ita.doc.gov/stats/ iastats1.html Table 8.6 AD and CVD measures initiated in non-US jurisdictions by industry. Source: Same as Table 8.5. Table 8.7 Summary of relationship between industry complexity and state involvement. Based on analysis in the text. Figures Figure 8.1 Size (assets) distribution of US firms by industry. Leo Troy, Almanac of Business and Industrial Financial Ratios 29th annual edition 1998 (Paramus, NJ: Prentice Hall). Categories used were weaving, textile finishing; women’s and children’s clothes; other electrical equipment; industrial chemicals, plastics; ferrous metal industries; motor vehicles and equipment; electronic components and accessories. Figure 8.2 Number of US patents by industry, 1977–98.

Comparing across industries 163 US Patent and Trademark Office, Office for Patent and Trademark Information, Technology Assessment and Forecast Program, General Statistical Reports, at www.uspto.gov/web/offices/ac/ido/oeip/taf/reports.htm. Figures 8.3–8.5 Industry and overall growth rates compared, moving five-year averages. Calculated from Federal Reserve data, “Industrial Production and Capacity Utilization, Historical Data”, Tables 1 and 2, at www.federalreserve.gov/releases. Series used were “Chemicals and Products” (SIC 28); “Electrical Machinery” (SIC 36); “Semiconductors and Related Elements” (SIC 3672-9); “Iron and Steel” (SIC 331, 2); “Motor Vehicles and Parts” (SIC 371); “Textile Mill Products” (SIC 22); and “Apparel Products” (SIC 23). For each year seasonally unadjusted data from February was used. Figures 8.6–8.9 Seven industries’ share in trade. United Nations Department of Economic and Social Affairs, Statistics Division, International Trade Statistics Yearbook Volume I, Trade by Country, various years, (New York: United Nations). Categories used to collect these statistics have changed periodically. The most significant changes are three. First, the category “transistors, valves, etc.” was the only measure of semiconductor trade initially but in more recent years a new category, “electronic microcircuits”, was used. Second, earlier statistics did not always separate passenger cars from other vehicles. Third, textile measures in the immediate post-World War II period were reported in a disaggregated format while later ones have been grouped under “textile, yarn, fabrics, etc.” Figure 8.10 Technical differentiation and maturation. As noted in text, based on case-study chapters and above data. Figure 8.11 Top country’s share of world production. Compiled from data published in the United Nations Statistical Yearbook, various years and from International Historical Statistics. Figure 8.12 Top five countries’ share of world production. Source: Same as Figure 8.11. Figure 8.13 Market share of top exporting country by industry. United Nations, International Trade Statistics Yearbook, various years. Figure 8.14 Market share of top five exporting countries by industry. Source: Same as Figure 8.13. Figure 8.15 Share of world imports of top importing country by industry. Source: Same as Figure 8.13. Figure 8.16 Share of world imports of top five importing countries by industry. Source: Same as Figure 8.13.

9

Conclusion Industry structures, systemic factors and implications for the study of international relations

In this concluding chapter, I consider the findings of this book in relation to the larger scholarly field of international relations. A distinctive feature of this book’s approach is its focus on processes and institutions at the level of international industries. This is in contrast to the prevailing tendency in the field of international relations to focus on systems-level factors such as the distribution of capabilities across the competitive state-system or structural elements of the global economy. Moreover, the field of international relations has been dominated by approaches that stress the preeminence of states in world affairs, a contrast with this book’s tracing of patterns to variations in industrial technologies. As noted in Chapter 1, one international relations approach that also has been used to analyze industries is the regime theory. However, even regimes have often been linked conceptually to systemic patterns such as the rise and decline of hegemonic states and theories have generally been state-centric. Thus, in considering the implications of this book’s findings for the field of international relations, it is important to discuss further the relationship between the industry-level patterns upon which it has focused and systemic factors, and to reflect on the relative merits of technology-centered and state-centered approaches. The chapter is divided into three parts. In the first I review the long historical period in which these industries have been in existence in order to highlight the relationship between the systems-level changes that occurred in this period, such as world wars, and the industries’ development. In the second I return to the four international relations themes set out in Chapter 1 to which it was anticipated that this book could make contributions: the role of hegemony, the role of epistemic communities, the role of private authority, and the content of regimes. In the third and concluding part I focus on the contrast between this book’s technologycentric approach and the prevailing state-centrism of international relations.

Systems-level change and industry-level change in historical perspective The industrial developments discussed in this book have spanned two centuries – from the emergence of the cotton textile industry at the beginning of the nineteenth century to the developments in all industries at the end of the twentieth

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century. During this long period dramatic changes occurred in the character of the international system. In the case-study chapters the impact of some of these changes were noted, such as the effects of Germany’s defeats in the world wars on the chemical industry. In this section I highlight eleven such changes that the case-study chapters suggest were significant for the development of the industries. These are set out in Table 9.1. Clearly these changes are interdependent: for instance the rise of the US, Germany, and Japan contributed to the decline of British hegemony. Nevertheless, the developments listed are independent enough to be treated separately. Although a detailed examination of each goes beyond the scope of this book, it is possible to make some general comments about importance of these systems-level developments relative to industry-level factors. There is no doubt that systems-level factors have had an important impact on the organization and governance of international industries, as for example with the prohibition of cartels, the greater involvement of countries other than the US and Europe in the global economy, European integration, and the enthusiasm for neo-liberal policies. While it is important to take systemic factors into account, there are three reasons why they are inadequate as explanations on their own. First, this book has demonstrated that there are major differences across industries in their organization and governance and these cannot be explained by Table 9.1 Key systemic factors, nineteenth and twentieth centuries System-level development

Effect on industries

Rise and decline of British hegemony

● ●

British state facilitated early cotton industry British 1930s diplomacy precluded state-run cartel

Rise of US hegemony

●

US anti-trust policies undermined cartels

World Wars I and II

● ●

Promoted state intervention in industries Led to dissemination of German technology

The role of Germany

●

Germany provided foundation for cartels

Decolonization

●

Accelerated dissemination of technologies and state intervention

Cold war

●

Contributed to European integration Contributed to US openness to imports from Asia

●

●

European Coal and Steel Community Fostered European focus of industry associations

Post-World War II high growth rates

●

Competitive pressures offset by market growth

Rise of Japan and East Asia

●

Contributed to rise in competitive pressures and attempts to control them

Late twentieth-century neo-liberalism

●

Decline in state intervention

The environmental challenge

●

Important constraint for chemicals, auto and semiconductors

European integration

●

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systemic factors where one would expect that the effects of these factors would be felt in all industries. For instance, if one looked at the steel industry by itself one might assume that the heavy intervention of states in it after World War II could be explained by the general enthusiasm for state intervention across the world, which in turn could be explained by the apparent success of Keynesianism and welfare policies, of state-led growth in the Soviet Union, and of strong state policies in winning the wars. Yet, the lack of comparable levels of state intervention in the electrical or auto industries highlights the inadequacy of such an explanation. Second, even where a systemic factor has had more of an impact on some industries than others, as with environmental constraints for chemicals, automobiles, and semiconductors, this distinctive impact is crucially dependent on factors specific to the industries themselves – in this case it is the physical character of chemicals with their toxic by-products, of autos with their emissions, and of semiconductors with the contamination of ground water that results from their production, that explains their prominence in environmental issues. Third, while certain international industries, by virtue of the country in which they were initially centered, were affected more than others by the rise or decline of that country in the international system, it would be difficult to argue that the country’s relative power caused the industry to appear or develop in the way that it did. For instance, the rise of the cotton industry and the form of organization it took was not caused by British political hegemony – as evident in the degree to which the industry was organized independently of the state. As for British economic hegemony, the rise and decline of the cotton industry was more a cause or an element of this hegemony than a result of it since cotton was the leading industry and its growth was not dependent on others as evident in the clustering of the industry around Manchester – distant from traditional economic centers such as London. Similarly, as discussed in Chapter 2, the connection between free trade and British hegemony was, to a significant degree, due to the pressure of the Manchester-based cotton industry in their campaign to abolish the corn laws.1 Similar points could be made about the auto industry in the US. As for the chemical industry in Germany, even after Germany’s two defeats in the World Wars, the industry’s technological profile and governance displays the same differences relative to other industries as it has from the beginning. The systems-level factor that appears to pose the greatest challenge to the model developed in this book is the rise of neo-liberalism. With privatization, reduced tariffs, and other forms of state retreat from the governance of industries, neo-liberalism complicates both comparisons across industries (since differences across industries in the level of state involvement may be reduced as state involvement generally is minimized) and across time. With respect to change over time, the model set out in Chapter 1 hypothesized that all industries were prone to having their technologies mature and disseminate and that this would be accompanied by changes in their organization and governance, with the initial reliance on private informal arrangements in a single location giving way to more formalized multilateral arrangements in which, eventually, states were more likely to be prominent. Thus, it is reasonable to ask whether this pattern could be eliminated by the effects of neo-liberalism on state intervention.

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While it is too early to know whether the impact of neo-liberal reforms on the governance of industries will endure, the findings of this book provide reasons to be skeptical of the idea that industry-level differences and dynamics will not continue to be expressed in variations in state involvement in the governance of industries. Much as was the case with the inter-firm collaboration after the post-World War II prohibition of cartels, or the creation of “voluntary export restraints” after the GATT restricted quotas on imports (Lemieux, 1994: 350–1), new but similar arrangements can be devised to comply with the formal letter of international or domestic law but carry out the same functions. Even in semiconductors, viewed by many as highly competitive and contemporary, the US state stepped in forcefully to create market-sharing arrangements in the 1980s and early 1990s. Even after the Uruguay Round agreements, which were supposed to restrict the use of tariffs, including those associated with anti-dumping measures, US steel firms continued to make vigorous use of such trade policy measures when faced with cheap steel imports after the 1997 East Asian crisis. Similarly, US textile and apparel firms were able to postpone adjustment to the Uruguay Round provisions by putting items not at risk – like umbrellas – at the top of the year-byyear schedule of items to be subject to reduced tariffs. Even more significant over the longer term, however, is the shifting of state intervention away from tariffs and national ownership to other forms of assistance. In the model set out in Chapter 1 it was suggested that some industries that had matured or were in decline may become so weak relative to others that states might forgo any support other than setting the rules within which they can engage in atomistic competition, while in other more powerful industries it was expected that firms would successfully mobilize states to assist them in controlling markets. It may be that some industries, like steel, will shift to the first of these two categories, while others, like chemicals, will enter into new forms of the second category, as states try to safeguard the industry by subsidizing research and development or by sponsoring, in the name of research, consortia and other cartel-like arrangements in which firms are more easily able to maintain control of markets. In this respect, SEMATECH may be a model for future mature industries.2 Such changes would be consistent with the past experience of the industries explored in the book – systemic factors have altered but not eliminated enduring patterns of variation across industries and time. In sum, then, it is important to consider systemic factors in analyzing the organization and governance of international industries: but they do not provide an adequate explanation of these by themselves. As Chapter 1 put it, the industrylevel factors upon which this book has focused are “played out on a shifting terrain which is in turn shaped by systems-level factors.”

Technological factors and four international relations themes In this section, I return to the four international relations themes to which Chapter 1 suggested this book may contribute: the role of hegemony, the role of epistemic communities, the role of private authority, and the content of regimes.

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Hegemony International relations theorists have argued that hegemony – the preeminence of one actor – is a key factor contributing to the creation of inter-state regimes. Some have focused on the overall hegemony of a state in the international system while others have focused on the hegemony of states within particular industries or issue areas (Keohane, 1984). The model developed in Chapter 1 challenged these views in proposing that inter-state regimes would emerge not in periods of hegemonic strength, but rather in periods of maturation and decline. It was hypothesized that collaborative arrangements between leading private actors would be the key source of governance in strong growing industries and it would only be after the technology had disseminated and relations were more multilateral that states would step in. In discussing systems-level factors above, I have already addressed the question of whether the variations in the governance of industries discussed in this book are related to world hegemony. As with other systems-level factors, the rise and decline of world hegemonies is not effective at explaining the differences across industries that this book has highlighted. If we look overall at the historical period covered by this book, starting with the early cotton industry, we have an opportunity to assess the effects of British hegemony in the mid-nineteenth century, the lack of hegemon in the inter-war years, and the rise and relative decline of US hegemony after World War II. Contrary to the arguments of the hegemonic stability theory, periods of hegemony were ones in which the most distinctive arrangements for the organization and governance of international industries were among private actors rather than among states. This is the case for the cotton industry at the time of British hegemony and the auto industry at the time of US hegemony. It was only in periods of hegemonic weakness or decline – the interwar period and the 1970s and 1980s – that arrangements became more formalized and states became more actively involved in organizing markets. This was evident in the cartels of the interwar period and the voluntary export restraints of the 1970s and 1980s. The major potential exceptions – the management of the clothing and textile industries beginning in the 1950s and the European Coal and Steel Community – are best explained by the technological profiles and more advanced maturity of those industries rather than with reference to US hegemony overall, since that hegemony did not produce similar outcomes in other industries. In part, this problem in hegemonic stability theory can be traced to its failure to consider the key but changing role of private actors in organizing markets and in part to its failure to address sufficiently the content of regime policies, questions which I examine in the sections that follow. This book also challenges approaches that focus on hegemony at the level of industries. Here, too, periods of concentration are ones dominated by private forms of organization and governance, while periods in which technology and production has disseminated are ones in which states are more likely to step in to organize markets or set the rules within which private actors interact. This was evident in all the case-study chapters as well as in the time-series analysis of

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Chapter 8, which for production and exports contradicted hegemonic stability theory and supported the model developed in this book. As noted in Chapter 8, concentration among importing countries in mature industries was correlated with inter-state arrangements for organizing markets; but this is not the type of trade-promoting role that is usually attributed to hegemons in hegemonic stability theory and is also largely accounted for by the emphasis on processes of maturation discussed in this book.

Epistemic communities As discussed in Chapter 1, the epistemic communities approach has suggested that policy-oriented communities of scientists and technical experts can be an important contributing factor in the formation of inter-state regimes in periods of scientific and technical complexity. The model set out in Chapter 1, in contrast, suggests that these communities can promote private – not inter-state – arrangements, and that, indeed, it is in periods of maturation, when scientific and technical complexity declines, inter-state regime formation is most likely. The subsequent empirical analysis in this book strongly supports the view of epistemic communities set out in Chapter 1. It is the most scientifically and technically complex industries – electrical and chemicals – that are most effectively organized privately and it is in the least complex industries – steel, apparel and textiles – that inter-state arrangements were most prominent. Moreover, in the earlier periods of the semiconductor, and apparel and textile industries, when the technology was relatively new, complex, and had not yet disseminated, it was private institutions that were supported by the technical complexity and not inter-state ones. One might perhaps try to argue that these experts were not true epistemic communities because they were not oriented primarily towards the influence of states – but this would introduce an element of arbitrariness and tautology into the epistemic communities approach that would make it ineffective. By supporting private arrangements and thereby substituting for the types of organizational and governance functions potentially provided by inter-state regimes, the communities of experts discussed in this book have had just as important an impact on the fortunes of inter-state regimes as have experts that are more directly engaged with public officials.

The role of private authority In Chapter 1, it was suggested that a deficiency of prevailing state-centric approaches to international institutions is their neglect of the important roles of private actors and institutions as sources of organization and governance in international industries. Subsequent chapters provided strong empirical support for this contention. There were numerous and varied examples of the role of private institutions, ranging from the informal arrangements and understandings that

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held the early cotton industry together or that are associated with contemporary strategic alliances, through the more formal organizations of firms in multinational conglomerates or cartels, to the industry and trade associations, many with quasipublic functions, that were examined in Chapter 8. Sometimes these private institutions were focused primarily on the organization of the actors directly involved in them, as with many cartels, while others have had a significant influence on states – as for instance with the role of Manchester in bringing about free trade or the role of the weaknesses of private steel arrangements in shaping the involvement of states in the industry. This book reinforced points that I and others have made in Private Authority and International Affairs (Cutler et al., 1999). That book pointed to the role of technical knowledge in constituting private authority. This is especially believable today when the authoritative role of experts in “high-tech” issue areas appears to be a distinctive feature of the contemporary world. This book confirms the organizational importance of technical knowledge in high-tech industries but also reminds us that we can also find this in earlier industries that were once “high-tech” but are no longer. Complex technologies can empower leading private actors either through their purposeful manipulation of it – as with the use of patent litigation by leading electrical and chemical firms to safeguard their dominance or the deliberate creation of a capacity for sustained R&D as in Edison’s lab – or through less deliberate developments, as when the clustering of individual actors in Manchester and Silicon Valley conferred competitive advantages on them relative to actors elsewhere or when a scientific breakthrough unexpectedly conferred an advantage – as with the Thomas–Gilchrist method of ore dephosphorization that was significant in the rise of German steel firms. The content of regimes In Chapter 1, I suggested that the tendency of international relations theorists to focus on generic features of international institutions and regimes, such as their strength, has led to inadequate consideration of the content of regime policies. Why are some international arrangements liberal and some protectionist? By examining governance in the context of the challenges and dynamics of the industries that regimes seek to regulate, this book has shown how one can explain a regime’s content as well as its organizational features. In addition to the key role of technological profiles and processes of maturation in explaining whether protectionist regimes are established, as has been discussed above, there are many other comments about the content of international institutions that can be made based on the analysis in this book. Collaborative institutions serve many purposes other than the promotion or denial of market access. Examples include the development of scientific and technical standards (as with the International Electrotechnical Commission), the promotion and enforcement of raw material quality (as with the International Textile Manufacturers Federation); the creation of needed infrastructure (as with the International Road Federation); the promotion of the use of the industry’s

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product among consumers (as with the World Power Conference’s promotion of electrification in developing countries); the addressing of environmental challenges (as with the chemical industry’s Responsible Care program); the promotion of efficient and reliable financial transactions (as with the Manchester Royal Exchange or the cotton industry’s factorage system); or coordinating production across industry segments, as with the international organizations of car parts manufacturers. If we include the organizational structures of firms in our analysis of international institutions, we can also note the way in which these can carry out crucial functions for an international industry – including developing new knowledge through R&D, assisting buyers with the use of new products and with after-sales service (especially critical in the chemical and auto industries), as well as making individual contributions to the types of tasks in which collaborative institutions are engaged. The analysis in this book allows us to specify which of the types of functions listed above are likely to appear at particular times or in particular industries. Some general statements can be made. For instance, in scientifically complex industries there is, not surprisingly, likely to be a focus on setting scientific standards in the work of international institutions. These industries, when they are first emerging, are also likely to create institutions for explaining and promoting their new products. In industries with technologies that are associated with many small competitive but interdependent firms, institutions are likely to arise that carry out functions that, in industries dominated by larger firms, would be done internally in those firms. Industries facing serious environmental challenges are likely to develop institutions to jointly address these, such as the electric car institutions in the auto industry or SUSTECH in the chemical industry. In addition to such general statements, by using the type of detailed industry-focused historical analysis carried out in the case-study chapters we can provide further analysis of the types of functions carried out by international institutions.

Contribution to international relations themes: conclusion As noted in Chapter 1, a criterion in assessing the analytic utility of a social science model is its capacity to reveal and explain sets of facts and relationships that are not addressed by, or are inconsistent with, other approaches. The above four themes demonstrate that the model developed in this book is not just consistent with the empirical record, as established in Chapters 2–8, but can also successfully answer questions that other approaches have not. Many of the points made in this section, especially those concerning the role of technical and scientific expertise, the role of private authority, and the varied content and functions of international institutions, are ones that are likely increasingly to displace the more conventional problems of inter-state conflict upon which international relations theories have traditionally focused. As industries become more globalized they are likely to be accompanied by new institutional problems and solutions, and not all of these will be centered on interactions among states.

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Technology, states, and international institutions: concluding remarks In this book, I have focused on the role technology plays in the organization and governance of international industries. In this final section I reflect on the significance of this book’s findings for our understanding of more general theoretical questions about the role of the state in a globalizing world as well as pointing to some avenues of future inquiry that an approach such as this book’s opens up. A distinctive feature of our contemporary world is the degree to which states – which had previously seemed to possess in a supreme form the capacity to organize, mobilize, and regulate social interactions – are being challenged by alternative organizational forms. Some of these alternatives are centralized, such as some of the mammoth multinational corporations that have been produced by late twentieth-century mergers, and some are decentralized, like the Internet or international financial markets. Despite its difficulties, there is a tendency to take the state as the paradigmatic example of organizational effectiveness, due in part to our proximity to the mid-twentieth century – a time when the state had reached the zenith of its power, having fought two World Wars, engaged in socialist and nationalist economic experiments, and attempted to solve a wide range of social problems in every country. Late twentieth-century analysis of the challenges faced by state power has often focused on markets, global civil society, or cyberspace in ways that do not ask seriously how activity other than that regulated by the state’s bureaucracy is coordinated and governed. Often these challenges to states are treated as flows of individual transactions that are powerful because of their size or speed. It is argued that their fluidity makes territory – a defining characteristic of states – irrelevant. This book has taken a different approach by focusing on the myriad mechanisms that facilitate the organization and governance of international industries. Rather than treating the economy as a relatively undifferentiated mass of flows or individual transactions, it has identified particular forms of organization – such as informal social networks, bureaucratized firms, cartels, or trade associations – which shape individual interactions and structure the industry as a whole. There are a great number of scholars who have focused on these institutions in domestic economies, or who have written about one or another of them internationally, but as yet there has been little progress made in analyzing them as a whole and in relationship to the role of states. Linking this book’s analysis of these institutions has been its understanding of technology. Technology has been seen as a distinctive social category because it combines guides for human conduct – such as technical standards – with material artifacts – such as electrical grids or blast furnaces. Technologies can regularize conduct across vast spaces, by integrating activities into large interdependent technical systems, or by serving as widely imitated prototypes that are reproduced by one set of actors after another as industries spread. Technologies are not just a set of material constraints on human conduct, however. Rather, they are a medium, much like language, that humans use to achieve certain ends. Like

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language they provide rules that must be followed if they are to be used effectively. Thus, they both constrain and empower. A focus on technology does not have to be deterministic. This book’s focus on technologies and economic institutions, while challenging state-centric approaches, is not intended to celebrate the initiative and self-organizing potential of the private sector. Certainly, there are organizational accomplishments to be admired in the accounts of non-state economic actors in these pages. However, there are also examples of failures, and of the negative consequences of a self-interested use of technologies and institutions to dominate and control. A problem with not taking the institutional and technological features of industries seriously is that these negative consequences of private arrangements can be concealed and the private actors that consequently benefit can be unaccountable. As we commence the twenty-first century there are signs, in a wave of anti-trust initiatives, from the Microsoft case to the denial of a series of mega-mergers, that the wave of uncritical optimism about the benefits of privately organized markets that characterized the late twentieth century has subsided. In a period of rapid technological change it is easy to mistakenly assume that the past holds no lessons for addressing these and other “high-tech” problems of the present. This book, with its long historical focus, has challenged that view. The inter-war period, with its cartels, bears more similarity to the early twenty-first century than we expect. The long historical trends and patterns this book has highlighted are unexpectedly enduring; and this should encourage us to ask in the future whether they continue to operate, even if their particular manifestations have changed.

Notes

1 Theorizing the role of technology in the governance of international industries 1 On international regimes, see Krasner 1983; Rittberger 1995; Hansclever, Rittberger and Mayer, 1997. 2 See for instance, Dosi et al., 1988; Foray and Freeman, 1993. 3 There are some other scholars who have pursued this line of inquiry. See for instance Eden and Hampson, 1997, and Portnoy, 1987. This book moves well beyond these, however. 4 Nelson 1992, 178–80 and Talalay et al., 1997, 6 were useful in formulating this definition. 5 On long-cycles and international relations see Goldstein, 1988. 6 Cohen et al. (1987: 543) argue that industry effects account for nearly half the variance in levels of research and development while business unit and firm size account for less than 1 percent. This finding is compatible with this book’s treatment of industries as having distinctive technological profiles, an element of which is scientific and technical complexity. 7 For a text that applies industrial organization theory in a comparative cross-industry manner and draws conclusions about US public policy on that basis, see Scherer, 1996. On the place of cross-industry comparisons in the larger field of industrial organization see Sutton 1997. He discusses a pattern of firm-size and technological development in which a few initial firms are joined by very large numbers of new firms, and this is followed by a shake-out that leaves the industry dominated by only a few firms. We shall see that this is the reverse of the relationship that I hypothesize exists internationally. This is in part because the process of technological development at a global level for many industries is far more extended than is the case domestically. Thus, a decline in the number of firms in the country in which the technology emerged may be accompanied by a huge expansion of the number of foreign firms entering that industry. 8 For interesting discussions of patterns of maturation, although not an international level, see Sutton (1998), Markusen (1985), Magee (1977), and Sahel (1981). A portion of the literature on long-cycles in the world economy also focuses on patterns in the emergence and maturation of technologies. See for instance, Freeman (1983) and the discussion of this literature in Goldstein (1988). 9 Vernon’s product-cycle model has come under significant fire for underestimating the degree to which research and development is done abroad. However such criticisms (see, for instance, Cantwell, 1995), while valid for individual products, do not address the initiation of paradigms. Moreover, as will become clear later in this chapter, the model developed in this book recognizes high levels of scientific and technical complexity may preempt patterns of industrial maturation. 10 For a useful overview of hegemonic stability theory see Lake (1993). 11 This is the well-recognized and widely used epistemological approach of Lakatos (1970).

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2 The cotton textile industry: from the industrial revolution to the present 1 A similar but earlier pattern occurred in Africa: private British traders displaced the Royal African Company after its collapse in 1748 (Mann, 1931: 149). 2 The following are relevant to the points made in this paragraph: Mahon and Mytelka, 1983; Dunn, 1998; Clairmonte and Cavanagh, 1981. 3 The steel industry: nationally-based cartels and market-sharing arrangements 1 The R&D gap between Britain and Germany was, like chemicals, serious: “In European works it was common to have an engineer continually present in each of the main shops … there was nothing of this kind in the British industry and in many works no member of the engineering staff had a scientific training” (Burn, 1940: 215). 2 In 1914, US Steel had 40 overseas warehouses and 1 foreign plant, in Canada. In 1928 it had only 24 warehouses and 2 plants in Canada (Chandler, 1990: 752 fn 131). 3 German firms incurred penalties as a result of exceeding production quotas. For instance in the first year of the cartel $12.9 million was paid in penalties to the cartel’s “equalization fund”. German firms paid $10.4 million of this (Notz, 1929: 51). 4 The German government acquired a controlling interest in VSt in 1932. It began to try to use the international cartel to promote its policy goals (Stocking and Watkins, 1946: 212–15). 5 “In 1929, ICI was party to some 800 agreements covering chemical production. Yet, by no means all this activity took the form of the classic cartel.” (Grant, Paterson, and Whitston, 1988: 27). 6 Gillingham, 1991: 355, citing Günter Sieber, “Die Rekonzentration der eisenschaffenden Industrie in Westdeutschland”, Stahl und Eisen 1: 1958: 46–55. 7 For further discussion of post-World War II private cartel activity in European steel see (Mirow and Maurer, 1982: 155–6). For instance, the European Tube Cartel was established in 1956 by British, French, Belgian, and German producers with the Japanese joining in 1966. Press controversy over market-sharing in 1971 led to a fine of 130,000 DM by the German Cartel Office but this was overturned on a legal technicality (Mirow and Maurer, 1982: 155). 8 This paragraph is entirely based on “US Steel makers”, 1995: 9. 9 Moore, 1996: 15, who cites the economies of scale of large-scale production, geographical concentration of plant sites, and the relative immobility of capital and labor employed in the traditional steel sector. 10 While not precisely comparable it is of interest that 40 percent of the European petrochemical industry was state owned or influenced. The major European producers, however, had less than 10 percent public ownership (Mussati and Soru, 1991: 40). Moreover, “even countries with state holding companies in chemicals are using them less as instruments of national policy and allowing them to function more as commercial entities.” (Grant et al., 1988: 213, 318). 11 On the emergence of minimills and the restructuring of US steel in the 1980s and 1990s see Ahlbrandt et al., 1996; Hall 1997. 12 Information on the MSA can be found in various issues of Iron Age/New Steel. 4 The electrical industry: enduring complexity and the longevity of leading firms 1 On the question of Edison’s contribution relative to others see Hughes, 1983: 25–7. 2 A prominent example of the ties between equipment producers and utilities was Samuel Insull, a leading figure in the development of utilities, who at one point controlled utilities serving 1,800 communities and by 1925 controlled 8.4 percent of electrical energy sales in the US (Sultan, 1974: 13). Insull had held important positions in the Edison firms until 1892.

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3 Notably absent were the US and Great Britain. Delegations came from AustriaHungary, Argentina, Belgium, China, Costa Rica, Denmark, Spain, Columbia, France, Greece, Guatemala, Italy, Japan, Mexico, Nicaragua, Norway, Basque Countries, Portugal, Dominican Republic, Romania, Russia, El Salvador, Sweden, and Switzerland. 4 A no contest plea does not leave the accused open to civil damages, as does a guilty plea. The government accepted the no contest pleas primarily because of the difficulty of pursuing all the cases given its limited anti-trust resources (Walton and Cleveland, 1964: 39). 5 AEG and Siemens initially had also both acquired nuclear energy technology under license from GE and Westinghouse, respectively, but both ended their partnerships after some years (Schröter, 1993). 6 According to a deposition in the 1960s anti-trust US cases one utility executive commented, “You people don’t have to cut prices to get our business. We, more or less, have a policy that we give a certain percentage of our business to one manufacturer and a certain percentage to another, because we want all manufacturers to live. We want research and development work to go on. We don’t want prices to get so low that you can’t do that, because research and development has done a tremendous amount for the industry” (Sultan, 1974: 25). 5 The chemical industry: complex technologies and private governance 1 For instance Germany was a minimal player in synthetics in 1860, held 50 percent of world markets in 1870, and 90 percent in 1900 – this latter dominance exercised by three firms (Grant et al., 1988: 18). 2 “Chemical technology is so charged with vitality, so cumulative, so pervasive, that the boundaries between chemical industries and other industries are artificial and fluid. The young and powerful chemical giants today challenge the nonchemical industries of yesterday” (Stocking and Watkins, 1946: 364). 3 Schröter (1992: 33), upon which this paragraph is based, notes “the dyestuffs cartel pioneered a new type of international convention”. By 1938, 62.2 percent of dyestuffs sales were made by the European dye cartels. 4 An interesting part of the story that goes beyond the scope of this paper is the role of American banks. Contrary to characterizations, based on other sectors, of German industry as being guided by close relations with German banks, the chemical industry has enjoyed much independence from banks (Grant et al., 1988: 118–31). In part this is due to its ability to generate finance internally. In the case of VSt it was US banks that stimulated its merger in the 1920s (Feldenkirchen, 1987: 421). 5 These are discussed in Mirow and Maurer, 1982, 129–30; 138–9 and 141–7, respectively. 6 For a similar comment by the chair of DSM, a European chemical company, see “Petrochemicals to Gain”, 1992, and by the chair of ICI, see Hampel, 1995: 962. 7 Even the publishing of statistical information may under certain circumstances be illegal under Article 85 of the Treaty of Rome (Grant et al., 1988: 194). 8 The chair of one European chemical company noted: “Ten years ago we had 30% overcapacity. Now it is 10% based on ability to produce.” See “European Petrochemical Industry”, 1992: 38. For a useful analysis of this period and other aspects of the chemical industry see Ilgen, 1983. 9 Chemical and Engineering News (Ember, 1995: 10) notes of the industry’s environmental program: “Responsible Care spotlights the collision of two languages: the technical, number-laden language of plant managers who reduce everything to systems, procedures, and timelines, and the value-laden language of a public speaking of trust, honesty, and credibility. One of the challenges for Responsible Care is to bridge this communications gap”.

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10 The significance of Responsible Care is debated. Some environmentalists see it as a sham. Despite a $10 million-a-year ad campaign in the US the chemical industry “still stands just above the lowest – the tobacco industry – in self-esteem” (Ember, 1995: 10). Currently a key and controversial issue in the industry is third-party verification. 11 Another striking example of the contrast between chemicals and steel on a similar issue is the differing headlines in trade journals with regard to the new ISO 9000 standards. New Steel’s (February, 1994: 40): “Mixed reviews for ISO 9000: Steelmakers have a lukewarm response to the quality standards … ”. Chemical Week’s (April 29, 1992: 30): “ISO 9000: Providing the Basis for Quality: Industry cleaves to an international standard.” Chemical and Engineering News (March 1, 1993: 12): “Value of Global Quality Standards Becomes Clear to Chemical Industry: Chemical companies have discovered ISO 9000 certification is key to conducting business and competing globally.” 6 The automobile industry: assembly lines and international investments 1 At its high point in the mid-1950s GM accounted for half of the North American market (Dassbach, 1989: 239). A 1958 Senate investigation confirmed the presence of GM-led administered pricing. See Adams and Brock, 1991: 456. 2 Section 301 of the 1974 Trade Act is a controversial measure used by the US government to threaten or impose sanctions unilaterally in retaliation for alleged trade barriers in other countries. 7 Semiconductors: rapid maturation and cartel creation 1 On non-market factors in the Japanese ascendance see Tyson (1993: 97). She notes as well that in the mid-1970s the top six firms controlled 79 percent of domestic sales in Japan. 2 A similar law was adopted in Japan in 1985 (Flamm, 1996: 156). 3 These points are made by Irwin (1994). Tyson points out that “forward pricing” was common in the US industry: rapid gains in efficiency through learning over the generation of a new product leads firms, early in the cycle, to set the price lower than one would expect based on costs alone (Tyson, 1993: 89). For a contrary view that stresses the collusive role of Japanese firms organized in a “shadowy Council of Nine” see Flamm (1996: 164). 4 The launching of a case by the government itself was unprecedented. It may have been at the instigation of Texas Instruments that did not want to risk retaliation against its affiliate in Japan (Tyson, 1993: 108). 5 The Europeans had already fallen well behind the US and Japan in this industry. Tyson lists three reasons: the European encouragement of FDI, the fragmentation of Europe into different national markets, and the failure of the European strategy of fostering national champions behind strong tariff barriers. See Tyson, 1993: 101–2. 6 The GATT ruled against the STA’s provisions for third markets but the problem was solved by the increase in chip prices and the agreement on an EC–Japan price floor (Flamm, 1996: 191). 7 This built on a Japanese industry structure that was already conducive to cartelization. See Tyson, 1993: 100. 8 A similar consortium, US Memories, was set up by three leading computer firms and four leading semiconductor firms in 1989 but folded the following year. An earlier industry-funded consortium, the Semiconductor Research Consortium, was set up at SIA’s initiative in 1983, but focused on basic research in universities. See Procassini, 1995: 183. 9 The SEMATECH members, as of 1999, were AMD, Compaq, CONEXANT Systems, Hewlett-Packard, IBM, Intel, Lucent Technologies, Motorola and Texas Instruments. This paragraph is based on information available at www.sematech.org.

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10 The 1991 agreement, because of its tough quantitative targets, was regarded by US officials as the “most successful ever struck with Japan.” The Japanese government, by contrast, regarded it as the “worst blunder in trade negotiations, and one that should never be repeated.” (Mitsuko, 1996). 11 The EIAJ merged with the Japan Electronic Industry Development Association into the Japan Electronics and Information Technology Industries Association effective November 1, 2000. See www.jeita.or.jp for more information. 12 The potential of collaborative arrangements such as the WSC to control markets was noted by Jürgen Knorr, chair of the semiconductor policy committee of the European Electronic Components Manufacturers Association, who, according to Electronic Engineering Times, envisioned “the WSC as an OPEC-like body that could rule on the production of semiconductors. The intent is to smooth the industry’s cyclical swings between over- and under-capacity.” (“Europe Downplays Tariffs,” 1996). 8 Comparing across industries 1 This quote and other information can be found at the IAF’s website: www.iafnet.org. Websites have been used as a source of information for each industry discussed in this chapter. 2 McLaughlin and Maloney (1999) provide an excellent and detailed account of the role of automotive associations in Europe. Their analysis differs from mine in its stress on the key role of the EU policy process in stimulating the formation of ACEA. 3 The Regional Network for Microelectronics in South East Asia and the Pacific, which appeared in the 1994 Yearbook of International Organizations, was dropped from the 1999/2000 edition. 9 Conclusion: industry structures, systemic factors and implications for the study of international relations 1 Citing The Times of 1886, Platt (1968: xxiii) provides convincing documentation that the British diplomats concerned themselves with high politics and had a “condescending and even contemptuous attitude” towards businessmen, whom were seen as socially inferior. Efforts to develop new sources of raw cotton received no support from the British state and were not very successful. 2 Weiss (1998) focuses on this theme.

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Index

Agreement on Textiles and Clothing 44–6 Alliance of Automobile Manufacturers (AAM) 110 American Automobile Manufacturers Association 96, 98, 144 American Iron and Steel Institute 61 American Textile Manufacturers Institute 45 Anti-dumping measures (AD) 61, 63–6, 93, 95, 117–8, 149–52 anti-trust policy see competition policy Asea Brown Boveri 81 assembly line see automation Association des Constructeurs Européens d’Automobiles 144–5 associations 20; automobile 145–7; chemical 114–15; electrical 74, 78, 146–7; semiconductor 147–9; steel 51, 53, 57, 60–1, 66–7, 145–6; textiles and apparel 128, 142–3 automation 43, 96–8 automobiles: automotive microelectronics 109, 130 banking, finance and futures 28, 34, 37–9, 54–5, 70–1 barriers to entry 87, 90, 97, 105, 110, 122 BASF 88, 90–1 Bayer 88, 90–1 Bell Labs 8, 112–14 Birmingham Commercial Committee 51 Bombay, role of associations 27, 38 Britain see United Kingdom capital intensity 13, 15, 43, 68, 82, 128–9 cartels 20–1, 118, 130; chemical 88–91; electrical 73, 76–7, 79–80; steel 52–4, 56–8, 60, 62–3 Coalition of American Steel-Using Manufacturers 67

competition policy 13, 15, 54, 58, 79–80, 86, 89, 108–9, 114, 116, 130 complex differentiation 15, 160 Corn Laws 33 cotton: machinery exports 26, 30–1; quality issues 27, 35, 37, 39, 42 Countervailing duties (CVD) 63–5, 93, 95, 149–52 customer service 16, 75 cycles see product and industry cycles diffusion see technology: diffusion DuPont 43, 86, 91–2 Dynamic Random Access Memory chips (DRAMs) 115, 132 East Asia 83, 115, 120–1 East India Company 31, 33, 35 Edison, Thomas 70–2 electric utilities 69–71, 78–9, 82–4 electricity: natural gas turbine technology 82 Electronics Industry Association of Japan 116–7, 119 embeddedness 10, 14, 55, 70, 90, 125–8 environment 82, 92–5 epistemic communities 21–2, 169 Eurofer 63, 65, 146 European Coal and Steel Community (ECSC) 58, 60, 63, 130, 145, 168 European Community see European Union European Electronic Component Manufacturers Association 117, 147 European Union 63–4, 91–3, 105, 118, 144; semiconductor projects 113, 117, 119, 148–9 exhibitions and fairs 31, 55, 71, 74 factorage 33–4, 37 Fairchild 114

194

Index

Ford 96–106, 110, 125 Fordism 3, 98 foreign direct investment (FDI) 72, 80, 96, 105–6 France 53, 59–60, 74 General Chamber of the Manufacturers of Great Britain 51–2, 57 General Electric 72–4, 76–7, 80–4, 99–109, 129 General Motors 97, 99–106, 108–10 Germany 46, 52, 56, 59, 62, 86, 88–90, 104, 165–6 hegemony and hegemonic stability theory 21, 149, 152–60, 165, 168–9 Hoeschst 88, 90–2 IG Farben 58, 85, 88–91, 125, 129 India 35, 38, 40, 159; see also Bombay industrial organization literature 2–3, 12–14 Information Technology Agreement 120 Intel 113, 120–1 International Apparel Federation 143 International Business Machines 116, 120–1 International Conference on Large High Voltage Systems 78 International Congress of Master Cotton Spinners’ and Manufacturers’ Associations 39–42, 128 International Cotton Advisory Committee 142 International Cotton Conventions 37, 39 International Cotton Producers Association 142 International Council of Chemical Associations 92, 142 International Electrical Association 77, 79–80 International Electrotechnical Commission 74–5, 146–7, 170 International Institute for Cotton 142 international institution: defined 5 International Iron and Steel Institute 145–6 International Rail Makers Association 53, 55 International Road Federation 100, 170 International Textile Manufacturers Federation 32, 143 International Textiles and Clothing Bureau 142 Japan 40–2, 61, 74–5, 81, 88–9, 96, 101, 106–7, 110, 111, 115–7, 121–2, 138

Japan Cotton Spinners’ Association 41 Joint European Submicron Silicon Program ( JESSI) 113, 119, 148 Keohane, Robert O. 110–11, 118–19, 122 Korea 110–11, 118–19, 122 Krupp 52–3, 130 labor 26, 99, 103 licensing see patents and licensing Liverpool Cotton Brokers’ Association 26, 19–31 London 28, 36 Long Term Arrangement 44, 151 Manchester 28, 32 Manchester Chamber of Commerce 26, 30–1, 33 Manchester Royal Exchange 29–31, 171 Manchester Statistical Society 30 microprocessors see semiconductors Microsoft 15, 120–1, 173 military and technology 8, 49, 55, 85, 87, 93, 114 see also World War I and World War II minimills 64–6 Ministry of International Trade and Industry 61 105, 111 Multi-fibre Arrangement 25, 43–4, 151 Multilateral Specialty Steel Agreement 65 Multilateral Steel Agreement 65 multinational corporations 72, 99, 160, 172 neoliberalism 82, 166–7 newly industrializing countries 44, 120–1 oil industry 87, 90–1, 100 Organisation internationale des constructeurs d’automobiles 144 overcapacity 15, 62–3, 67, 79, 93, 107 patents and licensing 15, 30, 53–4, 71–4, 76–7, 80, 86–8, 90, 96–9, 112–13, 130–1 path dependency 9 petroleum see oil industry private authority 6–7, 22, 169–70 product and industry cycles 10, 17–20, 63 protectionism see tariffs railways 9, 14, 16, 53, 55 regimes and regime analysis 2, 4– 6, 21–3, 164, 170

Index research and development (R&D) 112–14, 130–1 Responsible Care 92, 94, 142, 171 scale economies 70, 104–5 scientific discovery 7–8, 70, 85, 97, 113 SEMATECH 113, 117–20, 167 Semiconductor Industry Association 116, 118–20 Semiconductor Trade Arrangement 117–19 Short Term Arrangement 44, 151 Siemens 70–3, 75–6, 82, 129 Silicon Integration Initiative, Inc. 120, 148 Silicon Valley 112, 114, 125 social institution 4, 17, 26, 28, 34, 50–1, 125 South Korea see Korea standards and standardization 94, 113, 132, 170 states: role of 20–1, 42, 46, 62, 66–7, 87–8, 93, 100, 102, 104–5, 122, 149–60, 171–3 state-centrism 11–12 steam engine 51–2 steel: blast furnace technology 51–2 strategic alliances 106–9 structure-conduct-performance paradigm 12 surplus capacity see overcapacity SUSTECH 94–5, 171 tariffs and protectionism 76, 176 technological paradigms 10 technological profiles 14–16, 124–32, 139–40 technology: and International Relations 11, 164–73; definition 7;

195

diffusion 17–20, 25, 27, 47, 76, 89, 93, 96, 102, 100–1, 112–13, 115, 132–40; maturation 16–21, 115, 132–40, 160 Textile Monitoring Body 45, 143 textiles: synthetic 43, 91, 131 United Kingdom 24, 40, 50, 82, 86–8, 98, 101; role of state 26, 30, 32–3, 42, 88, 166 United States 52–4, 57, 59, 61, 64, 89, 115–16, 137; Civil War 26, 34, 37; south 33–5 Uruguay Round 43, 92, 150 US Steel 54, 61 US–Japan Automotive Agreement 111 US–Japan Framework Talks 110 Verienigte Stahlwerke 56, 58, 85, 89, 125 voluntary export restraints 61, 63, 66, 96, 106, 110–11, 167 Watt, James 51–2 Westinghouse 71–3, 76, 80–1 “Wintel” standard 120 World Energy Conference 78, 171 World Forum for Harmonization of Vehicle Regulations 144 World Power Conference see World Energy Conference World Semiconductor Council 119, 148–9 World Trade Organization 45, 120, 143 see also General Agreement on Tariffs and Trade World War I 49, 56, 85, 88 World War II 59, 85, 89–90