The role of institution-building in US industrial modernization programs

research policy ELSEVIER

Research Policy25 (1996) 265-279

The role of institution-building in US industrial modernization programs 1 Maryellen R. Kelley a,., Ashish Arora

b

a Industrial Performance Center, Massachusetts Institute of Technology, One Amherst Street, Room E40-281, Cambridge, MA 02139, USA b Carnegie Mellon University, H. John Heinz IIl School of Public Policy and Management, Carnegie Mellon UniL,ersity, Hamburg Hall, Room l19B, 5000 Forbes Avenue, Pittsburgh, PA 15213, USA

Abstract

An important issue for evaluating industrial modernization programs is how well alternative intervention strategies address the underlying problems that contribute to uneven patterns of technology adoption. The one-on-one industrial extension service model, where the state agency provides technical assistance directly to individual firms, constitutes one approach. By contrast, institution-building approaches emphasize inter-firm learning, in which government serves as the catalyst for bringing technology developers together with potential users and for providing closer linkages between organizations that are the technology leaders and those that tend to be followers. Programs that support such inter-firm learning opportunities stand a better chance of contending with the underlying problems retarding technology transfer, are more likely to gain acceptability by both technology leaders and followers, and are more likely to garner funds from the private sector.

1. Introduction

In 1988, the renaming of the National Bureau of Standards as the National Institute of Standards and Technology (NIST) signified a broadening of the scope of this agency to include a

* Corresponding author at: Industrial Performance Center, Massachusetts Institute of Technology,Cambridge, MA 02139, USA. 1The authors acknowledgea grant from the National Institute of Standards and Technologyof the US Department of Commerce and the able research assistance provided by Laura Dalbow and Sudha Neelankatan. The opinions expressed in this paper are our own and we take sole responsibility for any remaining errors or omissions.

responsibility for diffusion-oriented technology policy in the United States. Compared with the prior (and still dominant) concentration of public investment in basic R & D , this new direction in technology policy addressed problems of US manufacturing industries stemming from the neglect of follow-through innovation, including the widespread failure of individual plants and entire industries and sectors to adopt or effectively use existing best-practice technologies. One of the first steps that NIST took to address this concern was the creation of the Manufacturing Technology Center (MTC) program (renamed as the Manufacturing Extension Partnership in 1993). Its goal was to "help the nation's small- and

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medium-sized manufacturers upgrade their technological performance and competitiveness" (US D e p a r t m e n t of Commerce, National Institute of Standards and Technology, 1992). 2 Independent of the N I S T initiative, state governments, industry associations, and other branches of the federal government also began new programs during the 1980s to address manufacturing problems. In one form or another, all these programs are concerned with issues of technological upgrading of existing manufacturing operations, particularly as they arise among smalland medium-sized enterprises (SMEs). Much needs to be done to devise appropriate evaluations of these policy initiatives. As yet, there are few evaluation studies of industrial modernization programs, and those that have been done focus on assessing the benefits of a particular intervention strategy, rather than comparing the relative merits of alternative strategies. 3 However, efforts to compare different approaches are complicated by the variety of goals and activities found among industrial modernization programs, making it difficult to employ standard program evaluation techniques in which the same criteria for measuring success are applied to all programs. For example, when the main goal of a program is providing information and assessment services to individual firms, then service delivery targets, such as the number of firms served by agency staff, are commonly used as an evaluation criterion. On the other hand, when the goal is to create or strengthen linkages of SMEs to key private sector agents of technol-

2 There were seven regional centers established under the original MTC program. These centers are located in the following states: California, Kansas, Michigan, Minnesota, New York, Ohio, and South Carolina. An additional 34 centers were funded in 1994. Only 11 of these are large centers with annual budgets comparable to the original MTCs (i.e. $3 million or more annually). All of the new manufacturing extension centers provide individualized field agent services to small- and medium-sized companies. 3 For a recent example of an evaluation study of the direct service provider approach of extension agency field services, see Nexus Associates, Inc. (1993).

ogy transfer, then the willingness of such agents to participate in an industrial modernization program (e.g. the number of technology vendors agreeing to loan equipment to a technology demonstration center or the number of paid memberships by companies that are leaders in their use of manufacturing technology) is a more appropriate benchmark for measuring progress. This diversity of goals and intervention strategies reflects differences in the conception of both the underlying problem and of the appropriate public policy vehicle(s) for addressing it. There are three classes of explanations that prior research offers for the failure of many small- and medium-sized enterprises to adopt well-known (and relevant) process technology improvements. These include: a lack of technical competency and sufficient organizational resources devoted by SMEs to assessing the relevance and applicability of potential technologies; weak incentive structures of the markets in which small firms predominate; and a lack of opportunities for SMEs to learn from firms and institutions that play key roles in technology development and diffusion processes in the private sector. The industrial extension agency that devotes the bulk of its program resources to field engineers who "provide small companies a strategic perspective" in assessing the technological environment (Manufacturing Studies Board, 1993, p. 45) is an intervention strategy designed to address the first class of problems. For firms that have not developed their own technical competencies or have failed to devote adequate organizational resources to assessment and planning functions, the state agency is providing staff to perform that role. In the second case, where weak incentive structures are thought to inhibit SMEs from investing in process technology improvements, policy interventions may include financial subsidies such as low interest, longer term loans for making capital improvements or payments to technology vendors for providing services to SMEs. Lowering the cost to the firm of making an investment in a new technology enhances the profitability incentive for an SME (or, for that matter, any firm) to adopt a productivity-enhancing innovation.

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Lastly, poor opportunities for learning from key private sector sources of expertise are addressed by public agencies that serve as a bridge or catalyst for bringing technology developers together with potential users, or assist in the coordination of the efforts of major customer firms to upgrade their supplier base through new standards for certification in particular industries. These program activities are designed for building or strengthening private-sector institutions of technology transfer. In the following, we focus on this third situation, beginning with a review of institutional roles in technology transfer. We note that there are important differences among manufacturing sectors in the ways in which firms learn about new technologies and the extent to which they depend on external sources for process technology improvements (Dosi, 1988; Nelson, 1990). In sectors where sources of innovation external to the firm are particularly important, other enterprises and non-market institutions ordinarily play key roles in the transfer of technical know-how from technology developers to users and from organizations that are the technology leaders to those that tend to be followers. This discussion of the importance of institutional linkages in technology transfer is followed by an analysis of the intervention strategies and types of institution-building approaches employed by industrial modernization programs in the US today.

2. The importance of private-sector institutions to inter-firm transfer of process technology innovations Research on size-related patterns of adoption of new, commercially available information technology applications for manufacturing processes, such as CAD and computer-numerical control (CNC) machine tools, shows that small finns adopt these technologies at much lower rates than large firms (US Department of Commerce, Bureau of the Census, 1989; Kelley and Brooks, 1991). However, survey results in the mid-1980s from several countries also indicate that a substantial minority of SMEs are adopting these

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technologies in the United States, Japan, Germany and elsewhere despite the problems associated with their small size (US Congress, Office of Technology Assessment 1990; Kelley and Brooks, 1992). For all firms, information about new technologies is difficult to assess. The problem of imperfect information for learning about new technologies and the importance of accumulated (prior) knowledge and expertise in assessing the applicability of specific technologies explain why some firms are more likely to adopt a new technology or be sources of innovation themselves (Rosenberg, 1972; Nelson and Winter, 1977; Dosi, 1988; Cohen and Levinthal, 1990). Moreover, the more experience a firm accumulates from having employed related technologies, the more competent the managers and engineers of that firm become in assessing and incorporating additional improvements. Thus, one explanation for higher rates of adoption of new technologies among large firms is their greater resources and capabilities for assessing their applicability to the enterprise (Arora and Gambardella, 1992). Having the resources to employ specialized technical expertise (both to develop process improvements for a company's internal use and to keep abreast of technological developments occurring elsewhere) means that large firms have a greater potential capacity for learning about new technology, for planning, and for implementing change. Conversely, size-related differences in organizational resources mean that small firms tend to devote too little of their capacity to scanning and assessing the technological horizons. Additionally, special problems related to their small size explain why SMEs tend to underinvest in process technologies that are developed outside the firm. These types of process technology improvements always involve some sort of change in the ways in which products are made, in the allocation of tasks, in machinery, in work methods and skills that may imply retraining, and in organization (Leonard-Barton, 1988). Even after a company has decided that a new technology is both relevant and applicable to its processes, there is still some uncertainty about how best to exploit its capabilities within the firm's specific operations.

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For example, case studies on implementation show that problems encountered during the initial break-in period can be severe if inadequate attention has been paid to the necessity for reorganizing responsibilities and changing outmoded organizational practices and procedures (Chew et al., 1991; Tyre and Hauptman, 1992). After the initial break-in period is past, sustaining continuous improvement in productivity is likely to depend crucially on production workers' skills and new forms of work organization (Kelley, 1994; Appelbaum and Batt, 1994). Productivity increases associated with the installation of a new technology may be disappointingly small in those companies that are unable to make the necessary adjustments, particularly in the way in which work is organized. Similarly, if workers are inadequately trained for their new responsibilities, they will not be able to perform them very efficiently. Manufacturing sectors differ in the extent to which process technology innovations are developed outside of the firms that use them (rather than by the firms themselves), the conditions under which individual (especially small) firms can appropriate a competitive advantage from process technology improvements, and the degree to which small firms are important contributors to overall output. For some industries and technical processes, new technology improvements involve large scale investments in plant and equipment, as in steel, certain chemical processes, and autos. In other sectors, improvements in technologies can be achieved with relatively small investments. The latter sectors are the main loci of industrial modernization programs. Even when the investments are relatively small, weaknesses in the incentive structures of certain product markets with high concentrations of SMEs also deter the adoption of well-known process technology improvements. This problem has more to do with the poor prospects for the firms' reaping a profitable return on a technology investment than with the organization's lack of knowledge or inability to assess the benefits of innovation (Mansfield et al., 1977; Stoneman, 1980; Mansfield, 1989). Instability and uncertainty in the demand for their products shorten managers'/owners' planning horizons. As a re-

suit, the expected productivity gains from introducing a new technology are viewed as being too small or taking too long to be realized in the shortened payback periods these managers normally employ to justify such investments. Small firms play a particularly important role in what Pavitt (1984) terms the supplierdominated sectors and the specialized suppliers of capital goods, instruments, or other customized goods. 4 In these sectors, small firms are responsible for a sizeable share of industry output, which is sold largely to other manufacturing firms. Moreover, SMEs in these sectors depend on other firms, i.e. capital equipment producers and specialty software companies, as sources of process technology innovations. 5 Based on our own and others' research on uneven patterns of technology use, we posit that variations among sectors and countries in the nature of inter-firm relationships, together with the accessibility of non-market technology transfer institutions, hold the key to explaining differences in the rate and extent of the diffusion of new manufacturing technologies. These institutions condition the pace and effectiveness with which useful information flows to potential adopters. With respect to the adoption of hybrid corn among American farmers during the 1940s and 1950s, Griliches (1960) observes that in certain regions, where social institutions like the Grange provided another source of innovation for additional improvements, there were far higher and more rapid rates of adoption. As Nelson and Winter (1977) point out, federal agricultural extension service agents were an especially reliable source of information to farmers in these regions. In addition to information flows, 'non-market' institutions can be an important

4 Pavitt identifies the following industries with these sectors: textile, clothing, printing, furniture making, printing, machine tools, instruments, and certain parts and components suppliers for aircraft, agricultureequipment, or other complex products. s In the case of specialized suppliers of custom-made products, such as tools and dies, customer firms also depend on SMEs to make improvementsin process technologiesthat the customer-firmcan exploit in its own manufacturingprocess.

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source of technical advice and assistance as well. Saxonhouse (1974) attributes the rapid rate of diffusion of new techniques among Japanese textile manufacturers both to the importance of business trade associations serving as a conduit for information, and to the accepted practice of sharing technical know-how among these firms (see also Dore, 1973). Participation in trade associations or technical meetings of societies fosters the exchange of information between members and provides an economical way for technology developers to demonstrate their innovations to a pool of potential customers. However, not all firms are equally well-connected. Differences in small firms' access to opportunities for learning from such private sector sources of expertise as customer-firms that are willing to provide technical assistance to their suppliers, and industry associations or technology vendors willing to provide training, are key explanations of the variation among small firms in their propensity to adopt process technology improvements originating outside the user-firm. When small enterprises have such inter-firm learning opportunities, they tend to adopt relevant process technology improvements at a much higher rate than small firms that are similar to them in other respects but lack these connections (Kelley and Brooks, 1991; Kelley, 1993). These external learning opportunities are more available to companies residing in particular types of regions (those with agglomerations), belonging to certain kinds of industry or trade associations, or having close ties to certain kinds of customers. In other words, rather than view the enterprise as an isolated entity, we follow the literature on industrial networks (Storper and Harrison, 1991; Lincoln et al., 1992) and conceive of SMEs as potentially embedded in a production system in which separately owned and managed companies are technically interdependent links in a complex chain of supplier-firms making parts, components, and materials for one another. Systems differ in the incentives SMEs face to adopt innovations, and in their support for member firms in making adjustments to use technologies effectively. In their exchanges with other firms, SMEs potentially engage in more than merely the pur-

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chase and sale of goods and services. In some systems, process technology equipment vendors do not just sell the machinery but also provide assistance and training to SMEs in the use of that machinery. Equally important, perhaps, are the incentives to adopt new technologies in the form of the requirements imposed by customer firms. Large firms that lead or coordinate a production system with a substantial number of small firms can affect the technology adoption decisions of SMEs through their specifications and standards. At the very least, the technology adoption decisions of SMEs are likely to be taken in consultation with major customers that also are the technology leaders of an extensive network. For some networks, these technology leaders provide assistance to their suppliers to meet specific technology standards in order to qualify for continuing contract relationships. 6 In other systems, the leading firms may set standards for their suppliers, but do not provide any assistance to or incentives for their supplier firms to undertake improvements in technology. The preceding observations lead to a conceptualization of the problem of slow or uneven rates of diffusion of new technologies and methods recognized to be best practices with wide applicability in industry as stemming as much from weaknesses in non-market institutions as from market failures of some sort. 7 In a departure from previous formulations of the economic rationale for technology policy as a remedy for market failures, we see industrial technology policies as principally justified by the need to shape and otherwise strengthen the contribution of non-market institutions to inter-organizational learning and technology diffusion processes. Ex-

6 In analyses of the external factors affecting a firm's propensity to adopt NC/CNC machines, for example, Kelley (1993) observes that there are industry differences in the willingness of customer-firms to provide such technical assistance to suppliers. During the 1980s, customer-firms were more likely to provide such technical assistance to their suppliers in industries that were highly dependent on defense contracts. 7 There are, of course, well-known problems with markets for information and technology(Nelson, 1959; Arrow, 1962).

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isting institutions constructed for addressing technology transfer needs between firms at one time may fail to connect to new sources of technological expertise that arise in a subsequent period. Moreover, public and private institutions that serve a technology transfer function are often established with multiple purposes. Not surprisingly, some of these arrangements serve to promote industrial modernization better than others. In the US today, certain mechanisms for technology transfer among manufacturing firms are not available in all industries or do not serve to connect key constituencies. Some forms common in other countries are conspicuous by their rarity in the United States. For example, in contrast to Japan and German industry associations, few US trade associations provide technical assistance to their members (Lynn, 1988). 8 For such manufacturing activities as precision metal cutting, textiles, apparel, printing and semiconductors, a number (if not all) of the major producers of advanced manufacturing technology are no longer located in the United States. Instead, they are found in Japan, Germany, and Italy. Thus, US based companies that are potential users of such equipment, especially small companies oriented to local sources of innovation, are likely to be only weakly, if at all, connected to leading technology vendors through regular, informal contacts. Although we have not investigated this issue fully, we believe that an important, and somewhat underappreciated, consequence of the economic restructuring that took place in many industries in the US during the 1970s and 1980s was the weakening of key connections between technology vendors and SMEs, particularly in supplier-dominated industrial sectors.

s The National Machining and Tooling Association is an exception. The N M T A has been active in supporting industrial modernization programs in a n u m b e r of states, such as Massachusetts, Maryland, and Rhode Island. Training programs for the use of new technologies have been a major focus of such activities.

3. The intervention strategies of industrial modernization programs

From the discussion in the previous section on the factors affecting a small firm's adoption and implementation of process technology improvements, we learn that there are three aspects of the technology diffusion process where linkages to non-market institutions and supportive relationships among firms promote inter-firm learning. These are: acquiring knowledge about the attributes of a new technology and assessing its applicability to the enterprise; accumulating the workforce skills that are complementary to using the new technology; and implementing the requisite changes in procedures, work organization, and work incentives. 9 Our 1992-93 study of publicly supported industrial modernization activities undertaken by universities, government agencies, and private organizations was restricted to programs that were designed to address one or another of these three classes of problems (Kelley and Arora, 1994). In addition to information on the seven original manufacturing technology centers established by NIST, we conducted our own survey of 35 programs operating in 20 states. 10

9 We are well aware that a whole host of economic policies, such as investment tax credits, and even macroeconomic stability, also affect the overall rate at which technology diffuses. In this paper, we confine our discussion to problems associated with the uneven patterns of use of new technology and methods among firms. 10 There is no single source that lists all public agencies or programs that serve as technology transfer institution to smalland medium-sized manufacturing firms. As a starting point, we reviewed several directories that list public agencies and non-profit institutions identifying themselves as manufacturing technology centers, industrial extension programs, and technology transfer organizations. We then contacted state agencies responsible for providing such services, and several experts in the field. O u r final sample consisted of 44 programs operating in 17 states and another three programs that have national coverage in particular sectors. We were able to complete interviews and obtain supporting documentation from 35 of these programs, for a response rate of 79%. By design, our sample excluded programs that were directly affiliated with NIST manufacturing extension activities in 1992 (however, by the end of 1994, 15 of the 35 programs had become manufacturing extension centers of NIST). For further details on the study, please contact the authors.

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From our survey, we identified five classes of activities associated with industrial modernization programs: information services; the development and demonstration of new types of equipment or methods; educational workshops and occupational skills training; financial assistance; and assessment and planning consultations. Programs that provide information services distribute brochures, provide access to specialized electronic data bases and library information, publish newsletters, and conduct literature searches and referrals. Demonstration and development activities refer to centers or programs that have an applied research capability focused specifically on making improvements in manufacturing process technologies used by small firms in certain industries. Educational and training activities include programs that are designed to upgrade production workers' skills, as well as workshops on quality assurance techniques for employees and managers, and seminars for manufacturing managers on innovative production techniques and methods. Financial assistance consists of direct loans

or the financing of equipment upgrades, loan guarantees or underwriting of loans, and assistance with obtaining loans or grants from other sources. Finally, assessment and planning consultations include direct assistance with upgrading or implementing new technologies, and assistance with improving production and process development capabilities or capacity. Some programs provide these services with their own staff. Others rely on private consultants who contract to the agency. Both the number of full-time field consultants and the use of contract consultants to implement the recommendations of technical assessments provided by program staff were taken to be indicators that a program provided this type of service. Fig. 1 displays the distribution of the 35 industrial modernization programs by the type of primary service. For 27 of the 35 programs, we defined the primary service as the activity that received the largest share of the program's 1992 budget. For the remaining eight programs, we relied on mission statements and supporting doc-

Assessment & Planning 43%

Financing 9%

Informatic 9%

Technology De~ & Develop . . . . . . . . . . .

on z~-/o

Fig. 1. Distribution of industrial modernization programs by type of primary service. Source: Authors' survey of US industrial modernization programs (see text).

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uments provided by the program administrator to determine the classification of the primary service activity. The main conclusion to be drawn from Fig. 1 is that industrial modernization programs do not all follow the same model of providing staff from a public agency to perform technology and operations assessment and planning functions for SMEs. In our sample, we found 15 organizations who focused on providing assessment and planning consultation services. Our interviews suggest that although these programs employ different techniques in delivering these services, they share a primary emphasis on providing assistance for their technology transfer activities through individual consultations by field staff or by private consultants retained by the program. However, we also found that other activities and intervention strategies of a much broader scope are also being employed by the surveyed public and private institutions to address the problems of SMEs in adopting and effectively implementing process technology improvements. Institution-building and institution-linking, undertaken in a variety of ways by diverse programs, was a central feature of these broader intervention strategies, as we discuss in the next section.

4. The institution building approach How do those industrial modernization programs that promote institution-building advance competitive and technological improvements among industrial firms? Looking across program activities, we identify five different ways that industrial modernization programs employ an institution-building approach. These are: a focus on a common technical process or sector; self-help networks; linkages to technology vendors; the coordination of the supplier development and certification processes of large companies that are major customers of SMEs in a particular industry or sector; and consortia-based (rather than firmspecific) training programs. These approaches nearly always involve targeting groups of firms with similar technical problems or a common set of customers. The programs are supported by a

combination of membership dues (prorated by the size of the company), fees for services, donations of equipment, and state and federal government grants. As a group, industrial modernization programs with an institution-building focus attract a much greater share of private sector resources to support their activities than do programs that emphasize individual technical assistance and consulting. Moreover, agencies adopting an institution building strategy do not single out SMEs as a client group in need of services, but serve a constituency that includes a mix of both large and small firms. Examples of the five primary institution-building approaches are considered below. 4.1. F o c u s o n a c o m m o n technical process or sector

Of the seven original MTCs (with the possible exception of the California MTC located in Los Angeles), the Great Lakes Manufacturing Technology Center (GLMTC) has the most coherent local constituency for its technical assistance. GLMTC is situated in the midst of a large (over 10 000 firms) and vital agglomeration of metalworking firms centered around Cleveland, Ohio. All of the programs that GLMTC operates are designed to serve this community. The GLMTC offers seminars and workshops at its multi-service center located on the campus of the Cuyahoga Community College, which includes a facility for demonstrating a wide range of computer applications in metalworking operations, from a simple milling machine with a retrofitted programmable controller to a flexible machining cell, with two machining centers and a robot. The programs operated by the GLMTC attract large and small metalworking companies alike. NIST's support of the GLMTC began in 1988, but the Center was started in 1984 as one of eight centers specializing in specific process technologies developed by the successful Edison Centers program of the state of Ohio. The Textile/Clothing Technology Corporation, (TC) 2, is another organization that operates a technology development and demonstration facility. (TC) 2 was established in 1978 with combined support from the US Department of Com-

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merce, a leading textile and apparel company (Burlington Industries) and a major union (the Amalgamated Clothing and Textile Workers) with interests in representing workers in both apparel and textiles manufacturing. The Corporation began as a technology development entity but, in the mid-1980s, its mission was broadened to include educational and demonstration activities to support the diffusion of new technology and new methods of producing garments. (TC) 2 has a national constituency, providing assistance to apparel manufacturers all over the United States. A variety of workshops and training programs are offered to member companies by (TC) 2 at its National Apparel Technology Center (NATC) in Raleigh, North Carolina. The center develops training materials and organizes displays at industry trade shows. NATC is a 'teaching factory' where off-the-shelf technologies are deployed in a simulated job-shop environment. New production methods are employed in experimental production lines that make garments under contract with commercial retail customers. As in the GLMTC, all the equipment on display in the center is currently commercially available. Rather than use engineers or technicians to operate the equipment, the center employs traditional operators with years of work experience in apparel manufacturing companies. It is not just the 'machines' that are on display but also the employees and a form of work organization that relies on teams and on new technical skills in the use of computer-controlled equipment. 11 4.2. Horizontal networks among competitors Self-help networks have been started in Michigan, Ohio, Pennsylvania, and Florida. For the most part, these efforts have been modeled on the industrial districts of Northern Italy (Sabel,

11 T h e N A T C holds a unique position among technology demonstration centers, as a truly national center for showcasing new production methods in fabric cutting and sewing technology. Tours of the demonstration center by industry groups are booked m o n t h s in advance. Over 1500 visitors have toured the demonstration center in a recent year.

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1992). The Michigan MTC, for example, is experimenting with continuous improvement user groups (CIUG) of firms that have common process technologies and meet regularly to review each other's progress in implementing improvements, including changes in work organization. While it is too early to pronounce upon the success of the venture, the initial phase of the project (to develop 'trusting' relationships among member firms) proved to be more difficult to achieve than was initially anticipated. Several of the original group of participating firms have dropped out, and some organizations that have remained in the group are placing restrictions on which aspects of their operational improvements they are willing to share with others. A common obstacle to establishing cooperative relations among firms that are in the same industry derives from competitive pressures, particularly in industries facing a decline in demand (or increasing demands by business customers to cut costs) (Coy, 1992). Under these circumstances, the temptation to use information about competitors to selectively undercut their prices is very great. There seem to be more examples of networks that have failed to sustain their cooperative ethos in the face of such competitive pressures than those that have succeeded in doing so. For example, in Michigan, the United Auto Workers Union's efforts to establish another self-help network of auto suppliers (in cooperation with Michigan Manufacturing Technology Center (MMTC)) foundered as a result of the 'whipsawing' practices of their major customers, who used offers of price cuts by some network member companies to extract additional pricing cuts from other members of the supplier group. Similarly, cooperation in bidding for new work by a network of apparel manufacturers in eastern Pennsylvania dissolved as companies faced with declines in orders began to compete with each other through price cutting. Attempts to put together a network of furniture makers in Mississippi to engage in joint manufacturing were unsuccessful for similar reasons. The instances where self-help networks have been successful in the short run seem to occur when firms produce for new (growing) product

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markets rather than declining ones. Despite its name, the National Institute of Advanced Flexible Manufacturing (NIAFM) was a self-help network of a local group of tooling and machining firms that established a center for sharing technology and training resources in northwestern Pennsylvania in 1988. Financial support from Pennsylvania's Industrial Resources Center program helps underwrite the costs of staffing the center. NIAFM's mission was to gradually introduce new technologies into member firms' operations tb.rough their experiences in the demonstration and training facility. This was the only fully operational shared manufacturing teaching factory that our study identified in the United States in 1993. The introduction of the new technology is coupled with efforts by the member firms to experiment with new product markets. At the center, workers from member companies are trained in using the new technology for making new types of salable parts for their employer. After completing a general training program, these employees work on manufacturing processes and products specific to their employer. At this point, the trainee is making products for the client-firm on the center's equipment. For each hour that the trainee uses the equipment to make a salable product, the member company is charged a leasing fee. As the demand (volume) for these products increases, the leasing fees are set to a schedule that provides an incentive for a client-firm to buy the machine and install it in its own factory, rather than to continue using the teaching factory. Between 1989 and 1992, NIAFM sold 18 machines to member companies, for about $3.8 million in total sales. Similar to other horizontally structured self-help networks, the initial success of NIAFM has proven difficult to sustain over the longer term. In 1994, NIAFM closed the center, citing chronic underutilization of the center's resources by member companies in recent months as the main reason. 4.3. Upstream linkages to technology vendors

Besides the technical commonalities that unite potential users of new manufacturing methods, programs that take an institution-building ap-

proach also have novel ways of involving technology vendors. For example, NIAFM's success in equipment purchases by member companies was a major factor in convincing once-reluctant equipment manufacturers to lease new equipment to the center at reduced rates. In 1993, the price at which NIAFM leased machines from equipment vendors was reported to be about half the normal rate that these technology vendors usually charged in leasing arrangements with individual companies. NATC provides a service to fabric-cutting and sewing technology vendors that is a major attraction to them in donating new equipment. For each new piece of equipment, NATC technicians disassemble machines according to vendor-provided instructions. Through this process, the technicians identify errors and misleading directions in the documentation, pointing these out to the vendors and suggesting revisions that would make the instruction easier to understand by the industry's repair technicians. NATC also makes its own training videos on the maintenance and repair of vendors' equipment. For Japanese (e.g. Juki and Brother) and German (e.g. Pfaff) technology vendors, this service provides a particularly valuable test-marketing of the English translations of their machine repair and service manuals. For each new generation of their machines, 88 technology vendors now provide (TC) 2 with new equipment to be tested and used in the demonstration facility. 4.4. Downstream linkages to business customers

Most industrial modernization programs can be thought of as 'supply side' interventions. However, a major issue is the incentive to invest in new technologies. Thus, initiatives that explicitly consider customer-supplier relations in industry production systems may strengthen the incentives of small- and medium-sized supplier firms to introduce process technology improvements. Two of the original seven MTCs are particularly noteworthy for their concerted efforts to involve major customers of SMEs in efforts to standardize supplier development and certification processes: the Michigan MTC (originally known as the Mid-

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west MTC) and the Minnesota MTC (sponsored by Minnesota Technology, Inc.). While these efforts are still too recent to properly evaluate, there is some evidence that the MTCs have played a key coordinating role in the standard setting process. The Ann Arbor based MMTC has set up industry councils for the two industries that are the largest employers in that state: office furniture and automobiles. The industry councils are composed of SMEs that supply these industries, along with the major customers. ~2 For both industries, the MMTC has worked with the councils to develop common standards for their suppliers, thus reducing the burden on smaller firms of having to meet multiple (but technically similar) requirements. Automobile suppliers have long complained about the administrative costs of complying with different procedures for quality standards required by the big three US automobile companies. Although varying in form and terminology, the procedures are apparently very close in content and technical requirements. Over a period of several years of working with the Automobile Industry Action Group, the MMTC has assisted the development of a common industry standard for quality assurance (QS9000) that is now accepted by all domestic auto producers. In the office furniture industry, which has a concentration in West Michigan, major manufacturers such as Steelcase have been expanding their use of advanced information technologies and new inventory control order tracking and quality improvement methods. While such systems provide advantages to the final producers, they can impose additional difficulties on suppliers, especially if the final producers each pursue different approaches. In 1991, the MMTC affiliate in Grand Rapids, Michigan, organized an industry-based Office Furniture Council to re-

12 The automobile council is based in Ann Arbor, while the Grand Rapids based Western Michigan Alliance deals with the office furniture industry.

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solve common problems, harmonize procedures, and strengthen linkages between final producers and smaller suppliers. Comprised of final producers and suppliers, the Council has succeeded in promoting cooperation in several key areas. Common standards have been established for supplier quality, based on ISO 9000, and for electronic data interchange, based on the ANSI x 12 standard. Additionally, agreement has been reached on supplier calibration auditing procedures and work is underway on an industry standard for color approval (National Institute of Standards and Technology, 1995). Similarly, Minnesota Technology, Incorporated (MTI) has been working with a group of the largest companies in Minnesota (including 3M, Honeywell, and Cray) over the past 2 years to establish a common supplier certification standard for supplier-firms in the region. The goal is to reduce costs to the supplier firms of having to comply with multiple standards and to reduce the costs of monitoring compliance to the standard for the leading companies as well. The role of MTI in this process has been to serve as a convener or 'honest broker' to assist the customerfirms in working out their differences over what would be acceptable standards for all and to reflect the supplier-firms' concerns about having to comply with excessively burdensome or confusing standards. We see similar initiatives emerging at the national level as well. In 1992, the Consortium for Supplier Training was created by such major companies as Xerox, Motorola, Kodak, Texas Instruments, Chrysler, Digital, Texaco, along with SEMATECH (an industry consortia partly funded by the federal government). This group of leading companies has standardized its quality accreditation programs and established regional training centers. Suppliers to these companies may take an approved course on the quality control methods these companies have established as their common standard at one of seven local colleges certified by the Consortium. Again, the needs of both large and small firms are addressed, while the participation of the latter is motivated by the enhanced opportunity to sell to the former (National Center for Manufacturing Sciences, 1994).

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4.5. Consortia for skills training

4.6. Links between technology diffusion and research and development activities

As part of a longstanding regional economic development strategy, such southern states as Kentucky, South Carolina and Texas have established technical training programs at 2-year community colleges to provide 'customized' courses for industry (Rosenfeld, 1992). Training programs are nearly always designed to be technologyspecific or for an occupational specialty associated exclusively with a particular industry. Programs associated with community colleges, in particular, tend to provide training for specific occupational skills in using new technology, such as CAD programming. However, compared with other types of industrial modernization services, customized training programs are more likely to be designed to meet the exclusive needs of large companies for specialized courses. Instances of training programs specifically designed to meet the needs of a group of SMEs are exceptional. The activities of the Machine Action Project (MAP) established under the auspices of the Massachusetts Industrial Service Program provide an illustration of how an industrial modernization program can serve as a catalyst for collective action by small- and medium-sized enterprises. In collaboration with the local branch of the National Tooling and Machining Association, MAP surveyed firms in western Massachusetts to determine the type of training that would be complementary to the use of new technologies in metal working. Somewhat to the surprise of the staff, the survey showed that CNC machine tools and personal computers (for inventory control) were already widely used, and a substantial proportion of the firms surveyed already had CAD systems. What was lacking was skill in equipment maintenance and repair. Thus, instead of running information seminars on CAD or CNC, MAP piloted a training program for CNC repair in 1991 at the Springfield Technical Community College. A 26-week version of the program, made available in 1993, was oversubscribed, with 90 applicants for the 20 slots. As a limited-duration project, MAP was defunded by the state in 1992.

If the analogy to the agricultural extension service is to serve as any guide to the structure of the industrial extension service network being created by NIST, then we believe that there is a major missing piece in the design of this policy. Too few programs have any direct connection to sources responsible for developing new technologies. In principle, demonstration centers can be used as alpha and beta test sites for new generations of equipment. We identified two cases where research was focused on developing technology applications that could be deployed in the near term. Both cases provide examples of technology development centers that help form closer ties between two industries. In a third case, a stateinitiated research and development consortium is so successful that it has attracted a national and international industry membership made up nearly exclusively of large companies. Much of the state funding is aimed at activities to disseminate those new techniques to small- and medium-sized enterprises that are potential users of these methods but do not ordinarily participate in research and development projects. (TC) 2 focuses most of its research efforts on identifying and testing existing technologies and adapting them for textiles and apparel manufacturing processes. A case in point is the Apparel on Demand project, which combines video and computer graphics to allow client measurements to be sent directly from the retail store to the apparel production site. The main advantage to apparel manufacturers from such a technology is that it would tie the customer much more strongly to specific apparel companies with which it has such a technical link. Apparel manufacturers usually produce in volumes ordered by retail stores in advance of anticipated demand. If Apparel on Demand were to become an accepted method of purchasing clothes, there would be less surplus merchandise that retailers are forced to discount. This prospective cost-saving is what motivates the big retailers to be willing to enter into longer term, more collaborative contracts with key suppliers.

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Cotton Incorporated, a descendent of a government-sponsored cotton growers educational and marketing research organization, spends about 25% of its $42 million budget (financed completely by dues levied on cotton growers) on fiber research and technology improvements. It has developed and licensed a number of technologies and software applications, most notably an advanced inspection instrument called the HVI, which is now widely used among textile manufacturers in the United States and other countries. This technology permits laser grading of cotton fibers. The HVI did not originate with Cotton Incorporated but was adapted by this non-profit research and education corporation to automate the inspection and grading of cotton fibers. The lack of uniformity in natural fibers such as cotton made the inspection and testing of this raw material a costly and laborious process that increased the cost of manufacturing cotton cloth relative to cloth made from synthetic fibers. With the use of the new instrument, these cost differences are said to have been reduced. Cotton Incorporated employs a variety of methods to ensure that textile companies know about these developments. These include displays at meetings of industry associations, agents that visit potential adopters, and a laboratory and demonstration facility that textile manufacturers can visit. The Edison Welding Institute (EWI), part of the Edison Program in Ohio, is another example of an institution that carries out research focused on specific industrial technology applications. According to program documents provided to us, the Institute was established in 1984, to "advance and apply materials joining technology to benefit industry". The EWI's strategy has been to build on the recognized welding research capacity of Ohio State University and The Welding Institute in Cambridge, UK. Small- and medium-sized firms are potential users of the technologies developed by EWI, but support for EWI's research and development activities still comes mainly from the large firms that are the technology leaders in this process technology. EWI usually performs consulting assignments with industry clients for problem-solving and extended research efforts on a one-to-one propri-

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etary basis. The EWI has been quite successful in improving joining capabilities in its member firms, through direct transfer of improved welding and joining technology, as well as through its training and educational programs. EWI receives 75% of its revenues from industry through membership fees and research contracts. EWI membership includes 220 firms (only about one third are based in Ohio) that receive the results of core and proprietary R & D projects, applications engineering services, short-term problem solving, education, training, seminars, and various information services. Small- and medium-sized firms were not among the original membership of the Institute. During the early 1990s, EWI established special programs to involve SMEs in its technology development activities. One such effort involves a fund to partially subsidize small businesses using EWI's problem-solving resources. Another effort involves lower membership fees for Ohio based SMEs. By 1992, 25 of the 82 Ohio-based members were qualified for the special rate as SMEs. A third effort occurs through the hosting of conferences and workshops to present SMEs with technology applications developed by EWI researchers. The effectiveness of these efforts cannot be evaluated as yet.

5. Conclusions

In this article we have argued that a key element in the design of industrial modernization policy ought to be the strengthening and supplementing of private sector institutions that mediate technology transfer and diffusion processes. This perspective leads us to question the usefulness of policies that focus largely on a strategy of helping all small firms in a region through an agency providing assessment and consultancy services to individual firms. If such assessments are limited to a generic or standardized review of factory operations, then the service will be too basic for firms with well-defined and specific technology needs. There is the danger that industrial extension service agencies who define their mission as providing basic assessment and plan-

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ning functions to SMEs at subsidized rates will attract only those firms that lack technology strategies and have little interest in making any substantial investments of their own resources in process technology improvements. Moreover, the underlying weaknesses in these firms' technical competencies and their unwillingness to invest their own resources in such functions are not changed. Our analysis suggests that some industrial modernization programs have the potential to evolve into the type of quasi-public institutions needed to address the collective action problems identified with technology development and diffusion processes. These problems are complex, and we share with Romer (1993) the view that new institutions are needed to bring the key industrial constituencies together to address these problems. Programs that target companies with the same technical processes or with the same set of customers, and that allow for the involvement of key business customers and technology vendors, stand a better chance of survival as an institution than those programs that attempt to serve all SMEs in a region. Demonstration facilities that allow firms to try out equipment from several vendors in conditions that stimulate actual shop-floor conditions, with complementary training facilities for workers, are more likely to attract companies that are capable of making the change, and hence are willing to pay a substantial part of the cost of the service. Developing supplier-customer networks, while difficult to establish, is also likely to have big payoffs in terms of their effects on the performance of overall production systems. The institution-building approach implies that the involvement of large firms is desirable because of their roles as leaders in adopting new technologies. By modifying and improving these technologies as they use them, such early adopters bestow important positive externalities on the technology 'followers' that make up the base of firms participating in an industrial modernization program. Furthermore, in their roles as customers, large manufacturing firms can provide powerful incentives for the adoption of new technologies by their smaller suppliers. Thus, by

themselves, geographical or state boundaries, or the size of a company, are very poor criteria for targeting the delivery of industrial modernization services. Shared processes, or shared markets and customers offer much better criteria.

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