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STANDARDS: LEVERAGE FOR AMERICAN COMPETITIVENESS

2012

Ivan-Thibault Pham,
B.Sc. Biomedical Engineering,
Wallace H. Coulter Department of Biomedical Engineering,
Georgia Institute of Technology

Correspondence:
Email: thibaultpham@gatech.edu

Abstract
Standards have a great value to society: they facilitate innovation, and in turn, economic
gains and competitiveness. Anticipatory, responsive, and enabling standards all promote
advancements at different stages of innovation, while the process of creating standards fosters an
innovative society. In order to effectively harness standards as a tool for growth, the United
States needs to adopt a balanced innovation system, one that utilizes both committee and market
mechanisms. A hybrid system would prevent market or committee failures. While the American
market is well developed, the American standards developing organizations (SDO) network is
chaotic. The disorganization of the American SDO system leads to a lack of coherency at the
national level, resulting in differing standards and no real leadership. When projected onto the
international scene, this translates to poor representation, giving away advantages that could
drive international competitiveness. Reform is needed for effective leverage of standards as tools
for competitiveness.
1. Background
1.1 Defining Competitiveness & Innovation
The word, competitiveness, has taken on many forms throughout the years. It has
generated debate among economists about its values and the best ways to quantify it. In order to
avoid any confusion, whenever competitiveness is mentioned in this text, it will refer to as the
degree to which a nation can, under free and fair market conditions, produce goods and services
that meet the test of international markets while simultaneously maintaining or expanding the
real incomes of its citizens. (Presidents Commission on Industrial Competitiveness, 1985) This
definition implies that for a nation to be competitive, it needs to be efficient in terms of
productivity and income and strive to increase standards of living. Competitiveness will be
assessed through four indices: labor productivity, real wage growth, real returns on capital
employed in industry (ROCE), and position in international trade.
Innovation will be defined as the act of bringing a new product or process to the market
place that improves the range and quality of current offerings or delivery and production of
products.
1.2 Standards
Standard are commonly used specifications or characteristics that ensure consistent
quality. In a technology based market, standards can be distinguished as product or non-product
standards. Product standards involve key attributes or elements of a product while non-product
standards derive from a different technical base than that upon which the attributes of the product
itself depend (test methods, reference materials, etc.) (Tassey, 2000). Standards can reduce
transaction costs due to compatibility of products and prevent consumers from being short
changed due to inconsistent quality or pricing. Standards can produce economies of scale: By
limiting products characteristics or adopting common features for interchangeability through
standards, production and modification costs decreases.

2. Values of standards
2.1 Standards and Innovation
Standards are typically thought as restrictive regulations that impede innovation.
However, standards benefit society by facilitating innovation and fostering an innovative
environment that drives competitiveness. There are three ways we can observe how standards
interact with innovation: Through anticipatory, responsive, and enabling standards (Baskin et al,
1998).
The concept of anticipatory standards encompasses a future oriented and self-creating
process of defining standards: writing for the future now (Bonino and Spring, 1991). They are
primarily adopted to anticipate the evolution of a technology and facilitate its rapid development
and entry to the market. Anticipatory standards places attention to future needs in order to
prevent issues that would impede innovation. They facilitate innovation by being guideposts for
advancements and forces players to continuously improve and strive to meet the standards.
Several studies have shown that anticipatory standards in the environmental sector can lead to
increased productivity and provide incentives to firms for innovation (Murty and Kumar, 2002;
Lanoie et al, 2008). Examples of successful innovations developed from anticipatory standards
are plenty in the IT sector, the most well-known being the family of IEEE 802 standards.
Enabling standards are the sort that proceeds in parallel with market growth. They
provide improvements in quality, cost, and interoperability, and respond to consumer behavior.
Responsive standards are those that follow the maturing of an innovation or adoption of
the technology by critical mass. This relationship can be understood as the validation of
successful research and development efforts through standardization. Contrary to the popular
belief that responsive standards stagnates innovation by locking in a product, they can be used to
improve deficiencies and provide quality foundation for future innovations to be built upon.
The process of developing standards promotes innovation. Standardization takes place in
two of environments, market and committee environments. Standards emerging from market
based mechanisms are primarily enabling standards. These emerge from companies competing
for consumers' approval by launching their products into the market, relying on marketing,
openness, strategic management, and most importantly, innovation. This mechanism forces firms
to compete primarily through development of novel technology. A well-known example is the
Apple and Microsoft rivalry. Both compete, through constant innovation, for their respective
operating systems to be market standard through public approval. However, engaging in market
based standard wars can be extremely costly. In this case, standards (anticipatory and responsive)
can be set based on consensus from committees. Committee based standards emerge through
human interaction, so being actively involved in the standards process is crucial for developing
successful standards. For entities looking to gain competitive advantages from having their
standards being adopted, forging alliances prior and during conferences to get a consensus in
their favor is important. A degree of openness and honesty toward potential allies is crucial. This
openness in standards meetings promotes the exchange of knowledge, collaboration on scientific
and commercial projects, and provides participants with strategic positioning regarding
innovation trajectory.
Seeing how standards can facilitate innovation, it is important that the United States
promotes standards as a strategy for growth and competitiveness. The process of creating
standards fosters an innovative environment where the development of new technology and
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processes can drive competitiveness: Increases in efficiency of making or providing goods, from
technological advancements, reduce costs related to production and boosts productivity. New
technologies and production efficiency can provide absolute advantages to firms and countries
and make foreign direct investments more attractive. Foreign direct investments from countries
seeking these strategic assets can be beneficial for host countries, especially for developed
economies, providing positive externalities such as spillovers in technology and productivity
(Alfaro et al, 2009; Keller, 2009; Meyer and Sinani, 2009), leading to increased competitiveness.
Additionally, innovation generally yield far better returns on investments than the average return
for all American businesses (Nicholas, 1999). Promoting standards for innovation would lead to
increased ROCE and competitiveness.
2.2 Economic value
Adopting standards have been shown to have large economic impact. A study conducted
on the US automotive supply chain showed that a lack of standardization in software and
hardware for designing and sharing parts between suppliers and employees costs approximately
1 billion USD a year, where interoperability held 91% of the cost, and delays, 9% (Brunnermeier
and Martin, 1999). The $1 billion lost could have potentially been used for R&D and/or driven
up real income for employees. In Germany, standards have an economic benefit of .72% percent
of the gross national product (Blind et al, 2011)
On the international scene, adopting standards facilitates international trade. In todays
increasingly interconnected world, there is a demand for harmonized technology standards. In
order to be competitive, states need technology standards that conform to specifications to
prevent barriers to trade. Interoperability between products is often rewarded by increase
openness of markets and imports and exports. Studies have found that standards tend to have a
positive impact on exports (Swann et al,1996) and that in the case of the United States, exports
and economic growth have a bilateral relationship (Cheng, Chu 1996).
3. Leveraging Standards
As the United States recovers from the Great Recession, the slow economic growth
combined with intensifying global competition is threatening to diminish the American
international presence and puts its citizens prosperity at risk. In 2009, President Obama laid out
a strategy for economic growth and international competitiveness that focuses on market based
innovations (The National Economic Council, 2009). The plan is impressive, investing
substantial capital toward research and development, entrepreneurship, innovation, and the
market. However, since the American technology market is not immune to failures, a hybrid
innovation policy, one where committee and market mechanisms are equally important, is
recommended. Since the American market is already well developed, attention should be
directed towards the United States SDO system, a key regulatory infrastructure that balances
market based innovation mechanisms. The American SDO system is highly disorganized and
lacks leadership, which affects the United States ability to promote unity in domestic technology
standards and effective representation at the international level.

3.1 Hybrid System


Adopting a hybrid system of standardization, where market based and committee based
mechanism play equal role in setting standards, would provide checks and balances. Committee
standards would prevent consumers from locking into lesser technologies and the markets would
keep committees from steering innovation trajectory with too tight of a grip. Notable examples
of standardization failures stemming from market or committee dominated standardization
include when consumers locked in the QWERTY keyboard layout despite the availability of the
superior Dvorak arrangement and when Japans government owned Nippon Telegraph and
Telephone set technological trajectories that decoupled it from the international market.
3.2 Institutional Organization
Americas market system is developed; however, its standards institutions need
organization and reform. American standardization institutions have history of keeping
government at bay, fearing that a more centralized system would rob them of their revenues,
power, and autonomy. This has led to anarchy in the American system: It is decentralized,
characterized by a high degree of competition, and operated with little oversight from the
government. This has resulted in some 300 trade associations, 130 professional and scientific
societies, 40 general membership organizations, and about 150 consortia, which together have
set approximately 49,000 standards (Matli and Buthe, 2003). An important aspect that influences
effectiveness of committee standardization process, especially at the international scene, is the
institutional structure of standardization organizations. One can clearly see the importance of
organizational structure by comparing the American system versus the European system. In
contrast to the American standardization system, European standardization is centralized,
coordinated, regulated, and subsidized. Each European country has one standard developing
organization that represents national interest at the regional and international level. The
European standardization system is characterized by both highly organized national and regional
layers of standards organization. When standardization becomes international, the organizational
characteristics of the European standardization system make for a better match between the
national and international institutions than the American system (Matli and Buthe, 2003). This
allows them to be more involved earlier and more effectively than their American counterparts,
resulting in European firms possessing better information about international standardization
opportunities and to have more effective interest representation.
More effective representation at the international level increases the chances of having
American standard adopted which would reduce costs in modifications for interoperability, and
facilitates international trade, increasing competitiveness.
4. Conclusion

Standards are typically thought of as having no value beyond providing specifications.


However, this assumption is false. This paper has shown how standards benefit society through
innovation, which can bring economic gains and bolster international competitiveness. For the
United States to benefit from the innovative value of standards, it needs to reorganize its chaotic
SDO system and adopt a hybrid standardization system. This will provide a controlled domestic
innovation system and effective representation at the international level to facilitate trade and
increase competitiveness.
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