Dr. Vivek P. Kochikar
The book is a thoroughly researched, eloquently argued and highly persuasive piece. It's central thesis is that technological innovation is a complex, multiplayer game in which America still leads the world by a long way. American scientific, technological and economic pre-eminence are thus not going away anytime soon. The book goes on to argue that "neo-protectionist" fears are unwarranted, and shows how they will probably undermine America's economic might in the long run.
The book comes with impeccable credentials. It is authored by Amar Bhide, the Lawrence D. Glaubinger Professor of Business at Columbia University. Prof Bhide is also a co-researcher of Edmund Phelps, 2006 Nobel Laureate in Economics who is an authority on, among other things, the relationship between investment in education and research on the one hand, and economic growth on the other.
And Prof Bhide could hardly have chosen a better time to weigh in, as anti-offshoring rhetoric can be expected to rise over the next few months. It must be noted that the primary purport of the book is not to support outsourcing or offshoring,and I am sure nothing could be farther from the author's mind than to be painted as a torchbearer for the outsourcing brigade. Nonetheless, the arguments presented therein can be read as making a substantial case for a more liberal approach toward outsourcing.
The author marshals an astonishing array of evidence in supporting his thesis, stitching together data and information from diverse disciplines. He presents data to show that protectionist fears in the 1980s that the US would soon be overtaken by Germany and Japan, which focused on rigorous planning of their scientific manpower, proved baseless as the US prospered while the ostensible aggressors largely floundered. He says things are no different this time, with China and India.
The book's arguments can broadly be summed up as follows:
* Wealth arises not so much from creating new technological breakthroughs as from the capacity to benefit from those breakthroughs.
* This 'capacity to benefit' is a higher order capacity that includes elements such as the ability to create products based on those technological breakthroughs, the ability to market those products well, the ability to take risk and freedom from over-regulation. In particular, "venturesome consumption" - the propensity of consumers to embrace products based on new technologies - is vital.
* The US has most parts of this diverse puzzle - particularly venturesome consumption - and is hence best positioned to benefit from new technologies. This is true even of new technological innovations produced abroad. As an example, the author avers, the exceptional ability of US companies to use IT has been a strong reason why US productivity has outpaced that in Europe in Japan.
* Hence allowing technological breakthroughs to happen abroad certainly does not hurt, and possibly benefits , the US. The author offers the example of the iPod, much of whose technology originated in Europe and Asia, but which wouldn't have achieved the success it has without venturesome US consumers - who have in turn reaped huge benefits by so consuming the device.
* This higher-order capacity is deeply rooted in various economic, social, cultural and psychological structures and is hence highly sticky, which makes it difficult for the US to lose it - and for other countries to acquire it.
The author also introduces the notion of "nondestructive creation" (innovation that creates new products and services without displacing existing ones) in addition to the familiar Schumpeterian creative destruction. Such nondestructive creation creates new jobs without eliminating existing ones. At least in the nontradable services sector, these new jobs will have to stay in the US and cannot migrate to low cost locations.
Thus, Prof. Bhide assures us, there is unlikely to be a giant sucking sound anytime soon.
One potential objection that occurs to me, that protectionists may raise: relying too strongly on the 'nontradable services' argument may amount to standing on shifting sands at best. Several services thought to be nontradable have turned out to be tradable after all. IT services themselves were thought to be nontradable for long, until Indian IT service companies showed they could cross borders. Even advertising, which is highly culture- and context- specific - has been offshored (Lenovo has headquartered all its marketing activities outside China in Bangalore).
The book also perhaps bypasses one major theme on the subject of 'how innovation sustains prosperity in a connected world' (and this is also my favorite argument in favor of why developed economies including the US should not be chary of allowing high-end work - and high-paying jobs - to flow abroad): a lot of the prosperity that so 'leaks away' from developed economies comes right back in the form of demand for products and services. As an example, Indian IT outsourcing companies are perhaps the largest airline customers in the world, as tens of thousands of workers travel each year between India and the countries where clients are located. These airlines such as United and Lufthansa are mostly headquartered in developed countries. Similarly, the same India-based outsourcers lap up the laptops, PCs, servers and networking equipment made by Dell, Sun and Cisco. They are huge buyers of software produced by Microsoft, IBM, Oracle and SAP. These companies (and their employees) can safely be assumed to have an insatiable appetite for the latest cellular phones and so forth from the likes of Apple, Nokia and RIM. These companies also employ legions of workers at or close to client locations - workers who pay taxes and pump money into local economies. Many of these companies are listed on US and European stock exchanges, allowing people there to participate in their wealth creation. Thus, prosperity 'leaking' abroad contributes to prosperity in the developed economies - not in some nebulous, long-term sense but in a way that is direct and almost immediate.
These are but minor quibbles - the book cuts a wide swathe in making its elaborate argument convincing. Along the way, the author explores the question of why companies buy IT. The notorious 'Productivity paradox', which held that IT has not contributed to productivity gains in business - is firmly laid to rest. He avers that IT has brought new ways of doing business, and also delivered significant benefits to the customers of those businesses that used IT, which are ignored by conventional productivity statistics. Another interesting topic examined is that of why people acquire education (particularly higher education), and how universities perceive the economic value they impart to their graduates.
I read this book as I had come across the author's views that that, in addition to innovative inputs , entrepreurial firms require venturesome and resourceful customers who are willing to take a chance on their products and services. Too often I think innovation is viewed as the result of back room boffins planning and researching, whereas in fact the real world of trial, error and customers who are willing to adapt and suppliers who are willing to change is more real. There is a wonderful Dilbert cartoon where Dilbert proudly shows Dogbert the world's first video phone. Dilbert is ecstatic at his purchase, placing it on his desk saying `and all we have to do now is wait for someone else to buy one and we can talk'. Dogbert ruefully notes that societies material progress relies on people like Dilbert.
Amar Bhidé's an Indian-born, professor of Business at Columbia elegantly begins his discussion of innovation as follows "Just as a devout Hindu might begin a journey with a prayer to the Lord Ganesh, it is obligatory to start a discussion on modern innovation by invoking Joseph Schumpeter" Having nodded towards the master, he then proceeds to deconstruct, if not actually slaughter, the sacred cow that is the Schumpeterian model of innovation. This for me is a major strength of the book,it has become fashionable to take creative destruction - the utter replacement of one technology by another, as the basis for the cycles of prosperity and innovation. Yet the reality is somewhat different - in the 1930's typewriters were predicted to eliminate the need to write by hand, yet in 1990 sixteen billion pencils were sold; and
In most markets, a large majority of people will possess both a landline and a mobile phone, despite the potential of the mobile to replace the landline. While I believe that creative destruction as a model remains important for companies investing in new product research - as in Cristensen;s `innovators dilemma' and Foster's `attacker's advantage', however Bhidé's view that markets remain both more sophisticated and complex than one simple model, is both instructive and refreshing.
Bhidé's core argument is that the US consumer is assertive, adventurous and capable - in short, venturesome - in relation to new products. In what other market would such a significant group of customers exist who would be so open to products such as the iPod, who are willing to pay prices which will justify significant investment and who are open to being `experimented upon' ( ref. Fredrich Hayek). Bhidé reviews the work of a sample of US - based venture capital firms and the ventures they invest in, to draw conclusions about the exceptionalism of the US customer. In a variation of the `coming to America' theme, Bhidé documents how `making it' in the US first is hugely important for success, even for firms whose founders originate elsewhere. Indeed the US customer is blind to the national origins of product, the company or the individuals involved in providing the product/service.
I had three major concerns with this thesis - firstly the sample set, as Bhidé acknowledges ( indeed he has a major sideswipe at econometric analysis) , was not scientifically representative, and perhaps cannot be, but therefore runs the risk of being anecdotal. More importantly the VCs were US-based, I would have felt more comfortable with comparisons between success rates in US versus other VCs (the Israeli VC industry is well developed) and with other developmental paradigms - what about emerging companies in BRIC countries (for example)? Most importantly of all, the US is exceptional in terms of GDP per capita and technological prowess, so it may be easy to fall into the trap of stating that because it is rich, it is exceptional. An alternative may be that because it has been exceptional - no invasions in the 20th Century, opposed by an economic system which imploded - it is now rich. I think it would have been useful to examine markets in technology areas where the US is not the leader (eg. Korea for broadband Access, Europe for mobile phone penetration) to see whether venturesome consumers exist, or whether other parameters are important. I find it difficult to believe that US consumers are so significantly different to other consumers, in their uptake of new products, that this justifies a permanent exceptionalism. Nonetheless the arguments made are thought provoking and useful.
Bhidé remains optimistic about the potential for American industry and competitive enterprise within the global economy, and frequently disparages and disproves proponents of exclusion and economic and/or technological nationalism. Such optimism is refreshing (it should be noted the book was written before the Credit Crunch morphed into the Crisis of Capitalism), and forward looking, nonetheless it remains to be seen if (and it's a huge, world-transforming if) Chinese and Indian GDP per capita approaches US figures, will US firms and society still maintain their competitive edge. This is not to argue for economic nationalism, just to put a dampening comment that it is unlikely that 6% of the worlds population will remain so much a determinant of technological innovation and economic prosperity in a future where another 40% is coming to economic self-determination.
One last point, I was puzzled by the inclusion of chapters on immigration into the US. In so far as I understood it, I think the point being made was that the US society was a welcoming meritocracy, which formed a mutually beneficial relationship with all, suitably qualified and motivated, comers. I did not think this a good fit fit with the general thrust of the argument, though its possible that my reading the book was tilted towards what it had to say about innovation, and that I was not sufficiently connected to the prosperity-generating side of Bhidé's argument.