Q: Is the U.S. Losing Its Economic Edge?
A:
not a chance, thanks to innovative entrepreneurs and curious consumers. Amar
Bhidé on why the techno-nationalists have it all wrong.
From: Inc. Magazine, November 2008 | By:
Eric Schine
|
Amar Bhidé, a business professor at Columbia University,
bubbles with optimism at a time when many Americans have plenty to worry
about. In his new book, The Venturesome Economy: How Innovation Sustains
Prosperity in a More Connected World (Princeton University), he describes
a uniquely American form of innovation, one driven largely by the appetites
of American consumers. Bhidé talked with Inc. senior editor Eric
Schine about why it doesn't matter where scientific breakthroughs come from,
how entrepreneurs push basic innovations forward, and why the iPod represents
the triumph of the American system. |
The message of your book is that the U.S. economy is
amazingly resilient amid the rise of new supereconomies
like China's and India's. But since you wrote the book, we've all witnessed the
breathtaking crisis in the financial sector. How does this meltdown temper or
alter your upbeat message on the U.S. economy?
For a long time, I've felt that the
financial system was rotten to the core. A vast amount of unproductive wealth
has been created by the malfunctions of the financial system. The danger of
that is, it brings the entire process of wealth
accumulation into disrepute. Finance certainly contributes to prosperity, but
the vast wealth secured in recent years by a small number of financiers does
not map into a commensurate increase in their economic productivity: They
haven't created or financed new industries or turned around failing companies.
Rather, they have used subsidized borrowing to leverage the returns of
questionable schemes, secure in the knowledge that if things go wrong, the
authorities will step in. This casts a dark shadow on the people who do
contribute. And then people become hostile toward the idea of wealth accumulation
in general. You then have this sense that markets don't work, that free
enterprise doesn't work. So quite apart from the slowdown of the economy, it
pollutes the system of free enterprise. That's very unfortunate.
Are you, then, less optimistic about
America's ability to push ahead and create a vibrant, growing economy than you
were when you sat down to write your book?
No, not at all. We have one thing that works really well, and that's
innovation. In the past, many technological developments have taken place
during periods of severe economic stress. During the period of high inflation
and doom-and-gloom recession of the early 1980s, for instance, people were
buying and learning how to use PCs. That PC revolution set the stage for the
huge productivity gains of the 1990s. Even in the Great Depression, the
increases in productivity were enormous, based on the diffusion of a lot of
technologies that had been developed in the 1920s. I'm not wishing for a
depression or a replay of the 1980s. All I am saying is that we have a buffer
against the financial meltdown, and that buffer is our ability to innovate,
especially in the technology sector.
You write that the dire predictions
of so-called techno-nationalists are misplaced. Who are these techno-nationalists, and what are they missing?
These are people who, in the context of
trade and globalization, think that protectionism is bad, but that in order for
us to survive the "onslaught of competition" from China and India, we
have to crank up our technological investments so that we continuously stay
ahead. These people say, let's invest more in R&D, let's invest more in
basic research, let's train more engineers -- on the premise that the greater
the technological lead that you have vis-à-vis other nations, the more
prosperous you're going to be.
And that's wrong?
Absolutely. The U.S. isn't locked into a winner-take-all race for
scientific and technological leadership with other nations. What's more, the
growth of research capabilities in China and India, and thus their share of
cutting-edge research, does not reduce U.S. prosperity. My analysis suggests
exactly the opposite. Advances abroad will help improve living standards in the
U.S. Moreover, the benefits I identify aren't the usual ones of how prosperity
abroad increases opportunities for U.S. exporters. I show how cutting-edge
research developed abroad benefits domestic production and consumption.
That's counterintuitive for most
people.
It's helpful to think of a specific
example. The World Wide Web was invented by a British scientist living in
Switzerland. Think of how much this invention in Switzerland has revolutionized
lives in the U.S. and has improved U.S. prosperity, probably to a greater
degree than it has in Switzerland and certainly to a greater degree than it has
in most other parts of the world. Why? Because the U.S. is
really good at taking things like the Web and weaving them into our commercial
fabric. Or, to give you another popular example: Many of the high-level
technologies associated with the iPod were developed outside the U.S.
Compression software comes from Germany; the design of the chip comes from the
U.K. The whole idea of an MP3 player comes out of Singapore. But most of the
value has been captured in the U.S., because the U.S. happens to represent the
majority of the use of MP3 players in the world.
So the point is that U.S. businesses
are particularly adept at taking inventions and applying them to the
marketplace?
No, it's more than just applying them to
the marketplace. It's also about our ability to consume these innovations.
That's the really critical piece. At the Summer Olympics in Beijing, Coca-Cola
(NASDAQ:COKE) had a pavilion set up where they were teaching the Chinese how to
drink Coke, explaining that it should be drunk cold. That really caught my
attention. Think about how much further the U.S. is on the consumption side.
What does that really tell us?
That we live in a more
commercial culture than any in history. There is no other country where commerce and business have so
completely pervaded everyday life. And so people are always looking for ways to
serve consumers. Look at the historical differences between Europe and the U.S.
In Europe, consumption started off for aristocrats. A classic example in Europe
involves guns. When people first made sporting guns, they were primarily built
for the aristocracy to hunt. But when people made guns in the U.S., they were
used by farmers and ranchers. So these more standardized guns were made in the
U.S. at a lower cost and for a more mass market.
Even if Americans are the best
consumers on the planet, why shouldn't we still be fearful of the rise of China
and India and their incredibly fast-growing economies?
Because economic
systems don't compete with each other. Every gadget, car, or other product imported into the country brings
in its wake what I call nontraded services. Consider
a car. I bet there's three times as much value in all the nontraded
activities that go along with the car as in the import value of the car itself:
the employment at the dealer's showroom, the six-month servicing, the
inspections, and so on. And every new physical gizmo, regardless of where it is
manufactured, will end up generating many times the employment in the nontraded services sector it does in the traded sector.
Still, wouldn't U.S. companies be in
a stronger position if they invested more in research and development?
No. Look at a company like IBM
(NYSE:IBM). You might think the success of IBM was all about its technology.
But IBM's great revolution was as much in sales and marketing as it was in the
invention of the IBM 360. And the system that IBM developed for sales and
marketing was not only of tremendous value to IBM in the sense that it allowed
IBM to establish a dominant position in the computer industry. It was also of
enormous value to the economy as a whole, because it was through the sales and
marketing process that companies learned to use computers effectively. And that
transformed work in America. It wasn't simply because somebody invented this
box and called it a computer and plugged it in. There was a great deal of sales
and marketing that was necessary, not just to sell computers but also to put
them to use.
Do you find that entrepreneurs behave
differently than large corporations in the way they view markets?
Most entrepreneurs, even those who build
high-growth companies, tend to be more naturally focused on sales and
marketing, because they cannot afford the luxury of R&D. And they tend to
be skilled at taking inventions or innovations developed by someone else and
putting them into use, because they can't waste money doing R&D. If you
think of Microsoft (NASDAQ:MSFT) in its early years, they didn't do any formal
R&D. They couldn't. There was no cash flow to do that. Now, they spend a
few billion dollars on R&D. It's not clear to me that this is producing a
huge return, either for the economy or for Microsoft.
So entrepreneurs are good innovators?
Entrepreneurs are great innovators
because of the contributions they make on the ground level. It's critical to
take a broad view of the innovation process. When people think of innovation,
they often think of a technological breakthrough and scientists in white coats.
They don't often consider all the effort and initiative of putting that
innovation into use. But unless it is put into use, a technological
breakthrough is useless. It requires marketing, sales, and organizational
efforts. And the consumer is also a key part of the process. Someone who buys a
spreadsheet program off the shelf and, with diligence and resourcefulness,
creates a homemade CRM system is an important player in the innovation game --
a real innovator.
You write a lot about the power of
consumers to spur innovation. You call it venturesome consumption. What exactly
do you mean by that?
Venturesome consumption has three
important dimensions. One involves being the leading-edge user, where you help
whoever is producing the gizmo develop the gizmo and
thereby become a partner in its development. The second level of venturesomeness is a willingness to take a chance on new
goods and services where you haven't a clue whether they will give you good
value for money.
Any kind of
consumption in particular?
It could be flat-screen TVs, some new
electronic gadget, or anything, really. This goes beyond early adopters. As a
country and a culture, we just like to take chances when we consume. Let's just
buy it, with no regrets. We equip our houses with all kinds of weird objects.
And that brings me to the third level of venturesome consumption: the amount of
time we are willing to invest in learning how to use technology and make it
work for us. An illiterate peasant can buy and start using a mobile phone. But
most modern gizmos are not like that. They require a considerable amount of
resourcefulness and problem solving. So it's not just the person who is
creating the object who needs to figure out how to use it; it's also the person
who is using the object. And then the willingness to stay with it until it
works is unusual in the U.S., at every level -- at the consumer level and at
the company level. In Germany, according to interviews I've done, people don't
want the latest generation of what you have to sell; they want something they
know will work. In the U.S., they say, Hey, give us your
latest and greatest, and we'll figure out how to make it work.
How do you measure how this
consumption benefits the economy?
Consumption is underappreciated by
policymakers and economists. And I think the failure to understand its value is
broad-based. So we have investment tax credits, but they apply only to certain
bricks and mortar and pieces of steel, rather than the much larger investments
people and companies make in learning how to use new technologies. Why should
tax policies discriminate against these investments? Why do we make such a fuss
about low savings and investment when, in this day and age, we don't even know
what investment is? I invest a great deal of my time in learning how to use
computers. That never gets counted in any savings account. The fact that you
and I know how to use computers is an enormous national asset.
Most economists worry about the trade
deficit and its toll on our country's economic strength. But you seem
unconcerned about the trade deficit. Why is that?
A high propensity to use IT generates
trade deficits because we buy a lot of this equipment from overseas. But it
also enhances productivity in IT-using service industries, which account for a
much larger share of economic activity than the IT industry itself. Another
great example is the iPod. The invention of the iPod has increased the trade
deficit, because we import the physical iPods, and
there's no offsetting export associated with the iPod, right? Is it a bad thing
for the U.S. that the iPod was invented? I don't think so.
You also turn on its head the concept
of creative destruction -- the idea that new technologies tend to destroy
industries and jobs in their wake, even as they create new industries. You
focus, instead, on what you call nondestructive creation. What do you mean by
that?
Well, first of all, if we just had
creative destruction, we'd have massive unemployment, and the economy would
grind to a halt. So nondestructive creation is a vitally important
complement to creative destruction. And it is the reason we ought not to
worry about the loss of service-sector jobs, either to increased productivity
or to outsourcing or offshoring. Each new gizmo creates new service-sector jobs
that didn't exist before.
What's a good example of
nondestructive creation?
Thirty years ago, the only diagnostic
techniques that people used to use were X-rays. We still use a lot of X-rays.
But then we had CT scans, then PET scans, and now we have MRIs.
And with each of these innovations, we now can diagnose diseases that you
wouldn't have been able to diagnose previously. So it's not that MRIs simply substituted for X-rays. In fact, most MRIs are used to do things that X-rays could not do. An
X-ray could not show you a tumor in your back because of the soft tissue. So an
MRI is largely an example of nondestructive creation. In addition to helping
the early detection of tumors, it also created a whole bunch of jobs, both for
radiologists and for the people who maintain the MRI equipment and the
technicians who operate it. And because this keeps happening, we shouldn't
worry if some X-ray reading goes off to India.
Copyright © 2008 Mansueto
Ventures LLC. All rights reserved.
Inc.com, 7 World Trade Center, New York, NY 10007-2195.