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October 31, 2008

Rethinking America’s Innovative Edge

In his new book The Venturesome Economy, Amar Bhidé argues that the willingness and ability of Americans to develop and use innovations derived from the scientific research of other nations is a crucial driver of U.S. prosperity.


Your training and expertise is in management and entrepreneurship, but this book has a macro perspective.

I never would have had the nerve to write it except for the happenstance that shortly after I arrived at Columbia the phone rang and it was Edmund Phelps [2006 Nobel laureate in economics], who asked if I would like to have lunch. Since then, we have had lunch once or twice a week, and that’s been an exhilarating, real-time training in these big-picture things. That inspired me to tackle these big questions that I might otherwise not have taken on.

What role do China and India’s technological advances play in the U.S. economy?

There is a great debate about whether the increasing technological capabilities of China and India are a threat to the United States and how the United States should respond to these changes. Historically, debates about trade have been between protectionists and free-traders. Over the last 20 or 30 years, however, there has been a third, seemingly more progressive, camp — the techno-nationalists.

These are people who say protectionism is a bad thing; but to prosper in the face of low-cost competitors abroad, the United States must maintain its technological edge by, for instance, spending more money on research and training more scientists and engineers.

I think this view is probably less harmful than protectionism, but it is not a sensible way of looking at how the global economy is evolving. The idea of a zero-sum game between countries, in terms of their economic interactions, is silly. In particular, U.S. prosperity is not a function of the magnitude of its lead in cutting-edge science and technology. In fact, the geographic origin of technologies is irrelevant, particularly in a globalized world, because high-level ideas were always extremely mobile and they’ve become even more so.

The economic value of most new ideas is usually captured by the users of ideas, not by its developers. So if the world’s supply of new technologies and science increases, the largest benefits will accrue to those economies that are most capable of taking advantage of these advances.

But the increasing capacity of China and India to develop new technologies does little to mitigate the common American perception that globalization is a mechanism by which jobs are siphoned away to developing countries for the sake of producing cheap goods.

A feature of innovation that is frequently overlooked is nondestructive creation. Creative destruction, the use of new technologies that improve productivity but destroy old jobs, is certainly a big deal automobiles facilitated the creative destruction of stagecoaches and ATMs facilitated the creative destruction of bank tellers — but that’s only part of the story.

Innovations also, in fact, satisfy new needs and new wants — on quite a massive scale — that were not previously served. And because non-destructive creation more than offsets creative destruction, the total supply of jobs increases. Moreover, many of the new jobs are in the service sector. New artifacts usually create more service jobs — in transportation, sales and distribution — than manufacturing jobs. And most of the new service jobs are domestic jobs.

The protocols for the Web were developed in Switzerland. What difference does that make? As long as the United States can use inventions like the Web to satisfy new needs, the new service jobs that are created will more than offset the jobs that are lost to creative destruction, efficiency gains or outsourcing.

In fact, the bigger threat to the well-being of the United States is not that the Chinese will continue to increase exports but that, inevitably, they will eventually cut back on their exports, and this cornucopia of cheap goods that we have enjoyed will go away. Think of apparel: In the short run it may make sense to grow cotton in the United States, export it to China, have it turned into shirts and then shipped back. In the long run this doesn’t make sense because it creates an enormous supply chain, which is inefficient.

It works today because China has been historically underdeveloped — in terms of education, organization and infrastructure — and that has led to extremely low wages. But as China improves its standard of living, this practice of manufacturing there will become less and less sensible because salaries will increase and because China is a large country, and in large countries most economic activity is domestic. Over time, less and less of its workforce will be devoted to exports and more of it will be devoted to production for local consumption.

Isn’t part of America’s unease over losing its edge in technological innovation related to a fear of losing its status as a global leader?

The United States isn’t actually falling behind. And the idea that the United States needs to dominate in order to prosper is dubious.

In the book I discuss the contrast between Japan and Norway. Japan has been at the forefront of many cutting-edge technologies and increasingly has become a major force in science. But it has badly neglected and suppressed reforms in its service sector, which employs far more people than the manufacturing sector. And so, the Japanese economy has stagnated.

Though Norway produces almost no cutting-edge technologies, the Norwegian economy is No. 1 in terms of labor productivity per hour in the world, which results in high wages. This is because Norway is incredibly good at using new technologies, wherever they may be developed, to improve the productivity of its service sectors.

Or consider security issues. China fought three wars before its economic reforms took place. It has fought no wars since. In contrast, Georgia has been invaded by a country that is not developing economically to the degree that it should.

The growth of China and India certainly creates concerns about global warming and competition for scarce petroleum resources. A lot of attention ought to be paid to these problems rather than the gold-medal approach to who is publishing more scientific papers.

How can the United States take advantage of technological advances in developing countries?

The extent of cutting-edge technology coming out of China and India is vastly exaggerated. But let’s say that it is greater than it was in the past and it will be even greater in the future. So what? We should welcome these developments and invest in maintaining our capacity to use them.

Take healthcare: If China is developing cures for cancer, I say wonderful. The fear of China and India’s growing capacity to undertake medical research misses the point. The real problem is that we spend between 15 and 20 percent of our GDP on healthcare and don’t get good value for our money. We ought to focus on fixing that problem. The existing stock of medical technologies is vastly underutilized or misutilized. Medical technology has run far, far ahead of the system’s capacity to use it effectively. Increasing that gap in the name of a somewhat illusory competitive threat is misguided.

In a democracy, we shouldn’t be worrying about what share of the world’s research we conduct; we ought to be thinking about prosperity and the overall global public good.

Amar Bhidé is the Lawrence D. Glaubinger Professor of Business in the Management Division at Columbia Business School.


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