This October, Columbia Business School Professor Amar Bhidé published a new book called The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. Bhidé’s core thesis is that technologies developed overseas (even if they mean a loss of domestic jobs) can enhance American prosperity. This argument is based on his view that there is a general misunderstanding of how innovation contributes to economic growth, specifically that too much attention is paid to upstream development of new technologies by scientists and engineers and too little to the commercialization of innovations into products and the willingness of “venturesome consumers” to adopt cutting-edge products and services whose economic risks and benefits are difficult to judge. Bhidé believes that worries about the off-shoring of technological research and design are misguided because it’s actually consumer’s willingness to use products derived from scientific research that is “far more important” than generating new technology stateside.
We certainly agree with Bhidé that venturesome consumption and productivity on the user side, including the widespread use of information technology, is of crucial importance to innovation competitiveness and economic growth. Spurring demand and adopting more innovative technology, at individual, organizational, and governmental levels, is vitally important to unlock the potential of solutions like health IT, rapid learning networks, and smart grids, for example, to solve health care and environmental challenges.
Where we disagree with Bhidé is that we believe he presents a false choice between the importance of innovation production and innovation consumption, for there is no reason why the United States should not seek global leader ship in both the upstream development of new tech nologies and inventions by scientists and engineers and the downstream activities that realize effective com mercialization of innovations. To simply write-off leadership in innovation production as opposed to its application is to miss the point; innovation production remains at least as important as innovation consumption. In fact, there’s more than a passing relationship between innovation production and innovation consumption. It is not coincidental that the United States leads the world in use of information technology and also its innovation of it. The twain are not mutually exclusive, and in fact operate complimentarily.
One reason innovation production is so important is that there are two ways that nations get rich, either by enhancing their overall productivity growth (the “growth effect”) or by changing their industrial mix, meaning replacing firms in low-productivity sectors with firms in high-productivity sectors (the “mix effect”.) And while the United State has increased its lead in productivity, we have lost our lead on the mix effect. This is important because changing the mix effect—shifting the economy to higher-productivity sectors, such as technology or IT—is crucial because it leads to higher wages. For example, wages in the tech sector are 70 percent higher than in the rest of the economy, as ITIF’s Digital Prosperity report noted. The distinction between the growth and mix effect can be illustrated through the following example (see ITIF’s report The Rise of the New Mercantilists for a deeper explanation.) Consider a community whose automobile factory installs robotics technology; this is good, raising productivity, causing a large share of the benefits to flow to the firm’s customers in the form of lower prices. But if the community attracts or grows a high-productivity semiconductor firm to replace a lower-productivity firm that moved away (or died), most of the benefits accrue to the residents in the form of higher wages. If we want to be able to afford imports we have to export, and one area we can is in innovation production, where we still retain a competitive advantage (even if the size of our lead has slipped.)
In general, Bhidé’s thesis is really directed at the wrong nation. While the United States can and should continue to take measures to enhance its venturesome consumption, it’s actually other nations that need to more-closely heed the lesson of encouraging venturesomeness in their consumption to stimulate native demand and grow their economies domestically. (The United States, on the other hand, needs to become a more venturesome exporter.) In claiming that those who have sounded alarms about U.S. competitiveness are “techno-fetishists or techno-nationalists,” Bhidé also miscasts their message by insinuating that they “fear catch-up” by other countries. But that’s a red herring; that camp does not fear catch-up if other nations achieve it through venturesome consumption, technological superiority, or old-fashioned market competition, what it opposes is when nations use protectionist trade strategies to gain a competitive advantage over U.S. firms by shifting the cost equation, taking technology without paying for it, or blocking or limiting U.S. firm’s access to their markets. It fears more that the United States has yet to truly grasp the serious threat posed by foreign economies and their companies, not just through their genuine technical strengths and attractive products in many cases, but also illegitimate approaches that erect unfair or protectionist trade policies that systematically disadvantage foreign competition.
Bhidé’s argument that China or India as entire economies won’t be innovative for fifty years also misses the point. Rather, they are highly effective “branch plant innovators,” economies characterized by a high volume of transplant technology firms. The notion that U.S. firms may offshore their manufacturing (and jobs), but that the higher-valued added (and thus higher-paying) research, design, and management jobs will remain in the U.S. is becoming increasingly inverted. Intel’s recent decision to locate a $4 billion manufacturing plant near its R&D center in Israel (so the manufacturing facility could be close to its R&D site that spawned the innovation) shows than an economy that initially controls R&D and manufacturing can lose the value-added first from manufacturing, and then R&D. In other words, economies can use a branch-plant innovation approach to quickly become powerful competitors and migrate up the value curve to rapidly achieve competitiveness in high-value added industries, when once they were thought only to be low-skill, low-cost manufacturing centers.
Ultimately, Bhidé—and others who view the increasing technological competitiveness of foreign workforces and countries as an unalloyed positive development for American prosperity, even if it means a loss of U.S. jobs—fails to recognize that there is a difference between creative destruction and simply destruction. Their neoclassical-like view holds that if Boeing, for example, goes out of business, as long as America maintains flexible labor and capital markets, these resources will flow into other industries, including into expanding or new firms and sectors. In such a market environment, policies are needed only to facilitate resources from losing to winning companies.
This view may have accurately described a country’s economy before the emergence of globalization over the last two decades, which has caused a substantial increase in the proportion of an economy that is internationally-tradable (a point Bhidé misses entirely by claiming that the size of the untradeable sector of the U.S. economy is growing.) But in the new global economy, knowledge is increasingly the major factor of production (as opposed to the tangible capital embodied in machinery, laborers, and financial capital that characterized the old economy). It is embedded in organizations and if organizations die so too does a significant amount of knowledge. Thus, losing international competitions in knowledge-based industries (whether through other countries’ interventionist policies or the superiority of their firms) means losing much more than just the firms; it means losing the value from these dispersed pieces of value now represented by unemployed workers and under-utilized suppliers. When much of a country’s capital resides in intangible capital, it does not get reallocated easily, and it can’t be easily reconstructed. Put differently, a nation can’t expect to simply lose its high-tech industries, along with the high-skill, high-paying jobs they embody, and expect that its economy will readily reallocate those now displaced resources to other high-value-added forms of production. In fact, there is strategic complementarity between the percentage of high-skill workers and high-value, innovative firms in an economy, as economist Elvio Accinelli has noted. Losing the former risks losing the latter.
In conclusion, Bhidé is correct that the demand-side is important to an innovative economy, but it does not follow that an economy’s ability to produce innovations—based largely on the underlying scientific and technological strength of its workforce and industries—is not of vital importance (or a legitimate policy objective) to an economy’s ability to innovate and remain economically competitive.
Originally posted on FastCompany.com.