Who Is Afraid of Offshoring?

Is it likely that China and India will attain the parity with the United States that has eluded Japan, Korea and Taiwan?

March 20, 2009

Is it likely that China and India will attain the parity with the United States that has eluded Japan, Korea and Taiwan?

The world is a long way from being flat.

China and India aren’t anywhere close to catching up with the United States in their capacity to develop and use technological innovations.

Starting afresh may allow China and India to leapfrog ahead in some fields, in building advanced mobile phone networks, for example. But excelling in the overall innovation game requires a great and diverse team which, history suggests, takes a very long time to build.

Consider Japan, which began to “enter the world” after the Boshin War of 1868. In the subsequent Meiji Restoration, the country abolished its feudal system and instituted a Western legal system and a quasi-parliamentary constitutional government.

In a few decades, Japan had modernized its industry, its military and its educational system. Today Japan is a highly developed economy and makes important contributions to advancing the technological frontier.

But nearly a century and a half after Japan started modernizing, its overall capacity to develop and use innovations — as evidenced by average productivity — remains behind that of the United States.

Similarly, Korea and Taiwan started industrializing (as it happens, under Japanese rule) about a century ago and enjoyed miraculous rates of growth after the 1960s.

In several sectors of the electronics industry, Korean and Taiwanese companies are technological leaders. Yet their overall productivity suggests they have less capacity to develop and use innovations than does Japan.

Is it likely then that within any reader’s lifetime China and India will attain the parity with the United States that has eluded Japan, Korea and Taiwan?

The fear of offshoring of innovation is similarly exaggerated. Don’t expect to hear a giant sucking sound anytime soon. The massive relocation of innovation appears highly unlikely.

The fact that U.S. companies have started R&D centers abroad that do high-level research doesn’t mean that all lower-level development know-how will quickly follow.

Of the many activities included in the innovation game, only some are performed well in remote, low-cost locations. Many mid-level activities, for instance, are best conducted close to potential customers.

Any catch-up, even if it takes place gradually and in the normal course of development, will to some degree reduce the U.S. “lead.” Furthermore, the global influence of techno-nationalism could accelerate this process.

As alarmists in the United States don’t fail to remind us, governments in “emerging” countries such as China and India — also in the thrall of techno-nationalist thinking — are making a determined effort to leap ahead in cutting-edge science and technology.

I am skeptical that these efforts are going to do any more good for China’s and India’s economy than did similar efforts in Europe and Japan in the 1970s and 1980s.

But put aside the issue of whether investing in cutting-edge research represents a good use of Chinese and Indian resources. Does whatever erosion of U.S. primacy in developing high-level know-how that this might cause really threaten U.S. prosperity? Should the U.S. government respond in kind by putting even more money into research?

Princeton economist Paul Krugman, in a 1994 Foreign Affairs essay, decried a “dangerous obsession” with “national competitiveness.”

The tendency to think that “the United States and Japan are competitors in the same sense that Coca-Cola competes with Pepsi,” Krugman pointed out, is widespread. He quoted then-President Clinton’s claim that “each nation is like a big corporation competing in the global marketplace.”

This premise, which is at the heart of techno-nationalism, Krugman persuasively argues, is “flatly, completely and demonstrably wrong.” Although “competitive problems could arise in principle, as a practical, empirical matter, the major nations of the world are not to any significant degree in economic competition with each other.”

The techno-nationalist claim that U.S. prosperity requires that the country “maintain its scientific and technological lead” is particularly dubious. The argument fails to recognize that the development of scientific knowledge or cutting-edge technology is not a zero-sum competition.

The results of scientific research are available at no charge to anyone anywhere in the world. Most arguments for the public funding of scientific research are in fact based on the unwillingness of private investors to undertake research that cannot yield a profit.

Cutting-edge technology (as opposed to scientific research) has commercial value because it can be patented — but patent owners generally don’t charge higher fees to foreign licensors.

The then-tiny Japanese company Sony was one of the first licensors of Bell Lab’s transistor patent. It paid $50,000 for a license (after obtaining special permission from the Japanese Ministry of Finance) that started it on the road to becoming a household name in consumer electronics.

If patent holders choose to exploit their invention on their own (i.e., not grant licenses to anyone), this does not mean that the country of origin secures most of the benefit at the expense of other countries.

Suppose IBM chooses to exploit internally, rather than freely license, a breakthrough from its China Research Laboratory (employing 150 research staff in Beijing).

This does not help China and hurt everyone else. Rather, the benefits go to IBM’s stockholders, to employees who make or market the product that embodies the invention and — above all — to customers, who secure the lion’s share of the benefit from most innovations.

These stockholders, employees and customers, who number in the tens of millions, are located all over the world.

In a world where breakthrough ideas easily cross national borders, the origin of ideas is inconsequential. Contrary to Thomas Friedman’s assertion, it does not matter that Google’s search algorithm was invented in California.

After all, a Briton invented the protocols of the World Wide Web in a lab in Switzerland. A Swede and a Dane in Tallinn, Estonia, started Skype, the leading provider of peer-to-peer Internet telephony. How did the foreign origins of these innovations harm the U.S. economy?

The United States has more than just great scientists and research labs: It also hosts an innovation game with many players who can exploit high-level breakthroughs regardless of where they originate.

Therefore, the erosion of the U.S. lead in cutting-edge research isn’t just harmless: An increase in the world’s supply of high-level know-how provides more raw material for mid- and ground-level innovations that increased living standards in the United States.

The U.S. technological lead narrowed after World War II as Western Europe and Japan rebuilt their economies and research capabilities.

This led not to a decrease, but to an increase in U.S. prosperity. The United States likely enjoys a higher standard of living because Taiwan and Korea have started contributing to the world’s supply of scientific and technological knowledge.

Excerpted from “The Venturesome Economy” by Amar Bhidé, Princeton University Press. Copyright © 2008 Amar Bhidé. Used by permission of the publisher. All rights reserved.

Takeaways

Of the many activities included in the innovation game, only some are performed well in remote, low-cost locations.

Nearly a century and a half after Japan started modernizing, its overall capacity to develop and use innovations remains behind that of the United States.

An increase in the world's supply of high-level know-how provides more raw material for mid- and ground-level innovations that increase living standards in the United States.

The United States has more than just great scientists and research labs. It also hosts an innovation game with many players who can exploit high-level breakthroughs — regardless of where they originate.

Cutting-edge technology (as opposed to scientific research) has commercial value because it can be patented — but patent owners generally don't charge higher fees to foreign licensors.