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.

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