Venturesome consumption, globalization and innovation

Amar Bhide

Lawrence D. Glaubinger Professor of BusinessColumbia University, Graduate School of Business

Center on Capitalism and Society

The Oxford Institute of Economic PolicyOxford, 23 October 2006

Techno-fetishism and Techno-Nationalism

Focus on “upstream” development of science and

cutting edge technologies

Equate prosperity with international leadership

Age-old tendenciesPaul David (1986)

Innovation “cherished child, doted upon by all concerned with

maintaining competitiveness… whereas diffusion has fallen into

the woeful role of Cinderella, a drudge like creature who tends to

be overlooked when the summons arrives to attend the

Technology Policy Ball.”

Success equated with leadership, with pioneering on the

technological frontiers. To be an assiduous “follower,” seems

somehow to have acquiesced in defeat, abandoning adventure for

the haven of routine”

Exhibit A: Clyde Prestowitz

“American Wealth, economic growth and national

security have long been based on technological

leadership”

“For more than a half century America’s broad

technological leadership has been unchallenged”.

America’s Technology Future At Risk

“Well on its way to surrendering leadership in advanced telecom products and services”

$55 b trade deficit in Advanced Technology Products

“VCs pressing the start-up firms they finance to move R&D to Asia

Many telecom and technology companies [cutting] vital R&D

spending by 10-40%.... Government R&D spending in these areas

has fallen by over 30%”

“Foreign companies make up the majority of the top ten recipients

of U.S. patents each year and the United States has fallen behind

the EU and lost ground to Asian countries in the publication of

scientific articles”

Exhibit B: Richard FreemanLeadership in science and technology gives the US its

comparative advantage [and] contributes substantially to economic success.

Changes in the global job market for S&E workers is eroding US dominance in science and engineering… threatening the country’s global economic leadership.

By increasing the number of scientists and engineers …low income countries like China and India can compete with the US in technically advanced countries..

“Multinational movement of R&D facilities to developing countries are harbingers” of “diminished comparative advantage in high-tech.

Evidence of ‘decline’

Science and engineering PhDs

EU/US: 93% 1975 122% 1989 154% 2001

Japan/US: 11% 1975 16% 1989 29% 2001

China/US: ~0% 1975 5% 1989 32% 2001

Publications, citations patents, bachelors degrees

“Large increase in outward R&D investment”

50< MNC research facilities in China in 1997; >500 2004

Why it matters: “North-South” trade models

North-South trade is mutually beneficial provided “the South

competes with the North for production of older products through

low wages but is unable to compete in the newest technology”

The increased supply of S&E workers in large developing

countries threatens the North’s monopoly

Models in which loss of technological advantage benefits

advanced countries “theoretical curiousum rather than a realistic

representation of the current economic world.”

“Loss of technological superiority overall likely to be

disastrous for US workers and firms.”

Puzzle:

Why has the US maintained (or possibly expanded) its productivity and

per capita income lead while the EU and Japan have increased their

shares of PhDs, scientific articles etc.?

Hypothesis:

Techno-nationalism and North-South models based on faulty

assumptions, many Schumpeterian, about innovation and globalization

Focus on “upstream” indicators obscure importance of downstream

capacity

Not a zero sum game

Myths about modern innovation

Innovation requires creative destruction

Revolutionary change led by single innovator

Vs.

Destructive and non-destructive innovations

Multi-period, massively multi-player game

Myth: Passive but curiously omniscient mid- and downstream consumers…

Reality: ‘Venturesome’, entrepreneurial contributions Supply impetus or core idea (Von Hippel) Co-development through participation in experimentation

and dialogue Bearing Knightian uncertainty

Performance

Costs

Critical mass

Utility

Individuals and businesses Resourceful problem solving

Tradability assumptions

Nordhaus (et. al): Innovators don’t keep much of the value;

consumers get lion’s share.

Shouldn’t care where innovation originates, as long as its

freely tradable.

Techno-Nationalistic assumption: only final goods tradable;

when in fact.

Upstream science and technology travels more easily than

downstream

Significant proportion of economic activity un-tradable

Explaining US income and productivity lead

Trade deficit in high tech symptom of strength IT < 10% of GDP But significant impact on the other 90+% Source of productivity edge over Europe and

Japan: More -- and more effective -- IT spending

© Amar Bhide

Sales of operating systems

© Amar Bhide

Table 2a: Ratios of Sales of Operating Systems (in units and revenues) to GDP and of Gross Fixed Investment to GDP in 2001

(US ratios= 100)

Region Units sold/GDP Revenues/GDP Gross Fixed Investment/GDP

Windows OS

Linux All Systems Windows OS

Linux All Systems

USA 100 100 100 100 100 100 100

Canada 141 106 137 116 102 115 121

Latin America 60 36 57 58 36 55 116

Western Europe 74 65 73 NA NA NA 123

Central/Eastern Europe 96 54 91 NA NA NA 139

Middle East and Africa 38 23 36 NA NA NA 118a

Japan NA NA NA 87 34 80 152

Asia Pacific excl. Japan NA NA NA 88 24 80 175

Sales of operating systems

© Amar Bhide

Country Units sold/GDP Gross Fixed Investment/GDP

Windows OS Linux All Systems

USA 100 100 100 100

Austria 71 53 69 136

Belgium 86 65 83 125

Denmark 127 92 123 122

Finland 100 73 97 125

France 68 65 68 120

Germany 65 63 64 123

Greece 72 36 68 146

Ireland 92 56 88 143

Italy 63 42 60 125

Netherlands 93 80 92 130

Norway 87 62 84 112

Portugal 94 54 89 163

Spain 47 29 45 160

Sweden 117 91 114 106

Switzerland 92 73 90 137

UK 87 93 87 102

Overall IT spending/GDP

© Amar Bhide

Table 3: Ratios of IT expenditures to GDP, and gross fixed investment (GFI) to GDP, where US ratios =100

2001 2002 2003 2004

Region IT Ratio

GFI Ratio IT Ratio GFI Ratio IT Ratio GFI Ratio IT Ratio GFI Ratio

United States 100 100 100 100 100 100 100 100

Canada 90 121 90 130 90 130 88 126

Latin America 83 116 89 123 93 120 98 121

Western Europe 83 123 81 129 81 127 84 122

Central/Eastern Europe

98 139 105 144 90 143 83 134

Middle East and Africa

64 118a 68 133a 76 133a 81 123a

Japan 71 152 74 155 84 152 87 143

Asia/Pacific 83 175 85 193 88 200 88 198

Bloom, Sadun and Van Reenen’s (2005):

US multinationals in UK spend 41% more than industry

average (non U.S. MNCs 20% more)

“significantly higher productivity of IT capital” –

accounted for “almost all the difference between the

overall productivity of resources used by U.S. owned and

all other establishments.”

Effect confined to ‘IT using intensive’ industries that

largely accounted for US productivity growth acceleration

since the mid 1990s.© Amar Bhide

Elusive Underpinnings:

Some obvious basic conditions

Education

Free markets (consumer and producer autonomy)

Satisfaction of basic wants

© Amar Bhide

Distinctive (and subtle) factors

Expectations and beliefs

Predisposition to believe in technology

Utility from early adoption

… and disregard for thrift

Grow or die imperative

© Amar Bhide

Policy Implications

Paul David (1986):

Overt policies less important than indirect effects

Speeding up may not always be optimal

Case by case approach

© Amar Bhide

Redressing biases and neglect

R&D vs. marketing

Savings and investment vs. consumption

and spending

Education (“more engineers”) and

immigration (“more Phds”)

Anti-trust, land use etc.

© Amar Bhide

Concluding questions:What’s the difference between Norway and Nigeria? Is it

the capacity to produce (or even pay for innovations) or

to implement and use modern technology? The US lost its "commanding lead" over Europe and

Japan after the second world war? Did this erode or enhance US prosperity (or national security for that matter)?

Suppose the North "loses share" in the development of cancer treatments to China but the total number of cures increases. Should the North complain?

© Amar Bhide