Outsourcing Innovation

Over the last 20 years or so, as global barriers fell and telecommunications and information infrastructure increased, it has become easier and cheaper to outsource some functions.  In the US this started with NAFTA for manufacturing and then moved to Taiwan and to mainland China.  For services it started in the nineties as many firms moved high overhead operations like call centers to places like India and the Philippines.  Today, we are reaching the point where anything that can be reduced to information can be outsourced.  For example, when you have an x-ray or CAT scan, there's a good chance someone overseas is reviewing that and sending information back.  It won't be long before much of our backoffice accounting and financial planning will be done overseas as well.

Richard Florida wrote a post today entitled The Global Innovation Paradox, which points out that we think that much of the low margin work is getting outsourced but we also believe that the US leads in general innovation.  In his article he points to new research by the National Science Foundation that finds that many US firms are outsourcing R&D.  In the most extreme example, foreign-based Automotive R&D accounts for 40% of the total R&D for US companies.  In a number of other industries, from pharmaceuticals to semiconductors, an increasing amount of the R&D is happening overseas.  I'm glad he pointed out the research, but I don't understand his title of an Innovation Paradox.  It's not a paradox to see American companies outsourcing their R&D when they want to make products for the global market.  These firms are leveraging smart, well connected people in a number of different geographies to create new products and services faster, and more relevant in all markets.  Additionally, as the developing world catches up with the US in investments in education, they are "climbing the learning curve" by taking on more innovative research and development.  Soon, countries like India and China will do what Finland has done - match the US in innovation research and output, no longer following our lead but competing with us for the innovation lead.

Anything that can be outsourced - done less expensively at the same level of competence - will be outsourced.  Whether that is answering phones for customer support or designing circuit boards, it can and will seek the best people at the lowest cost.  That's a reality.  What we in the States need to understand is that we can either attempt to differentiate on cost, or differentiate on innovation and creation.  For the most part we've ceded the cost battle to other countries, so we can't afford to cede the innovation battle.  That means we need to continue to innovate in traditional R&D forms where we can, and also create new innovation models in new forms.  Notice that much of what Florida points out in the NSF research is still basic "R&D" which will become for the most part new physical products.  We in the US can continue to innovate in new products, but can open up new innovation opportunities in services, customer experiences, business models and so forth.  As these other countries develop, their customers, too, will demand the new products, services and business models we've created.  The benefit to being a follower in this case is that other countries get to learn from our mistakes and can be fast followers rather than pioneers.

We in the US have to remain the innovation pioneers.  We have to continue to break new ground, because we can't assume that we'll retain the "innovation" lead, whether we measure that in dollars of R&D invested or patents generated or whatever measure we choose to use.  There are too many smart, motivated people outside the US who are using our models and our methods that we've perfected over a 20-30 year time horizon.  They benefit from the fact that we have perfected the models and that we offer the world a compelling, ever growing market that demands new products and services.  So, to some extent, we are building our own gallows, demonstrating the best methods and models for innovation, and consuming the products created by others using our techniques.  If that is the case, we have to continue to invest in innovation and develop new techniques and new insights that continue our lead - in R&D yes, but in all facets of innovation.  The alternative is stagnation, loss of innovation leadership and being forced to compete as a high cost, low innovation economy.  Not the best situation to find oneself in.