Tuesday, September 27, 2011

How much longer will countries outsource idea generation to the US?

I was thinking recently about the challenges and possibilities of outsourcing.  It's interesting if you think carefully about it, since what we call outsourcing is to some extent simple economics.  Comparative advantage was first conceived by David Ricardo, who argued that each participant in a transaction should spend its efforts doing what it did best and acquiring goods and services from other participants doing what they do best.  To the extent that free trade is possible, Ricardo argued that every country or participant benefits when each focuses on its comparative advantage.

For years we in the West have exercised this philosophy, outsourcing work that we can't do effectively to locations where labor or other costs are cheaper.  Textiles present an excellent example.  In the 1700s England dominated much of the textile industry, until low labor costs and suitable locations in the Northeast of the US demonstrated that textile production could be accomplished at lower costs.  Over time, textiles migrated to the Southeastern US and were a centerpiece of manufacturing in many small southern towns.  In the last twenty years a significant portion of that textile production has moved overseas, to locations that can produce cloth more inexpensively.  While we may decry this outsourcing of good jobs, it should not be unexpected if we argue for free trade.  The alternative is to place high tariffs on imports, to prop up the price of cloth produced in the US, which raises prices for clothing and artificially inflates prices and costs for consumers.  Sort of what we do for sugar, as an example, but I digress.

What's interesting from an innovation perspective about this is that we in the US have no problem allowing others to "outsource" their idea production to us.  What I mean by that is that we have staked out the position that we are at a comparative advantage where ideas are concerned - we produce and create ideas more rapidly and more effectively than other locations, so many countries have made an implicit swap - they'll produce the goods that we conceive.  This implicit agreement has paid dividends for us and for many other countries over time.  Strangely, no one seems concerned about other countries outsourcing their idea generation and intellectual property development to us, while they seem very concerned about the US outsourcing production jobs to other countries.  While the dichotomy about who produces what is interesting, note one other issue:  comparative advantage suggests that each country should do what it does best within a free trade scheme, and it will be difficult for any country to compete head to head with the US in idea and intellectual property production, but we don't live in a frictionless, free trade world.

Increasingly, rapidly developing countries (India, China, Brazil) aren't going to "settle" for merely manufacturing products or packaging content that we imagine and create.  There's a market premium for innovation, and their countries and their firms are going to want that premium, and will place increasing emphasis on original IP and innovation.  In other words, they'll be less interested in outsourcing the idea generation and intellectual property development to us, and will attempt to do more and more of that at home.  While the US is in a leadership position today in terms of higher education, deep research and intellectual property generation, rapidly growing economies are increasingly placing more and more emphasis on developing their own capabilities.  When the Indian Institute of Technology graduates more engineers that all of the US engineering schools, and when doctoral and PhD candidates from other countries return home to create new companies and pursue their research, warning lights should go off across the US.

Our compelling national comparative advantage is creativity, innovation, spotting and recognizing new ideas, new market opportunities and creating compelling products and services faster than any other country or region.  When we slow or shackle that capability, or neglect it, or, more worrying, become comfortable outsourcing it, we lose what had made the US an engine of capitalism and job creation.  Will anyone worry if our firms "outsource" creativity, design and innovation to other countries in the same way they worry when we outsource manufacturing jobs?  It will be interesting to watch.

In the mean time, we need to ensure our comparative advantage in innovation remains.  This means we need to focus on our capabilities at a country level, through political policies and tax policies.  We need to focus on our capabilities in educational settings, teaching and reinforcing creativity and innovation in all aspects of educational life. Our businesses need to determine how important innovation and creativity are for their competitive advantages and reinforce internal skills.  It could be very easy to allow others to innovate for us, to allow others to dream and take on the risks of creation, but that would be to subvert the very nature of our economy.  We need political leaders, business leaders and social leaders who realize the importance of creativity and innovation, and their vital place in our national lives.
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posted by Jeffrey Phillips at 6:05 AM


Blogger better ck said...

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