Globalization of Innovation: Industry Trends and Professional Workforce Implications

I attended this symposium at the National Academy of Science on Friday. I thought the content was great – people talking who really knew their subjects! The meeting discussed innovation in a number of sectors, and I came away with the idea that the scenarios really are different in the different fields.

What I didn’t hear was someone to put the whole picture into context.

I think in the long run, economic progress comes mainly from technological innovation. Investment to increase the capital stock clearly helps to improve labor productivity, but greater progress comes in the long run from new products, working smarter, and organizing better.

Working smarter is importantly a result of process innovations. There are also economic gains due to expanding markets, allowing comparative advantage to work over larger areas, but these are also in large part due to improved transportation and communications technologies.

As to “organizing better”, the information revolution has fostered a process of reengineering organizations and restructuring institutions and sectors that makes clear the connection between technology and organization. Information and communication technology is rewiring the nervous system of our institutions, and the institutions are evolving under the pressures created by ICT.

Ultimately, I suggest, people are more willing to save and invest if technological innovation stimulates changes that in turn offer higher rates of return to investments. Thus technological innovation stimulates investment, which in turn allows the capital formation needed to increase capital per worker. The investment allows the purchase of the new plant and facilities incorporating the new technology.

There seems to be an underlying feeling that technological innovation, and indeed knowledge generation, are zero-sum gains. That if other countries forge ahead in science and technology, that the people of the United States will necessarily lose. I suspect that this is simply poor economics.

I think it is generally agreed, and thus not in need of defense, that knowledge is a public good. The more knowledge is created and shared, the better off we all are.

Economic progress in other countries is, I believe, enhanced by applied science and technology. The applied science, among other things, helps the people of a country to understand the problems they face more clearly, and the resources that they can tap to deal with those problems. The technology helps, as mentioned above, to increase productivity, to develop new products, and to expand markets.

I think history indicates that the countries that participated in previous technological revolutions progressed together. In a sense, the reconstruction of Europe and Japan after World War II can be read in this way. These economies progressed rapidly (in historical terms), and surely in the process productivity increased rapidly; many products entered or reentered the market, and markets expanded. It has been estimated that the Marshall Plan, by stimulating faster growth in Europe and Japan, added one percent per year to U.S. economic growth for an extended period. It did so by expanding markets for U.S. products. So too, if the world trading system can be kept fair and working well, I would suspect that the economic progress of Asia and Europe in the 21st century may enhance economic progress in the United States.

I think part of the problem is that people confound comparative advantage with competitive advantage. Economists have long discussed the former, which holds that two countries can both do better economically by trading, even if one produces every good and service more efficiently than the other. As long as the ratio of the costs of production are different in the two countries, trade works. Each can, in theory, improve the economy by specializing in one good it produces with relatively more efficiently and trading the excess for another good the other country produces with greater relative efficiency.

As other nations progress economically, they should buy and sell more to the United States. The increase in their sales to the United States should be increased should be matched by the increase in purchases from the United States. The United States should benefit from increased exports to pay for its increased imports. U.S. consumers should benefit from cheaper prices for the newly imported goods. Jobs should be created in the United States in new industries (including those with increased exports) to make up for any lost in the industries losing market to the imports.

Nations develop according to their own resources, policies, and institutions, as well as to historical circumstance. They do not develop in lockstep. As a result, some industries will develop faster than others in any nation, and the pattern of industrial development will differ from country to country. As a result, the pattern of comparative advantage will shift over time. Consequently, the pattern of exports and imports will also shift over time.

The important thing for the United States is to keep innovating, so there are always new products and new industries being developed in which the United States has a competitive advantage. The United States has depended on high-tech industries for competitive advantage, and will I think continue to do so. While Asian nations are increasingly competitive in many ICT industries, I would expect the United States to develop new capacity in pharmaceuticals, biotechnology, and nanotechnology and eventually in neurotechnologies (as neurobiology begins to pay off). As the global information infrastructure makes services increasingly tradable internationally, I would expect the United States to further exploit its competitive advantages in fields such as education, health care and financial services.

What is it the United States should seek ultimately? I suggest it is not leadership per se. The ultimate objective should be, I hope, a rapid rate of social and economic progress. I suggest that such a rate would be best achieved in a world in which other nations were also using science and technology to advance rapidly, and in which countries continued to draw closer together. This would be a world in which technology innovation occurs everywhere. It would be a world in which patterns of comparative advantage change constantly. Indeed, it would be a world in which the United States would give up competitive advantages in some fields, and seek to replace them with competitive advantages in others.

A vibrant scientific and technological system, spinning off technological innovations at a rapid rate, would seem to be an essential element for the United States to pursue such a policy in such a world. It is not ultimately feasible in such a world for five percent of the population (and that percentage shrinking as other nations grow faster than the United States) to lead the world in all areas of science and technology. Nor, I think, would the United States continue to produce so large a part of the global product, nor to consume so large a portion of the global resources.

The United States should not seek to protect leadership in all areas of science and technology, but be willing to share scientific and technological leadership ever more widely. But, it should also work especially hard to assure it maintains leadership in some fields and develops leadership in new fields to retain competitive advantages in some fields, thus to continue as a lead player in an increasingly global economy.

The United States has done so in the past, in large part, by its openness to innovators -- be they domestic or foreign. It not only has welcomed immigrants, but it has opened its financial and other institutions to them, creating a climate to foster innovation and entrepreneurship. It would be wise to continue to do so.

It was noted again and again in the symposium, that innovation takes place in many places within a productive system. Innovation takes place in the design of products, but also in the design of parts, and in the processes by which parts and products are manufactured. It takes place in the design of services, and in the processes by which those services are provided. And it takes place in the way products and services are marketed and distributed. Increasingly, as production systems become more global, and as innovation occurs in globally, integration of innovations becomes critical.

The speakers at the symposium suggested again and again that those who benefit most from the innovations are not necessarily the innovators themselves, but those who most effectively appropriate the benefits of innovations through control of the key elements of the overall production system. Thus, it was suggested, that the computer industry innovates at a great rate, but somehow the profits seem to flow to Intel and Microsoft.

I think that key issues for continued successful U.S. economic development are to prepare for continued change and for continued excellence in science and technology, as well as to assure that U.S. economic systems effectively and increasingly capture innovations made globally and efficiently appropriate their potential benefits for Americans.

Patents versus Open Source

Irving Wladawsky-Berger (of IBM) spoke, and in his talk mentioned that IBM holds a collection of some 40,000 patents which it uses for many purposes. The most common belief about patents is that they are exploited to allow monopoly production of a new invention, and no doubt IBM does exploit patents in this way. No doubt it also cross licenses groups of patents with other computer companies so that both can manufacture complex products, and to limit those without such patents from manufacturing competing products without paying license fees. He stressed, however, IBM’s concern for “open source” and “open standards”, and said that IBM consciously uses its patents to protect these alternatives.

He mentioned the importance of developing new markets for patents, that would allow intellectual property to be exploited more fully. His comment made me think about the complexity of institutionalizing new systems for handling intellectual property.

Intellectual Property systems, including patents, have been around for a long time. Society has tinkered with them for centuries. Clearly new technologies require adjustments in the patent system, and the patent system is changing relatively rapidly in areas such as ICT and biotechnology, in large part due to the increase in organized commercial R&D in these fields. It is changing less rapidly, I think, in mature technological sectors.

It seems that open source/open content systems are increasingly useful alternative to patents in many areas, and the institutions that have evolved to manage open source are much newer than the patent system. I think therefore that they are even more likely to be in flux. I fear that the flux involves more risk to socially useful open source/open content approaches. If I recall correctly, radio broadcasting was an open field in its earliest days, but the days of the independent, aficionado broadcaster were limited when the U.S. and U.K. regulated broadcasting, and the private and public networks largely took possession of the broadcasting spectrum. Could something similar happen in these developing open source areas?

What is an institution? Wladawsky-Berger mentioned the stock market, and let me take that as an example. There is clearly a place where trades take place – real as in the New York Stock Exchange, or in a virtual place in cyberspace. There are rules, as to what may be traded, who may trade, and how soon the items traded must be exchanged. The markets are regulated by government agencies. There are networks of brokers that are in business to handle the trades – each a formal organization, with its facilities, staff, computers, procedures, etc. So too, there are organizations that rate stocks and bonds, and others that provide information in organized manners to investors. There are mutual funds, and firms inventing and marketing derivatives. There are books published on how to invest, and courses in which investors can learn how to participate in the market. The “institution” of the stock and bond market thus is a very complex social and economic institution, with these and more components.

So too, I suspect, will the open content/open source institutions evolving in our society turn out eventually to be complex, multifaceted institutions.