In a Borderless World, Innovation Reigns Supreme

Economists and policymakers recognize that investment in research and development – by government or industry – contributes to innovation, employment and higher living standards. In pursuit of bigger markets and lower costs US firms started the trend of relocating manufacturing and services overseas, and now R&D activities follow, explains economist Ashok Bardhan. The transfers raise questions about how globalization of technology and increased research within emerging economies might influence innovation: A broader base globally could expand innovation’s impact and its benefits; or perhaps innovation has reached a plateau or transitional stage, offering incremental improvements rather than disruptive technologies like electricity or computers. Investing large sums in research assists, but does not guarantee innovation to flourish. Stagnation in innovation and new job creation is a global problem, and Bardhan warns that the US, most affected and alarmed, is not alone in confronting the impact of slowing innovation in rising inequality and low job growth. – YaleGlobal

In a Borderless World, Innovation Reigns Supreme

As innovation slows, the source for the next wave of good jobs remains unknown
Ashok Bardhan
Monday, April 4, 2011

Innovate or perish: A Singaporean engineer on a work visa (left) with an American colleague in a San Diego lab

BERKELEY: Wounds inflicted on the US economy by the Great Recession will require more time to heal. The economic recovery underway has been feeble and stuttering, and employment growth is anemic at best. At the same time, the emerging economies, led by China and India, have continued their explosive growth with barely a pause. All this has fueled concerns about future US competitiveness, its standard of living, and sources of job creation.

Many of these concerns owe their origin to the phenomenon of offshoring which started with the relocation abroad of factories and manufacturing jobs. US multinationals transferred production from the US to East Asia, then importing much of the output of these foreign investment projects. There was impeccable business logic behind the act, as long as the production costs were significantly lower and the quality acceptable. Manufacturing employment in the US fell from 20 million in 1980 to about 11.5 million today. But that was fine, said many sanguine economists. After all, over the same period the economy added close to 40 million new services jobs.

Next, there was a wave of offshoring of services jobs from the US due to a confluence of technological and institutional factors, including rapid development of the internet, the opening up of English-speaking economies, like India, and, of course, the large wage differences between workers in the US and developing countries. Accounting, payroll, indeed any activity that was internet-enabled, could in principle be carried out from afar. Again, many policymakers assured the agitated that there was little to worry about – the job loss was temporary and only low-end services and software jobs were migrating, leaving high-paying innovative activity and R&D jobs anchored in the US.

Now, the inexorable tide of offshoring has engulfed R&D and innovation as well.

While there is an ongoing debate about the impact of offshoring on jobs in the US, there is a fairly broad consensus that the only sustainable path for continued growth in both jobs and living standards is through innovation. Innovation would raise living standards not only through continued increases in productivity, but also through the creation of new goods, which could be sold to the rest of the world.  Innovation is supposed to lead to the creation of high-paying jobs and confer significant benefits on both firms and employees, at least temporarily, until perhaps the monopoly is dissipated or production moves abroad and the cycle repeats itself. Consumers would benefit too, both from the value generated by the new goods or services, as well as their exchange for imported goods on favorable terms.

Given the central importance of innovation in today’s environment, concerns are being raised about job creation in the US and the implications of rising productivity and technological innovations in other countries. How widespread is this phenomenon of globalization of innovation? Could the Next Big Thing originate abroad, especially in emerging economies, and if so what are the implications for US leadership in high-tech industries and for US economic prospects more broadly?

Several academic papers and newspaper articles have documented the rise of the offshore, captive R&D labs of Western multinationals in China, India and Eastern Europe. The list of major US firms with research centers in Bangalore, Beijing, Shanghai and other locations in emerging economies reads like a Who’s Who of the Fortune 500. Heads of these centers have gone on the record to state that the potential size of these markets, their rapid advance to the technology frontier and, in many cases, their capacity to be early adopters of new technology make it imperative that western firms base considerable innovative resources in emerging economies. These activities indirectly give a huge boost to purely indigenous innovation efforts as well.

Since globalization implies increased international specialization and division of labor, it is possible that these efficiencies and the larger numbers of people from diverse creative environments involved in research and development may result in an increase in the size of the “innovation pie.” Everyone could benefit. A benevolent scenario would involve continuing innovation in the US at the “higher” end, as well as innovation abroad closer to big markets and rising living standards everywhere.

Despite the possibility of the next big wave of innovations originating abroad the location-specific advantages of the US and Silicon Valley remain considerable. Given the vast support structure of innovation in place there – the venture capitalists, lawyers, accountants, investment bankers – as well as the universities and other expertise available, many of those foreign firms would likely base significant operations in the US. After all, the US is still the largest market as well as a springboard for launching products worldwide. Silicon Valley and other technology hotspots in the country could still reap significant economic benefits, including well-paying jobs, from innovation occurring abroad.

Still, other countries are developing this soft infrastructure and will be in a better position in the future to appropriate most of the economic gains from innovation.

The crucial issue, therefore, is how to boost domestic R&D and innovative activity. However, as US economist Tyler Cowen and others have pointed out – developed countries may have reached a plateau in innovation. The Economist notes, “...economic engines in the rich world are running ever slower as countries exhaust easy sources of rapid growth.”

Many technological advances in our parents’ and grandparents’ lives – air travel, television, antibiotics, automobiles and others too numerous to name, completely altered the daily flow of their lives in diverse ways. In comparison, apart from the admittedly revolutionary impact of information technology, have our lives been impacted, and will they continue to be impacted in a similar fashion? Have the low-hanging fruits of scientific discovery and technological applications already been plucked? There is, after all, no law in nature, science or in economics that suggests that transformative discoveries and inventions automatically follow from large amounts of money thrown into the effort.

This is not to suggest that the wheels of innovation have run aground, but perhaps that we are in a more transitional stage of innovation, the one-more-blade-in-the-razor-makes-a-better-shave or the one-more-me-too-drug moment. Also, much of the time savings and enhanced convenience of many innovations are not reflected in statistics, particularly if the monetization of these advances is problematic for whatever reason.

Perhaps innovation develops in punctuated equilibria, in fits and starts, and we could be in a stage of temporary stasis.Or, the slowdown is a result of the preponderant share of services in the economies of developed countries. Productivity growth in many services activities is problematic. Most of our past breakthroughs have involved tangible goods, and even services provision and delivery is ultimately manufacturing dependent. While the question – where is the next wave of high-paying jobs going to come from – is particularly acute for developed countries, it is a global issue. Indeed, rapid manufacturing productivity growth in places like China and the increase in services sectors have resulted in stagnation in manufacturing employment there.  

The continuing twin problems of low employment growth and inequality in the US are facing the twin specters of slowing innovation and globalization.

Ashok Bardhan is an economist at UC Berkeley.

Copyright © 2011 Yale Center for the Study of Globalization

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