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January 19, 2006

What Innovation Advantage?

In our current don't-worry-be-happy mode of economics, the tendency is to shrug off the growing competition from China, India and others. The story line goes like this - yes, they are low cost producers, but we're the innovators and designers. Not so says Roger Martin, Dean of the Rotman Business School at the University of Toronto, in a provocative essay in the most recent issue of Business Week - "What Innovation Advantage?":

There is a romantic notion in North American business that its future lies in design and innovation, while India and China will be the home of less skilled, lower-paying operations churning out the products and services the U.S. comes up with. It is a nifty twist on David Ricardo's seminal 19th century theory of "comparative advantage," which explained why cloudy and cool England exported woolen goods to sunny and hot Spain, which in turn exported wine to England.

The problem is that the theory didn't ring true when I rode through the streets of Hyderabad, Bombay, and Bangalore on visits to major Indian companies. At Tata Consultancy Services' 23-acre campus in Bombay, for instance, I learned about its central goal of providing customers with not just an acceptable-quality service but also a user experience that delights and surprises. To accomplish this, its tech professionals also are taught how to manage client change.

. . . These globally oriented outfits are not entrusting all creativity, design, and innovation to "first world" opponents while they huddle over their workstations. True, they have staggering cost advantages over traditional competitors. But that doesn't mean they are incapable of design and innovation. (Their North American rivals just wish they were.) The Ricardian logic, based on so-called natural endowments, simply doesn't apply.
. . .

Assuming that capabilities are static and advantages are permanent is a mistake. Natural endowments of climate, location, and mineral resources may be enduring, but company-generated capabilities are quite fluid. It is as much an error to assume that competitors won't attempt to develop a capability because it seemingly conflicts with an existing one -- in this case low cost vs. innovation expertise. The general rule: If the opposite of a capability sounds stupid, competitors won't try to acquire it -- they'll pursue the reasonable one. For example, the opposite of choosing to be "customer-oriented" is to elect to ignore your customers, a truly daft proposal.

Since lackluster design and staid conformity are obviously bad ideas, it is safe to assume that compelling design and potent innovation are going to be almost universally sought. So North American companies, many of which have pretty dreary design, are wrong if they assume their Asian rivals will pay no attention.

Professor Martin is right on target. While the future of competitiveness is in innovation and design, the US is not necessarily winning that fight. Nor is that high-end/low end division of labor turning out in our favor. Every month I publish in this blog an analysis of trade data in intangibles (which includes high-end professional services, royalties, fees, etc.). That data shows the US with a modest surplus of $6.9 billion - but one that has been essential flat. In other words, our small surplus in high-end services is not growing to cover our huge deficit in low-end goods. And the US has not had a surplus in advanced-technology goods since June 2002.

Policy makers need to wake up and understand that the future of the US economy is in serious jeopardy.

Posted by Ken Jarboe at January 19, 2006 8:35 AM

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Comments

The true problem is that the corporate elite tried (and mostly succeeded) to convince the US public that the "design" in computer software is like the "design" in physical goods - i.e., you can still do the design here, and everything else over there.

With software, that falls apart in about three hundred ways, the two most obvious being that the way you learn to design is by having spent a number of years _DOING_, and that the advantage in doing certain things in software instead of hardware is that you can somewhat change the design as the product goes on without having to stop the assembly line.

Posted by: M1EK at January 19, 2006 10:25 AM

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