Fletcher Features
Amar Bhidé Describes Western Economy as an Optimistic Story With a Novel Twist
The acclaimed author and scholar, Amar Bhidé described his most recent study of the Western economy as an “optimistic story with a novel twist,” at a lecture sponsored by the International Business Center at The Fletcher School on October 5th.
Bhidé offered his field-based view of globalization, innovation and the practices of venture capital firms, especially in cross-border interactions. The speaker explained why the countries involved in the Organisation for Economic Co-operation and Development (OECD) should embrace, not fear, India and China catching up with them. The movement of research and development to India and China will only be good for the West, Bhidé argued, providing analysis of current business structures and strategies, and criticism of techno-nationalistic ideas.
Bhidé’s main point was that modern economies need not only technological and scientific development, but innovation in sales and marketing practices as well as management and business models. He argued that venture capital backed businesses tend to primarily develop mid-level know-how. These companies spend almost as much effort on developing non-technical know-how, as on technical expertise, they need to develop, not just the product, but the sales and marketing structure that makes customers buy the product. This process is not scientific, but iterative, highly interactive trial and error experiments, conducted mostly online. Meanwhile, techno-nationalists concentrate on the innovations of high-levels of knowledge only.
While many people believe that many new products and services come from multi-national firms, Bhidé’s research proves that no more than 6 out of 107 companies surveyed were seriously globalised. 61% of firms sampled by Bhidé derived 10% or less of their revenues from foreign countries, and only 4% received over 50% of their revenue from outside their home country. Because interaction with potential customers is a critical part of the process, domestic market development is easier to implement— a sales pitch is easier to develop locally. Hence a U.S. firm will develop a product which it knows fits the local market.
Bhidé also mentioned that most of the American products sold abroad (30% of total U.S. sales) are high or mid-level products, and no ground-level products and services went abroad. Moreover, those U.S. companies that do sell abroad tend to sell to English-speaking countries:. They sell their products in Australia, which is a tiny market, rather than Germany, for instance. High-tech companies, such as Microsoft and Intel have sales in India and China, but these companies are not backed by venture capital.
There is a general belief that high-tech development is moving out of the U.S. to China and India. Bhidé found out that this is not completely true: out of his sample of just over one-hundred companies, only 24 have some kind of the offshore offices. Out of these 24, 11 firms have their own facilities for development and product testing, and 6 of these firms started abroad and relocated to the United States. There are more than 10 companies that have some off-shoring relations, but only 8 of these companies developed a product or service in cooperation with a foreign office. Another important reason for companies to operate locally is that they want to interact with their customers regularly in order to develop their products or services. Communication with developers abroad is more difficult than communicating domestically, and these same developers should be in close touch with the sales and marketing staff. With companies organized that way, the development process, because of its complexity and speed, is harder to implement cross-border.
It is important to consider that U.S. high-tech companies stay local because it is easier to find a good engineer in the U.S. than in India. The best Indian engineers tend to move to Silicon Valley, and the rest tend not to stay in their positions very long, as they are frequently looking to move into management.
Meanwhile as cross-border interactions continue to grow, high-level innovations will decline in the West, and grow in India and China. In the techno-nationalist view this is a threat to countries, such as the USA, which have traditionally been leaders in the field, and the loss of technological superiority is seen as a disaster for these countries. Bhidé argued that this was not inevitable, because Western countries can fix and develop their economic and business models to take advantage of the situation, rather than worrying about high-tech development loss. “The economic value of innovation is tiny”, Bhidé said, “95% of the value of innovations goes to the users, not the producers.” There is also massive unbundling between manufacture and innovation. Moreover, the number of jobs in the manufacturing industry is not related to the proximity of research and development, thus high-level research would not necessarily create much domestic added value.
Bhidé’s conclusion was that the OECD countries should be happy with technological development of China and India, since high-level innovations are very mobile. Low-level knowledge gets to be localized, while high-level innovation gets universalized.
Maria Yulikova, F10