WORM'S EYE

outsourcing, America, globalization and other natural disasters

(These stories are so close to me because I’m supposed to lose my outsourced job to Slovakia, and pro-globalization Americans are reportedly in the flurry of making protectionist legislation at home. These are two views that are optimistic for all parties affected by these otherwise disastrous socio-economic developments. - RSO)

Innovation is the secret of America’s sauce
Thomas L. Friedman
New York Times
Monday, March 8, 2004

BANGALORE, India - Yamini Narayanan is an Indian-born 35-year-old with a Ph.D. in economics from the University of Oklahoma. After graduation, she worked for a U.S. computer company in Virginia and recently moved back to Bangalore with her husband to be closer to family. When I asked her how she felt about the outsourcing of jobs from her adopted country, America, to her native country, India, she responded with a revealing story:

‘‘I just read about a guy in America who lost his job to India and he made a T-shirt that said, ‘I lost my job to India and all I got was this (lousy) T-shirt.’ And he made all kinds of money.’’ Only in America, she said, shaking her head, would someone figure out how to profit from his own unemployment. And that, she insisted, was the reason America need not fear outsourcing to India: America is so much more innovative a place than any other country.

.There is a reason why the ‘‘next big thing’’ almost always comes out of America, said Narayanan. When she and her husband came back to live in Bangalore and enrolled their son in a good private school, he found himself totally stifled because of the emphasis on rote learning — rather than the independent thinking he was exposed to in his U.S. school. They had to take him out and look for another, more avant-garde private school.

.‘‘America allows you to explore your mind,’’ Narayanan said. The whole concept of outsourcing was actually invented in America, added her husband, Sean, because no one else figured it out.

.The Narayanans are worth listening to at this time of rising insecurity over white-collar job losses to India. America is the greatest engine of innovation that has ever existed, and it can’t be duplicated anytime soon, because it is the product of a multitude of factors: extreme freedom of thought, an emphasis on independent thinking, a steady immigration of new minds, a risk-taking culture with no stigma attached to trying and failing, a noncorrupt bureaucracy, and financial markets and a venture-capital system that are unrivaled at taking new ideas and turning them into global products.

.‘‘You have this whole ecosystem that constitutes a unique crucible for innovation,’’ said Nandan Nilekani, the chief executive officer of Infosys, India’s IBM. ‘‘I was in Europe the other day and they were commiserating about the 400,000 (European) knowledge workers who have gone to live in the U.S. because of the innovative environment there. The whole process where people get an idea and put together a team, raise the capital, create a product and mainstream it — that can only be done in the U.S. It can’t be done sitting in India. The Indian part of the equation is to help these innovative U.S. companies bring their products to the market quicker, cheaper and better, which increases the innovative cycle there. It is a complementarity we need to enhance.’’

.That is so right. As Robert Hof, a tech writer for Business Week, noted, U.S. tech workers ‘‘must keep creating leading-edge technologies that make their companies more productive — especially innovations that spark entirely new markets.’’ The same tech innovations that produced outsourcing, he noted, also produced eBay, Amazon.com, Google and thousands of new jobs along with them.

.This is America’s real edge. Sure, Bangalore has a lot of engineering schools, but the local government is rife with corruption; half the city has no sidewalks; there are constant electricity blackouts; the rivers are choked with pollution; the public school system is dysfunctional; beggars dart in and out of the traffic, which is in constant gridlock; and the whole infrastructure is falling apart. The big high-tech firms here reside on beautiful, walled campuses, because they maintain their own water, electricity and communications systems. They thrive by defying their political-economic environment, not by emerging from it.

.What would Indian techies give for just one day of America’s rule of law; its dependable, regulated financial markets; its efficient, noncorrupt bureaucracy; and its best public schools and universities? They would give a lot.

.These institutions, which nurture innovation, are America’s real crown jewels that must be protected — not the 1 percent of jobs that might be outsourced. But it is precisely these crown jewels that can be squandered if we become lazy, or engage in mindless protectionism, or persist in radical tax cutting that can only erode the strength and quality of our government and educational institutions.

.Our competitors know the secret of our sauce. But do we? .

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The German experience

Michael Heise
(as published in International Herald Tribune)

FRANKFURT - Globalization is biting at the heels of the United States. For years an aggressive advocate of greater openness to trade and investment flows, the United States today is faced with a situation where it must respond to new international challenges.

That scenario is one with which Germans are well familiar. Germany's moment of truth occurred in the mid-to-late 1980s, when its industry found that because of cost pressures from abroad it no longer commanded as powerful a market position as it once did in key export sectors such as cars, chemicals, pharmaceuticals, electronics and especially machine tools. In the wake of this development, some branches, like consumer electronics, virtually disappeared.

At the time, it was U.S. and Japanese competitors who put a mirror to the face of German industry. German manufacturing came under tremendous cost pressure. This came as a shock to many Germans, who had believed that Germany's strong system of vocational training and its focus on value-added and high-quality production made its position in the manufacturing sector almost unassailable.

The current worries in the United States about India fall into a similar category. The reason why the outsourcing of well-paying service jobs is so painful is that it is hitting the United States right where it thought its comparative advantage was most robust.

Twenty years ago, we all lived in a simpler world. One could roughly identify "goods" with "tradables" - and "services" with nontradables. Today, the Internet and satellite communication are rapidly breaking the geographical constraints on almost all services. In addition, the U.S. economy is exceptionally dependent on services, with 64 percent of men and 86 percent of women employed in those sectors. The comparable numbers for the 12 member countries of the euro zone are 54 percent and 80 percent, respectively. In Germany - the least service-oriented of the advanced economies - the numbers are 50 percent and 79 percent.

Some of the highly qualified service activities that the United States has dominated - software production most notably among them - are facing fierce new competition from Russia, China and especially India. But lower-tech services - such as call centers and medical transcription - are similarly feeling the heat. The new competition in services is here to stay. Just as Germany awoke in the 1980s to find its prized manufacturing and machine tools sector could no longer dominate its rivals across the board, the United States is finding today that service activities it thought were locked into place are footloose and looking for a better deal.

The German story, though, is ultimately a heartening example for the United States. Rather than retreating into protectionism, German industry was pruned by the shears of competition. That process allowed the survival of only those companies and products that were doing well in international competition. The German share of world exports is still far greater than the Japanese share and about the same as that of the United States. The adjustment strategy entailed efforts to bolster productivity, to focus on profitable areas and to foster distribution and retail activities.

But another strand of the story was a surge in outward investment. Part of that was focused on distribution activity, but a large fraction also meant export of jobs. This triggered decades of discussion about the merits of globalization. But at the end of the day, the German case does provide evidence in support of the thesis that foreign direct investment is a way of keeping companies competitive in ever-fiercer markets.

Germany's adjustment process was painful, but worked even within the confines of inflexible German labor laws, tough environmental standards and sluggish domestic economic growth. America's greater flexibility and more robust growth should make it easier for U.S. companies to adjust to new realities and find ways to employ those workers - many of them highly skilled - who were displaced by outsourcing.

That is how competition is supposed to work. Some companies will go bankrupt and some products that had been produced domestically will be imported, but new companies and products will prosper. That is the lesson America has long advocated when it urged other countries to open up and reform their economies. The United States is now being tested not only to see whether its actions match its rhetoric, but whether it can take politically difficult steps that will ultimately benefit its economy - and its claim to global economic leadership.

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Michael Heise is chief economist at the Allianz Group and Dresdner Bank.