CandidCapital

8th Cambridge Enterprise Conference: Summary of Presentation by Professor Amar Bhidé, Venturesome Consumption, Globalization and Innovation

At the 8th Cambridge Enterprise Conference held at Churchill College, Cambridge, on 5th September 2007, Professor Amar Bhidé (Glaubinger Professor of Business, Columbia University, New York, and member of its Center on Capitalism and Society), presented a paper on the role of venturesome consumption.

Like Professor Bhidé’s paper at the 2nd Cambridge Enterprise Conference in 1999, based on his then-unpublished book Origin and Evolution of New Businesses, this presentation was full of wit, insight and information and has been much discussed since by those who heard him speak.

In the hope of creating a wider audience for Amar Bhidé’s controversial and contrarian paper, www.CandidCapital.com has prepared a short summary, set out below. Readers may also wish to consult the original paper published in 2006.

Introduction

Professor Bhidé challenged many long-standing assumptions inherent in popular economic models of innovation. Note that much of his case was based on US experience, which may inhibit direct translation to a UK context. The original article on which his talk was based - Venturesome Consumption, Innovation and Globalization - is highly recommended, as it brings together succinctly and wittily some leading-edge thinking on technology policy.

Upstream vs Downstream Innovation

Professor Bhidé’s opening observation was that rather than adopt an even-handed approach to both invention (upstream) and implementation (downstream), many respected economists and policy-makers have championed a ‘techno-fetishism’ that privileges upstream (research) innovation over downstream (implementation) innovation and equates economic success and prosperity with technological leadership.

Such analysts worry, for instance, that relative increases in skilled labour abroad undermine the technological dominance that the US has enjoyed to date. The ratio of science and engineering PhDs in China to that in the US has increased from approximately 0% in 1975 to 32% in 2001. In Europe the ratio has grown from 93% and 154%; in Japan from 11% to 29%.

Does this mean – as many traditional economists have suggested - that the US is losing its advantage over both developing and developed countries? Is China undermining the US’s lead in producing new technologies? No. Rather, the US has at least maintained its productivity and per capita income lead while Europe and Japan have increased their proportion of PhDs, scientific articles and other measures of innovative activity.

Furthermore, ‘there does not seem to be much of connection any longer between the locations where innovations occur and the sites where goods are physically produced.’

Professor Bhidé argued that resolving such conundra requires moving on from faulty assumptions about innovation and globalization:

1. Concentrating attention on upstream indicators ignores the key contributions of implementation capacity and consumers. Developing new technology is important, but the willingness and ability of consumers to acquire and use technology is as important and is commonly overlooked. In small countries ‘adoption willingness’ can be more relevant than the development of technology.

2. Trade and innovation are not a zero-sum game. The benefits of inventions made in one market can be shared across countries. Innovations in one country do not occur at the expense of other countries. If downstream capacity and a willingness to adopt exist in other countries, the benefits of innovation are available no matter where the innovation originated: ‘Suppose the North "loses share" in the development of cancer treatments to China but the total number of cures increases. Should the North complain?’

Pernicious Innovation Mythologies

Three commonly-held myths have resulted in misguided models and faulty conclusions:

1. Modern innovation. Schumpeterian dogma of ‘creative destruction’ is not always appropriate, and innovation should not be expected to appear from a single source. Innovation happens in both destructive and non-destructive forms. To give due weight to non-destructive forms, we must recognize incremental and evolutionary changes as being as important as the one-off ‘leaps’ more commonly associated with change. Over time, the ‘leaps’ reduce and innovations become more complex to satisfy evolving consumer demands. These complex, non-destructive innovations are made by many players (including consumers) over a long time-frame, not the lone, heroic innovator of popular imagination.

2. Role of consumers. Mainstream economic theory assumes that consumers are both passive and omniscient, but this fundamentally misrepresents end-users. Consumers (both firms and individuals) are ‘venturesome’, constantly making contributions to the entrepreneurial process by choosing products and giving feedback. These consumers are not passive but are engaged in a dialogue with producers better described as co-development. Contrary to the underlying assumption of Mainstream Economics, lead consumers do not have a well-defined ‘utility function’, but operate with uncertainty over a wide range of variables.

3. Tradability. The assumptions behind the developed/undeveloped economic model (US/China in the 1970s, for instance) of tradability give too much weight to upstream developments in science and technology. Freely tradable goods can render the origin of innovation irrelevant only if the ‘recipient economy’ has downstream capacity to support implementation. Furthermore, an increasing share of economic activity is non-tradable sectors, such as services.

Explaining the US Productivity Lead

If US dominance in innovation has been eroded as many policy makers assert (but Professor Bhidé disputes), how has the US nevertheless maintained a lead in productivity? Though US IT spend is less than 10% of GDP, its influence on the remaining 90% is profound. The source of the US productivity edge over Europe and Japan is not simply that the US spends more on IT but also that it spends more cleverly. The higher ‘productivity of IT capital’ almost completely accounts for the overall productivity lead of US companies in IT intensive industries.

Other factors often associated with the US may also be relevant:

1. US consumers are more readily disposed to ‘believe’ in technology.

2. Utility gains from early adoption favour a culture of IT spending, which is higher in the US than in most comparable economies.

3. A disregard for thrift (see conclusions below)

4. A competitive market encourages ‘grow or die’ attitudes, making proportionally higher IT spend less unreasonable.

High-level Policy Conclusions

1. What makes some countries rich and others poor? What matters for innovation is not primarily who can produce or pay for technology – as ‘competitive advantage’ economic models suggest - but who has the capacity to implement and use modern technology most effectively, which is closer to comparative advantage.

2. Rethinking savings and investment and trade balances:
a. Knowledge-based industries should not be assessed on the same basis as traditional sectors. Traditional firms would expense salaries through the P&L but count capital equipment as investment; innovative firms would be justified in treating recruitment of key staff in many instances as investment, despite current accounting conventions.
b. If Apple invents and designs the iPod in California and it is produced in China, its very success in the US market will look bad on the trade figures but be good for a US corporation and its local contractors (eg, designers).

3. Considering the fundamental importance of implementation, policy makers responsible for immigration policy should place less emphasis on obtaining highly skilled labour (PhD) and more on basically-qualified programmers (BSc) from developing countries such as India, to staff the engine room of innovative service companies such as banks.

4. Some obvious basic pre-conditions will always apply:
a. Education
b. Free markets (consumer and producer autonomy)
c. Satisfaction of basic wants

5. From Paul David (1986)
a. Overt policies less important than indirect effects
b. Speeding up may not always be optimal
c. Case by case approach is favoured

6. Is the UK generally spending too little on IT? Or not spending or using wisely?
a. US multinationals in UK spend 41% more than industry average (non-US MNCs 20% more)
b. ‘significantly higher productivity of IT capital’ accounted for ‘almost all the difference between the overall productivity of resources used by US owned and all other establishments.’
c. Effect confined to ‘IT using intensive’ industries that largely accounted for US productivity growth acceleration since the mid 1990s.

Some More Contrarian Insights

‘Moreover nations – unlike many individuals and organizations – don’t have to outperform ‘competitors’ in order to prosper. Notwithstanding the rhetoric about the competitive advantages of nations countries are not locked into zero-sum trade. An innovation originating in one country does not impoverish other countries. Rather it tends to improve standards of living in all countries that have the downstream capacity to acquire and implement the innovation.’ From the CEC 8 talk.

‘[T]he physicist Robert Wilson appeared before Congress to secure $250 million for building Fermilab, the largest particle accelerator in the world. A friendly Congressman tossed a “softball” question, that gave Wilson the opportunity to justify the new atom smasher using national defense. Wilson insisted that it had “nothing at all” to do with national security. Rather Wilson said “It has only to do with the respect with which we regard one another, the dignity of men, our love of culture. It has to do with, are we good painters, good sculptors, great poets? I mean all the things we really venerate and honor in our country and are patriotic about. It has nothing to do directly with defending our country except to make it worth defending.”’ From Bhidé (2006) p 25

Prepared by Pangloss
1st October 2007