Innovation Outsourced?

by Sachin Balagopalan on May 9, 2008 · 1 comment

A pretty interesting article in Business Week that talks about the “fate” of U.S. innovation and whether it will also follow in the footsteps of manufacturing, engineering, design and even R&D to low cost countries like Russia, India and China.

Apparently not, according to a new study published by the National Academies, the Washington organization that advises the U.S. government on science and technology policy. The 371-page report titled Innovation in Global Industries argues that, in sectors from software and semiconductors to biotech and logistics, America’s lead in creating new products and services has remained remarkably resilient over the past decade—even as more research and development by U.S. companies is done offshore.
“This is a good sign,” says Georgetown University Associate Strategy Professor Jeffrey T. Macher, who co-edited the study with David C. Mowery of the University of California at Berkeley. “It means most of the value added is going to U.S. firms, and they are able to reinvest those profits in innovation.”

In theory this sounds great if you’re a U.S. company with a presence in one of these low cost countries. You come up with ideas for new products and services and offshore the nitty-gritty’s to low cost countries and the ensuing profits can be re-invested back into innovation. It’s still an American company making the profits and that means the American worker benefits as well - or do they?

And while the authors of the report make compelling cases that U.S. companies are doing just fine, thank you, none of the writers addresses today’s burning question: Is American tech supremacy thanks to heavy investments in R&D also benefiting U.S. workers? Or are U.S. inventions mainly creating jobs overseas? A few years ago, most people took it for granted that what was good for companies was good for the greater economy. But the flat growth in living standards for most Americans during the last boom has raised doubts over the benefits of globalization.

As these low cost countries become wealthier in terms of per capita income (due to off shoring) their consumption of oil, gas, food and everything else increases and now all of a sudden the demand for these goods and services increases causing prices to go up. This indirectly impacts the lifestyle of the American worker who has to now pay more for his/her consumption. Anyone notice the irony here! :)

It is probably true that American companies are the biggest winners from the globalization of R&D. But if the aim is to rally national support for dramatic increases in federal spending for science and technology in the name of boosting American competitiveness, the next studies on the topic may need to go further. The deeper question is whether U.S. leadership in innovation still creates wealth for average Americans, not just corporate shareholders and top executives.

I was listening to a podcast recently where a top executive of a huge multinational made this point (paraphrase) - “The reason we invest (offshore) overseas is not only for cost savings - In fact countries like India and China are not cheap anymore - but rather these countries are emerging economies with a steady growth and GDP and we want to participate in those economies to maximize our shareholder value”.

I think the comments by this executive pretty much answers the “deeper” question - whether U.S. leadership in innovation still creates wealth for average Americans, not just corporate shareholders and top executives. It’s not about cost savings anymore!

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{ 1 comment… read it below or add one }

Engineering Services Outsourcing 05.09.08 at 7:36 am

This topic came up on the The Daily Show even , it featured Fareed Zakaria , who has come out with his new book .Is globalization backfiring on the US ?

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