Do we need a more venturesome economy?

Late in January 2010, Thomson Reuters reported that since 1981, across 10,500 journals, China had increased its number of peer-reviewed scientific papers 68 times – and that it had special prowess in chemistry and materials. Brazil was up; Russia had completely lost its strong position; India was faltering. By 2020, Thomson Reuters said, China would be the largest publisher of scientific papers on the planet (1).

For readers with long memories, who can recall previous eras in which American Democratic Party intellectuals grew heated about their country’s loss of leadership in innovation, this book, The Venturesome Economy by Amar Bhidé, comes as a fine cold shower. The author reminds us that ‘techno-nationalists’ in the US have cried wolf before – most obviously, in the 1970s, when the growth of German and Japanese scientific and engineering capabilities seemed unstoppable. For Bhidé, ‘excelling in the overall innovation game requires a great and diverse team, which, history suggests, takes a very long time indeed… Is it likely, then, that within any reader’s lifetime China and India will attain the parity with the United States that has eluded Japan, Korea and Taiwan?’ (2)

Bhidé is right and he is wrong. It does, typically, take decades to build a technologically powerful nation. But right now, I’d bet that my twentysomething children will see China and India surpass America within their likely-to-be-lengthy lifespans. Anyway, the Cold War revival of America’s principal allies, Germany and Japan, did have something to do with those countries’ renewed fondness for research, which had long been a prewar tradition. It was also a revival that was accompanied by a palpable relative decline, for the US, not just in scientific research, but also in military performance (Vietnam), cars, and the dollar.

Those conditions cannot be compared with the more primordial growth processes afoot in China and India today. As Bhidé himself notes, ‘the integration of China and India into the global economy is a seminal development, unprecedented in its scale’, and the two countries are ‘starting afresh’ (3). In the 1970s, too, the US had direction, of a kind – something it has lost since the ‘war on terror’ replaced the Cold War, and certainly since the credit crunch. Finally, China and India are not at all formal allies of the US (the Copenhagen summit on climate change is alone ample evidence for this).

Bhidé writes well, and often wittily. He does a great job providing vignettes on the development of the Apple iPod, how Google built its management team with the backing of venture capitalists, and how those same VCs had earlier treated the rise of PC companies with relative disdain (they backed Compaq in 1982, but not Michael Dell in 1984). His ‘Book 1’, within the book, which consists of an empirical study of 106 VC-backed and rather internationally orientated businesses, based on interviews with their CEOs, is a meticulous piece of research.

But the fact is that, as an economist, Bhidé both underestimates scientific research and is complacent about the general status of national competitiveness today. A Hayekian free marketer by inclination, his account of globalisation is weak on the politics of the matter. Finally, in common with many other theorists of innovation today, Bhidé tries too hard to convince that innovation consists of activities that cannot be reduced to high-level research. For him, mid-level technologies, ground-level context-specific rules of thumb and all-round marketing are much more important.

In foreign policy circles, there has long been controversy about the ‘declinist’ school of thinking on America’s geopolitical position (4). Bhidé’s contribution turns the focus on to US business and R&D. He ably chronicles how a motley group of American patriots have for years moaned about US ‘loss of leadership’ in key areas of scientific and technological expertise, from the Harvard Business Review (1980) through to the US National Academies Committee on Science, Engineering and Public Policy, and its massive call to arms on US innovation, Rising Above the Gathering Storm (2005) (5). Of state efforts to revive spending on R&D through subsidies or tax credits, he notes: ‘Einstein’s research produced great knowledge spillovers: would they really have increased if he had been given a tax break that induced him to spend more time doing research?’.

It is a pity, however, that the author attacks a straw man when pointing out that, for all their multiplying PhDs over the period 1975 to 2003, Europe failed to catch the US in terms of growth in output per hour (1995-2003), and both Europe and Japan failed to catch the US in income per head (6). Here he ridicules theories of economic convergence, which is fair enough; but who, in their right mind, would ever see such a direct correlation between the number of doctorates on the one hand, and productivity and personal wealth on the other? More importantly, Bhidé misses the key assumption that techno-nationalists make.

Harvard labour economist Richard Freeman, whom Bhidé skewers, is not alone in exaggerating the importance of science and technology on account of the US having mysteriously become ‘a knowledge-based economy’. Rising Above the Gathering Storm makes the same mistake. But while technological knowledge is an important and ever-more influential part of modern economies, the forces that are decisive in economic performance remain profitability, the making of value and the exploitation of the working class. Looking for state handouts to different parts of industry, US techno-nationalists exaggerate the power of R&D, just as much as Bhidé underestimates it.

Bhidé is not all wrong to see the US as benefiting from other countries’ skills in innovation. Outsourcing work of all kinds, including high-level research, brings the outsourcing firm undoubted benefits. If Asia is able to package up Western high-level research and sell the resulting gadgets back to US employers, this will aid the US economy. But in keeping with his free-market inclinations, Bhidé is also adamant that US consumers very much contribute to his win-win scenario. Successful innovations, he says, produce a ‘consumer surplus’ – the value that buyers receive in excess of the price they pay, and something that can represent ‘the primary source’ of the social value of an innovation. Despite, then, the iPod being sold at gross margins of 20 to 30 per cent, it makes a strong consumer surplus. It is, Bhidé concedes, ‘difficult to prove’, but with innovations, it is users, not producers, who are the real winners (7).

None of this convinces. It is, however, of a piece with Bhidé’s general accent on collaboration with users, which his study of VC-backed firms highlights, on the diffusion of innovations, and on Dell-style innovation in business model. Now of course, all these outside-the-lab aspects of innovation are important to it. However, though Bhidé says that he doesn’t want to cut government funds for R&D, this is the only direction in which his argument can go.

That would be a pity. Government support for R&D, like everything in R&D, does not guarantee a result. But failure to spend on R&D brings a certain outcome – a focus merely on combining and integrating the old, rather than on inventing the new. That’s what Bhidé rightly sees Apple – the universally vaunted example of hardware-and-software innovation – as doing. But this is an indictment of limitations, not grounds for the enthusiasm that Bhidé evinces.

The world always works smoothly for the man. Just as Western outsourcing and the growth of Asian R&D are always good news for America, so Bhidé emphasises that ‘the massive relocation’ of innovation from West to East is ‘unlikely’. But the truth is that such a relocation has already begun.

Does it matter? Bhidé follows the liberal economist Paul Krugman in believing that only firms compete internationally, not nations. He might not know it, but nearly a century ago, the Russian revolutionary Vladimir Lenin upbraided his rightist comrade, Nikolai Bukharin, for the view that international commercial rivalry had become simply a battle between different state capitalisms. Lenin was right; but Bhidé is wrong to pass over, in the way he does, the modern state’s role in the economy, and the concern it has with the machinations – scientific, technological or otherwise – of other states.

Knowledge and science do move around internationally, making the world economy a more complex place than Democrat theorists allow. Bhidé paints a subtler picture of innovation than most. But now that America and its allies are so obsessed with the danger of cyber-attacks at the hands of Russia and China, it is clear that just as there is more to the world economy than basic research, there is also more to it than simple inter-firm contestation.

Science isn’t quite indivisible internationally, and technology is certainly kept as secret as possible. It would be wise to remember that.

James Woudhuysen is professor of forecasting and innovation at De Montfort university, Leicester. He is author, with Joe Kaplinsky, of Energise! A Future for Energy Innovation, published by Beautiful Books. (Buy this book from Amazon(UK).)

The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World, by Amar Bhidé, is published by Princeton University Press. (Buy this book from Amazon(UK).)

(1) ‘China scientists lead world in research growth’, Financial Times, 25 January 2010

(2) Venturesome, p13

(3) Ibid, pp5, 12

(4) The book that started the ‘declinist’ school is Paul Kennedy, The Rise and Fall of the Great Powers, Random House, 1988. For an early critique, see Henry R Nau, The Myth of American Decline: Leading the World Economy into the 1990s, Oxford University Press, 1990

(5) Venturesome, pp257-269. See Robert H Hayes and William J Abernathy, ‘Managing our way to economic decline’, Harvard Business Review, July-August 1980, and US National Academies Committee on Science, Engineering, and Public Policy, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, National Academies Press, 2005. For more on today’s debates on US R&D and competitiveness, see for example Is America losing its Mojo?, Newsweek, 14 November 2009, and Stephen J Ezell and Robert D Atkinson, RAND’s Rose-Colored Glasses: How RAND’s Report on U.S. Competitiveness in Science and Technology Gets it Wrong, The Information Technology & Innovation Foundation, September 2008

(6) Venturesome, p267 and Tables 71a, 71b and 71c, p484

(7) Ibid, pp17, 269