By Azra Brankovic, IESE Research Associate
When Amar Bhidé’s book The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World came out last year, it caught our eye because it seemed to be saying that the locus of innovation in the economy is diffuse, and that a creative culture matters. The book argues that there is a bias in how innovation is perceived in the United States, especially by the government and by “techno-nationalists.” Their notion of innovation, according to Bhidé, is confined to cutting-edge, high-level research and technology, and their desire to maintain U.S. “leadership” in innovation globally translates into funneling money into high-level R&D and education for engineering and science students, all in an effort to allay fears of being surpassed by other economies, notably the rising ones of China and India.
The U.S. economy was already roiling when Bhidé’s book came out—Lehman Brothers filed for bankruptcy on the day of its publication—but the further meltdown and the election of President Obama, who has issued directives to bolster innovation as a remedy for the recession, have accelerated the discussion around whether the government should be funding innovation, and how and to what degree.
Book I: How innovation and globalization work
The main purpose of Bhidé’s book is to urge against a ramping-up of government investment based on misplaced assumptions of how innovation and globalization work. To this end, he devotes the first part of his book to a detailed accounting of what U.S.-based venture capital-backed businesses do. This part of the book resembles a statistical report on an industrial sector; Bhidé himself suggests the reader may want to skip it and move straight to the second part of the book, where he makes his arguments based on the numbers in the first part. Bhidé explains that a certain percentage of VC-backed businesses pursue high-level innovation, others pursue mid-level innovation, and yet others pursue low-level innovation (the examples he gives of the three, respectively, are working on laws of physics; circuit designs and chip layouts; and the tweaking of conditions in a specific semiconductor fabrication plant). These businesses face different levels of “Knightian uncertainty,” or ambiguity. A lot of innovation happens at the mid- and low level—this is a key point. Therefore, when we think of innovation we should not think only of high-level R&D; we should think of mid-level development and low-level commercialization, too. A second important point is that innovation consists both of new products and services and of new know-how.
Bhidé then goes into detail about VC-backed businesses’ international operations. Do they sell abroad at all, do they develop products abroad—and if they do, do they do R&D abroad or just manufacturing, say. He shows that what VC-backed businesses do offshore, and to what extent, depends on the size of their businesses, where their markets are, and so on. It turns out that a lot of them focus on the domestic market, both because of their smaller scale (as compared to large multinationals) and, more important, because of their focus on services.
Services and IT
The big reason VC-backed businesses are U.S.-focused is that the U.S. economy is largely a service-based economy; 70% of GDP comes from services. Services are not as easily, or at all, exportable. Therefore, Bhidé suggests, the U.S. should not fear that globalization will threaten its economy; U.S. nationals will continue to have jobs serving U.S. customers. Moreover, GDP growth is a result of productivity growth, and the U.S. service sector’s productivity has risen rapidly in the last ten years or so. Bhidé attributes this improvement to the services businesses’ avid use of IT, which in turn feeds innovation in the technology sector. What you get in the U.S. is a self-feeding snake, if you will, where services fuel IT fuels services, all of which fuels GDP.
The relocation of innovation
Bhidé argues that not only has the U.S. nothing to fear from technological and scientific advances abroad, but also that such advances will improve the standard of living in the U.S. The reason is that technology and knowledge transfer benefits everyone—it doesn’t matter where knowledge originates, it is what is done with it, and the U.S. is in a good position to capitalize on any advances, which in turn benefits domestic production and consumption in the service sector. If the techno-nationalists succeed in blocking the flow of high-level ideas from abroad, they impair the performance of other players in the innovation game who use high-level know-how. These mid- and low-level players are crucial to the innovation game in the U.S., as Bhidé sees it, and he makes much ado about the significance of marketing (if no one markets a new invention to people or teaches them how to use it, what use is it) and user-generated innovation (companies adapting new products to their needs come up with further innovations) that these players provide.
The fear of offshoring of innovation is similarly exaggerated, according to Bhidé.
The massive relocation of innovation appears highly unlikely (italics his). The fact that U.S. companies have started R&D centers abroad that do high-level research doesn’t mean that all lower-level know-how development will quickly follow. Of the many activities included in the innovation game, only some are performed well in remote, low-cost locations. Many mid-level activities, for instance, are best conducted close to potential customers.
Immigrant scientists and engineers
The fear of a dependence on foreign scientists and researchers is overblown as well, Bhidé says. In his analysis, the immigration system does a good job of bringing in the right amounts of talent that the country needs. Meanwhile, total demand for labor in the important IT industry is unpredictable, with sudden bursts of need for large numbers of new employees with specialized skills, which immigrants can supply. Immigrants also play a role in supporting legacy systems when local talent has moved on to new specialties. Immigrants serve a further complementary role in starting up their own businesses and encouraging the formation of enterprises that otherwise would not exist. Finally, Bhidé suggests that the inflow of foreign talent into the U.S. is unlikely to abate significantly, as “the economic opportunities in the United States remain a powerful draw for a multitude of immigrants.” He points out that while India produces a vast number of engineers (owing to national policy encouraging the opening of engineering schools), the Indian economy cannot absorb the supply, leading to their seeking opportunities abroad. He notes that India was not the largest supplier of college-educated immigrants living in OECD countries in 2000; the UK was.
Book 2: What makes for a Venturesome Economy
While Bhidé’s book is useful in identifying what we have outlined so far—the different types of innovation and their roles; how VC-backed businesses work and offshore; the services-IT matrix fueling the U.S. economy; the improbability that the U.S. will be hurt by competition in innovation from abroad or by immigrant engineers and scientists—he is not as illuminating on what it is about the U.S. economy that makes it “venturesome.” Bhidé does not pretend to have a definitive answer, and rather lists possible influences, calling them “elusive underpinnings,” but there is something unsatisfying in reading 400 pages hoping to glean what it is that makes us venturesome only to find that it’s elusive and that the explanations will only be sketched in several pages.
Consumer willingness to spend
Bhidé sees modern consumers’ changed attitudes as a reason that we see more innovation today than in the nineteenth-century U.S. economy:
Several common beliefs and attitudes that undergird the modern system of innovation—expectations of technological change, gratification from buying cool new products first, and the desirability of job hopping—have distinctively modern, late twentieth century, features…In earlier times, a relatively small number of people—mostly visionary inventors and scientists—believed in the inevitability and desirability of technological progress. Now…(m)any believe they can prosper by pursuing the new New Thing, and that if they don’t, they will fall behind. The widespread acceptance of such beliefs has helped turn progress into a self-fulfilling prophecy…The fear of being left behind similarly helps explain the speed with which IT innovations are deployed.
Apparently our fear of being left behind in pursuing the new New Thing or IT innovation suffices to keep us in the innovation race; we needn’t, in addition, fear foreign economies or immigrants.
In terms of U.S. exceptionalism, Bhidé points to the greater willingness of U.S. consumers both to spend and to “take chances on unproven innovations developed by fledgling companies—and to provide feedback that helps refine those innovations.” According to his interviewees, Bhidé says, this was not because buyers abroad are less technically qualified; rather, “even if they are more knowledgeable, they are less willing to stick their necks out, possibly because of some combination of cultural norms (my interviewees’ favored explanation), organizational rules, and the lower incidence of job hopping (which decreases concern about bad investments).”
Bhidé praises the willingness of the U.S. consumer to spend, putting it in a broader comparison of the present to the past: whereas in the past capital grew out of thrift (in Max Weber’s model), today it grows out of consumption. Bhidé is somewhat cavalier in his attitude toward people racking up debt in fueling this growth, saying “the young and the impecunious are more likely to have the recklessness of spirit necessary to perform this role. At least up to a point, their spendthrift ways and the credit cards that sustain them are a boon to economic growth; and because there is no knowing what that point might be, there is no justification for promoting or discouraging their behavior.” The current straits of the economy as a result of a lax attitude toward debt should humble this attitude, although perhaps it is attributable to Bhidé’s macroeconomic perspective.
Salesmanship and managerial know-how
In addition to the consumer’s propensity to spend and a favorable legal and regulatory environment for business in the U.S., Bhidé points to advanced salesmanship and marketing and management know-how as the distinguishing factors of success of U.S. companies, including abroad. Bhidé shows that U.S. businesses invest less than their counterparts in Europe and Japan in fixed investments, but that they invest a lot more in IT. More important than the investment itself, though, is U.S. companies’ ability to draw value out of it, which he says appears to be due to managerial know-how. He cites research showing that “establishments owned by U.S. multinationals invested about 41 percent more per employee in IT than the average for the industry” and that “U.S. multinationals also apparently got more for their IT buck; they enjoyed ‘significantly higher productivity of IT capital.’” This research suggested that “U.S. multinationals can use IT more effectively because of their greater ‘devolution’—they operate ‘with flatter hierarchies with more control passed down to lower level employees.’”
Bhidé thinks “it isn’t just that U.S. businesses are more decentralized” but that U.S. companies “give individual employees more responsibility and opportunity to exercise personal initiative than many European or Japanese companies.”
Organizations are, paradoxically, willing to treat their members more as individuals than as interchangeable automatons—and to specify rules, curiously enough, that provide opportunities for individual initiative. To use a phrase popularized by Peters and Waterman, U.S. businesses have figured out the right balance of ‘loose-tight’ controls. For example, a CEO may dictate the choice of an ERP system and may even closely monitor its implementation, but also leave ample scope for employees to exercise individual initiative and creativity.
A pressing question that remains unanswered in the book is what, if anything, the government should be doing about innovation. While Bhidé makes the argument that over-focusing on high-level innovation is misguided and that the government should instead do more to help mid- and low-level innovators, his proposals for what this would consist of are scarce. At most, he seems to suggest that providing tax credits and subsidies for the marketing of products or the development of ground-level know-how would be better than providing them for R&D. His exhortation is not to do anything that might cause harm; his book essentially says “if it ain’t broke, don’t fix it.” It is not clear, however, that things are not broken, or that the only people calling for increased investment in high-level R&D are under-informed government officials and paranoid or pugnacious techno-nationalists. There is a flurry of voices calling for something to be done, on the part of people with experience in this space who do not think the best the government can do is get out of the way (articles 1, 2, 3, 4, 5, 6, 7). It is unlikely that all these voices are uninformed or only calling for this investment for reasons of personal bias or gain. It is in the failure to engage with these voices that Bhidé’s book falls short.
May 2009. All rights reserved.
“According to Knight, real profits (as opposed to the returns to labor, capital, or other resources earned in a competitive market) aren’t earned by taking known, or precisely quantifiable, risks, such as betting on a roulette wheel. Rather, profits represent a reward for assuming unmeasurable and unquantifiable risk, which Knight calls uncertainty. ‘Knightian’ uncertainty arises when novel circumstances preclude mechanistic extrapolations based on historic patterns—when past isn’t necessarily prologue.”
 Along the lines of Robert Skidelsky’s comment in reviewing Joseph Stiglitz’s Making Globalization Work (“Gloomy About Globalization,” The New York Review of Books, April 17, 2008): “However valid in its own terms, this is the perspective of a microeconomist, whereas the main problems of globalization, I suggest, lie in its uncontrolled macroeconomy. I find more congenial, and more relevant, the relatively permissive attitude with regard to the so-called market failures displayed by the great twentieth-century economists Keynes and Friedrich Hayek and their greater concern with the problem of securing macroeconomic stability, differently though they set about it. They understood that uncertainty and the disappointment of expectation were inherent, not contingent, features of economic life.”