Business Forum: Competitors Don't Kill

By Isaac Cheifetz
Published March 10, 2003

Last month's Commerce Chain column discussed the increasing trend of big corporations moving elements of information-technology and back-office operations to subsidiaries or partners in low-wage nations such as India.

What are the implications of this trend for the United States and other Western economies? Is it a threat, a positive development, or some combination? For the United States as a society, how can we compete with this trend?

As Samuel Johnson said: "Man never does less damage than in the pursuit of commerce." In the long term, the rise of offshore outsourcing bodes well for our economy -- it will create new markets of middle-class consumers around the world. It represents stability and growth of international markets and is particularly positive for our prospects for living in peace.

Low-wage countries competing for jobs are an economic challenge, but "no-wage" countries that would rather "fight than switch" from their dysfunctional societies are a mortal threat. As you read this column, the United States faces the threat of countries and cultures that insist they would rather destroy themselves and us than compete in the realm of business and culture.

In the 1990s, New York Times columnist Thomas Friedman made famous the "McDonald's stability argument," which holds that no two countries stable enough to have McDonald's restaurants have ever gone to war with each other. The 21st century version may be that no two countries whose economies rely on service level agreements, the contractual underpinnings of the service economy, have gone to war or are likely to.

Price no Real Advantage

A low-cost strategy is only a temporary advantage for a corporation or for a country in the international market. Wages go up when stability and track record are established. Forty years ago, Japan was the low-cost manufacturer of Asia; over time, its companies improved their quality, value proposition and brand. Taiwan, Korea, Malaysia and others have entered the world economy through the low-cost niche and then left it to others.

Consider this Associated Press report from last week: "Thailand Prime Minister Thaksin Shinawatra appointed Narayana Murthy, chairman of India's software giant Infosys Technologies Ltd., to join his advisers' team on information technology issues. Thaksin, a telecommunications tycoon before he entered politics, said he was impressed by Murthy's ability to put his company among the world's leading software developers in just a few years and to help make the Indian city of Bangalore 'the Silicon Valley of Asia.' "

China is the current low-cost competitor, with manufacturing wages under $100 a month, and software development wages under $500 a month. Even so, as I have discussed in past columns, the success of Chinese companies in the world economy will swiftly increase their pricing and their workers' expectations.

The Knowledge Advantage

Knowledge is sexy. Well, it should be, anyway. Education doesn't necessarily make you wiser -- there are plenty of educated nitwits on the world stage. But it does have a lot to do with a person's ability to compete in the job market. In the mid-1990s, a Money magazine study determined that two-thirds of U.S. workers making more than $75,000 had at least a master's-degree education.

Fifty years ago, there was little connection between education and success at work. For that matter, there was relatively low overlap of brains and success. As recently as 30 years ago, unemployed Ph.D.'s in the social sciences and humanities were forced to drive taxicabs -- their degrees had no obvious utility in the business world.

Today, a Ph.D. in art history or anthropology would be snapped up by a blue-chip consulting firm or a corporate marketing department. Their skills in gathering, analyzing and synthesizing large volumes of information are considered invaluable.

Yet much of our society's brainpower goes unused. There is low prestige attached to learning in the United States compared with many other societies. If success is sexy in our society, rigorous, lifelong education must be as well.

Looking Ahead

We must invest in the future, not the past. Just as a company would be ill-advised to subsidize products and markets in which it no longer has a competitive advantage, a country or state must be similarly unsentimental about its past successes. Worthwhile investments have economic return on investment, not just social return on investment.

We should invest in industries we project as being on a growth curve, not those mature industries we wish -- for good reason -- to protect. For Minnesota, there is little we can do to resuscitate mainframe computing, and there might be a limited effect we can have on the manufacturing sector. But we can compete with anybody.

We must seed the economy but not try to control it. Fifteen years ago, Germany and Japan were considered to have better-balanced economies than the United States; today, they are struggling, caught in the ropes like a hapless professional wrestler. At the core of both of these economic models is the fallacy of top-down control, the idea that elite planners know better than the marketplace, better than the mass of individuals.

Germany's system had several key elements: a government-subsidized and -organized apprentice system, controls on the ability of employers to lay off employees and frequent cross-holdings between state banks, corporations and labor unions.

Japan's Ministry of International Trade and Industry supposedly was the mastermind behind the Japanese economic miracle, allocating resources and creating new industries more efficiently than the marketplace.

This top-down model has been disproved in the corporate world and now has been put to bed decisively in the government sphere as well. Free markets, grass-roots government and decentralized organizations spur risk-taking activity and simultaneously mitigate risk by spreading it among many stakeholders acting as decision-makers.