Creative Destruction or Development?

Thomas L. Friedman listened to Tung Chee-hwa (董建華), Hong Kong’s first chief-executive under Chinese sovereignty. Ralph Gomory on the other hand doesn’t want us to listen to Thomas Friedman. That said, all that Tung said (not too long ago, apparently) was that

“China was asleep during the Industrial Revolution. She was just waking during the Information Technology Revolution. She intends to participate fully in the Green Revolution.”

Anyway, Friedman wants innovation for America – “president Obama should seize this moment before the midterms — possibly his last window to put together a majority in the Senate, including some Republicans, for a price on carbon — and put in place a real U.S. engine for clean energy innovation and energy security”.

Friedman’s view is based on some scientific evidence. America is at a strategic inflection point, he writes. Andy S. Grove, a leading IBM manager, describes a strategic inflection point as

“a time in the life of a business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end”.

And before you could say something like “gee, that man must be paranoid”, Andy Grove himself confirms that he is. Always been. That’s why Friedman likes reading Grove after all.

But since then, when Friedman supported his president in 2003, the times have changed. For one, the Iraq war was wrong, or not exactly as right as it first looked. Besides, maybe the French weren’t really that stupid back in 2003. The French prime minister was out drumming up business for French companies in the world’s biggest emerging computer society in India while Friedman and GW Bush were taking care of Saddam’s weapons of mass destruction.

But let’s get back to the strategic inflection point.

To succeed at a strategic inflection point, a company (or a country’s industries, as generalized by Friedman) must not only absorb new technologies, or develop them according to emerging or hidden trends in demand, writes Grove.

To put it more fundamentally scientific (as I understand it), America’s strategic choice between catching Osama and contributing to the wave of green technology is about a choice between surviving and growing in a great time of creative destruction, or getting destroyed in the process – economically, not militarily.

Friedman advocates a – by now seemingly established – pattern of international division of labor:

In the process, China is going to make clean power technologies cheaper for itself and everyone else. But even Chinese experts will tell you that it will all happen faster and more effectively if China and America work together — with the U.S. specializing in energy research and innovation, at which China is still weak, as well as in venture investing and servicing of new clean technologies, and with China specializing in mass production.

This could be a nice prelude for a more perfect Doha Round.

There is probably noone who would question the benefits of being a big player in new technologies – green technologies for example. But Ralph Gomory, himself a scientist, took issue with Friedman’s ideas. America can’t avoid the fate of losing productive capacity by trading designs, ideas, and R&D […]  for the items we need. Gomory argues that while R&D is crucial for manufacturing, it’s share in an economy is clearly less than ten per cent. There is no way to balance the value of manufactured goods with R&D alone. Gomory writes that

[w]e need successful industries and we need to innovate within them to keep them thriving. However, when your trading partner is thinking about GDP rather than profit, and has adopted mercantilist tactics, subsidizing industries, and mispricing its currency, while loaning you the money to buy the underpriced goods, this may simply not be possible.

Nor is there a need to rely on generating nothing but designs, ideas, and R&D anyway. “Cheap labor” as a location factor doesn’t explain why Japan and Germany as high-wage countries are successful in the automotive industry, and it doesn’t explain why semi-conductors as a model of a high investment, low-labor content industry, are mainly made in Asia.

No need to say that JR finds Gomory’s argument more convincing. What only adds to the charme, Gomory offers surprisingly simple numerical evidence for his side of the debate. When you have good designs at hand, you better take them and build something useful and valuable yourself, rather than put it at your competitors’ disposal.

Besides, every country has its share of tinkerers, engineers, farmers, and unskilled workers. There is little space for that argument in economics – but if a trade-surplus country like China or Germany wants to do its share in rebalancing global trade disparities, not-so-bright citizens must find opportunities to earn money, too.

And then, maybe evening school will help a routined machine operator to become an engineer in the process. This would make sense both economically, and in terms of civil society. Long-term unemployed people on the other hand tend to lose interest in further education.


National Export InitiativeWhite House, March 11, 2010
No Global Governance, January 1, 2010
Obituary: Paul Samuelson, December 14, 2009

23 Responses to “Creative Destruction or Development?”

  1. The problem with Friedman’s idea is that he accepts at face value the idea that the Chinese are really interested in an international division of labor that allows US companies to retain an R&D advantage while leaving the Chinese companies to carry the manufacturing ball. Has Friedman, with all of his wisdom, overlooked the teensy problem of intellectual property theft?

    To me, it doesn’t seem as though Chinese companies have accepted the idea of a division of labor. They want to learn from Western companies AND maintain their share of manufacturing, and they are willing to do it the naughty way. This is one reason why joint ventures are so risky in China. X company enters into a JV with Y (Chinese) company. Y shortly steals the technology of X and opens a third company to take advantage of that technology.

    As for the point of inflection, I would have to agree that Americans should be ashamed at how many opportunities to develop green technology that they have missed. There is no good reason, apart from the lobbying of parties and regions that have interests in fossil fuels, why the US couldn’t better develop wind power or solar power two decades ago. And it may seem unsettling that many Chinese companies seem to be making headway in developing green technologies while such technologies languish in the US. However, I think it is a bit premature for farmers such as Freidman to count China’s chickies before they are out of their eggies.

    People’s exhibit A: (This was copied from an SCMP story that was printed earlier this week. It seems that a Chinese Vice-Minister has just labeled at least one Chinese windfarm as a vanity project and has claimed that China is unsuitable for developing windfarms. I am not a windfarm expert, so I can’t verify his comments, but it does raise a troubling specter: Why do so many commentators fail to comment on the technical difficulties that Chinese firms might face?)

    People’s exhibit B: From today’s SCMP:
    “Chinese carmaker BYD yesterday indicated it had scrapped its highly publicised plan to mass-produce pure electric cars on the mainland by the middle of this year.

    “Instead, company chairman Wang Chuanfu said in Hong Kong that the company would make 100 of its E6 pure electric cars – to be used as taxis in Shenzhen, where the company is based.

    “Wang said the further development of electric cars would depend on how well the taxis worked. He did not disclose a specific timeline for a large-scale production of the “new energy” car.”

    (I remember reading several articles a few months ago that talked about how China was going to leapfrog over the US in the development and production of electric cars. Invariably, these articles mentioned BYD. According to today’s news, the hype over the upcoming release of BYD’s new cars was just that: Hype! It seems that BYD will create a pilot program using taxis instead.)

    In conclusion, R&D is important. But so is manufacturing. Both will be needed if the US is to maintain any sort of economic vitality and economic sovereignty. And, above all else, neither should be sacrificed lightly, especially not to benefit a competing market run by leaders who have shown no inclination that they are willing to play fairly.


  2. Friedman frequently stirrs controversy. I’m not sure what is driving him, business interests, naivete, or something else. He’s ofte lauded for his skills as an essayist (I think he won the Pulitzer Prize some time in the past), but I’d never trust his judgment.
    In a way, his turn from supporting the Bush/Cheney administration to his innocent (?) advocacy of American-Chinese “cooperation” as in his recent New York Times article both seem to show a blind admiration for power, no matter of which nature it may be.



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