In a recent Business Week article, Intel co-founder Andy Grove argued that startups are not the answer for job creation. To create jobs in substantial quantities, companies need to achieve scale like Intel did in the decades past. His prescription is to keep manufacturing jobs in the US by levying taxes on products produced outside the US. In reply, Vivek Wadhwa, a visiting scholar at UC Berkeley argues that protectionism via levying taxes would simply lead to a trade war and subsequently to a depression. Instead Wadhwa trusts the creative destruction unleashed by university research and technology startups to eventually create jobs.
There are problems with both arguments. Taxes once imposed will almost certainly lead to escalating rounds of protectionism and constriction of trade. This would hurt the US not just in the form of more expensive goods in the short and medium term, but also in the form of reduced foreign credit to the US (foreign countries hold a huge amount of US debt after all). Were this to happen, unemployment in the US would likely be a lot worse than it is now.
On the other hand, if the US focuses on a narrow definition of innovation - University research and startup activity in hi-tech and bio-tech for example - it cedes advances in efficient manufacturing and running large organizations to corporations abroad. Further, the US takes on the burden of doing the kind of research that once consummated can be copied by companies in foreign countries with weak IP protection thus diluting the ROI of the original research. The US can hardly copy the learnings of foreign manufacturing companies: partly due to better IP protection in the US, but also because efficiently running large scale operations is a human issue that takes a lot of practice and thus not easily replicated.
One possible answer is for the US to support large scale "efficient large scale manufacturing" by way of Govt. support for such projects - say by providing land grants, low interest loans and access to Govt. funded research. Even if this doesn't solve the problem entirely, it gives the US a wider portfolio of "innovation".
Saturday, July 10, 2010
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What an important topic! Certainly created a lot of discussion between Sumedha and myself. Thanks, Rohit, for pointing to both the articles and summary.
ReplyDeleteBoth Andy Grove's article and Vivek Wadhwa's reply point to multiple problems. The part that interests me most is the diverse proposed solutions. Undoubtedly many, like us, thought of some more.
Andy Grove's success is in germinating these discussions. Have we become comfortably numb that we want the cheap goods, which became cheap via outsourcing, but perhaps by violating human rights and evading environmental regulations... or by getting funding from regimes that trample freedom, intellectual/other property rights, promote terrorism/drugs? What about the environmental impact of shipping raw material and goods around the world? How do we tag a price on all these? Would the 'outsourced' manufacturing be as cheap if the consumer has to be pay the real full price?
Products everywhere do not include the full price of the production - e.g. nobody includes the environmental costs in their pricing. That said, the problem is definitely worse in some developing countries like China where Govt. subsidies make the cost accounting worse.
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