Thursday, May 11, 2006

United States against the newcomers

After reading the new book of Thomas L. Friedman, “The World is Flat”, I realized that the flattening of the world is causing more than just the ability to move around resources. It is not only about productive but also non-productive resources that get moved by the flattening of the world.

In Friedman’s book, he touches on different flattening factors, and by flattening he means increased connectivity. Several of those flattening factors are off-shoring, outsourcing, availability of information, supply chaining, etc.

To the increasing power of these different factors, Friedman attributes the lost of manufacturing and service rendering power of the USA.

From my perspective, I think it goes beyond the fact that manufacturing or certain services are migrating to countries where you can get cheap labor (the “new comers”). In the short run, USA would be able to adapt to this migration of production power. USA production would focus on high-level processes and the “newcomers” would take on the lower-level processes. In certain cases, the “new comers” are already taking over high-level production processes.

On the other hand, in the long run, USA would decrease its output and will not create any sustainable value. If USA cannot –as Friedman says—power its intellectual resources to overcome the “newcomers”, it would be at the mercy of the newcomers’ business strategies.

Something that I covered a couple of days ago and really stuck into my mind was the fact that wealth is not valuable if we don’t produce any goods or services that could be exchanged. Let’s take a extreme example. If I have $100 dollars but I cannot buy anything, my US$100 dollars are worthless.

In the world where the “newcomers” take over USA’s production of goods and services, the “newcomers” receive all the money from the wealthy USA. At the end of the day, all the wealth from USA would move to the “newcomers”.

With USA multinationals investing on research and development (R&D) in places like China or India, they are just accelerating the process. Instead of replacing old scientific power in the USA, multinationals are boosting “newcomers” potential. In the case of China, USA multinationals are investing a huge percentage of its R&D expense in knowledge centers in one of the 11 Chinese cities with population over 2 million. But the investing is not only in knowledge but infrastructure. The foreign direct investment (FDI) in China per year is $60 billion.

The problem is that multinationals believe that this FDI and investment in R&D would return higher profits and better margins. What they don’t see is that in the not-that-far future, Chinese would learn from their internationals counterparts and would implement their own production lines. This is already happening in industries like automobile, cement and oil. Chinese companies are founded on the knowledge acquire by partnering with multinationals. The apprentice is becoming the master.

To avoid the migration of all production (goods or services) from any country to the "newcomers", we not only need to invest in education to overcome the increasing technical and scientific capabilities of the "newcomers" but also think about investing R&D in our own countries. Focus on the long term, it is not about tariffs, quotas, or subsidies (those are not sustainable). Think about creating the resources that are not longer migrating to the USA (i.e. foreigners to US universities).

Let's invest in education and research.