Tuesday, July 27, 2010

Schumpeter's notebook

Business and management

Schumpeter's notebook

  • A war on the right

    Cato, the AEI and a new "culture war"

    by Schumpeter

    BRINK LINDSAY has mounted a powerful attack on Arthur Brooks's new book, "The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America's Future". Given that the two men are both luminaries of America's intellectual right—Lindsay is vice-president of research at the Cato Institute and Brooks is head of the AEI—this suggests that not everyone on the conservative side has succumbed to "epistemic closure" (though it is notable that the review appeared in the pages of a left-wing magazine, The American Prospect).

    Mr Brooks's book might be summarised thus:

    America faces a new culture war. This is not the culture war of the 1990s. This is not a fight over guns, abortions, religion, or gays…Rather, it is a struggle between two competing visions of America's future. In one, America will continue to be a unique and exceptional nation organized around the principles of free enterprise. In the other, America will move toward European-style statism.

    The metaphor of a culture war sticks in Mr Lindsay's craw, for two good reasons. The first is that it overstates the tension between the market and the state. You can have a big state with a well-functioning free market, as Denmark and the Netherlands demonstrate; you can also have small states that habitually distort the economy, as any number of undeveloped countries prove. The second reason is that, when it comes to regulation and free trade, the great American people are more backward than the elites. Voice the sort of economic liberalism that passes for common sense in Washington, DC, in a bar in Cleveland and you might be in for a rough night. In other words, Mr Lindsay thinks, rightly in my opinion, that Mr Brooks is declaring a culture war that his side will inevitably lose.

    I would add a third objection to Mr Lindsay's duo. This is a practical one. The only chance that America has of shrinking the state, given the country's closely divided politics, is for both sides, Republicans and Democrats, to co-operate. You cannot deal with problems such as entitlements if the other side is going to demonise you and indulge in demagoguery. Republicans and Democrats need to unite behind reform and proclaim, in effect, that there is no alternative. Turning economic policy into another excuse for a culture war is a guarantee of paralysis and failure.

  • Innovation policy

    Unchain the profs from their universities

    Jul 5th 2010, 16:34 by Schumpeter

    A WONDERFULLY simple idea on how America can improve its innovation machine, over at the Kauffman Foundation's Growthology blog.

    American innovation got a huge boost back in 1980 when the Bayh-Dole Act allowed universities to hold on to the intellectual-property rights of ideas produced with federal funds. But recently the innovation engine has been running out of steam: there are fewer new products than there used to be, and academics complain about proliferating red tape. Lesa Mitchell and Bob Litan argue that the best way to revitalise the system is to free professors from the monopoly power of the universities that employ them:

    Open up technology transfer to market competition. That is, allow a professor from University X with a potentially breakthrough innovation to go outside his or her university's TLO [technology-licensing office] and use that of University Y, if University Y happens to be more skilled at commercialization in this particular discipline. University X would not be required to relinquish IP rights, and of course the professor is not required to do anything. The idea is simply to bring more openness and competition into a process that has become muddled and distorted. Where else in society do we tolerate such artificial monopolies with public research dollars at stake? This idea, in fact, perfectly carries forward and extends one of the primary motivations behind Bayh-Dole—to smooth the commercialization process.

  • Apple versus Nokia

    Taking the shine off the Apple

    by Schumpeter

    THERE are no signs of the recession in Apple's cavernous store in Regent Street in London: you have to elbow your way through crowds to get your chance to play with the iPpads and iPhones on display, and stand in endless queues to part with your money.

    But is Apple capable of replicating this success in the emerging world? In today's Financial Times Liu Chuanzhi, Lenovo's founder and chairman, says that Apple is fluffing the China market ("We are lucky that Steve Jobs has such a bad temper and doesn't care about China...")

    And in the Harvard Business Review's blogs, Dan Steinbok points out that young Indonesians are buying Nokia's new smart phones rather than Apple's new iPhone4.

    Nokia has dramatically outperformed Apple in the emerging world. Apple will struggle to catch up, given the holes in its global supply chain, and growing unrest in the Chinese labour market.

    In order to surpass Nokia globally, Apple will have to increase production 10-fold to some 400-500 million smartphones on an annual basis. Apple is not well-positioned to expand its production capabilities, particularly when compared to Nokia's established global production systems.

    Since the 1990s, Nokia has built its production network worldwide, especially in China. More recently, it has relied increasingly on in-house production and, even with smartphones, only 5 percent of the production is outsourced.

    In contrast, Apple has no production of its own; it is entirely dependent on a few suppliers. Moreover, only a few of these outsourcing giants can manage massive volumes, including Flextronics, Hon Hai (Foxconn), and Sanmina-SCI.

    While Apple is trying to scale up fast, its timing is difficult. Today, the world's largest electronics contract manufacturers in Guangdong suffer from extraordinary labor turmoil, which has resulted in salary hikes.

    Moreover, since early spring, Foxconn, which won Apple's order to make the iPhone, has been in the spotlight in China, due to multiple suicide cases.

    That said, the iPad is a truly wonderful device.

  • General Electric and China

    Immelt blasts China

    by Schumpeter

    THIS week's plain-speaking prize goes to Jeff Immelt, the boss of General Electric.

    He argued that China is increasingly hostile to foreign multinationals; he also gave warning that his company, the world's biggest manufacturer, is actively looking for better prospects in other emerging markets. "They don't all want to be colonised by the Chinese", he said, going rather further than was prudent. "They want to develop themselves".

    Mr Immelt's broadside was undoubtedly significant. It reflects a growing mood of disillusionment with China among big Western companies. It came from the mouth of one of China's biggest boosters, a man who praised the Chinese leadership, only last December, for doing exactly what they say they will.

    Is Mr Immelt right about the changing mood in China? The Chinese are certainly unusually self-confident at the moment, thanks to the financial meltdown. They have flexed their muscles against a succession of companies, including Rio Tinto and Google.

    But the Chinese have always driven a hard bargain, and they have always made it clear that they will give only to get. The American Chamber of Commerce reported in 2008 that three-quarters of the foreign companies that they surveyed were finally making money in China, a big increase on the historical average. Many Western companies, notably Yum! Brands, have finally cracked the China code, and are becoming ubiquitous across the country.

    It will be interesting to see how Immelt's comments play out in China, a country which puts a great store on "face", and which does not take kindly to even gentle criticism, let alone talk of "colonisation".

    Google seems to be retreating, with its long tail between its legs, from its bold challenge to Chinese authoritarianism. It will therefore also be interesting to see if, sometime in the near future, Mr Immelt finds himself delivering a speech with a rather different message.

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