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Emerging concerns about ‘innovation offshoring’
By Dieter Ernst

HONOLULU (March 25) -- The contentious political debates over NAFTA (The North American Free Trade Agreement) in this year's presidential race may miss the central point about an emerging international challenge to the American economy.

The real concern may not be the shift of manufacturing jobs to South America or Asia, the traditional concern of unions and those who court them. Rather, it is the possibility that the United States may lose its core economic strength in the 21st Century economy: U.S. dominance in research and development and innovation.

But with positive and creative thinking, the shift of intellectual work offshore may turn out to be less of a problem for the United States than a powerful catalyst to renew and restore America’s preeminent role as innovator in the global economy.

Until recently, there was general agreement that the center of technological innovation must remain in the United States as a pillar of our economy.

Silicon Valley cannot move overseas.

But that is precisely what is happening.  Knowledge workers in Silicon Valley now work directly with colleagues in Seoul, Taiwan’s Hsinchu Science Park, Beijing, Shanghai, Bangalore, Delhi and Hyderabad.

Simply put, over the past decade the rise of Asia as an important location for such work, or “innovation offshoring,” has begun to challenge the notion that the U.S. will remain the innovation capital of the world.

Also lost is the complacency that goes with such a notion. For a long time, it was thought that while lower-wage service and manufacturing jobs might migrate overseas, high-end innovation work would remain at home. There was a belief that for some reason, innovation – as opposed to most other aspects of manufacturing – was “sticky.” It would remain a domestic specialty.

No more.

This profound shift has not happened in a vacuum. American companies are at the forefront of this trend as they experiment with new approaches to the management of global innovation networks as they strive to keep operations profitable and competitive.

And for their part, Asian governments have been active, promoting themselves as new sources of innovation.  The trend is likely to accelerate because Asian governments know they can no longer rely on being the manufacturer of someone else’s idea.

For instance, the growth of U.S. patents issued for inventions from Asia has grown exponentially over the past decade.

Today, we have become accustomed to the idea of Global Production Networks. The new car Americans drive is likely to contain parts manufactured or assembled in factories and plants all over the world.

But now, we must begin to think of Global Innovation Networks, where part of the basic brainwork of bringing a new product or idea to market takes place overseas, often in Asia.

Sometimes, it will be an American company buying the completed work of bright, but lower-cost talent from overseas. But it might also be a decision by a company to outsource some stages of innovation to specialized Asian suppliers within its own firm.

As a result, there is growing concern that innovation off shoring might lead to the “hollowing out” of the U.S. economy far beyond manufacturing to include core strengths such as research and development, the most precious source of domestic economic growth.

That could well lead to a new round of high-tech protectionism.

But the United States need not go down that path. With the right combination of flexible and creative strategies, there can be new opportunities and new markets for American companies.  And there will be new reasons to strengthen and refresh the U.S. innovation system.

More innovation in Asia does not mean less innovation in the United States. Asia’s progress may well enhance U.S. domestic capacity to produce significant innovations and new market-defining standards at home.

What’s needed for the U.S. to remain competitive is nothing less than a new national strategy to cope with the opportunities and challenges of innovation offshoring.  That strategy should contain these elements:

1.    More access to data about innovation and where it is occurring to inform the national policy debate.
2.    Sustain and build upon existing strengths in the U.S. innovation system to stem “home made” causes of the shift overseas.
3.    Support domestic innovation through tax incentives for investments in start-ups and through reform of the patent system so smaller inventors and innovators have easier access.
4.    Upgrade the domestic talent pool of knowledge workers. This means incentives to study science and engineering, encouraging “soft” capabilities such as management and cross-cultural understanding and encouraging immigration of highly skilled workers. That is, it is no longer good enough to depend on science and engineering education alone to remain competitive.

It is a changing world. But the United States can remain a leader if it embraces flexible strategies that will allow it to adapt to the new blurred boundaries of innovation.

Sidebar: IBM: From a ‘closed’ to an ‘open’ system.

The huge information company IBM offers a telling example of how a firm can transform itself from a “closed” to a more “open” corporate innovation system.

In 1964, IBM decided to bet its future on the 360 "family" of computers, closely related machines from mainframes to minicomputers. These machines were designed to set the global standard for computers.  Virtually all stages of the value chain were kept within IBM, from basic development through manufacture, assembly, distribution, service and even financing.

The 1990’s brutally exposed the computer giant to the weakness of a closed system. It experienced huge losses.

In response, IBM transformed itself into a global supplier of integrated solutions, open to outside technologies and outside suppliers.

Rather than focusing on tightly controlled innovation management, the company shifted to technology licensing, in which it has become a leader.

The result was a profitable global web of research and development alliances from Singapore to Japan, Korea and beyond. It came up with its “Power.Org” alliance of open business interface standards for servers, handsets, digital consumer electronics and the like, all sharing IBM’s “Power” microprocessor architecture.

The Power.Org Alliance, interestingly, was introduced to the world not in the United States, but in Beijing.

Dieter Ernst is a senior fellow in the Economics Study Area at the East-West Center in Honolulu. This article is based on his publication,“Innovation Offshoring: Asia’s Emerging Role in Global Innovation Networks” and a recent presentation in Washington, D.C.

The EAST-WEST CENTER is an education and research organization established by the U.S. Congress in 1960 to strengthen relations and understanding among the peoples and nations of Asia, the Pacific, and the United States. The Center contributes to a peaceful, prosperous and just Asia Pacific community by serving as a vigorous hub for cooperative research, education and dialogue on critical issues of common concern to the Asia Pacific region and the United States. Funding for the Center comes from the U.S. government, with additional support provided by private agencies, individuals, foundations, corporations and the governments of the region.

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