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Brigadier
The Washington Post reports that some in Washington are wringing their hands with worry over China’s seemingly insurmountable assault on U.S. high tech manufacturing jobs. But this report ignores four essential areas where the U.S. has enormous advantages over China.
Why is Washington worried? According to the Post, the U.S.’s National Science Board (NSB) reported that U.S. high-tech manufacturing jobs tumbled 28%, or 687,000, between from 2.45 million in 2000 to 1.77 million in 2010.
And the report highlighted three trends that disturb Washington. I summarize them below and point out why they are not such frightening concerns:
* R&D expenditures in China and nine other Asian countries now match those of the United States. Big company R&D is generally not a particularly productive way to spur innovation — venture capital is far more effective and there is little of it in Asia.
* Chinese engineering PhDs more than doubled, and they now “far exceed the number awarded in the United States.” The real question is who employs those PhDs — in the U.S., plenty of them have been going to Wall Street and if the ones in China go to start successful technology ventures, then they could threaten the U.S.’s high tech lead. But what really matters is which country creates the best environment for start-ups.
* The number of research workers for U.S.-based multinationals working overseas has more than doubled. I don’t think this is a concern since whatever new products those research workers come up with can produce new jobs all over the world.
In short, the NSB report strikes me as much ado about nothing. Moreover, the U.S. government should not be using its resources to try to counter what amounts to a phantom threat. Instead we should recognize that the U.S. is the world’s best place to turn ground-breaking technologies into products that make business work better and enhance the lives of consumers.
To understand why that is, it helps to have a broader context for comparing countries and regions. As Srini Rangan and I described in our book, Capital Rising, one way to frame that context is to think about why capital flows to countries and regions.
In answering that question, we found that economic growth is one big reason. Another is the relative strengths of their entrepreneurial ecosystem (EEs) — consisting of four factors: corporate governance, financial markets, human capital, and IP regime.
To get a closer look at how EEs differ in several of the Asian countries mentioned in the NSB study, I bring some fresh exposure. Between January 3rd and 13th, I led 25 Babson College MBAs to meet with start-ups, capital providers, government officials, and professors in a so-called offshore elective dubbed the Hong Kong/Singapore Start-up Strategy Offshore Elective.
A comparison of the EEs of the U.S., Hong Kong/Singapore, and mainland China, reveals that the U.S. has advantages in four key areas. Here’s how:
* Corporate governance. In the U.S., minority investors can offer stock options to key people. While Hong Kong and Singapore have clear laws that support good financial reporting, there is not a well-established way to give stock options to key people. And in mainland China, neither the stock options nor the rule of law are well-established.
* Financial markets. In the U.S., Hong Kong and Singapore financial reporting standards are stricter than in mainland China. This has tripped up many Chinese companies that may be used to engaging in business practices that get them into legal trouble if they list their shares in the U.S. And while Hong Kong and Singapore have good reporting, in contrast to the U.S., they lack deep financial markets for providing capital to start-ups and profitable exits for capital providers.
* Human capital. China, Hong Kong and Singapore produce considerable technical talent. But the culture in these countries drives that talent into working for big companies that pay high salaries – such as investment banks and consulting firms. In Singapore, if a company goes bankrupt, the founder is likely to be permanently ostracized from the established business community.
* IP regime. The U.S.’s IP regime is hardly perfect but it’s better than it is in China as are the ones in Hong Kong and Singapore. While here companies use each other’s patented IP quite often, there is at least a court system where patent disputes are often settled through a combination of cross-licensing and cash payments.
Simply put, thanks to its superior corporate governance, financial markets, human capital, and IP protection, the U.S. is the world’s best place for high tech innovation.
This means that China’s high tech entrepreneurial talent will likely be drawn to the U.S. — although we risk losing that talent unless we implement a Startup Visa program that would let that technical talent stay here if it can raise $250,000 here.
Meanwhile, Apple (AAPL) manufacturing partner, Foxconn, demonstrates that low wage high tech manufacturing jobs in China will stay there as long as the pay is low enough. As China’s wages rise, those jobs will go to Bangladesh and Vietnam where the pay is “globally competitive” — e.g., the world’s stingiest.
If China ever overcomes its four high tech competitive disadvantages, then the U.S. is in big trouble. And Washington should watch closely to see if China’s making progress there. In the meantime, it should pass the Startup Visa Act — I figured it could help create 8.8 million new jobs.
