Can the U.S. Maintain the Leadership Position in the High-Tech Sectors?

There is a debate going on as to how to restore American competitiveness through technological innovation and manufacturing on Harvard Business Review site, which made me rethink a couple of issues and post up this piece. In fact, I was kind of disappointed at the quality of debate (after all, the contributors in the debate are among the most intelligent people in the States), so I commented on two articles there.

Conundrums and challenges the U.S. faces in terms of technological innovation are not limited to the States. Many of the issues the U.S. has to deal with can be applied to other countries, both advanced economies and newly industrialized ones like Korea to some degree. In this context, it is interesting to look at the U.S. experience and learn from it.

The U.S. economic growth had been fueled by innovation and entrepreneurship to a large extent until financial engineering reigned. While the U.S. has had the best technology in many areas such as software, specialty logic chips and capital goods, the best engineering schools, the world-class high-tech firms, whether the U.S. can keep the leadership position in the high tech field doesn’t appear to be that promising due to several factors.

Owing to its relatively high standard of living, stable political system, and superior social/industrial/scientific infrastructure, the U.S. has attracted the best talent around the globe. However, the U.S. is currently facing tough economic times. It is running on major deficits. Hiring freezes, rising layoffs and credit crunch have choked startup enterprises’ growth and entrepreneurial spirit.

Increasing outsourcing and offshoring trend has stirred up some concerns in the U.S. Many of the major U.S. high-tech firms have not only outsourced manufacturing jobs but set up R&D centers in emerging economies like China and India. The more the U.S. high tech firms become international corporations, the more they tend to move to wherever they can be more profitable. The notion of technonationalism gets diluted. Of course, as I’ve pointed out recently, this problem is not restricted to the U.S. Korea is facing the similar conundrum.

All politics aside, one of the reasons for offshoring and outsourcing by the U.S. corporations lied in cost savings mainly through labor arbitrage. However, some argue that the U.S. workers’ wage has been squeezed down to the benefit of the top 1%. Consequently, the issue of income disparity of corporate America should be factored in.

The demise of U.S. manufacturing is appalling, resulting in the intended and unintended consequences. Sending the manufacturing jobs to China in exchange for selling its treasuries has generated the profound impact including the weakening middle class base. Since MNCs tend to prefer to locate their production or R&D operations in a region where they sell their products to take advantage of physical proximity to the consumer market, currency exchange rates, and various incentives, the destruction of the middle class coupled with dwindling purchasing power points to further deterioration of the America’s manufacturing foundation.

R&D undertaking is closely related to the overall health of the economy not only because the state of the economy affects the availability of R&D capital but because it would further increase manufacturing and R&D outsourcing and offshoring. Sustaining and expanding America’s innovation competitiveness can’t be decoupled from the financial reality. When a country is heavily burdened by the financial reality at both the public and private levels, the production centers of the economy are eroding quickly. Perhaps both the U.S. financial crisis and the Asian financial crisis teach us that although we may all agree growing and sustaining a country’s competitiveness through technological innovation and production is critical when making advances in standards of living, we shouldn’t overlook the problem of dissonance between the manufacturing industry and the financial sector.

The U.S. has been trying to revive the economy with borrowed money without revamping the broken system. This may work for a period. And yet, the bottom line is: will government measures trump market forces?

The U.S. seems to be moving more towards a state-led economic system in which a dubious collusion between state and big business has negative ramifications. A government’s role and the degree of its involvement in fostering high-tech R&D should be probed and determined in this context.(Since I’ve elaborated on the government’s role in innovation and technology before, I wouldn’t go into the details.)

Nurturing and attracting talent is critical since talent is everything in the high-tech business. Nowadays, it is a worldwide phenomenon that smart kids don’t want to get into engineering schools: too much hard work for less money compared to financial jobs, for example. Besides, when the social conditions deteriorate, the U.S. would lose top-notch talent in the high-tech sectors to an alarming degree.

Any country with the high-tech base should invest in the next generation of high-tech products like bio technology and alternative energy, fully utilizing and bolstering their indigenous R&D capacity. Moreover, they need to take a long term view on innovation. In reality, making this long-term commitment happen seems to require top leadership’s foresight and determination.

The U.S. still has the right combination of talent and potential for innovation. However, it should make the right moves including appropriate investments in appropriate areas and oversight of its innovation-related investments. And above all, the U.S. economy needs to reestablish itself. Otherwise, the U.S. would be likely to lose its leadership stance in the high-tech sectors.