Starting with Sputnik in 1957, Americans have suffered periodic bouts of competitiveness anxiety. Who imagined the Soviets would orbit the first Earth satellite? After the Soviets, it was the Germans in the 1970s, then the Japanese and even THE South Koreans in the 1980s. We lagged in technology, management and overall economic vitality. Could we restore our competitiveness?
It’s happening again. The latest fright stems from the sluggish economy — especially lingering high unemployment from the Great Recession — and China’s stunning rise. Already, 53 percent of Americans rank China as the world’s “leading economic power,” finds a Gallup poll. Only 33 percent rate the United States as the leader. (Fact: Per capita incomes in China are only one-sixth the level of those in the United States, estimates the World Bank.) As before, competitiveness studies and conferences have boomed.
The newest entry is a special edition of the Harvard Business Review (cover line: “Reinventing America”). “We’re in a very serious situation, one that predates and goes well beyond the recent economic downturn,” warns dean Nitin Nohria in an introduction. “It won’t go away when an economic recovery occurs; in fact ... it may get worse.”
Anyone who reads the 16 articles would be hard-pressed to disagree. Among the sobering evidence is a survey conducted by business school professors Michael Porter and Jan Rivkin. They asked Harvard Business School graduates — including many chief executives and senior managers of major global businesses — about location decisions involving the United States. In only 32 percent of the cases was an American site chosen.
“Though U.S. multinational companies continue to locate the bulk of their activity at home, they have been expanding faster abroad,” write economists Matthew Slaughter of Dartmouth’s Tuck School of Business and Laura D’Andrea Tyson of the Haas School of Business at the University of California, Berkeley. Here’s what happened from 1989 to 2009: Foreign sales of these U.S. multinationals rose from 24.5 percent of their total to 35 percent; overseas employment jumped from 21.4 percent of their total to 32.3 percent; and research and development conducted abroad went from 9 percent to 15.6 percent of their total.
What explains America’s fading allure? To some extent, it’s the benign consequence of a wealthier world. If you’re Wal-Mart, Marriott or Dell, you can’t serve customers in China, Mexico and Brazil from the United States. You need local stores, hotels and distribution centers. This accounts for some of U.S. multinationals’ overseas expansion. But the shift also reflects low wage rates (cited by 70 percent of respondents in the Porter-Rivkin study) and the perceived better quality of foreign workers (cited by 30 percent).
How much manufacturing has moved offshore is unclear. A lot, but probably less than most people think. An article by economists Robert Lawrence of Harvard and Lawrence Edwards of the University of Cape Town estimates that factory jobs would have been 2.9 million higher in 2010 if the United States had no trade deficit in manufactured products. However, there’s a catch: Although the number of jobs would be higher, they would still be declining over time. Improved manufacturing technology means that fewer workers produce more goods.
What’s missing in the Harvard report is originality. The diagnosis leads to the usual solutions: better schools; more emphasis on science and math; simpler taxes; less burdensome regulations; more transparent financial markets; more sensible executive pay. Few suggestions venture beyond the mainstream. There are other possibilities: Perhaps, for example, we should abandon the idea of everyone going to college and, instead, revive vocational education.
Somehow, we need to adapt to a changed competitive landscape. Once, this country’s vastness created a unique benefit to U.S. firms: a mass market that fostered huge economies of scale. This advantage is gone. Falling trade barriers, lower transportation costs and the emergence of China and the European Union have created multiple mass markets. Similarly, we no longer boast the best-educated labor force; many countries have caught up.
But not all trend lines are negative. The United States has more oil and natural gas than experts suspected 10 years ago. There’s already a drilling boom, and cheaper natural gas — a primary fuel for many industries — may spur manufacturing. Similarly, U.S. farms face a bright future in a world clamoring for food. Past episodes of competitiveness anxiety have usually had good results. They’ve forced businesses, workers and government to reconsider standard assumptions and practices. What’s at issue today is whether we can still renew ourselves.