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Restoring American Competitiveness - Harvard Business Review

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R esto ri g A m eri n can C o m p eti ven ess ti
by G ary P . P i o and W i l C . S h i san ly h
As the United States strives to recover from the current economic crisis, it’s going to discover an unpleasant fact: The competitiveness problem of the 1980s and early 1990s didn’t really go away. It was just hidden during the bubble years behind a mirage of prosperity, and all the while the country’s industrial base continued to erode. Now, the U.S. will finally have to take the problem seriously. Rebuilding its wealth-generating machine—that is, restoring the ability of enterprises to develop and manufacture high-technology products in America—is the only way the country can hope to pay down its enormous deficits and maintain, let alone raise, its citizens’ standard of living. Reversing the decline in competitiveness will require two drastic changes: • The government must alter the way it supports both basic and applied scientific research to promote the kind of broad collaboration of business, academia, and government needed to tackle society’s big problems. • Corporate management must overhaul its practices and governance structures so they no longer exaggerate the payoffs and discount the dangers of outsourcing production and cutting investments in R&D. T h e C om peti veness P ro b l ti em For much of the past two decades, the stunning growth of the U.S. economy was widely hailed in academic, business, and government circles as evidence that America’s competitiveness problem was as obsolete as leg warmers and Jazzercise. The data suggest otherwise. Beginning in 2000, the country’s trade balance in high-technology products—historically a bastion of U.S. strength—began to decrease. By 2002, it turned negative for the first time and continued to decline through 2007. (See the exhibit “A Sign of Trouble.”)

Even more worrisome, average real weekly wages have essentially remained flat since 1980, meaning that the U.S. economy has been unable to provide a rising standard of living for the majority of its people. This undoubtedly is one reason Americans have attempted to borrow their way to prosperity, a strategy that clearly is no longer tenable. What, then, was actually happening when it seemed things were going so well? Companies operating in the U.S. were steadily outsourcing development and manufacturing work to specialists abroad and cutting their spending on basic research. In making their decisions to outsource, executives were heeding the advice du jour of business gurus and Wall Street: Focus on your core competencies, off-load your low-value-added activities, and redeploy the savings to innovation, the true source of your competitive advantage. But in reality, the outsourcing has not stopped with low-value tasks like simple assembly or circuit-

http://hbr.org/2009/07/restoring-american-competitiveness/ar/pr

10/27/2012

Restoring American Competitiveness - Harvard Business Review

Page 2 of 11

board stuffing. Sophisticated engineering and manufacturing capabilities that underpin innovation in a wide range of products have been rapidly leaving too. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented. Among these are such critical components as light-emitting diodes for the next generation of energy-efficient illumination; advanced displays for mobile phones and new consumer electronics products like Amazon’s Kindle e-reader; the batteries that power electric and hybrid cars; flat-panel displays for TVs, computers, and handheld devices; and many of the carbon fiber components for Boeing’s new 787 D ream l n er. i Why Amazon’s Kindle 2 Can’t Be Made in the U.S. The Kindle 2 e-reader was designed by Amazon’s Lab126 unit in California. The vast majority of its components are made in China,...
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