THE DEANS OF BUSINESS

Breaking even in a global economy

Posted March 04, 2011, at 11:35 p.m.

People often blame globalization, or the increased linking of production and markets across different countries, for destroying jobs in the developed world, including the United States. Indeed, millions of jobs have been outsourced over the last 20 to 30 years to China, India, Mexico and a whole host of other emerging economies. Activists bemoan the weak labor and environmental standards in host countries, and politicians proclaim they fight it to keep jobs in the United States.

Is globalization really bad?

In general, it is not. Its net economic effect is positive, especially for developing countries, but also for the developed market economies. While those who lose their jobs suffer, at least in the short term, consumers benefit from lower prices, and investors from higher profits. Certain jobs are eliminated in the developed world, but many others are created in their place. This is because the outsourcing of factories creates demand in the developing world for machines and cutting-edge technology. Also, as living standards there improve, a growing middle class spends more on consumer goods and services.

Can globalization be stopped?

No. It has been generally accelerating since World War II and is here to stay. World competition will only intensify: There are millions and maybe even hundreds of millions of qualified people in countries such as India, China and Brazil, who are willing to work for a fraction of the U.S. pay. And while in the past, outsourcing was primarily a threat for routine jobs in manufacturing, now it puts services at risk too, and not only call centers, but even medicine (an X-ray can be read by an Indian doctor in seconds) and education (you can get a tutor for your teenager by videoconferencing from the other side of the world).

How can the United States compete against the low-cost advantage of the developing world?

The major competitive advantage of the United States is the ability to innovate. Our country remains the leader in developing new products and know-how, from computers to the Internet to biotechnology to instrumentation to energy. We lead in science, and our universities are envied overseas. Consistently, we have been able to develop and offer commercially viable innovations that the rest of the world values and adopts. The ability to generate innovation is supported by our free market system, the legal protection of private property, and the available infrastructure to support entrepreneurship (such as available funding through grants and venture capital).

However, this competitive advantage should not be taken for granted: It can erode if education starts slipping and can no longer produce graduates with the requisite technological expertise, or if other countries catch up in technology and institutional infrastructure. All these shifts have been happening to varying degrees. For instance, the United States ranks around the middle of the Organization for Economic Cooperation and Development countries in educational achievement and is indeed trailing the average in math. Also, the United States is slipping in competitiveness, from leading the World Economic Forum’s ranking until a couple of years ago to fourth now, while China is climbing up, albeit still at a distant No. 27.

Does globalization matter for Maine?

It matters a lot. On the one hand, much of the traditional manufacturing has left the state, in part because of globalization. On the other hand, however, some medium- and small-sized enterprises have thrived on the open borders and the new market possibilities that globalization brings. Again, the factor which defines the benefits of globalization for the U.S. is the ability to innovate. Despite successes by individual companies, Maine as a whole has been less than successful to date in capitalizing on innovation. The trouble is that innovation is not distributed uniformly across the country. Instead, it is clustered in certain geographic areas, for example information technology in Silicon Valley and around Seattle, life sciences around Boston and in the Research Triangle in North Carolina, semiconductors around Dallas-Fort Worth, medical devices in Minnesota, aerospace around Phoenix, etc. Thus areas with such high-tech clusters benefit disproportionately from globalization opportunities, while those without such specializations are at disadvantage.

What should we do in Maine?

State government, companies, universities, and economic development agencies should emphasize innovation as a cornerstone of the state’s future competitiveness. Sensible steps include:

  1. Focus on STEM areas (sciences, technology, engineering and math) in higher and K-12 education.
  2. Promote innovation in the curriculum through initiatives such as the Student Innovation Center at the University of Maine. Encourage networking between inventors and entrepreneurs with business expertise to improve economic development.
  3. Make the business climate friendly to entrepreneurially minded inventors.
  4. Target sectors in which Maine has good positions, such as wood composites, marine technology and aquaculture, and clean energy, and develop economic policies to encourage innovation and build a high-tech cluster around them.

In the era of globalization, sound, business-friendly policies are called for more than ever. The winners would have markets throughout the whole world. Slipping further back should not be an option.

Ivan Manev, an accomplished scholar in international business and entrepreneurship, joined the faculty of the University of Maine in 1997 and serves as dean of the Maine Business School.

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