This essay is based upon the article by Gary P. Pisano and
Willy C. Shih, “Restoring American Competitiveness.” Summarize the article by answering the
following questions:
·
Introduction: What is the name of the article
and who wrote it?
·
What is the key problem expressed in the
article?
·
What is/are the causes of the problem?
o
Provide a brief history
o
Explain the relationships between the various
contributing factors to the problem
o
Describe the outcomes resulting from these
factors
·
What are the proposed solutions to the
problem? Explain how these actions will
resolve the situation.
Review the points discussed in class to include some of
these in your summary. To facilitate your conclusion, consider whether there
has been progress in resolving the problem, what the current data regarding
this issue show.
Remember – provide an accurate summary; do not just state
your reaction to the article or what you believe!
GLOBAL
COMPETITIVENESS
NEW WORLD
in the
SPECIAL ISSUE
Lloyd Miller Restoring
American
Competitiveness
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 fi nally 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 defi cits 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 scientifi c research to promote the kind of broad collabo-
Decades of outsourcing manufacturing has left U.S. industry without the
means to invent the next generation of high-tech products that are key to
rebuilding its economy. | by Gary P. Pisano and Willy C. Shih
hbr.org | July–August 2009 | Harvard Business Review 115
116 Harvard Business Review | July–August 2009 | hbr.org
GLOBAL COMPETITIVENESS in the NEW WORLD.
ration 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 payoff s and discount the
dangers of outsourcing production and cutting
investments in R&D.
The Competitiveness
Problem
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 hightechnology
products – historically
a bastion of U.S. strength – began
to decrease. By 2002, it turned
negative for the fi rst time and
continued to decline through
2007. (See the exhibit “A Sign of
Trouble.”)
Even more worrisome, average
real weekly wages have essentially
remained fl at 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 lowvalue
tasks like simple assembly or circuit-board
stuffi ng. 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-effi cient 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; fl at-panel
displays for TVs, computers, and handheld devices;
and many of the carbon fi ber components for
Boeing’s new 787 Dreamliner.
A similar trend is undermining the U.S. soft ware
industry. Initially, companies outsourced only relatively
mundane code-writing projects to Indian
fi rms to lower soft ware-development costs. Over
time, as Indian companies have developed their
own soft ware-engineering capabilities, they have
been able to win more complex work, like developing
architectural specifi cations and writing sophisticated
fi rmware and device drivers.
Equally alarming is the U.S.’s diminished capacity
to create new high-tech products. For example,
nearly every U.S. brand of notebook computer, except
Apple, is now designed in Asia, and the same
is true for most cell phones and many other handheld
electronic devices.
We have heard managers rationalize outsourcing
decisions by saying that they can always reverse
course if the quality of the work isn’t good enough,
if the anticipated cost savings prove ephemeral, if
supply-chain complexities or risks are too great, or
if the work turns out to be more strategic than they
originally thought. But this logic overlooks the lasting
damage that outsourcing infl icts not only on
a fi rm’s own capabilities but also on those of other
companies that serve its industry, including suppliers
of advanced materials, tools, production equipment,
and components. We call these collective
capabilities the industrial commons.
The World Is Not Flat
Centuries ago, “the commons” referred to the land
where animals belonging to people in the community
would graze. As the name implies, the
commons did not belong to any one farmer. All
were better off for having access to it. Industries
also have commons. A foundation for innovation
and competitiveness, a commons can include R&D
know-how, advanced process development and
» Thanks to destructive outsourcing
and faltering investment in
research, the U.S. has lost or is on
the verge of losing its ability to
develop and manufacture a slew
of high-tech products.
» To address this crisis, government
and business must work
together to rebuild the country’s
industrial commons – the collective
R&D, engineering, and
manufacturing capabilities that
sustain innovation. Both must
step up their funding of research
and encourage collaborative R&D
initiatives to tackle society’s big
problems. And companies must
overhaul the management practices
and governance structures
that have caused them to make
destructive outsourcing decisions.
» Only by rejuvenating its hightech
sector can the U.S. hope to
return to the path of sustained
growth needed to pay down its
huge defi cits and raise its citizens’
standard of living.
IN BRIEF
IDEA
hbr.org | July–August 2009 | Harvard Business Review 117
engineering skills, and manufacturing
competencies related to a
specifi c technology.
Such resources may be embedded
in a large number of companies
and universities. Software
knowledge and skills, for instance,
are vital to an extremely wide
range of industries (machine tools,
medical devices, earth-moving
equipment, automobiles, aircraft ,
computers, consumer electronics, defense). Similarly,
capabilities related to thin-fi lm deposition
processes are crucial to sophisticated optics; to
such electronic products as semiconductors and
disk drives; and to industrial tools, packaging, solar
panels, and advanced displays. The knowledge,
skills, and equipment related to the development
and production of advanced materials are a commons
for such diverse industries as aerospace, automobiles,
medical devices, and consumer products.
Biotechnology is a commons not just for drugs but
also for agriculture and the emerging alternativefuels
industry.
More oft en than not, a particular industrial commons
will be geographically rooted. For instance,
northern Italy is home to a design commons
that feeds, and is fed by, several design-intensive
businesses, including automobiles, furniture, apparel,
and household products. The mechanicalengineering
commons in Germany is tightly coupled
to the country’s automobile and machine tool
industries. The geographic character of industrial
commons helps to explain why companies in certain
industries tend to cluster in particular regions –
a phenomenon noted by Michael Porter and other
scholars. Being geographically close to the commons
is a source of competitive advantage.
What about the popular notion that distance
and location no longer matter, or, as Thomas Friedman
put it, “The world is fl at”? While we agree
with the general idea that geographic boundaries
to trade are falling and that the global economy
is more intertwined than ever, the evidence suggests
that when it comes to knowledge, distance
does matter. Detailed empirical work on knowledge
fl ows among inventors by our HBS colleague
Lee Fleming shows that proximity is crucial. An
engineer in Silicon Valley, for instance, is more
likely to exchange ideas with other engineers in
Silicon Valley than with engineers in Boston. When
you think about it, this is not surprising, given that
much technical knowledge, even in hard sciences,
is highly tacit and therefore far more eff ectively
transmitted face-to-face. Other studies show that
the main way knowledge spreads from company to
company is when people switch jobs. And even in
America’s relatively mobile society, it turns out that
the vast majority of job hopping is local.
This helps to explain why commons persist in
specifi c locations in an era when huge amounts
of scientifi c data can be accessed easily from anywhere.
For example, even though virtually all the
raw data from the Human Genome Project,
the decade-plus eff ort to map the human
genome, is available electronically
all over the world, the drug research it
has generated is heavily concentrated
in the Boston, San Diego, and San Francisco
areas.
Once an industrial commons has
taken root in a region, a powerful virtuous
cycle feeds its growth. Experts fl ock
there because that’s where the jobs and
knowledge networks are. Firms do the
same to tap the talent pool, stay abreast
of advances, and be near suppliers and
potential partners. The Swiss pharmaceutical
giant Novartis, for instance, chose to move
its research headquarters from Basel, Switzerland,
to Cambridge, Massachusetts, to be close to universities
and research institutes that are global leaders
in biosciences and the hundreds of biotech fi rms
already in the area. And its presence, in turn, has
increased the Boston area’s pull on yet more fi rms
and individuals. These dynamics make it diffi cult
for other regions that do not yet have a vibrant biotechnology
commons to attract biotech companies,
even with generous incentives.
Our research on the semiconductor, electronics,
pharmaceutical, and biotech industries has found
that commons are even more important to countries’
and companies’ prosperity than is generally
believed. That’s because innovation in one business
can spawn whole new industries.
2000 2001 2002 2003 2004 2005 2006 2007
27.8
4.8
−53.6
−17.5
−27.4
−37.0
−44.4
−38.4
A Sign of
Trouble
The U.S. trade defi cit in
high-tech products ($ billions)
Note: Sectors included are:
biotechnology, life sciences,
optoelectronics, information
and communications,
electronics, fl exible manufacturing,
advanced materials,
aerospace, weapons,
nuclear technology,
and computer software.
Source: National Science
Board, “Science and
Engineering Indicators
2008”
Nearly every U.S. brand of laptop and
cell phone is not only manufactured
but designed in Asia.
118 Harvard Business Review | July–August 2009 | hbr.org
GLOBAL COMPETITIVENESS in the NEW WORLD.
Going…Going…Gone
Semiconductors
ALREADY LOST
“Fabless” chips
AT RISK
DRAMs
Flash memory chips
Lighting
ALREADY LOST
Compact fl uorescent
lighting
AT RISK
LEDs for solid-state
lighting, signs, indicators,
and backlights
Electronic
displays
ALREADY LOST
LCDs for monitors, TVs,
and handheld devices
like mobile phones
Electrophoretic
displays for Amazon’s
Kindle e-reader and
electronic signs
AT RISK
Next-generation “electronic
paper” displays
for portable devices
like e-readers, retail
signs, and advertising
displays
Energy storage
and green energy
production
ALREADY LOST
Lithium-ion, lithium
polymer, and NiMH batteries
for cell phones,
portable consumer
electronics, laptops,
and power tools
Advanced rechargeable
batteries (NiMH, Li-ion)
for hybrid vehicles
Crystalline and polycrystalline
silicon solar
cells, inverters, and
power semiconductors
for solar panels
AT RISK
Thin-fi lm solar cells
(the newest solarpower
technology)
Computing and
communications
ALREADY LOST
Desktop, notebook,
and netbook PCs
Low-end servers
Hard disk drives
Consumer-networking
gear such as routers,
access points, and
home set-top boxes
AT RISK
Blade servers,
midrange servers
Mobile handsets
Optical-communication
components
Core network
equipment
Advanced
materials
ALREADY LOST
Advanced composites
used in sporting goods
and other consumer
gear
Advanced ceramics
Integrated circuit
packaging
AT RISK
Carbon composite
components for aerospace
and wind energy
applications
A historical example is the birth of the modern
pharmaceutical industry. It began in the late 1800s
in Switzerland and Germany because the earliest
drugs were based on synthetic dye chemistry and
the two countries were home to large chemical
companies with strong research labs and deep
technical expertise in synthetic dye production.
A current example is the solar panel industry,
which is booming in Asian countries such as India,
Japan, Taiwan, Korea, and especially China. India
owes its position to Moser Baer, a leading manufacturer
of optical storage media, which used its
capabilities in thin-fi lm coating and manufacturing
to move into solar panels. China’s, Japan’s, Taiwan’s
and Korea’s successes stem, at least in part,
from their deep expertise in processing ultrapure
crystalline silicon into wafers and applying thin
fi lms of silicon onto large glass sheets – capabilities
developed by their semiconductor foundries and
their manufacturers of fl at-panel displays. (China
has another advantage: It is the production base for
the mundane components like power semiconductors,
controllers, and housings that are needed to
produce full panels.)
Although the U.S. still produces about 14% of
the world’s photovoltaic cells, it no longer is a
signifi cant player in crystalline silicon–based solar
panels, the prevailing technology. Some U.S.
manufacturers such as Tempe, Arizona–based
First Solar are trying to become players in thinfi
lm solar, the newest technology. But the decline
of the domestic infrastructure in thin-fi lm deposition
and electronics manufacturing puts them at
a big disadvantage.
Many high-tech products can no longer be manufactured
in the United States because critical knowledge, skills,
and suppliers of advanced materials, tools, production
equipment, and components have been lost through
outsourcing. Many other products are on the verge of
the same fate.
hbr.org | July–August 2009 | Harvard Business Review 119
Erosion of the Commons
When a major player in an industry outsources an
activity, cuts funding for long-term research, and
gains a short-term cost advantage, competitive
pressure oft en forces rivals to follow suit. As potential
employment opportunities shrink, experienced
people change jobs, moving out of the region, and
students shy away from entering the fi eld. Eventually,
the commons loses a critical mass of work,
skills, and scientifi c knowledge and can no longer
support providers of upstream and downstream
activities, which are, in their turn, forced to move
away as well. This is what happened to the industrial
commons serving a number of high-tech sectors
in the United States.
Consider the commons supporting the personal
computer industry in the United States. In the late
1980s, original equipment manufacturers in the
United States initially began to outsource the assembly
of printed circuit boards to specialist contractors
in South Korea, Taiwan, and China. These
specialists off ered signifi cant cost savings, partly
because of their location in low-wage countries
and partly because of the economies of scale they
achieved by serving lots of OEMs. The OEMs understandably
didn’t see the move as strategically risky
because they held the critical intellectual property
and design skills (they provided the contractors
with detailed specifi cations) and because manufacturing
the boards wasn’t a source of competitive
advantage.
Ferocious competition and razor-thin margins,
however, prompted many of the contractors, particularly
those in Taiwan, to seek higher-valueadded
work. They persuaded the OEMs to allow
them to assemble a greater share of the overall
product, and from there they moved into complete
product assembly. Given that many of the components
were also sourced from Asia, a logical next
step was to take over the management of the supply
chain from their American customers.
Then came design. Initially, these fi rms took over
design-engineering tasks on a contract basis. The
OEM typically would still provide the high-level
conceptual design and specifi cations, contracting
with the Asian supplier to do the detailed engineering.
Eventually, though, the suppliers took over
those activities as well for products like notebooks,
which require designers to interact frequently with
manufacturing. The result: These “original design
manufacturers,” as they describe themselves, ended
up designing and manufacturing virtually all Windows
notebook PCs.
The standout exception is Apple, whose design
capability in the U.S. for both notebook computers
and consumer electronics has been critical to its
success. Although Apple has outsourced the manufacture
of its notebooks, iPod, and iPhone, it has
been able to preserve a fi rst-rate design capability
in the States so far by remaining deeply involved in
the selection of components, in industrial design,
in soft ware development, and in the articulation of
the concept of its products and how they address
users’ needs. But for how long can it continue to
do so? Given the perennially ruthless competition
Apple faces and the continuing migration of design
capabilities away from the U.S. to Asia, Apple’s
challenges promise to increase.
Aft er a contractor has evolved into an ODM,
there’s little to prevent it from launching its own
brand and becoming a competitor to its OEM customers.
That’s exactly what happened in consumer
electronics, where U.S. pioneers like RCA and Sylvania
in television manufacturing ultimately became
nothing more than brands that were traded like
playing cards among Asian manufacturers. Most
U.S. companies in the notebook PC business now
seem headed for the same fate.
The electronics-outsourcing story exposes several
pieces of conventional wisdom as myths. One
is the popular belief that an advanced economy
like the United States no longer needs to manufacture
and can thrive exclusively as a hub for highvalue-
added design and innovation. In reality, there
are relatively few high-tech industries where the
manufacturing process is not a factor in developing
new – especially, radically new – products.
That’s because in most of these industries product
and process innovation are intertwined. So
the decline of manufacturing in a region sets off a
chain reaction. Once manufacturing is outsourced,
process-engineering expertise can’t be maintained,
since it depends on daily interactions with manufacturing.
Without process-engineering capabilities,
companies fi nd it increasingly diffi cult to conduct
advanced research on next-generation process technologies.
Without the ability to develop such new
processes, they fi nd they can no longer develop
new products. In the long term, then, an economy
that lacks an infrastructure for advanced process
engineering and manufacturing will lose its ability
to innovate.
Another myth is the prevailing view that the migration
of mature manufacturing industries away
from developed countries like the United States is
just part of a healthy, natural process of economic
120 Harvard Business Review | July–August 2009 | hbr.org
GLOBAL COMPETITIVENESS in the NEW WORLD.
evolution that allows resources to be redeployed
to new, higher-potential businesses. We certainly
agree that a dynamic global economy leads to shift -
ing patterns of production and trade. We also agree
that shedding certain activities that no longer provide
opportunities for innovation and redeploying
resources to others can spur economic growth and
raise living standards. If that hadn’t occurred in the
U.S., its economy would still be largely agrarian
and probably quite poor. But this logic has been
taken to a dangerous extreme.
It ignores the fact that new cutting-edge hightech
products oft en depend in some critical way
on the commons of a mature industry. Lose that
commons, and you lose the opportunity to be the
home of the hot new businesses of tomorrow. We
mentioned one example earlier: The migration of
semiconductor foundries to Asia, which caused a
sharp decline in silicon-processing and thin-fi lmdeposition
capabilities in the U.S., greatly reducing,
if not eliminating, its chances of becoming a major
player in solar panels.
Another example is batteries for hybrid and
electric vehicles like GM’s forthcoming Chevy
Volt. The Volt’s lithium-ion battery – the highestvalue-
added component in the car – will be manufactured
in South Korea. GM had no choice but
to look abroad. Rechargeable-battery manufacturing
left the U.S. long ago. Why? Most innovation
in batteries in recent decades has been driven by
the increasing demands of consumer electronics
products for more and more power in smaller and
smaller packages. When U.S. companies largely
abandoned the “mature” consumer electronics
business, the locus of R&D and manufacturing –
not just for the laptops, cell phones, and such but
also for the batteries that power them – shift ed
to Asia. Yes, there are some eff orts (including one
by General Electric–backed A123Systems) to resurrect
rechargeable-battery manufacturing in the
United States. But given the state of the U.S. commons
relative to Asia’s, players like A123 face an
uphill battle.
So do U.S. automakers. Japan’s and South Korea’s
strong battery and car industries give them
an advantage over U.S. companies in developing
electric and hybrid cars. And, as the New York Times
reported in April, China’s leaders want to make
their country one of the world’s top producers of
hybrid and all-electric cars within three years. Chinese
battery maker BYD has announced plans to
begin selling hybrid and electric cars in the United
States and Europe in 2011.
Restoring the Commons
During the 1980s and early 1990s, when outsourcing
by U.S. fi rms and inroads by Japanese companies
last raised concerns about U.S. competitiveness,
there was heated debate about the remedies.
Some called for Washington to follow the lead of
Japan’s Ministry of International Trade and Industry
and provide special support for important industries.
Others exhorted American companies to
stop outsourcing for patriotic reasons. Neither of
these recommendations is a realistic way to preserve
U.S. competitiveness and jobs.
As Robert Reich astutely pointed out nearly 20
years ago in his provocative article “Who Is Us?”
(HBR, January–February 1990), the national identities
of large corporations have become meaningless.
Given the realities of global competition and
capital market pressures, it is too much to expect
executives to demonstrate an allegiance to a particular
location merely because it is their company’s
nation of origin. Nor does it make sense for Washington
to favor multinationals that happen to be
headquartered in the United States and discriminate
against foreign-based corporations that run
large operations in the country; both sets of companies
are important contributors to the American
economy.
That said, it is in the interests of Washington
and all companies that operate in the U.S. to work
together to reinvigorate the country’s industrial
commons. Washington’s interest is obvious: to revitalize
the all-important high-tech sector. Why
should companies care? America is an important
market. If a company, regardless of its nationality,
is a player there, building or sustaining local capabilities
is in its interest. Beyond that, a commons,
regardless of where in the world it’s located, can be
a source of long-term competitive advantage for all
its members. So whether you’re the U.S. fi rm IBM
with a major research laboratory in Switzerland
or the Swiss company Novartis operating in the
biotech commons in the Boston area, sacrifi cing
such a commons for short-term cost benefi ts is a
risky proposition.
We don’t claim to have an elaborate master plan
for repairing the U.S. commons. But especially at a
time when Washington’s eff orts to save the banks
and the U.S. auto industry are reigniting the industrial
policy debate, we think it would be helpful to
challenge some widely held perceptions about government
involvement, suggest ways to learn from
programs that worked in the past, and off er some
ideas on what management needs to do.
hbr.org | July–August 2009 | Harvard Business Review 121
What Government Should Do
All too oft en, the debate about what role Washington
should play in supporting innovation degenerates
into a battle between two extremes: the laissezfaire
camp and advocates of centralized industrial
policy. Listening to them, you’d think there could
be no middle ground.
History says otherwise. While the U.S. has perhaps
the most market-oriented economy in the
world, federal and, to a lesser extent, state governments
have long played a central role in supporting
technological innovation. In the early twentieth century,
the agricultural experiment stations created
by state governments were instrumental in spawning
innovations like hybrid corn that enormously
boosted agricultural productivity. In the 1950s and
1960s, the Department of Defense spurred innovation
in semiconductors through procurement and
targeted research programs. In the 1960s through
the 1980s, DOD- and NASA-sponsored research contributed
heavily to building American
science and engineering capabilities in
chip design, aeronautics, and satellite
communications.
Not all government programs have
been successful, of course. The supersonic
transport program of the 1960s
and the thermal solar and synthetic fuels
initiatives in the late 1970s and 1980s
are examples of failures. In general, government
has been eff ective in its support
for innovation when it has acted
as a customer seeking a solution to a
concrete, compelling need or when it
has been a patron of basic or applied research
that has the potential for broad
application. Conversely, its support of
innovation has generally failed when it
has not had a user’s stake in the outcome
or when it has bet on unproven
technical solutions that required extensive
knowledge of commercial applications
or market realities that it lacked.
With this in mind, we off er three broad
suggestions for what Washington should
do to rebuild the industrial commons:
Reverse the slide in the funding of
basic and applied science. Innovative
activities can be grouped into three
broad categories, whose boundaries are admittedly
a bit blurry. Basic scientifi c research seeks to deepen
our understanding of fi rst principles, such as the genetic
mechanisms that regulate how cells grow and
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, Taiwan, and South Korea, and it is assembled in China,
a center for such work.
Flex circuit
connector
MADE IN CHINA
REASON U.S. supplier
base eroded as the
manufacture of consumer
electronics and
computers migrated
to Asia.
Wireless card
MADE IN SOUTH KOREA
REASON South Korea
used its infrastructure for
designing and manufacturing
consumer electronics
to become a center
for making mobile phone
components and handsets,
especially products
using CDMA technology,
which is widely used in
South Korea.
Highly polished
injectionmolded
case
MADE IN CHINA
REASON U.S. supplier
base eroded as the
manufacture of toys,
consumer electronics,
and computers
migrated to Asia.
Lithium polymer
battery
MADE IN CHINA
REASON Battery development
and manufacturing
migrated from the
U.S. to Asia along with
the development and
manufacture of consumer
electronics and
notebook computers.
Photo courtesy of ifi xit.com
Controller board
MADE IN CHINA
REASON U.S. companies
long ago outsourced
the manufacture
of printed circuit
boards to Asia, where
there is now a huge
supplier base.
Electrophoretic display
MADE IN TAIWAN
REASON Its manufacture
requires expertise developed
from producing fl at-panel LCDs,
which migrated to Asia with
semiconductor manufacturing.
122 Harvard Business Review | July–August 2009 | hbr.org
GLOBAL COMPETITIVENESS in the NEW WORLD.
divide. Applied research seeks to extend that knowledge
to answer more specifi c questions about realworld
problems, like which particular genes are
involved in cancer. And commercial R&D focuses
on fi nding marketable solutions – for example, discovering,
developing, and testing a drug to treat
a certain type of cancer. We can think of applied
research as the bridge between basic research and
commercial R&D.
Washington has long been the main
supporter of basic research in the U.S.
and a major provider of funding for
applied research. No country, in fact,
has invested more in basic research
since the end of World War II than the
United States, and three-quarters of
the funding has come from the federal
government. Through such agencies
as the National Science Foundation
and the National Institutes of Health,
Washington has spent an infl ationadjusted
total of $1.2 trillion since
1953. By funding knowledge, supporting
skilled scientists and technical
personnel, and underwriting vibrant
research universities that have acted
as magnets for the laboratories
of private enterprises,
this support has
been a vital stimulus for
commercial innovation
in the United States. (We
can’t emphasize enough
the importance of worldclass
universities in
building a commons. Silicon
Valley would never
have become what it is
without the presence of
universities like Stanford
and Berkeley.)
But while U.S. government funding for basic scientifi
c research, adjusted for infl ation, grew at a
healthy pace through the 1990s, it began to drop
in 2003 and has been fl at or declining slightly since
then. That’s a worrisome trend.
Government funding for applied research has
declined even more sharply. Historically, federal
funding was split relatively evenly between basic
and applied research, refl ecting their equal importance.
However, since around 1990, that has
no longer been the case: Government funding for
applied research declined 40% from 1990 to 1998.
Even though it then rebounded, it’s fl attened in recent
years and is still way behind funding for basic
research (see the exhibit, “A Flagging Commitment
to Scientifi c Research”).
This is troubling because government support
for applied research has been just as important
to U.S. industrial competitiveness as its support of
basic research. Government-sponsored endeavors
that have made a huge diff erence in the past three
decades include DARPA’s VLSI chip development
program and Strategic Computing Initiative; the
DOD’s and NASA’s support of composite materials
work; the NSF’s funding of supercomputers and of
NSFNET (an important contributor to the internet);
and the DOD’s support of the Global Positioning
System, to mention a handful.
In most instances, these programs required
a long-term commitment. Consider the internet,
which sprang from a decades-long applied research
eff ort that began in the late 1960s, when the federal
government’s Advanced Research Projects Agency,
or ARPA (later renamed DARPA when it became
part of the Department of Defense), issued its fi rst
request for proposals to build a four-site computer
network. Creating the internet involved little or
no new basic science. It did, however, require signifi
cant investments in applied research on packet
switching, communications protocols, and networking
infrastructure – investments that the private
sector probably would never have made because
the time horizons were too long and the payoff s
too diffi cult for any one company to capture. The
way the project spurred collaboration among researchers
in an array of companies and universities
catalyzed the growth of basic networking-related
capabilities, led to innovations such as the multiprotocol
router, and resulted in the creation of
a number of companies, including Cisco Systems,
Juniper Networks, and Extreme Networks.
The U.S. cannot aff ord to be complacent. Governments
in other countries like Singapore, China,
Korea, and the United Arab Emirates are intent on
fostering growth or building new world-class research
universities. They are also investing heavily
in applied science, hoping to replicate the success
of Taiwan, whose Industrial Technology Research
Institute built the foundations for that country’s
highly successful semiconductor industry.
Focus resources on solving “grand challenge
problems.” Climate change, a dependence on
expensive dirty hydrocarbons, a lack of potable
water, the ravages of diseases – these are some of
the grand problems plaguing the world that will
1986 1990 1994 1998 2002 $11.4B
$31.2B
2006
$21.4B
2006
$11.5B
1980
Basic
Applied
A Flagging
Commitment
to Scientifi c
Research
The federal government has
been the dominant provider
of funding for basic research
in the United States and a
major underwriter of applied
research. But in recent years,
the gap between the two
has widened. This disparity
could undermine the competitiveness
of the country’s
high-tech sector over the
long term.
U.S. federal government funding
for research (in constant 2000
dollars)
Source: National Science Board, “Science and
Engineering Indicators 2008”
hbr.org | July–August 2009 | Harvard Business Review 123
require fundamental advances in knowledge to
solve. Governments are oft en uniquely positioned
to mobilize and coordinate the eff orts of the numerous
organizations needed to confront these
huge challenges. At its peak, for instance, the ARPA
networking initiative involved dozens of private
companies and universities. Under the purview of
the Department of Energy and the NIH, the Human
Genome Project involved a similar
number of laboratories from around
the world.
Such government-sponsored collaborative
eff orts have two benefi ts. First,
they leverage resources: A dollar spent
on research goes much further when
the fruits of that spending are shared
broadly. Second, they help to create networks
of collaborators that cut across
academia and industry, which can
provide a foundation for an industrial
commons.
Unfortunately, the granting process for much
of the scientifi c funding in the U.S. is biased toward
lower-risk, incremental projects (“normal
science”) that fi t neatly into established academic
fi elds and is weighted against higher-risk, highreturn
research that spans disciplines. To address
this bias, the peer review process that such agencies
as the NSF and NIH employ to award grants
must be reformed. Currently, panels of academic
scientists, each oft en composed of individuals from
within a single discipline, make these decisions.
Instead, groups comprising experts in a range
of disciplines from the academic, business, and
policy-making communities should be choosing
the problems and deciding how best to structure
basic and applied research programs to seek solutions.
It is especially important for government
policy makers involved in these decisions to have
strong scientifi c backgrounds (as they do in Taiwan
and Singapore).
Let ailing giants die. Throughout the world,
governments have provided signifi cant fi nancial
support to industrial companies struck by the
economic crisis. As we were writing this article,
Congress and the Obama administration were
considering whether to give teetering GM more
aid or let it go into bankruptcy proceedings. We
oppose more support. There are rare instances
when companies cannot be allowed to fail because
of vital national interests (national security)
or systemic eff ects (the impact that the failure of
a big player like AIG or Citigroup would have on
the interconnected fi nancial system). Auto companies
don’t fall into either category.
Advocates of aid to the auto companies have
argued that, in addition to preserving the huge
number of jobs at those enterprises, a key reason
to continue to prop them up is to preserve the supplier
base. Lose these giants, they say, and you will
lose feeder industries (machine tools, advanced
metal fabrication, molding, and so on) crucial to
the country’s industrial base. We disagree and for
two reasons believe that the potential impact on
the U.S. commons has been exaggerated.
First, companies that are failing as a result of
poor management or misguided strategy oft en
suck the vitality out of the commons in which they
participate, and government bailouts almost never
succeed in restoring such companies to full health.
Indeed, one cause of the U.S. automakers’ current
predicament is their failure to nurture a strong
industrial commons. Several studies have documented
a marked diff erence between the ways U.S.
and Japanese companies have managed their supplier
bases, for instance. Toyota has always understood
the concept of industrial commons. It treats
key suppliers as long-term partners, shares development
work with them, and sticks with them over
the long term. When a Toyota supplier is struggling,
Toyota sends in its own people to help. In
sharp contrast, U.S. auto companies have generally
treated their suppliers as adversaries. They keep
them on a tight leash. They off er them only short
contracts. They all too oft en base their purchasing
decisions largely on price. When a supplier has a
problem, the U.S. auto company’s typical response
has been to terminate the contract.
Second, the bailout debate (in both the United
States and Europe) completely ignores the global
nature of the auto business and the contribution
foreign-based companies make to the U.S. industrial
commons. Not every player in the U.S. auto-
Companies that are failing due to
poor management or misguided strategy
suck the vitality out of the commons.
124 Harvard Business Review | July–August 2009 | hbr.org
GLOBAL COMPETITIVENESS in the NEW WORLD.
manufacturing sector is a basket case. There are
plenty of healthy factories. Most of them are owned
and operated by foreign-based corporations like
Toyota, Honda, Nissan, and BMW. These companies
are contributing to the U.S. industrial commons.
If anything, Washington should encourage even
more participation in the commons by foreign
companies. An immediate case in point: the Fiat-
Chrysler deal to save Chrysler. The Italian company
has agreed to transfer its technology for producing
highly effi cient diesel engines to Chrysler in
exchange for a substantial minority stake – contributing
precisely the kind of clean technology that
the Obama administration wants the U.S. to pursue.
Ironically, some in Congress opposed the deal because
they didn’t want to use taxpayer money to
benefi t a “foreign” company. They just don’t get it.
What Businesses Must Do
Government support of basic and applied research
can fertilize the soil, but it takes private companies
willing to make long-term investments in risky
R&D to build a commons. The management challenge
is a familiar one of balancing long-term and
short-term performance. Here are six suggestions
for striking that balance:
Make capabilities the main pillar of your
strategy. Companies pour enormous amounts of
resources into marketing to build brands. But with
the exception of a few industries like soft drinks,
brands are only as good as the distinctive products
they represent. Creating and making distinctive
products requires an array of strong technical, design,
and operational capabilities. Given how demanding
and sophisticated customers throughout
the world have become, marketing cannot cover
up weak innovation for long. Apple, Intel, Corning,
Amazon, and Applied Materials are companies that
understand this. They realize that the only way to
stay ahead of competition is to maintain an innovation
advantage over the long term, and the only
way they can do that is if they invest in new, diff erentiated
capabilities.
Stop blaming Wall Street for short-term behavior.
We’ve heard it over and over again from
executives: “We’d love to build capabilities over
the long term, but Wall Street, with its relentless
pressure to produce ever-higher quarterly earnings,
won’t let us. We have no choice. We have to outsource.”
This devil-made-me-do-it defense does not
hold up.
When companies promise to increase returns
quarter aft er quarter, that’s what Wall Street expects.
But when they articulate a credible longterm
strategy and demonstrate a capacity
to execute that strategy, the capital
markets have given them the necessary
room to achieve it. In his fi rst letter to
the shareholders in the 1997 annual report,
Amazon CEO and founder Jeff Bezos
explained that his company would
take a long-term perspective in its strategy
and operating decisions. This message
has been consistently reinforced in
every subsequent letter. So short-term
investors know Amazon is not the company
for them. Sure, Amazon’s stock has
taken some hits now and then when the company
has suff ered a setback. But Bezos and his team have
understood that the stock will rebound, and they
have stayed the course.
Recognize the limits of fi nancial tools. Most
companies are wedded to highly analytical methods
for evaluating investment opportunities. Still, it
remains enormously hard to assess long-term R&D
programs with quantitative techniques – even sophisticated
ones like real-options valuation and
Monte Carlo simulations. Usually, the data, or
even reasonable estimates, are simply not available.
Nonetheless, all too oft en these tools become
the ultimate arbiter of what gets funded and what
does not. So short-term projects with more predictable
outcomes beat out the long-term investments
needed to replenish technical and operating capabilities.
Managers would serve their companies
more wisely by recognizing that informed judgment
is a better guide to making such decisions
than an analytical model loaded with arbitrary assumptions.
There is no way to take the guesswork
out of the process.
Reinvigorate basic and applied research. In
the 1980s and 1990s, corporate research laboratories
fell out of favor. They were deemed wasteful
Companies need to stop blaming
Wall Street for their short-term focus.
This devil-made-me-do-it defense
does not hold up.
hbr.org | July–August 2009 | Harvard Business Review 125
because many of their eff orts could not be linked
to the immediate business needs of their companies.
Several – including Bell Labs and Xerox PARC,
the birthplaces of many critical technologies that
underpin important industrial commons – withered,
disappeared, or were jettisoned by their corporate
parents. Their resources were redeployed to
business units.
It’s true that laboratories like PARC generated
many inventions that didn’t serve the needs of their
owners’ core businesses. (It’s widely known that Xerox
was content to let other companies commercialize
many of PARC’s inventions, like the graphical
user interface, Ethernet, and ball mouse.) But the
fact that PARC’s labs were generating inventions
that Xerox’s core copier business couldn’t use should
have told Xerox’s executives something: that there
were huge opportunities outside the core. Their inability
to read and react to those signals was the
fault of their fl awed resource-allocation processes
and strategies, not of PARC.
Of course, focused R&D that serves customers’
needs is vitally important. But so is the capacity to
explore. Recognizing this, a few companies, including
IBM and Corning, have maintained strong corporate
research capabilities and look to them to spur
the next major wave of business opportunities.
Collaborate. While we want large companies
to dedicate more resources to basic and applied research,
we’re not suggesting they return to the days
when corporate labs were largely insular places.
Rather, they should follow the lead of companies
like Corning, IBM, and Novartis, which recognize
that their scientists needn’t, and shouldn’t, go it
alone. They understand the value of the commons
as a source of research capability.
IBM’s leaders, for example, saw that the company
could no longer aff ord on its own to make the
investments required to stay on the cutting edge of
semiconductor-manufacturing processes. Accordingly,
over the past decade Big Blue has built what
it calls a “radical collaboration” model in which it
and a set of commercial partners share research capabilities
and a common manufacturing platform,
even though some of them compete downstream.
IBM calculates the value of the benefi ts it receives
from this relationship to be fi ve to 10 times the
amount it invests.
Create technology-savvy boards of directors.
To eff ectively govern a company whose competitive
advantage rests on science and technology, a
board needs to have the same feel for technology
as it has for fi nance and accounting. Boards – including
those of many American high-tech corporations
– are populated with plenty of lawyers,
fi nance and accounting experts, and CEOs from
other companies. Scientists are a very small minority.
And while many corporations have scientifi c
advisory groups, we have not yet come across one
whose board has a science or technology committee.
Regulations and good corporate governance call
for audit, compensation, nominating, governance,
fi nance, and executive committees. Shouldn’t the
boards of companies whose competitiveness heavily
depends on science or technology also have a
committee to ensure that all is well in this area?
• • •
Alfred Chandler, the noted Harvard business historian,
described how American companies like
DuPont and General Motors gained prominence
in the twentieth century by developing and integrating
R&D, manufacturing, and marketing capabilities.
These enterprises did not create these
capacities to be good corporate citizens. They were
pursuing competitive advantage, and they understood
that these capabilities were essential to that
goal. Today, the United States is at an analogous
juncture, but the challenge is no longer to create
capabilities to manage the large-scale, vertically integrated
enterprise of the twentieth century; it is
to build anew the technological operational capabilities
needed to conceive and produce high-value
goods and services. We must recognize that the
capacity to undertake advanced process engineering
and complex manufacturing is as important to
continued innovation as are strong universities and
a robust venture capital industry.
If major venture capital fi rms like Kleiner Perkins
and Sequoia Capital announced they were
leaving the U.S. to go to, say, India because they saw
more profi table investment opportunities there, it
would cause an uproar. Outsourcing by high-tech
manufacturers should do the same. It’s unfortunate
that the warning cries of the 1980s and early 1990s
were ignored. Much has been lost since then, but
it’s not too late to rebuild the industrial commons.
Only by rejuvenating its innovative capabilities can
America return to a path of sustainable growth.
Gary P. Pisano (gpisano@hbs.edu) is the Harry E.
Figgie, Jr., Professor of Business Administration, and
Willy C. Shih (wshih@hbs.edu) is a professor of
management practice, at Harvard Business School
in Boston.
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